Overview: China and Japan continue to struggle to stabilize their currencies, while global interest rates rise. The offshore yuan has fallen to new lows but in late dealings the onshore and offshore yuan have recovered. The dollar also traded above JPY150 for the first time since 1990 and the market knows it is on thin ice as with the threat of official intervention. A risk-off mood permeates. Equity markets have retreated in the Asia Pacific region and Europe. US futures are also trading lower. Benchmark 10-yields are 1-3 bp higher in Europe, and 10-year US Treasury yields reached a new high around 4.17% before steadying. The greenback is mixed. Among the G10 currencies, the Australian and Canadian dollars are firmer, while sterling, the Swiss franc, and Swedish krona are nursing small losses. Emerging market currencies are also mixed. Central Europe is outperforming East Asia. Gold recorded a new low for the month near $1622.50 before catching a bid. Initial resistance is seen near $1640. December WTI extended yesterday’s recovery and reached a new four-day high near $86.30. The nearby cap is seen in front of $88.00. Natural gas is snapping a four-day drop in both the US and Europe’s benchmark. Iron ore tumbled 2.4% to new lows below $90. However, copper is jumping back 1.4% in what could be its first gain in five sessions. December wheat, which has lost 2.3% over the past two sessions is recouping a little more than 1% today.
Asia Pacific
The dollar rose above
JPY150 for the first time since 1990 and there has been no sign of intervention.
Ironically, the weaker yen is one of the factors pushing up Japanese
yields, which in turn spurs BOJ purchases, which in turn underscore the
monetary divergence that weighs on the yen. In regularly scheduled and
unannounced purchases, the BOJ bought about JPY1.3 trillion today (~$8.5 bln).
The yen's weakness aggravates the terms-of-trade shock in the first instance. Japan
reported a slight narrowing of the September trade deficit to JPY2.09 trillion
from JPY2.8 trillion. Export growth accelerated to 29% year-over-year from 22%,
while import growth slowed to 45.9% from 49.9%. Tomorrow, Japan reports
September CPI. The core rate, which excludes fresh food, is seen rising to 3%,
while the measure that excludes both fresh food and energy may tick up to 1.8%
from 1.6%. The BOJ meets next week. Its forecasts may change, but policy is a
different story.
Employment in Australia
ground to a near halt in September, gaining less than 1000 jobs. This may overstate the case, a little. The
loss of part-time positions more than offset the 13.3k increase in full-time
posts. Still, the loss of momentum is clear. The three-month moving average of
full-time posts is slightly negative the lowest this year. The other metric
held in better. The participation rate was unchanged at 66.6%, and the
unemployment was steady at 3.5%. The Reserve Bank of Australia meets on
November 1 and is expected to hike the target rate 25 bp to 2.85%.
The dollar poked above
JPY150 in early European turnover and quickly fell back to about JPY149.70. It just as abruptly snapped back to
the JPY149.90 area. The market knows it is tempting official action and is
skittish. Indeed, the entire session range was set in a little more than 30
minutes. Without international cooperation, we see BOJ intervention most likely
confined to Tokyo hours and that the second operation will not yield the same
results as the first. Late September's record intervention immediately knocked
the dollar back about 5.5 yen. Follow-through selling initially saw the
Australian dollar fall to a three-day low near $0.6230 before bouncing back to
new session highs in the European morning near $0.6280. The intraday
momentum indicators are getting stretched, suggesting a run to yesterday's
highs around $0.6325 may be too much. The dollar traded to CNY7.2480 today, its
highest level since late September. It pulled back a little away from the
CNY7.25 level and is trading near CNY7.2360 in late turnover. The prime lending
rates were left unchanged today. Even without the latest weakness of the yuan,
a cut was not expected. The PBOC lifted the dollar's reference rate to
CNY7.1188. That puts the upper end of the 2% band a little above CNY7.26. The
greenback reached CNH7.2790 against the offshore yuan, a new high. It has
pulled back to below the CNH7.2550 area.
Europe
Out of the frying pan, into
the fire. So goes the UK
Prime Minister whose honeymoon may be measured in hours. Her tenure is still be
debated. It is not about economic policy so much anymore, as Truss has accepted
the reversal of her fiscal experiment. She did not win the leadership challenge
among the Tory parliamentary members, but their job was to narrow the field to
two candidate and let the rank-and-file decide. And chose they did. Now, a new
effort by the MPs to force her out short of an election, which polls say the
Conservatives are sure to lose. Meanwhile, Home Secretary Braverman was forced
to resign after violating cabinet confidentiality. Braverman was a candidate
herself party leader but was knocked out early. Her resignation letter was also
a biting criticism of Truss. Ironically less than 24 hours earlier, in a
rhetorical flourish, Braverman called the Labour Party and the Lib Dems, a
"coalition of chaos, it's the Guardian-reading, tofu-eating
wokerati." Truss tried tightening the screws on a vote on fracking,
Tory MPS were threatened with expulsion from the party if they voted against
the beleaguered government and controversial issue even in some strong Tory
districts. The Chief whip, the parliamentary enforcer resigned as did her
deputy. And then in a dramatic reversal, it appears Truss persuaded them to
retract their resignations to end a dramatic day.
The eurozone reported a 26.3
bln euro August current account deficit. Like, Japan, the eurozone has experienced a significant
terms-of-trade shock and a marked deterioration of its external balance. Consider
that last August, the EMU recorded a 17.1 bln surplus, or that this year it has
recorded an average monthly deficit of 9.2 bln euros compared with an average
surplus of 28.3 bln euros in the first eight months of last year.
The euro initially extended
yesterday's losses to about $0.9755 before recovering to almost $0.9800, where
options for nearly 2 bln euros expire today. We suspect that they have largely been neutralized, but
today's high is about $0.9795. The intraday momentum indicators suggest there
may be a little more upside potential, but the $0.9820 area looks like the best
that can be hoped for today, barring new developments. Sterling has sulked
to almost $1.1170 in the European morning. On the downside, there are
options for GBP480 mln at $1.1145 that roll off today. If Truss does step down,
we suspect sterling can bounce initially. While we suspect a major low is in
place, a move above $1.15 would add credence to this view. More immediately,
the $1.1250 area looks to offer the initial cap. Lastly, Turkey's experiment is
set to continue. Despite CPI above 84%, the central bank is expected to cut its
one-week repo rate by 100 bp (to 11%) for the third consecutive move. The lira
is off about 28.5% this year, of which about 5% has been recorded in the past
three months.
America
The Beige Book was
unexpectedly dour. However,
it did not deter the surge in US interest rates. The anecdotal report prepared
for the November 1-2 FOMC meeting gave an overall sense of slowing activity and
easing of some price pressures. Businesses were worried about demand. Several
districts reported easing of labor market conditions. In broad strokes, here is
a scenario, which seems to be gaining credence: Q3 growth is a bit of
catch-up the first half and most of the payback will be from trade. The US
economy may nearly stagnate or worse over the next few quarters. Monetary and
fiscal brakes are being slammed. Inflation is high but the year-over-year
comparison has too long of a memory, as it were. US headline CPI rose at an
annualized rate of around 10% in Q1 and Q2. It slowed to 2.0% in Q3. The Fed,
as Bullard suggests, may front load more hikes this year and ratify market
expectations (that he helped shape), meaning 75 bp moves in November and
December. Frontloading takes on new meaning if one is in a hurry to get
inflation down, so it is in a better position to act if when
the economy warrants. The implied yield of the December 2023 Fed funds futures
is about 17 bp below the implied yield of the September 2023 contract.
September housing starts
reported yesterday were weaker than expected, slowing after jumping almost 14%
in August. Existing home
sales are on tap for today and they are expected to have continued to fall. January
was the last month-over-month increase. Mortgage demand has cratered as one
would expect. Also, the drying up of the refinance market also cuts into a
source of income (consumption?) as previously, owners were often tempted to
take out equity. Also, weekly initial jobless claims are rising again but the
levels are modest. Still, looking ahead, it seems reasonable to assume the
labor market conditions are likely to weaken. The October Philadelphia Fed
survey may confirm the weak sentiment seen in the Empire State survey last week.
The price sub-indices draw attention given the market's sensitivity to
inflation. Four Fed officials have scheduled appearances, but only Hacker
(around midday ET) may address the economic issues.
Canada's CPI was stronger
than expected and this sparked a new appreciation for the risks that the Bank of
Canada delivers another three-quarter point hike next week. The headline rose slightly, and the market
had expected a small decline. The year-over-year rate eased to 6.9% from 7.0%.,
not quite as much as expected. That said, the pace of inflation stopped cold in
Q3. Consider, and CPI rose at an annualized pace of more than 13% in Q1 and
almost 12% in Q2. Q3? Minus 0.4%. The average of the core
rates was little changed because of the upward revision to the August series.
In the swaps market the odds of a 75 bp move surged from almost 25% to 85%. That
failed to give the Canadian dollar traction as the risk-off (proxy S&P 500)
was the flavor of the day.
For the third session, the
US dollar has found offers above CAD1.38 that caps the greenback. A close below CAD1.3720, where the 20-day
moving average is found, would be a cautionary note for the greenback. This
moving average has not been violated on a closing basis for over a month.
Without new US dollar strength, the 5-day moving average can fall below the
20-day moving average early next week. It would be the first time in two months.
The greenback firmed to a marginal new high for the month yesterday against
the Mexican peso near MXN20.1760. With a few exceptions, the MXN20.20 area
has capped the dollar since mid-August. For those needing to buy peso, this
area may be attractive. Initial support today is seen near MXN20.05-MXN20.10.
Disclaimer
Reviewed by Marc Chandler
on
October 20, 2022
Rating:
