The Dollar’s Still Got the Groove

High US yields and increasing pressure on emerging market currencies continue to secure the US dollar's status as a sound safe haven. The focal point today will be whether the Chinese renminbi declines further following the unexpected rate cut imposed yesterday. It is anticipated that demand for the dollar will remain strong.

USD: Strong US retail sales should help.

The dollar pushed ahead around 0.7% yesterday as pressure on EM currencies around the world encouraged more dollar demand. Very much in focus remains China's renminbi (CNY), which hit a new low overnight after the People's Bank of China surprised with a 15bp rate cut in its Medium-Term Lending Facility. USD/CNH (the liquid offshore pair) has pushed up to a new high for the year above 7.30 and has its sights set on last October's high at 7.3750. I mention the renminbi so much in this dollar section since weakness drags most of the Asian FX complex with it and provides a bullish undercurrent to the dollar across the board.

Nevertheless, a rate cut from China is a stimulus and perhaps means that some of the commodity currencies do not have to fall as much. The rate cut also provides a tailwind to renminbi-funded carry trades. In terms of what comes next from China, we could possibly see a cut in the required reserve ratio (RRR) on FX deposits - this was cut to 6% from 8% last September to take some pressure off the renminbi.

In quiet markets, the US dollar might also be getting some support from events in Argentina and the market is watching USD/RUB trade through 100.

For the dollar itself, July US retail sales was stronger and kept US two-year yields near 5%. It seems the market is indeed settling into the view that the policy rate will be kept at these levels for an extended period - providing few reasons to sell the 5%+ yielding US dollar.

DXY can probably trade bid within a narrow 103.00-103.50 range today.

EUR: Support turns into resistance.

Developments in emerging market currencies yesterday saw dollar demand push EUR/USD through key support at 1.0930 yesterday. That level marked the 100-day moving average which had defined the downside of EUR/USD over the last couple of weeks. The question now is whether 1.0930 proves the top of the near-term trading range - it could well do.

In terms of the European calendar today, the focus will be on Europe GDP. These have been deteriorating for the last few months and are expected to fall a little more. Combined with a strong US retail sales figure yesterday, EUR/USD could well trace out a 1.0875 to 1.0930 range and remain offered into tomorrow night's release of the FOMC minutes.

GBP: Sterling enjoys a temporary lift from the wage data.

Sterling is rallying this morning after wage growth data surprised on the upside.

Here is what ING UK economist, James Smith, says about the data: “Private sector wage growth is now running at 8.1%, up from 7.9% previously. These figures have been backwardly revised, so not all the upside surprise is in the latest month. But still clearly running much too fast for the BoE's liking and will help cement a September hike. The flip side is that unemployment is clearly rising now and employment on the ”single month“ measure was down by 360k vs three months ago.”

James had thought that the wage growth could surprise on the upside, but equally, he feels that today's release of July CPI could see services inflation surprise on the downside. If he's right, today's EUR/GBP dip below 0.86 should prove temporary. The 0.8550/80 area may well hold in EUR/GBP ahead of tomorrow's CPI release.