Dollar consolidates amid India sanctions and BRICS trade concerns - ING

The dollar is consolidating after Friday's heavy losses. And the greater market interest in the short term is President Trump's newfound focus on India. Here, the threat of secondary sanctions became more real yesterday as Washington squarely turned its attention to India's purchases of Russian crude oil - a substantial 1.7 million barrels per day. Whether the threat of secondary sanctions on India's financing of Russia is the core goal remains to be seen. Or indeed, this move may be increased US leverage on India to open up its domestic economy to agricultural imports or commitments to buy US energy instead. Either way, India and its currency, the rupee, are under pressure, and speculation will build as to whether the Reserve Bank of India wants to protect the 88 level in USD/INR. This year, the RBI has been allowing more flexibility in the rupee and inflation is lower than usual, questioning how committed the RBI will be to the defence of 88.00, ING's FX analyst Chris Turner notes.

DXY rally stalls in the 99.00/99.25

"Also in the firing line currently is Brazil. US tariffs are currently set at 50% as the US accuses Brazil of human rights abuses in the pursuit of former president, Jair Bolsonaro. Brazilian institutions are not backing down and instead yesterday placed Bolsonaro under house arrest. President Lula will address the nation tomorrow as to how his government his handling this pressure from Washington. Clearly, there is scope for escalation here - US tariffs to 100%? - yet the Brazilian real is performing quite well. Here, the global interest in the carry trade continues and the near 15% implied yields of the Brazilian real remain attractive. South Africa's rand is also performing pretty well, despite the 30% US tariffs. Here, the local central bank's unilateral move to pursue a lower (3%) inflation target is being welcomed by flows into the local bond market."

"Perhaps the most dominant question here regarding the pressure on the BRICS country grouping is whether the US-China trade detente lasts. The market assumes it does, but we do have another deadline coming up on 12 August. An early extension of the currently benign trading conditions would very much be welcomed by the market. If not and the US does ratchet up pressure on China again, then it would look like President Trump was opening up a new campaign on the BRICs nations after all."

"Back to the dollar, we heard from Federal Reserve non-voter Mary Daly last night that she thinks the risks are now skewed to more than two Fed cuts this year. Around 60bp of Fed easing is currently priced. More importantly, we'll hear from Fed voters, Susan Collins and Lisa Cook, tomorrow. For today, the US focus is on the ISM services figure for July. A mild improvement is expected and could give the dollar a nudge higher. However, we suspect that any DXY rally stalls in the 99.00/99.25 - i.e a shallow correction after Friday's drop."