Greenback Jumps Back

Overview: With the exception of Japan, Taiwan, and India, the large equity markets in the Asia Pacific region traded higher today. The Hang Seng led the move (1.65%) amid reports that Alibaba will seek its primary listing there. Europe’s Stoxx 600 is edging higher today. If it can hold on to the gains, it will be the fourth consecutive rise, the longest advance since May. US futures are slightly under water. Benchmark 10-year yields are mostly lower, with the US off a couple of basis points to 2.77%. European yields are mostly 4-7 bp lower, but Italy’s 10-year is off only one basis point. The US dollar is mostly firmer. Among the majors, the yen is the exception, and it is flat to slightly higher. The pressure on the euro is dragging the central European currencies lower. The Philippine peso has jumped more than 1%, a huge move for the currency after the central bank governor confirmed a 25 bp or 50 bp hike next month. Gold is flat around $1720. September WTI is up another 1.8% (~$98.45) after rallying 2.1% yesterday to snap a three-day drop. US natgas is 2% higher and is at its highest level since mid-June. Europe’s benchmark has jumped 11% after rising nearly 10% yesterday. It has risen by around 27% over the past five days through today. Iron ore prices jumped 5.5% today, its third consecutive increase, over which time it has risen by around 13%. Copper is also rebounding. It is nearly 3% higher today after rising by about 1.7% over the past two sessions. September wheat is 2.3% higher. It gained 1.45% yesterday after falling more than 15% over the previous two weeks. 

Asia Pacific

There are three Chinese developments to note. First, Alibaba announced plans to have its primary listing in Hong Kong. This helped lift Chinese and Hong Kong markets today, but it also seems to be consistent with preparation to be de-listed in the US as some juncture. Second, China's zero-Covid tactics may be changing to try to be less disruptive. Reports claims that 100 of the largest businesses in Shenzhen are being told by local authorities to restrict operations to employees living in a closed loop, with little contact with people beyond their plant or offices. Even within companies, officials want limited contact between the non-manufacturing staff and the factory floors. Supply chain disruptions are still possible. Third, some reports are drawing attention to the Politburo meeting before the end of the month for new initiatives, and possibly recognizing economic risks in H2 after a disappointing H1.

Two new members joined the Bank of Japan over the weekend as Kataoka and Suzuki's five-year terms ended. It will be difficult for Takata (economist) to be as dovish as Kataoka, who was among the most ardent defenders of ultra-easy policy. Takata recognizes that this is not the time to exit the current stance, he argues the BOJ needs to be keeping an exit in mind. Previously, he thought that when the ECB began tightening that pressure on the BOJ would increase. Tamura (banker) seems to be somewhat more skeptical that negative rates have given the economy much support. Some accounts suggest that the new appointments could mean that the yield-curve-control is modified. Yet, this would seem to be only another possible "sub-variant" of the current policy and shows the challenge to those who argue that Governor Kuroda is key to the BOJ's stance, and that it will not change until he leaves next April, and Deputy Governor Wakatabe's term ends next March. 

Elsewhere in the region, note that South Korea's Q2 GDP was stronger than expected, rising 0.7% (quarter-over-quarter) after a 0.6% expansion in Q1. The median forecast (Bloomberg survey) was for a 0.4% increase in output. Domestic consumption and government spending offset the drag from trade. The Chinese lockdowns earlier this year have disrupted output from other countries. In May, for example, Japan's industrial output collapsed by 7.5% (month-over-month). The June figures is out later this week and is expected to have bounced back (~4.2%). Earlier today, Singapore reported its June industrial output plummeted 8.5% on the month. The median (Bloomberg survey) called for a 6.8% decline. The May surge of 10.9% was revised to a still heady 9.2% increase.

The dollar did not close below its 20-day moving average against the yen from late May through most of last week and finally did so before the weekend. It closed yesterday below it too, and today, has remained below it (~JPY136.85). The five-day moving average is set to slip below the 20-day moving average tomorrow (if not today). It would be the first time since early June, and illustrates the loss of the dollar's momentum, arguably encouraged by the pullback in the 10-year US yield nearly 75 bp from its high in mid-June. The greenback is in a narrow range, not quite a quarter of a yen on either side of JPY136.50. The Australian dollar is threatening the downtrend drawn off the early April and early June highs that also caught last week's and yesterday's highs. It comes in near $0.6955 today and the Aussie reached almost $0.6985 in early Asia Pacific activity. Although the upside momentum faded, the breakout is holding. Below it, support is seen around $0.6940. The Chinese yuan remains in narrow ranges showing little enthusiasm for either direction. Although it has frayed a little, the range set on July 14 (~CNY6.7235-CNY6.7685) has mostly confined the recent price action. For the first time in several sessions, the PBOC set the dollar's reference rate a little below expectations (CNY6.7483 vs. CNY6.7493).

Europe

Ahead of last week's ECB meeting, the bears where piling into shorts in futures market. The gross short position jumped from 200k as of the last Tuesday in June to 238.6k as of last Tuesday, July 19. It is the largest since the early days of Covid (record gross short position ~272k). The bulls had been culling their longs, five weeks in a row through the end of June, (~47.5k contracts). They were trying to pick a bottom in the first couple of weeks in July, increasing their long position by 7.8k contracts. However, it looks like some got stung by the break of parity and almost 1.4k contracts were cut in the week through July 19.

Russia's has reduced Nord Stream 1 to about half of what it was, which itself was 40% of capacity. Moscow blames the lack of turbines to pump the gas. Normally, Gazprom says there are six turbines, but now there is only one fully functioning. One turbine has been caught up in sanction red tape, first in Canada and now in Germany. Other turbines that need maintenance need to go to Canada, according to reports. Others argue this is simply another diversionary tactic by Putin. Still, natural gas prices are rising sharply and there continues to be concern about a complete shutdown. The EU holds an emergency energy meeting today after last week's plans for a 15% voluntary cut in consumption ran into a wall of opposition from several peripheral and central European countries.

The euro's recent peak was when the ECB met last week and surprised many with a 50 bp hike. It almost reached $1.0280. In the following three sessions, including today, the euro has not been above $1.0260. The downside has also been limited. The low of the past five sessions took place before the weekend near $1.0130. We still suspect there is scope for the euro push lower ahead of the tomorrow's outcome of the FOMC meeting. Sterling managed to edge slightly higher, reaching $1.2090 earlier today, its best level since July 5. However, the momentum is faltering, and sterling has come back offered. It is testing the $1.20 area near midday in Europe. However, given the intraday momentum indicators are stretched, it may be difficult to extend the loss significantly in early North American activity. Initial surveys suggest Truss won the first head-to-head debate with Sunak, but the market does not seem very interest. Lastly, note that Hungary is expected to hike its base rate 100 bp to 10.75%, which in turn would signal a simply hike in the one-week deposit rate later in a couple of days. 

America

Between bills and the two-year note auctions, the US Treasury raised around $141 bln yesterday. Today, $46 bln five-year notes will be sold. Still to come this week, is a two-year floating rate note and a seven-year note not to mention four- and eight-week bills. The macroeconomic data is expected to be soft. S&P CoreLogic Case-Shiller measure of house prices may have eased for the second consecutive month. The recent regional Fed surveys have mostly disappointed and no reason to expect the Richmond Fed manufacturing survey to be different. New homes sales in June are expected to pullback after the outsized 10.7% jump in May. The Conference Board's measure of consumer confidence likely deteriorated. The earnings seasons gets under way dramatically several household names reporting today, including Google, GE, GM, McDonalds, Texas Instruments, UPS, Raytheon, and Kimberly Clark. Walmart's cut in its forward guidance ahead of its earnings in a couple of weeks, weighs on sentiment.

In August 2019, many were worried that the US slowdown was morphing into a recession. The entire yield curve, three-month bill against the 30-year bonds was briefly and slightly negative. It ended the year a little above 75 bp and steepened to nearly 250 bp in March 2021. It retested it this past May, but has flattened dramatically to below 58 bp yesterday, the flattest since February 2020. The three-month bill yield was above the 10-year note yield for most of the May through October 2019 period. It finished the year near 35 bp and reached 125 bp in the early days of Covid. After backing off to around 45 bp in August 2020 it has trended higher to reach 230 bp in early May. It has crashed and now fell below 35 bp yesterday, back to where it was in late 2019.

Brazil reports its July IPCA inflation measure, and the year-over-year pace is expected to have moderated for the second month. It peaked at 12.2% in May and slipped to 12.04% in June. The median forecast (Bloomberg's survey) sees it at 11.41%. Brazil's central bank meets next week (August 3), and the market expects a 50 bp hike (to 13.75%), the same that was delivered in June. The market suspects after next week's move, the Selic rate is within 50 bp of its peak. 

As risk appetites wane, the US dollar is bouncing higher against the Canadian dollar. It set a new low for month today in late Asia/early European activity near CAD1.2815. However, it has jumped back and recorded new session highs near CAD1.2670. Nearby resistance is seen in the CAD1.2880-CAD1.2900 band. Meanwhile, the greenback is consolidating quietly in a narrow range against the Mexican peso (~MXN20.4110-MXN20.4825). A move above the MXN20.53 area would warn that a low may be in place. The Brazilian real soared 2.6% yesterday. It appears to be the biggest move since January 2021. Rising commodity prices and inflows into the equity market were cited. The greenback settled below its 20-day moving average (~BRL5.3750) for the first time since June 7. The next support area is seen near this month's low, which also corresponds to the 200-day moving average around BRL5.25. 

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