Consolidative Summer Session

Overview: News that Pfizer's vaccine was granted full approval helped lift US equity indices to record highs yesterday, and this spilled over to the Asia Pacific region, where China claimed to have eradicated local cases.  The MSCI Asia Pacific Index advanced for a second session, led by a 2.5% rally in Hong Kong.  Europe's Dow Jones Stoxx 600 is pushing higher for a third session, while US futures are trading firmly.  Benchmark 10-year yields firmed in Asia but are a bit softer in Europe.  The US 10-year is hovering around 1.26%.  The US dollar is mixed today.  The dollar-bloc currencies and Scandis have traded higher, while the euro and sterling are seeing yesterday's gains pared.  The Swiss franc and yen are little changed.  The JP Morgan Emerging Market Currency Index is flat, reflecting a mixed performance.  Asia currencies are mostly higher, led by a 1% gain in the Thai baht as new infections fall to four-week lows, while central European currencies are heavier.  Gold pushed above $1800 yesterday, but the momentum stalled, and some profit-taking has set in.  October WTI jumped 5.6% yesterday; its biggest rally in almost a year and a half to around $66.50 before consolidating. Copper prices are softer after rising more than 4.5% over the past two sessions.  Iron ore steadied yesterday to snap a four-day slide and rallied almost 2.3% in China today.  

Asia Pacific

There have been two developments to note in the region.  First, New Zealand reported stronger than expected Q2 retail sales (3.3% vs. 2.5% expected), and this is seen as boosting the chances of a rate hike when the RBNZ meets next in early October.  Recall that the New Zealand dollar fell in every session last week.  It snapped back by 0.8% yesterday and another 0.7% today to lift it to around $0.6945.  Resistance is seen in the $0.6955-$0.6975 band.  Second, while China's ride-hailing app Didi is reconsidering its plans to list in Europe due to Beijing's insistence that data is stored in China, the US SEC has begun formalizing new disclosure rules for China-based companies' IPOs.  These new rules focus on the offshore structure and on the risk of government interference.  

The dollar spiked to around JPY110.15 yesterday before reversing lower and leaving a bearish shooting star candlestick in its wake.  However, follow-through selling has been limited to about JPY109.65, where a $980 mln option expires today.  Similarly, an expiring option for around $655 mln at JPY109.90 seems to have capped the upside.   After yesterday's nearly 1.1% advance to snap a five-day losing streak, the Australian dollar is seeing follow-through buying.   It has been bid to almost $0.7240 today.  The next target is the $0.7265-$0.7270 area.  The Chinese yuan edged higher after recovering yesterday.  At the end of last week, the dollar had flirted with the upper end of the two-month trading range near CNY6.50 but has pulled back to near the middle of the range that extends to CNY6.45.  The PBOC dollar fix at CNY6.4805 was anticipated by the market, where the Bloomberg survey found a median expectation for CNY6.4807.  

Europe

The news flow from Europe is light.  The UK has called a G7 meeting to discuss Afghanistan and ostensibly to persuade the US to extend its month-end pullout deadline.  Although the media is highlighting the heartbreaking scenes at the airport, in the US, Biden's support has softened, but polls suggest it is not because of Afghanistan, which is not a particularly salient issue for potential voters.  The economy and jobs are more significant considerations, according to the surveys.  We note that several banks have revised down growth, and this may be partly virus-related.  The second issue today is the central bank of Hungary meeting. It is widely expected to raise rates 30 bp for the third consecutive time.  Nor will today's likely move complete the tightening cycle.  Another hike is expected in Q4.  

The euro stalled yesterday at $1.1750, a four-day high.  It has eased today toward $1.1725 in quiet turnover.  There is an option for 690 mln euro at $1.1775 that expires today.  The intraday momentum readings look constructive for another push to the highs in early North America.  Sterling, unlike the euro, extended yesterday's gains to almost $1.3750 today but subsequently lost its mojo and was sold to session lows a little below $1.3700 in early Europe.  Still, it too looks poised to rechallenge the highs in North America.  

America

As the market awaits the start of the Jackson Hole Fed symposium, the US reports new home sales today and the Richmond Fed's August manufacturing survey.  Existing home sales unexpectedly rose 2% in July yesterday, and this is seen boding well for today's report.  A 3% gain is expected after a 6.6% decline in June.  The regional Fed's manufacturing surveys have disappointed, and the risk is for a small decline in the Richmond survey.  Mexico reports its bi-weekly CPI measure, and the year-over-year headline rate may soften a little.  The central bank does not meet again until the end of September, and another 25 bp rate hike is expected.  Canada's economic diary is light, and some polls suggest a tightening of the race, which means that the chances of Prime Minister Trudeau securing a majority are slipping.

The US dollar shot CAD1.2510 on August 16 to CAD1.2950 before the weekend.  It plummeted to almost CAD1.2640 yesterday and retreated to almost CAD1.2610 today before catching a bid.  And this is typically a low-vol pair.  Rising risk appetites, for which we use the S&P 500 as a proxy, and commodities, for which we use oil as the proxy, helped fuel the Loonie's recovery yesterday.  The CAD1.2600 area offers support and a break targets CAD1.2550.  Like most of the freely accessible liquid emerging market currencies, the Mexican peso did not benefit as much from the greenback's pullback or the better risk appetites.  The US dollar bottomed on August 13 near MXN19.84 and advanced every day last week to reach MXN20.4565 ahead of the weekend.  It snapped a five-day advance yesterday by pulling back 0.25% but has jumped back today and is back near where it settled last week (~MXN20.3650).  Initial resistance now is seen in the MXN20.40 area and then MXN20.45.  

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