Here's Why USD Is So Strong

 
It was a strong day for the U.S. dollar. The greenback traded higher against all most of the major currencies with USD/JPY drifting back up to 102. U.S. data was relatively benign as import prices increased 0.1% in July and jobless claims ticked slightly lower. These second-tier economic reports had very little impact on the dollar, which took its cue from Treasury yields and an overall demand for U.S. assets. The Dow Jones Industrial Average climbed to a record high as 10-year yields jumped 7bp. Although there was no news to properly explain Thursday's move, it is clear that continued easing outside of the U.S. makes American assets more attractive. On Wednesday night, the Reserve Bank of New Zealand cut interest rates by 25bp and indicated that rates will fall further. This contrasts with the U.S. where Federal Reserve officials have been saying that a rate hike in 2016 is still possible. We heard these comments most recently from Fed President Williams on Thursday. More aggressive policymakers have even indicated that September is a "live meeting" but we think that is highly unlikely. Some of the buying could also be attributed to positioning ahead of U.S. retail sales, which are scheduled for release on Friday. With wage growth rising and auto sales rebounding, consumer spending is expected to grow in July. However we fear that the number could disappoint because gas prices have been falling and Johnson Redbook reported a drop in spending last month. If we are right, USD/JPY will end the week on the 101 handle -- but if we're wrong and the data is strong, hardening the case for tightening this year, USD/JPY could make its way back toward its August high.

Thursday's best-performing currency, next to the U.S. dollar, was CAD, which bucked the trend to rise strongly on a day of broad-based dollar strength. This is quite remarkable and can be attributed completely to the 4.5% rise in crude oil. Talk of possible action to stabilize crude prices sent the commodity soaring even though the discussion won't be occurring until the informal meeting at the end of next month. The chance of an actual change in production is unlikely but on a day with very little catalyst, the minor possibility was enough to send USD/CAD to 1-month lows.

Thursday's worst-performing currency was the New Zealand dollar. NZD/USD initially soared after the RBNZ cut interest rates because investors had been hoping for a 50bp cut instead of the 25bp delivered. However when the dust settled, market participants realized that not only did the RBNZ cut rates to 2%, but it talked of doing more. Wheeler did not feel that a one-shot 50bp cut was necessary but he made it clear that further easing will be required. It was not a "may" but a "will". RBNZ projections account for 60bp of easing, which means another 25bp this year is very likely, especially if we do not see a meaningful decline in NZD/USD. Wednesday night's knee-jerk rally was completely overdone whereas Thursday's pullback was in line with fundamentals. For the Reserve Bank, the main goal of easing was to bring NZD down and it will continue to take steps to guide the currency lower -- both verbally and physically. It won't be long before NZD/USD tests 71 cents. The Australian dollar ticked lower but the decline was modest. Chinese retail sales and industrial production numbers were scheduled for release Thursday evening and will most certainly have an impact on AUD.

Sterling spent most of the day below 1.30. As reported by our colleague Boris Schlossberg, cable crashed "after the RICS house price data printed far worse than expected. The RICS report came in at 5% versus 19% eyed with the Institute noting that "Sales dropped the most since the financial crisis in 2008" while "Prices rose at the slowest pace in three years in July and new sales declined". This shows that the housing market is already adjusting to Brexit and with UK consumers so heavily leveraged to housing, the sharp decline in that asset value is likely to impact consumer spending going forward.


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