Overview: Bonds and stocks are mostly heavier today
and the dollar has turned mixed. Oil prices are consolidating after soaring to
new highs since late last year on the longer than expected extension of Saudi
Arabia's extra cut of one million barrels a day. Since July, it has been
extending it by one month at a time. Yesterday, it extended it through Q4. Russia,
who had previously indicated intentions on reducing its exports by 500k
barrels, announced it was extended a 300k barrel a day cut also through the end
of the year. October WTI's eight-day rally is under threat today. It is
consolidating largely in a $86-$87 range today. Note that the average price of
US retail gasoline is slightly lower than where it was a month ago but is still
relatively high for this time of year (~$3.80 a gallon).
Stepped-up warnings by Japanese
officials have may have helped steady the yen. The dollar is narrowly mixed
against the G10 currencies and is =/+ about 0.15%. Most emerging market currencies
are lower. Of note, the Mexican peso remains under pressure as stale longs get
squeezed out. The peso is off about 0.7% today, making it the weakest of the
majors. Over the last five sessions, it is off nearly 4.7%. Equities in the
Asia Pacific region were mixed. Japan, Hong Kong, and India are higher. China's
Shanghai and Shenzhen composites eked out a small gain, but the CSI 300 slipped
by around 0.2%. The Stoxx 600 in Europe is off by about 0.65%, which would make
it the sixth consecutive losing session if sustained. US index futures are
heavier. European benchmark yields are slightly higher, while the US 10-year
yield is flat slightly above 4.25%. After testing $1950 at the end of 4last
week, gold is eased to almost $1922.60 today, a six-day low. The 200-day moving
average is near $1917.
Asia Pacific
Australia report Q2 GDP
expanded by 0.4%, in line with expectation, and Q1 growth was revised to 0.4%
from 0.2%. The
year-over-year rate stands at 2.1%, a little less than the 2.4% pace in Q1. 1.6%
from 2.3%. It is the slowest growth since the contraction was reported in the
last three quarters of 2020. The median forecast in Bloomberg's survey sees the
year-over-year growth to slow to below 1% in Q4. The Reserve Bank of Australia
forecasts 1.3% growth this year and the IMF puts it at 1.6%. Tomorrow, RBA
Governor Lowe is expected to give a final speech as before stepping down toward
the end of next week. July trade figures are also due on Thursday.
Since the pre-US jobs low
near JPY144.45, the dollar has shot up to JPY147.80, a new high for the year. It made a marginal new 10-month high in
Asia today before steadying. Japan's Finance Ministry stepped up its
intervention rhetoric, using key word signals, including "watching the
market with a high sense of urgency" and threatening to counter
"speculative moves" with appropriate action. We have suggested
initial potential toward the secondary highs set last November in the
JPY148.40-85 area, ahead of the multiyear high set last October 21 near JPY152,
ostensibly with the help of BOJ intervention. One notable difference between
then and now is that one-month implied volatility is hovering around 9.2%, well
below the 50-day moving average, near 10%. On October 21, 2022, it reached
nearly 17%. The 10-year JGB yield was around 0.25%. Since then, the BOJ has
doubled the cap twice to 1.0% and the yield is now near 0.66%. The 30-year
yield, which is not capped settled at 1.61% last October 21, and is now near
1.67%. There is some speculation that BOJ intervention could focus on the
10-year JGB if it threatens the 0.70% level. The yen is threatening its recent
lows against the other major currencies. The Australian dollar is
consolidating after falling to new lows for the year yesterday (slightly below
$0.6360). According to Bloomberg, it made a new low by 1/100 of a cent
today, before bouncing on the GDP figures and briefly traded above $0.6400.
Nearby resistance is seen in the $0.6400-20 area. The measuring objective
of the double top at $0.6900 projects to $0.6300. One metric that captures the
divergence between the US and Australia is that the US two-year premium over
Australia has nearly doubled since the mid-July 60 bp. The premium has not been
more than 120 bp since the bank stress erupted in March. The dollar
settled above CNY7.30 for the first time this year and remains above it
today. It reached slightly above CNY7.3215. This is the highest the
dollar has been since it peaked last November near CNY7.3275. There are
two key drivers of the yuan's weakness and observers seem to disagree on which
is more significant. First, the disappointment with the Chinese efforts to
reanimate the economy. The second is the dollar's broad strength. The PBOC set
the dollar's reference rate at CNY7.1969. The average projection in Bloomberg's
survey as for CNY7.3108. The gap between the two is the largest yet. The top of
today's band is about CNY7.3408. The high in the offshore market so far today
has been CNH7.3278. Last year's high was CNH7.3749.
Europe
Retail sales in the eurozone
fell by 0.2% in July, matching the June decline. Details for Q2 GDP will be reported with
tomorrow's revisions, but EMU consumption looks lackluster, may have risen by
0.1% after a 0.8% increase in Q1. Consumption could contract this quarter.
Separately, after reporting a heady 7% rise in June factory orders, which was
revised to 7.6%, German orders collapsed by 11.7% (median forecast in
Bloomberg's survey was for a 4.3% decline. Recall that Airbus had received 902
aircraft orders in June. Hamburg hosts a major plant while there are several
smaller facilities in the rest of Germany. The drop, like the increase in July
was due to major orders. Without these, factory orders would have risen by
0.3%. Germany will report July industrial output figures tomorrow. Industrial
production is expected to have fallen for the third consecutive month and four
of the past five. The UK's August construction PMI slipped to 50.8 after
jumping to 51.7 in July (from 49.8 in June). Still, it was a better than
expectations, which were for a drop back below the 50 boom/bust level.
The euro was beat down to
nearly $1.0705 yesterday. There are large options expiring tomorrow (1.6 bln euros) and
Thursday (1.3 bln euros) at $1.07. Early in the North American session, a brief
attempt on the upside faltered near $1.0750, were 1.45 bln euros in options
expire today. Today's high has been 2/100 of a cent below there. The euro
settled below its lower Bollinger Band (~$1.0735) for the first time since
mid-May. It comes in today near $1.0720. A break of $1.07 targets the
$1.0600-35 area. Sterling was sold to almost $1.2525 yesterday, its
lowest level since mid-June. It frayed its lower Bollinger Band
(~$1.2555) but managed to settle slightly above it. There are options struck at
$1.25 for nearly GBP1.4 bln that expire today. The euro posted an outside down
day against sterling. It looks poised to last month's low near GBP0.8490, the
lowest level since last August. Recall that last year's low for the euro was almost
GBP0.8200, which was the low since the UK referendum in 2016. Note that
Poland's central bank meets later today, and many look for the first rate cut,
a quarter-point move to 6.50%.
America
Today is the busiest day of
the week for North America. The US is expected to report a wider July trade deficit. Although
the trade deficit widened in Q2 over Q3m it is smaller than H2 22. Indeed, the
average monthly trade shortfall H1 23 (~68.2 bln) and is the smallest on a
six-month rolling basis since July 2021. The combination of the dollar's
strength and growth differentials are typically associated with a wider US
trade deficit. The US also sees the final services and composite PMI, which
will be overshadowed by the ISM services index, though they normally track each
other closely, as one might expect. Late in the session, the Federal Reserve's
Beige Book, the anecdotal survey ahead of the FOMC meeting will be released.
The market sees practically no chance of a hike at the conclusion of the Sept
20-21 meeting and the chances of a November hike continue to be cut. It stands
now a little below 45%. It was near 70% at the start of last week.
Shortly after Canada's July
merchandise trade deficit is reported, the Bank of Canada's meeting concludes. After hiking at the past two meetings, the
chances of another hike were never very high, and after the unexpected
contraction in Q2 GDP reported last week, the odds fell further. The swaps
market shows practically no chance of a hike today, down from around a 1-in-4
chance seen at the start of last week. The market is looking at the first rate
cut in early Q3 24.
The US dollar set the
session high against the Canadian dollar yesterday in Europe near CAD1.3670. It came off in North America but found
support near CAD1.3600. There are options for nearly $1.5 bln set there that
expire today. The dollar made a marginal new high and remains firm. Some still
view the Canadian dollar as a petro-currency, but during oil's recent surge the
correlation has lessened. The 30-day correlation of changes in the exchange
rate and WTI is about 0.24, the lowest in six months. Around 0.40, the 60-day
correlation is near its lowest in five months. Support is seen in the
CAD1.3570-CAD1.3600 area. A move above CAD1.3670, which is also the late April
high, could spur another leg up toward CAD1.3800. The greenback frayed the
upper Bollinger Band (~CAD1.3650) but settled within it. The upper Bollinger
Band is slightly above CAD1.3660 today. The shakeout of the Mexican
peso continues. It began last week with the central bank's announcement of
plans to reduce its currency hedge facility. The dollar was trading near
MXN16.75-80 before the announcement and shot up to MXN17.10. Yesterday, it
reached almost MXN17.46, and today jumped to MXN17.6740. Nearby chart
resistance is seen in the MXN17.73-77 area. The dollar closed well above its
upper Bollinger Band (~MXN17.3555) yesterday and remains above it (~MXN17.4410)
now. Lastly, note that Chile's central bank cut the overnight target rate 75 bp
to 9.50% as expected. It is the second cut in the cycle. It began the easing
cycle in July with a 100 bp cut.
Reviewed by Marc Chandler
on
September 06, 2023
Rating:
