Overview: The dollar’s recent losses have left it stretched on a near-term basis after today’s ECB meeting, the focus will shift to the Federal Reserve, next week’s meeting, and the employment report. The greenback is trading with a firmer bias against the G10 currencies, while the emerging market currencies are more mixed. There, several Asian currencies are leading the advance today (South Korea, Taiwan, and the Philippines). Central European currencies are posted 0.6%-0.8% losses as is the Chinese yuan. Benchmark 10-year yields are also firmer by 6-8 bp today, including US Treasuries. Chinese and Japanese stocks were lower, but the other large regional markets, led by South Korea and Taiwan, advanced. Europe’s Stoxx 600 is off 0.4%, as a three-day nearly 3.5% rally stalls. US equity futures are narrowly mixed. Gold is consolidating in a relatively tight range mostly between $1660 and $1670. After a 3% rally yesterday, December WTI is hovering around $88. It settled last week closer to $85. US natgas is little changed for the second consecutive session near $5.60. Europe’s benchmark is up almost 5% after gaining nearly 3.5% in the past two sessions. Iron ore continues to get pounded. It fell 5.5% today, its fourth consecutive decline. It was down around 4.75% for the week coming into today. December copper is paring yesterday’s sharp 4.35% gain, its most in three months. December wheat is firmer. Today’s gains and yesterday’s increase leaves wheat prices little changed on the week.
Asia Pacific
Few observers give BOJ
intervention much chance of success. Indeed, it has been cast as part of a
trilemma, maintaining open capital markets, setting the price of money (yield
curve control) and trying to manage the currency. While recognizing that
it was unlikely to be effective, we framed it as a question of buying
time. The BOJ, in effect, needed to buy time until the US rate cycle
peaked. That said, it is not like the BOJ is simply standing pat. It is
continuing to expand its balance sheet. Consider that through today, the
BOJ bought JPY3.7 trillion (~$25.5 bln) of government bonds this week.
Tomorrow the BOJ's meeting concludes, and it is not expected to change its
stance. Separately, Japan's government is expected announce a new
spending package, whose expected size has crept up to the upper end of the JPY20-30
trillion that has been bandied about. The spending is expected to include
subsidies for household electricity (by ~20%) through Jan-Sept 2023, gasoline,
and wheat. The subsidies are expected lower CPI, especially in the
first part of next year. Reports suggest that the measures will provide
more incentives for Japanese companies to boost wages, support tourism, and
some financial encouragement to re-shore production.
Yesterday, the Reserve Bank
of Australia reported inflation surged in Q3 to 7.3% with the trimmed mean
jumping to 6.1%. The
market is wrestling with the implications of the report for the November 1 RBA
meeting. The swaps market recognizes a small chance for a 50 bp hike
instead of another quarter-point move, like it delivered earlier this
month. The futures market had only 20 bp discounted at the start of last week
and was around 23 bp as of Tuesday. Now, a little more than 27 bp is
priced in. We suspect this may understate the risk but are favor a 25
quarter-point move.
The dollar fell to about
JPY145.10, a nearly three-week low today, having peaked last Friday a little
shy of JPY152.00. It
is threatening to post its first three-day decline since July. There are
options for almost $715 mln at JPY145 that roll off today. The near-term
low may be in place. The dollar moved above JPY146 in the European
morning. The JPY146.50 may off the nearby cap. The
Australian dollar extended yesterday's gains a little through $0.6520, its best
level since October 6. However, it too has stalled, and is recording
session lows in Europe. A break of $0.6450 signals a deeper pullback but
0.6400, where nearly A$500 mln in options are set to expire today, may be a bit
too far today. After falling by the most this year (~1.3%) against the
Chinese yuan yesterday, the greenback bounced back by almost 0.8%
today. The dollar's reference rate was set at CNY7.1570, while
the market (median projection in Bloomberg's survey) was for CNY7.1629.
That gap was the narrowest in a couple of months. Yesterday's fix was at
CNY7.1638. Imagine those state-owned banks that reportedly bought dollars
yesterday. Many think it was done at the request of officials, but one key is
who absorbs the losses? Or is it the same thing, when the BOJ says it may
take drastic action and some banks buy dollars? Are losses
socialized?
Europe
The ECB is widely expected
to deliver a 75 bp hike today. At the same time, ECB President Lagarde can only offer a
dour economic outlook. Her message will likely be a variation on the
"a stich in time saves nine" or the "poor tasting medicine is
needed to prevent a more serious illness". She may point to a few
favorable developments. Since the ECB met last, the price of the Dutch natural
gas one-month forward contact, which serves as a benchmark, has been more than
halved. It is still up 50% from a year ago. Also, the euro is
enjoying its largest recovery of the year. It bottomed in late September
near $0.9535 and traded to $1.0090. yesterday.
There are two other areas
that market participants will look for guidance. First, the deposit rate makes it
more lucrative for banks to bring the ECB is excess liquidity. The ECB
may want to discourage some of this activity, and it can do so be having
different thresholds or tiers for the interest earned with the ECB.
Second, and partly related, are the TLTROs, the long-term loans that account
for about a quarter of the ECB's balance sheet. With interest rates
rising, the ECB may want to make it somewhat less lucrative. Even if it
is within its legal rights, re-setting the terms will not set well with
many. In addition, the TLTRO maturity schedule needs to be included in
discussions about unwinding the balance sheet.
The UK government's fiscal
policy statement has been postponed from October 31 to November 17. The content is unlikely to
change. Spending cuts will be featured. The reason for the delay is to
get a better assessment from the Office for Budget Responsibility that will use
interest rates for five days through today, or possible a little later,
according to press reports. A formal decision is expected shortly.
Still, the takeaway is that the OBR forecasts will look better now that
interest rates have fallen, and sterling strengthened.
Last Friday, the euro
recorded a low near $0.9700. Earlier today it reached almost $1.0095. It settled yesterday above the upper
Bollinger Band (~$1.0055). After such a sharp run, it ought not to be
surprising to see a modest pullback ahead of the ECB meeting. Session
lows are being recorded in the European morning, near $1.0030. Parity should offer
support and there are 2.35 bln euro in options struck there that expire
today. Similar price action is unfolding in sterling today. It made marginal new high near $1.1645 before losing its momentum and pulling back to
around $1.1555. The intraday momentum indicators are getting
stretched. Nearby support is seen in the $1.1540-50 area. The $1.15 area
that had acting as resistance may now be support, with the help of almost
GBP600 mln expiring options struck there.
America
The US reports its first
estimate of Q3 GDP today. The median forecast in Bloomberg's survey is for a 2.4% annualized
rise after a 0.6% contraction in Q2 and a 1.6% decline in Q2. Trade and
inventories were played a big role on the H1 contraction and likely in the Q3
bounce. Even after yesterday's trade report that show a 5% deterioration
on the monthly trade deficit, the Atlanta Fed's GDPNow tracker was tweaked to
3.1% from 2.9%. If there is a modest beat, the market's reaction may be
short-lived. The idea is that this more or less the reverse the H1
GDP-math "distortions." It is as if with the noise behind us,
the underlying signal will re-emerge and that is a gradual slowdown that will
first produce near stagnant conditions. That is the proverbial
soft-landing. But the risks still seem to be skewed to the downside. We
note that the median forecast in Bloomberg's survey has growth at 0.6%
annualized in Q4 and a 0.1% contraction in Q1 2023.
The Fed's view (median
projection) of this year's GDP seems unduly weak at 0.2%. The market is at 1.7% and the IMF is at
1.6%. However, next year the role is reversed. The Fed's 1.2%
median forecast is well above the economists surveyed by Bloomberg (median of
0.4%) and a bit above the IMF's 1.0% projection. The Fed's 2024 forecasts
are for just below trend growth at 1.7%, while the median in Bloomberg's survey
is for 1.4% growth and the IMF is at 1.2%.
The Bank of Canada surprised
the market with a 50 bp hike instead of 75 bp. The US dollar jumped from around CAD1.3580
to CAD1.3650. Within an hour, it unwound the gains and traded down to
around CAD1.3540. As US equities weakened in the US afternoon, the USD dollar
firmed back above CAD1.3580. Clearly signaling that it is not done, Bank
of Canada Governor Macklem said the past hikes, 225 bp since the end of H1, are
beginning to weigh on growth. In its updated forecasts, the Bank of
Canada cut Q3 growth to 1.5% from 2.0% and projects the economy slowing to 0.5%
in Q4. Next year's growth forecast was halved to 0.9%. At the same
time, Macklem was clear: there was no meaningful evidence that the
underlying price pressures were easing. Still, this year's inflation
forecast was trimmed to 6.9% from 7.2% and next year's was reduced to 4.1% from
4.6%. This would seem to confirm that the Bank of Canada will stop
tightening monetary policy with CPI twice the target. This does not mean
that Canada will change its inflation target. Instead, it is a
recognition that monetary policy takes place with a lag. The Bank's
forecast is for 2.2% CPI in 2024.
After the initial sell-off
after the smaller-than-expected Bank of Canada hike yesterday the Canadian
dollar settled at its best level since October 4 near CAD1.3555. Today, the US dollar is trading inside yesterday's
range with a firmer bias. Yesterday's high around CAD1.3650 may be
tested. The key, we suspect, is the US equity market. Still, the
intraday momentum indicators are getting stretched, and this may encourage a
cautious tone in early North American turnover. Meanwhile, the
greenback tested the lower end of the two-and-a-half-month range against the
Mexican peso yesterday around MXN19.80. It recovered yesterday
and extended the gains today to almost MN20.04. Today, Mexico reports
September employment and trade figures. The peso does not often appear
sensitive to these reports, but we note that it may be the second consecutive
month that the trade shortfall shrinks. Still, intraday momentum
indicators favor further upside for the US dollar in early North American
turnover. Meanwhile, the dollar jumped to BRL5.38 yesterday and that was
before the central bank left rates on hold for the second consecutive
meeting. The market is nervous ahead of this weekend run-off. This
is a new US dollar high for the month and last month's high was slightly below
BRL5.43.
Disclaimer
Reviewed by Marc Chandler
on
October 27, 2022
Rating:
