Overview: The
dollar continues to ride high. It reached its highest level against the yen
since the recent intervention. The Canadian dollar has fallen to its lowest level
in two-and-a-half years and the New Zealand dollar is approaching the 2020 extreme.
The greenback is firmer against all the major currencies but the Swiss franc,
and against nearly all the emerging market currencies today. Equities have been
sold. Japan, South Korea, and Taiwan re-opened after yesterday’s holiday and
reacted dramatically to Washington’s latest sanctions on China in the chip space.
Only Chinese shares, among the large Asian markets posted gains. Europe’s Stoxx
600 is off about 1.2%, its fifth consecutive losing session. US futures are off
about 1%. US and European bond yields are firmer today. The US benchmark is approaching
4%, while in Europe peripheral spreads are widening. New efforts by the Bank of
England have helped steady the Gilt market. Gold is extending its pullback for the
fifth consecutive session. After trading near $1730 last week, it is below $1665
now. December WTI peaked yesterday around $92.35 and has fallen to $87.30
today. US natgas is off about 1% today after falling 8% in the past two
sessions. Europe’s natgas benchmark is little changed after rising 2.7%
yesterday. Iron ore fell nearly 2.5% today, giving back the lion’s share of
yesterday’s 3% advance. The same is true for December copper. It is off 1.1%
after advancing 1.3% on Monday. December wheat rallied 6.5% yesterday amid
concerns about Ukrainian supplies. Those gains are being pared by about 1.25%
today.
Japan's August current
account underscores a weight on many currencies that continues to be attributed
to monetary policy divergence. The deterioration of the external account in many Asian countries
and Europe would likely spur an adjustment in the foreign exchange market. Japan's
current account surplus averaged JPY471 bln (~$3.2 bln) this year. It averaged
JPY1.59 trillion (~$12.2 bln in Jan-Aug 2021). The trade balance is
overwhelming the income earned from past investments (yields, dividend, profits,
royalties licensing fees, etc.). Japan's trade deficit on the
balance-of-payments basis fell to JPY2.49 trillion in August from JPY1.21
trillion in July. The shortfall has averaged JPY1.173 trillion this year after
a JPY313 bln in the first eight months of last year.
Another source of pressure
on several Asian currencies is also coming from equity outflows. These equity outflows, especially
recently, are not simply a function of tighter US monetary policy and would not
necessarily stop or reverse if the Fed were not as aggressive. For example,
even before last week's new US efforts to block China's access to advanced
semiconductor chips and the technology to make them, the semiconductor industry
was under pressure on this side of Covid. The US actions have aggravated the
situation. Japan, South Korea, and Taiwan markets re-open after yesterday's
holidays and the tech sector in general but especially the chip sector was hit
hard. The largest semiconductor company in the world, TSMC, was off a record of
more than 8% today, for example.
The dollar edged close to
the JPY145.90 peak last month. The market hesitates, wary of another bout of intervention. It is
likely misguided to assume that the BOJ will defend a particular level. Still,
the market treads gingerly. Prime Minister Kishida endorsed the easy monetary
policy stance, while the US 10-year yield is approaching 4%. Initial support is
seen near JPY145.50. Last Thursday, the Australian dollar posted a
bearish outside down day and it has fallen for the past three sessions. Today,
it slipped marginally through $0.6250. Last Thursday's rejected high was
around $0.6540. The next notable chart area is in the $0.6100-20 area. The 2020
low is still a distance off around $0.5500. Note, though the New Zealand dollar
traded down to almost $0.5535, drawing closer to the 2020 low near $0.5470. After
rising 0.5% against the Chinese yuan yesterday, the dollar is up almost 0.3%
today. The PBOC set the dollar's reference rate at CNY7.1075 today. The median
projection in Bloomberg's survey was CNY7.1375. A 2% band from the reference
rate allows the greenback to trade today to almost CNY7.25. So far, it has held below
CNY7.1950.
Europe
Reports suggest an important
shift in Germany's position and now it can support a new joint EU debt issue. Germany had come under strong criticism
for earmarking 200 bln euros to cushion the energy shock at home while
objecting a joint EU bond to help others that do not have Germany's fiscal
space. It is not clear yet whether objections, like from the Netherlands, will
also be dropped. Germany insists, though, that if there are new funds they are
distributed as loans not grants. This suggests the model/precedent is not the
Next Generation recovery fund but SURE, which arose from the labor market shock
of Covid. Its disbursement was completely on a loan basis. Some reports suggest
German Chancellor Scholz wants to first have a better sense of Italy's new
government's commitment to Europe. Still as news of the change in the German
position spread, Italy's premium over Germany narrowed dramatically. The
10-year premium narrowed by nearly 25 bp, and around 227 bp, is the smallest in
a couple of weeks. Italy' s premium on two-year money fell back below 100 bp,
also a two-week low. It settled at 125 bp at the end of last week. The spreads
have widened today, recouping some of yesterday's move.
UK Chancellor Kwarteng was
to speak to the Tory Party's 1922 Committee (formally the Conservative Private
Members' Committee) tomorrow, but Prime Minister Truss will address the MPs
herself. Recall that
among the Tory MPs Truss lost to Sunak. It was the rank-and-file that gave her
a victory. She campaigned, in part, on unwinding Sunak's tax hikes. Polls have
shown the Tories have lagged Labour beginning in spring 2020. Rather than
reverse the slide, Truss has widened it. Still, an election is not necessary
until January 2025. The mini-budget may have been the proximate cause, but the
Tories have led the UK government for 12 years. Voters are exhausted and the
Tories broad agenda has fallen out of favor. The FT recently cited the latest
British Social Attitudes survey that showed a majority favor increasing taxes
and increased spending on public services (e.g., education, healthcare, and
welfare). Just 1 in 17 thought taxes and spending should be cut. Among the
Tories themselves, the survey found nearly half (46%) thought taxes and
spending should increase.
After the inflation-linked
securities in the UK sold-off hard yesterday, the Bank of England indicated
that it would buy these securities in a bond-buying operation that is
projected to terminate at the end of the week. It did not buy inflation-linked securities
during QE. Of the new GBP10 bln buying wherewithal a day, it said as much as
half could be used to buy inflation-linked bonds. Separately, the UK labor
market report was somewhat stronger than expected, with payrolls rising 69k
after a revised 31k increase in August (initially estimated at 71k). Notably,
base pay rose 5.4% in August (from 5.2% in July) on a three-month
year-over-year basis and is the seventh increase in the past eight months and is
the fastest pace since August 2021.
The dollar traded above
parity against the Swiss franc for the first time in nearly four months. It looks set to challenge the year's high
set in May near CHF1.0065. This is a function of the demand for dollars, and it
is obscuring a dramatic drop in sight deposits. They have fallen from a record
high in mid-September to their lowest level since mid-2020, a 14.5% drop. Last
month the Swiss National Bank declared it would use bonds and repos to steer
market rates, and the decline in the sight deposits reflects just that. In late
September, the euro fell to its lowest level against the Swiss franc since
January 2015 when SNB abandoned the Swiss franc cap. It recovered from almost
CHF0.9400 to almost CHF0.9810 last week. It pulled back to the minimum
retracement (38.2%) near CHF0.9655. The SNB's stealth tightening, the anxiety
ahead of the sitting of the new Italian government (the lower chamber will sit
for the first time since the election later this week), and ideas that Russia
may escalate its efforts after the weekend attack on the bridge that links
Crimea to Russia may weigh on the cross. Technically, the momentum indicators
look poised to turn down for the euro.
The euro is in a narrow
quarter-cent band around $0.9700. The four-day drop was initially extended into the fifth session,
but it recovered in late Asia and early European activity. However, the
intraday momentum indicator is getting stretched, suggesting North American
operators may sell it again. The next important chart point is closer to
$0.9645. On the upside, it probably requires a move above $0.9750-60 to draw
attention. Sterling has traded below $1.10 for the first time this month. It
remains heavy. The next downside target is around $1.0920, but in front of
it today are GBP1.33 bln in options struck at $1.0925 that expire today.
America
Ahead of the PPI (tomorrow)
and the CPI (Thursday), the US reports its monthly budget balance today. It tends not to be a market-mover, but it
is a good reminder that it is not just about monetary policy. Fiscal policy is
tightening aggressively. Consider in the first five months of the fiscal year,
the US budget deficit has fallen from about $1 trillion last year to a little
less than $277 bln this year. The median forecast in Bloomberg's survey projects
the deficit to fall to about 4.2% of GDP this year from 10.8% last year. It
took the better part of four years after the Global Financial Crisis for the
deficit to fall from 10.1% of GDP (2009) to below 4% (2013). As interest rates
rise, there is more attention of the cost of servicing the debt burden. The
weighted-average maturity in the US is a little more than five years. By
comparison, the UK's average is closer to 14 years. However, there is another
rub to consider. Less than 9% of the US debt is linked to inflation. The UK's
share is around a quarter.
Brazil is expected to report
the third consecutive decline in IPCA inflation. It peaked in April slightly below 12.15%. It
stood at 8.73% in August and the median forecast (Bloomberg's survey) sees it
falling to nearly 7.1% in September. Lower fuel prices and tax cuts are
expected to have weighed on inflation measures. The Selic rate is at 13.75%,
which is seen as the potential peak. Chile's central bank meets tomorrow. It
began hiking last July, two months before the Fed's pivot. After hiking the
target rate by 100 bp last month, the market expects a half-point move that
would bring its target to 11.25%. Inflation eased to 13.7% in September from
14.1% in August. It was the first decline since February 2021. The swaps market
sees the terminal rate closer to 11.50% for Chile.
The Canadian dollar has been
sold to new two-and-a-half year lows today. The US dollar has risen to
CAD1.3855. The high for
the day does not appear in place. It could rise toward CAD1.3880 today, but in
the larger picture, we see a risk to CAD1.40. Given the Bank of Canada Governor
Macklem's recent comments, the Canadian dollar's weakness may prompt the
central bank to hike 75 bp at its next meeting on October 26. The market
has only about a 25%-30% chance discounted now. We see it as
closer to a 50/50 proposition and rising. The greenback is a little firmer
today but remains below the middle of the MXN19.80-MXN20.20 band that has
confined most of the price action over the past two months. Today, there is
upside potential back into the MXN20.05-MXN20.10 area. While Brazil and Chile's tightening efforts may be over or nearly so, the swaps market sees another 125-150
bp of tightening from Banxico.
Reviewed by Marc Chandler
on
October 11, 2022
Rating:
