Overview: The US dollar is having one of toughest days of the year. It has been sold across the board and taken out key levels like parity in the euro, $1.15 in sterling, and CAD1.36. The Chinese yuan surged over 1%. Chinese officials promised healthy bond and stock markets. There is some talk that the PBOC may have intervened directly in the forex market. Large bourses in the Asia Pacific region rallied and the CSI 300 rose by 0.8%, its first gain of the week. After rising by around 2.8% over the past two sessions, Europe’s Stoxx 600 is slightly lower. A disappointing batch of corporate earnings is weighing on US futures. The US 10-year yield is around four basis points lower at 4.06%, while European yields are mostly 2-4 bp higher. A softer dollar helped lift gold to two-week highs near $1675. It is up 1% on the day in Europe. December WTI is firm near $86. US natgas has steadied after surging around 12.5% in the past couple of sessions. The negative price reported for spot in Texas is a reflection of the strong supply and limited pipeline capacity. Europe’s benchmark fell 16% on Monday and rose 3.1% yesterday. It is up around 2.5% today. Iron ore fell 2.5% today, its largest decline this month, and follows a 2% loss yesterday. December copper is up almost 2% today after losing 2.3% over the past two sessions. December wheat is also snapped a two-day decline and is up about 0.5% today.
Asia Pacific
The BOJ has capped the 10-year bond yield at 0.25% and it now owns the
vast majority of such bonds. However, longer-term yields have continued to
rise. For example, the 20-year yield that was below 0.90% in mid-September
surged to over 1.30% yesterday. Today, the central bank responded by stepping
up its purchases of longer-dated bonds. It boosted the 10-25-year purchases by
JPY100 bln to JPY350 bln and increased the 25-year buys by JPY50 bln to JPY150
bln. The government is still expected to announce new stimulus spending and
some part will have to be financed through debt issuance. The market has
indicated a preference for short-dated bonds as the long end is too illiquid. The
20-year yield fell to about 1.10% before rebounding to almost 1.20%. The
30-year yield reached nearly 1.72% yesterday, dropped to 1.45% today and
settled by 1.55%.
Australia's CPI accelerated to 7.3% in Q3 from 6.1% in Q2. The median
forecast was for 7.0%. The trimmed mean accelerated to 6.1% from 4.9% while the
weighted median rose to 5.0% from 4.3%. The central bank expected inflation to
peak around 8% this year here in Q4. Separately, the decline in US yields and the
lower Australia bond issuance projected for FY22-23 (to A$95 bln from A$125
bln) helped support the Australia debt market despite inflation's acceleration.
Australia's three-year note yield fell by eight basis points to 3.48%. It was
the third consecutive decline. It is off 23 bp this week after rising 21 bp
last week. The Australian dollar was knocking on $0.6400 for the past three
sessions and jumped to almost $0.6500 today, its best level in nearly three
weeks.
While no one gave BOJ intervention much chance to succeed, given that it
was not by surprise; it did not signal a policy change, and it was
unilateral. However, we argued that it was buying time until US rates
peaked, and the decline in US rates is weighing on the greenback broadly. The
dollar set a range on Monday of JPY145.55 to JPY149.70. It remained in the
range yesterday, and so far, today. The session low has been recorded in Europe
near JPY146.75. The Australian dollar's surge is seeing the five-day moving
average move above the 20-day moving average for the first time since
mid-August. The next upside target is near $0.6550, which may be too far
today and is, in any event "protected" by options for roughly A$565
that expire today. The $0.6400 area should now offer support. Just as
narratives about how China really wants a weak yuan began circulating, the
redback surged by 1.3%, easily the biggest rally of the year. The dollar
fell from nearly CNY7.31 seen yesterday to a little above CNY7.17 today. Chinese
banks were reportedly large sellers of dollars. Some suspected direct PBOC
intervention. Officials did signal their interest by setting the dollar's
reference rate today at CNY7.1638. The median projection in Bloomberg's survey
was CNY7.2481.
Europe
German Chancellor Scholz recently overrode his government to insist that
all three remaining nuclear plans remain operational through the winter. Yesterday,
he overrode concerns about selling the Hamburg container port to China. Scholz
was previously the mayor of Hamburg and supported a state-owned Chinese
company's bid for the container terminal. Scholz got an agreement to sell a
smaller stake to the Chinese company Cosco Shipping Holding Co of just less
than 25% rather than a 35% stake in of the four terminals. Scholz is going to
Beijing next week to meet with Xi.
Italy's new Prime Minister Meloni easily won a confidence vote in the
Chamber of Deputies yesterday. The Senate holds its vote today. Among the
first things she has done is give the go ahead to install a new liquified
natural gas terminal. The floating storage and regasification facility had met
local opposition. This is a continuation of an effort that began with the
previous government. It is projected to provide around 6.5% of Italy's gas
needs and be operational in the spring. Separately, Meloni is expected to
support a stalled merger between Telecom Italia and Open Fiber. Italy's 10-year
premium over German fell to 2.20% yesterday, the lower end of where it has
traded since mid-August. Today it is slightly firmer. Italy's 2-year premium
fell below 80 bp yesterday for the first time in over two months. It is little
changed today.
Yesterday, the euro pushed slightly above $0.9975. Today, it jumped
to almost $1.0050, its best level since September 20. Some of the buying today
may be related to the 1.35 bln euro options at parity that expire today. There
are almost 2 bln euro in options at $1.000 that expire Monday. The ECB meets
tomorrow and on the day of three of the meetings this year, the euro has fallen
(by ~0.5%-0.9%). It rose in February and in July and was virtually unchanged at
the last meeting on September 8. The intraday momentum indicators are stretched
and there may be some back filling in the North American session. It may
have to test support at $1.000. Yesterday, sterling came within 1/100 of a
cent of the $1.15 level that capped it earlier this month. It has surged to
$1.1620 today, its best level since September 13. Options for almost GBP955 mln
at $1.15 expire today. The next upside target is near $1.1780, but like the
euro, the intraday momentum indicator is stretched, and some consolidation is
likely in North America today.
America
The US 10-year yield peaked before the weekend near 4.33%. It reached
4.05% yesterday. The two-year yield peaked slightly above 4.63% at the end of
last week and briefly dipped below 4.40% yesterday before the soft auction
results. However, expectations for Fed policy have hardly changed. The implied
yield of the December Fed funds futures contract settled last week at 4.18% and
it closed yesterday at 4.185%. The implied yield of the June 2023 futures
contract was at 4.87% at the end of last week and finished yesterday at 4.905%.
Treasury sells $24 bln two-year floating rate notes today and $43 bln of
five-year notes. It will also sell $33 bln in 17-week bills.
So far this week, the US saw a dismal preliminary PMI, a larger than
expected pullback in August house prices, and a poor October consumer
confidence report from the Conference Board. Today, we get a key bright
spot for Q3 GDP, whose first estimate is out tomorrow, namely the September
goods balance and wholesale and retail inventories. The US also reports
September new homes sales, which after the 28.8% surge in August, like slowed
sharply. Still, the takeaway is that just like Q1 and Q2 contractions were
largely a function of trade and inventories so is the bounce back in Q3. However,
the economy is expected to slow markedly here in Q4.
The Bank of Canada is expected to deliver a 75 bp hike. Expectations,
measured by the overnight index swaps market, have been volatile lately. Recall that
at the start of the month, the market was not completely convinced that it
would deliver a 50 bp move. As recently as October 18, the market had
discounted a little less than a 25% chance of a 75 bp move. At the close of
business on Monday, the swaps market had slightly more than a 25% chance of a
100 bp move. At yesterday's close, the pendulum of market sentiment swung to a
70% chance of a 75 bp hike. A three-quarters point hike would lift the target
rate to 4.0%. The terminal rate is seen near 4.50% by the end of Q1 23.
The US dollar closed slightly above support at CAD1.3600 yesterday and has
been sold to almost CAD1.35 today to test the month's lows set on October 4-5. The
five-day moving average cross below the 20-day moving average for the first
time since mid-August yesterday. The next technical target is near CAD1.3465
and an option for around $515 mln expires there tomorrow. However, the
greenback is oversold on a near-term basis and a bounce toward CAD1.3600 cannot
be ruled out. The US dollar is at new lows for the month against the Mexican
peso around MXN19.8330. It briefly dipped below MXN19.80 in the middle of
last month for the first time since June. A convincing break of MXN19.80 could
target MXN19.60. On a bounce, the greenback faces its first hurdle near
MXN19.90.
Disclaimer
Reviewed by Marc Chandler
on
October 26, 2022
Rating:
