Overview: The dollar is well bid. It has risen to new two-year highs against the dollar bloc and Chinese yuan. Aided by worse than expected retail sales, sterling, on its anniversary of leaving the European Exchange Rate Mechanism fell to its lowest level since 1985. This fits into the broader risk-off move. The S&P 500 fell to new two-month lows yesterday, and FedEx warnings after the bell yesterday add to the string of worrisome comments from leading US corporates. Asia Pacific equities bled lower. The Nikkei, Shanghai and Shenzhen, Australia, and Index fell 1%-2% today. The MSCI Asia Pacific Index fell for the fifth consecutive week. Europe’s Stoxx 600 is off more than 1% as it slides for the fourth consecutive session. US futures are trading more than 1% lower, as well. Bonds are heavy, and benchmark 10-year yields are of 2-5 basis points in the US and Europe. The US 10-year is approaching 3.5%. Gold is no match for the stronger dollar and higher rates. It has been sold to new two-year lows today near $1654. After falling nearly 4% yesterday, December WTI is steady now, hovering around $84. The US is avoiding a railroad strike, and this weighed on US natgas prices. They fell 8.7% yesterday and are off another 3.25% today. Europe’s benchmark fell 2.7% yesterday and is off 7.7% today. Iron ore fell 2.5% today and settled below $100 for the first time since the middle of last week. December copper is extending its sell-off for the fourth consecutive session. Around $344.50, it is off 3.5% this week. Wheat, which had been supported by the prospects of a rail strike, fell 3% yesterday and is off a little more today. This will likely be the first week in four that December wheat prices have eased.
Asia Pacific
China's economic data points
to some recovery, but the headwinds are significant as the property market is
not fixed, which has served as a critical engine for growth and development. Nor were the data sufficient to prevent
the largest slide in the CSI300 (-2.35%) in four months. Industrial
production (4.2% year-over-year), retail sales (5.4%), and fixed asset
investment (5.8%) were stronger than expected. However, property investment
(-7.4%) and residential property sales (-30.3%) illustrate the challenge. The
surveyed jobless rate eased to 5.3% from 5.4%.
By a 17-5 vote yesterday,
the US Senate Foreign Relations Committee based a bill that would strengthen
the US-Taiwan relationship. Among other things, it would officially recognize Taiwan as a
major non-NATO ally and would commit the US to boosting Taiwan's presence in
international organization that are based on state membership, like the United
Nations and IMF. It would change the key Taiwan Relations Act (1979). The next
step requires a vote in the whole Senate. It is a bipartisan measure and there
are parliamentary maneuvers that could boost the chances of its passage, like
tying it to a spending bill that must be passed. In some ways, however, even
without passage, the intent is clear. It moves the relationship in the direct
that President Biden has often spoken about, but only to be walked back later. For
good reason, both sides suspect the other is trying to change the status quo. One
lesson drawn from Russia's invasion of Ukraine (again) is strengthening the
commitment not to let a similar story play out in the Asia Pacific.
Japan and China are not the
only ones wrestling with depreciating currencies. The South Korean won, the second weakest
currency in Asia after the yen, has fallen to 13-year lows. Jawboning by the
government and some thought of quiet intervention helped cap the US dollar at
KRW1400. South Korean President Yoon Suk Yeol will reportedly meet US Biden and
Japan's Kishida on the sidelines of the UN. South Korea may seek to renew the
$60 bln swap line that was established in March 2020 that expired at the end of
2021. A swap line would allow South Korea to borrow (a fixed amount) of dollars
for a pre-established period and rate in exchange for won. It addresses the
problem as one of dollar liquidity and not an exchange rate issue per se. Part
of the challenge is that South Korea's inflation rate is at 5.7% (August) but
the central bank has been slow to raise rates. Its seven-day repo rate is at
2.5%. Inflation has risen by 200 bp this year while the repo rate has risen by
125 bp.
Jawboning by Japanese
officials has promoted the consolidation of the yen's exchange rate. The JPY145.00 was approached last week and
re-tested this week. It held. At the same time, chart support near JPY141.65
held as well. Still, it is the fifth consecutive weekly advance for the
greenback. It settled last week slightly below JPY142.50. The Australian
dollar slipped through support at $0.6700 yesterday and today took out the July
low (~$0.6680) to record a new two-year low today near $0.6670. There are
options for A$310 mln at $0.6650 that expire today but might be too far away
given the stretched intraday momentum indicators. Still, recall that the
measuring objective of the head and shoulder pattern that we have been
monitoring is closer to $0.6600. The central bank governor confirmed what the
market has suspected: the phase of 50 bp rate hikes may be over. The dollar
rose above 7.0 against the offshore yuan (CNH) yesterday, and today, the
greenback gapped above it against the onshore yuan (CNY). Today's low
is CNY7.0048, according to Bloomberg. The US dollar reached a little above
CNY7.0250. It looks poised to test the 2019-2020 high around CNY7.18. The PBOC
continues to try controlling the pace by setting the dollar's reference rate
well below expectations. Today, the fixing was set at CNY6.9305 vs.
expectations (median in Bloomberg's survey) for CNY6.9761.
Europe
On the anniversary of
"Black Wednesday" when the sterling dropped out of the European
Exchange Rate Mechanism in 1992, sterling has been sold to its lowest level
since 1985 (~$1.1350). It
was already under pressure before the UK reported dreadful retail sales. The
median forecast in Bloomberg's survey projected a 0.5% decline, but instead
August retail sales plummeted 1.6% (including and exclude gasoline). It is the
largest decline this year, in which retail sales have only risen in one month
(July). Sales declined across all the major sectors, underscoring the general
and intense cost of living squeeze. The new government will unveil its fiscal
plans formally next Friday. It is expected to include reversing the hike in the
national insurance. The Bank of England also meets next week. The market has
moved away from the expecting a 75 bp hike and now is seen as about a 20%
possibility, down from 80% earlier this week.
The Fed is, depending on
where you either the hero or the villain of the bullish dollar narrative. There might be more to it than that. The
eurozone and Japan are experiencing a dramatic deterioration of their external
balances. Consider the trade reports out yesterday. The eurozone's average
trade deficit in the first seven months of the year was 25.3 bln euros. For the
same period last year, it had an average monthly surplus of
16.6 bln euros. In the Jan-July period in 2019, the average surplus was larger
near, 21 bln euros. Japan's latest trade figures cover August, and this year
Japan has recorded an average monthly deficit of JPY1.53 trillion (~$11 bln). In
the same period last year, it averaged a monthly surplus of
JPY73 bln.
The most important
implications of the switch to trade deficits are not about the structure of Japanese
or European society (see here) but
it could have knock-on effects in the circuit of capital. However, both Japan and the eurozone
are still reporting a broader current account surplus. The eurozone seems more
likely to fall into deficit, which would mean that it might have to compete
with the traditional deficit countries to attract capital. Without getting too
far ahead of ourselves, the forces have been set into play that will change
this, even if it takes a bit more time. Specifically, according to the OECD's
measure of purchasing power parity, the euro and yen at historic
under-valuation levels of about 42.5%. This is a huge competitive advantage. Consider
than the major currencies rarely deviate more than 20% from the OECD's fair
value (PPP). However, the decisions for trade and direct investment are not as
rapid as constant adjustments in the 24-hour a day more money. The
unprecedented extreme valuations will encourage a change in behaviors of
businesses and households and will be part of the broader narrative when the
(dollar's) bull market ends.
The euro has been sold to
new lows for the week (~$0.9945) but held the 20-year low recorded last week
near $0.9865. Options for
700 mln euros at $0.9900 expire today, and another set for a billion euros
expire there on Monday. The $1.0000-$1.0020 offer the nearby cap. Sterling,
on the other hand, fell to $1.1350 before finding a bid. It took out
$1.1375, where GBP400 mln options were struck that expired today, and may have
spurred more sterling sales. The intraday momentum indicators are trying to
turn up, but sentiment is poor, and the $1.1400 area offers initial resistance,
with the $1.1450 likely a more formidable cap now. There is little on the
charts ahead of the 1985 low that was slightly above $1.05.
America
The series of mostly
disappointing US economic data prompted the Atlanta Fed's GDPNOW tracker to cut
its projection for Q3 to 0.5% from 1.3%. Yet, it was not weak enough to prevent the US 2-year yield
from rising to new higher near 3.87%. Perhaps, the fifth consecutive weekly
decline in weekly jobless claims (at 213k, they are the lowest since the end of
May) coupled with the elevated prices reported earlier this week spur the
market to continue to revise up the terminal rate for Fed funds. The yield on
the March 23 Fed funds futures has in all but two sessions in the past three
weeks, The move began in the session after Fed Chair Powell's terse statement
at Jackson Hole. Over this span, it has risen almost 70 bp (~3.78%-4.47%). If
Fed funds are going toward 4.5%, then surely the risk is that the US two-year
yield rises above 4%.
After toying with the idea
again of a 100 bp hike next week, the market has reassessed what was once a
little better than a 50/50 proposition is now seen less than a 1-in-4 chance. It The market now sees the Fed hiking rate
by half-a-point in each of the two meetings in Q4. It is also notable that
through this rise in US rate expectations, European rates have kept pace and
more. Specifically, the US two-year premium over Germany peaked in early August
near 277 bp. It has been trading between 220 bp and 240 bp this month. Offered
as a mile-marker, the 200-day moving average is around 216 bp. The spread has
not fallen below this moving average since mid-2021. There is currently 175 bp
difference in the policy rates. The swaps market does not see it closing much
over the next year (162 bp).
The University of Michigan's
consumer survey, including inflation expectations, stands ahead of the weekend.
The Treasury's
international capital flow report is released as the markets close today, which
ahead of the weekend, will be more a curiosity than a market-mover. Canada
reports August housing starts and wholesale trade (weaker) and July portfolio
capital flows. With the S&P 500 falling to two-month lows yesterday, the US
dollar finally closed above CAD1.32 yesterday. Follow-through buying today
lifted the greenback to almost CAD1.3300, a new two-year high. We suggested
that the break of CAD1.3200 targets the CAD1.3340 area, which is the (50%)
retracement of the US dollar's losses since the March 2020 high (~CAD1.4670). A
move above there signals a move toward CAD1.3400-20, which we see offering the
next target. The US dollar was fraying the bottom end of its range against
the Mexican peso (~MXN19.80) at the start of the week and now is approaching
the upper end, seen around MXN19.20. Today's eight-day high has been about
MXN20.1335. Barring a big reversal, the greenback will snap a three-week
decline against the peso. Among emerging market currencies this week, only the
Russian rouble has gained on the US dollar. The JP Morgan Emerging Market
Currency Index is off 1%, pending the LATAM session. It is the third
consecutive weekly decline.
Disclaimer
Reviewed by Marc Chandler
on
September 16, 2022
Rating:
