Overview: The dollar is mostly firmer against the
G10 currencies and has been confined to tight ranges through the European
morning. Outside of the China's deflation and Japan's monthly portfolio flow
data that showed Japanese investors bought the most amount of US Treasuries
(~$22 bln) in six months in September, the news stream is light. Most emerging
market currencies are trading with a softer bias today. The Philippine peso is
the strongest among the emerging market currencies after Q3 GDP rose nearly
twice as much as expected (3.3% quarter-over-quarter vs. 1.8% median forecast
in Bloomberg's survey.
Benchmark 10-year yields up mostly a
couple of basis points in Europe, while the 10-year US Treasury yield has
popped up by five basis points to 4.53%. The two-year Treasury yield is
flattish near 4.94%. Meanwhile, equities are mostly higher. In Asia Pacific,
Hong Kong and India were the exceptions, with modest losses. Europe's Stoxx 600
is extending yesterday's gains after falling Monday and Tuesday to snap last
week's five-day advance. US index futures are narrowly mixed after the late
recovery yesterday allowed the S&P 500 to extend its gain to eight
consecutive sessions and the NASDAQ to streak to nine sessions. Gold briefly
dipped below $1950 yesterday and its losses have been extended slightly through
$1945 today. Support is seen now in the $1925-$1935. December WTI frayed the
$75-level yesterday but remains above there today. A move back above
$76.70-$78.00 may help steady the technical tone.
Asia Pacific
China's October CPI fell to -0.2%
year-over-year after a flat September. While consumer price pressures are soft, the headline
overstates the case. Pork prices plunged 30.1% and fresh vegetable prices fell
by 3.8%. Excluding food and energy, China's core CPI stands at 0.6%, down from
0.8% where it spent Q3. Commodity prices fell in October, and this arrested the
recovery in producer prices seen every month in Q3. Producer prices fell 2.6%
from a year ago after a 2.5% decline in September. On a month-over-month basis,
producer prices were unchanged after rising 0.4% in September. Even though the
decline in consumer prices was driven by food prices, today's report boosts
speculation that the PBOC may cut the one-year Medium-Term Lending Facility
rate (2.50%) next week.
Japan reported a larger current account
surplus in September of JPY2.72 trillion (JPY2.14 trillion in August). It was the largest since March 2022. As is
widely recognized, Japanese current account surplus is not driven by the trade
balance. Afterall, Japan is experiencing a trade deficit, though it is falling.
The average monthly trade deficit was JPY1.3 trillion last year. The average
monthly trade deficit this year has been about JPY625 bln. Still, on a
quarterly basis the deficit was reduced to about JPY113 bln monthly average in
Q3, the fourth consecutive quarterly improvement. While Japan's undervalued currency
has not brought much criticism from Europe or the US, we suspect it could
change if Japan begins experiencing a growing trade surplus. The current
account figures also showed that Japanese investors bought JPY3.3 trillion
(~$22 bln) of US Treasuries in September, the most in six months. Japanese
investors were net sellers of other sovereign bonds in September, with the
notable exception of French and Swedish bonds.
The yen fell to five-day lows yesterday,
even though the US 10-year yield softened, dipping below 4.50%. Part of the yen's weakness may have
stemmed from comments by Bank of Japan Governor Ueda who seemed to suggest that
there is only a small chance of an end to the negative overnight interest rate
this year, as some had anticipated. He was quoted saying "At this point, I
am not sure when we can be confident" that the inflation target will reach
on a sustainable basis. By poking above JPY151, the dollar retraced a little
more than (61.8%) of the three-day decline that began the month. It extended
yesterday's gains marginally to almost JPY151.20 in the European morning. There are
around $1.1 bln in options at JPY151 that expire today. The Australian
dollar slipped through $0.6400 in late dealings in North America yesterday to
meet the (50%) retracement objective of the rally off the year's low set on
October 26 near $0.6270. It is in narrow range today of roughly
$0.6395-$0.6410. The next retracement (61.8%) is near $0.6365. Additional
support maybe around $0.6330. A move above $0.6450-5 would lift the tone. The
greenback edged higher against the Chinese yuan to a three-day high near
CNY7.2875. Still, it continues to trade in a narrow range that was largely
at the end of last week. The PBOC's dollar fix and the average in the Bloomberg
survey continues to narrow gradually due to the survey response. The reference
rate has slipped slightly to CN7.1772. A week ago, it was CNY7.1796. The
average projection in Bloomberg's survey was CNY7.2721, down from CNY7.3134 a
week ago.
Europe
The five economic think tanks that advise
the German government delivered more sobering news. Yesterday, they slashed this year's GDP
forecast to 0.4% from 0.2% and nearly halved next year's forecast to 0.7% (from
1.3% in March). Germany's national measure of CPI (as opposed to the EU
harmonized metric) has averaged 6.5% through October. The Council of Economic
Advisers see it falling to 6.1% this year before tumbling to 2.6% next year.
Negotiations between the EU and
Switzerland for a more comprehensive trade agreement were aborted in 2021 but
may resume next year. Yesterday,
Swiss government indicated it was cobbling a new negotiating mandate together.
There are various sectoral agreements in place but both sides seem interested
in a broader agreement. Switzerland wants to reach new agreements on
electricity, food safety, and health, single market participation (to include
the Agreement on the Free Movement of Persons), its financial contributions to
the EU, rules regarding state aid to industry and financial regulation.
Switzerland was dropped from the US
Treasury's monitoring list of countries having met only one of its three
criteria (fx intervention, size of current account, and bilateral trade
imbalance with the US) in the four quarters through June 2023. Separately, the Swiss National Bank's 13F
filing with the SEC published yesterday revealed that its US equity portfolio
(of more than 2600 listed companies) declined by 13% in Q3 to $127.5 bln as of
the end of September. Yet, the Russell 3000 and the S&P 500 fell by about
3.6% in Q3. The Swiss franc depreciated by a little more than 2% against the US
dollar. The SNB holds
about 25% of its foreign exchange reserves in equities ("as market-neutral
and passive as possible", while exempting systemically important banks and
coal miners). As of the end of last month, the value of SNB reserves was
CHF657.8 bln (or ~$725 bln).
The euro met the (38.2%) retracement of
last week's rally found near $1.0665. It recovered to new session highs around $1.0715 before
consolidating above $1.07. A move above $1.0720 lifts the technical tone. It is
in an exceptionally narrow range so far today, mostly between $1.0685 and
$1.0715. Provided, the $1.0680 area hold now, we anticipate another try at the
$1.0720 area in the North American session. For its part, sterling met
the (50%) retracement objective of last week's rally on Tuesday near
$1.2260. Yesterday, it fell to almost $1.2240 before it too recovered.
The next retracement (61.8%) is slightly below $1.2225. The recovery stalled
around $1.2300, and sterling held above $1.2280 in the North American afternoon.
It is little changed in Europe, rising to almost $1.2310 before slipping back. Overcoming
resistance in the $1.2335-60 area would boost confidence that the pullback is
over.
America
The US 10-year yield fell to a marginal
new session low near 4.50% after the $40 bln sale. The auction was not as smooth as
yesterday's three-year note sale. The 10-year was awarded at 4.519% ever so
slightly higher than the 4.511% in the When-Issued market. The bid-cover for
the three-year was higher than the last auction (2.67 vs. 2.56) but not for the
10-year (2.45 vs. 2.50). Still, indirect bidders stepped up for 69.7% of the
sale (vs. 60.3% previously). In dollar terms, this means that indirect bidders
took $27.88 bln of the 10-year note, up from $22.9 bln at the auction. Given
the yield was near the lower end of where it has traded since late September,
meaning that there was no "concession" to induce buying the larger
amount ($2 bln increase from August's refunding) that was being tendered, the
auction was successful even with the tail. Today, Treasury is in for more. It
will sell $180 bln of four- and eight-week bills and finishes the refunding
with $24 bln 30-year bonds. The 30-year yield fell to about 4.63%, its lowest
since last September. Some argue that the 30-year is not so attractive when one
can be 5.4% on the three-month bill. The issue is really about market segments.
If one thought that the US interest rate cycle was near a peak and wanted to
lock in rates, one faces reinvestment risk with the bill. That is ask when the
bill mature then what? One may have to accept lower yields.
There seems to be a new buzz that
US-Chinese relations are thawing. US Treasury Secretary Yellen will meet with China's Vice Premier
He. Earlier this week US and Chinese officials had "constructive"
nuclear talks with the US. There is speculation that Kerry (special
presidential envoy on climate) may meet his Chinese counterpart on the
sidelines of COP28 in Dubai that starts at the end of month. More immediately,
Biden and Xi may meet in San Francisco next week at the APEC summit (though
Beijing does not appear to have confirmed it). This all might be Kabuki theater.
While there have been a number of high-ranking visits, behaviors have not
changed. That is the only thing, arguably, that really matters. The US
announced its latest technology sanctions on China a month ago and reports
suggest that the US continues to military personnel in Taiwan on training
assignments. This week, Beijing required exporters of rare earths and oxide
products to report transactions. China accounts for almost 70% of the mining of
rare earths and almost 85% of the global processing capacity in 2022. Earlier
this year, China boosted the export reporting requirements for graphite,
gallium, and germanium products, used in semiconductor chip fabrication and
computers.
Mexico reports October CPI today, several
hours before the central bank concludes is policy meeting. Headline and core inflation likely
continued to moderate. The improvement in Q2 may have overstated the case.
Mexico's CPI actually fell in Q2 (~-0.20% at an annualized rate) and rose at
almost a 2.0% annualized rate in Q3, which is the same pace as H1 23. The pace
of core inflation rose at annualized rates of almost 1.40% in Q2 and Q3 down
from 2.40% annualized rates in the previous two quarters. The median forecast
in Bloomberg's survey calls for a 4.26% year-over-year headline rate (down from
4.45% in September). The core rate is expected to fall to 5.49% (from 5.76%).
There is little doubt that the central bank will keep the overnight cash rate
target at 11.25%. Forward guidance from the central bank, and its economic
outlook will be the key to the market's reaction. The swaps market appears to
be looking for the first cut by Banxico in Q2 24 (June 1 national elections).
The Canadian dollar has
underperformed. Unlike
the other currency pairs, we look at here, it is the only one to overshoot the
(61.8%) retracement of last week's gains. For the greenback that level was
almost CAD1.3800 and yesterday's high was closer to CAD1.3815. The weakness in
Canada's September building permits (-6.5% vs. median forecast in Bloomberg's
survey of a 1.2% gain) may not have helped matters, but the Canadian dollar was
soft ahead of it, and was near session lows before the data release. The US
dollar is consolidating in a narrow range between about CAD1.3780 and
CAD1.3805. It takes a break of the CAD1.3740-50 area that holds a retracement
objective of this week's recovery and the five- and 20-day moving averages to
give technical reason to suspect the high is in place. The greenback
traded inside Tuesday's range (~MXN17.45-MXN17.5940) against the peso
yesterday, which was largely seen on Monday as well. This
consolidation looks slightly favorable for the US dollar. The MXN17.59 area is
the (38.2%) retracement of the leg down since November 1. It is in a range
today of approximately MXN17.5250 and MXN17.5835. The (50%) retracement and
200-day moving average is near MXN17.68-69. The greenback snapped a five-day
slide against the Brazilian real yesterday and settled above BRL4.90. The gap
from last week, roughly BRL4.9340-BRL4.9515, is important from a technical
perspective. Overcoming it could signal a move back to the BRL5.00-BRL5.05
area.
Reviewed by Marc Chandler
on
November 09, 2023
Rating:
