FX Daily: Dollar Risk Premium Consolidating Amid Chinese Data Disappointment

FX Daily: Dollar risk premium consolidating

Chinese data disappointment was not enough to trigger a broad-based rebound in the dollar, which continues to show some disinflation risk premium (i.e. short-term undervaluation). We’ll monitor some US releases including retail sales today, on an otherwise very quiet day data-wise. In Australia, RBA minutes reiterated openness to another hike.

 

USD: No real benefit from China's data disappointment

This week had started with the question of whether the dollar could still suffer from the residual effect of the disinflation surprise amid a quiet data calendar and with the FOMC meeting (26 July) drawing closer. Yesterday’s price action in FX saw a relatively sanguine reaction to the disappointing growth numbers out of China: the highly exposed AUD and NZD declined, but EUR/USD was unchanged despite European stocks’ underperformance.

The lack of larger-scale dollar gains on the back of deteriorating Chinese sentiment indicates that markets remain reluctant to build back USD long positions for now. That must be weighed – however – with indications that the dollar is undervalued in the short-term vs some major currencies (excluding JPY): it may be a matter of time, or a simple lack of catalyst, to see some convergence of the dollar with its short-term drivers. As discussed in yesterday’s FX Daily, we may well see the dollar recover a bit of ground, although the mis-valuation gap can also be closed by a move in other market drivers.

Today, the market’s focus will be on June’s retail sales figures out of the US (expected to be quite strong), as well as industrial production, some housing data and TIC flows. These releases normally do not trigger wide market reactions by themselves, although a combined positive data flow today could at least help keep the dollar losses capped for now.