Overview: The market has not yet become convinced
that the Fed will in fact deliver the two hikes the median dot anticipates this
year, and the dollar was sold off sharply yesterday, the day after the FOMC
meeting. In fact, the swaps market is more convinced that the ECB hikes in July
than the Fed. Outside of the yen, which was sold after the BOJ stood pat, the
G10 currencies are mostly little changed, consolidating the recent moves. Emerging
market currencies are mixed. Central European currencies are a little heavier,
and are joined by the Mexican peso, which is looking increasing vulnerable to a
pullback. The Chinese yuan rose for the third consecutive session, the longest
advance in more than a month.
Equity markets are mostly firmer. Among the large bourses in the Asia Pacific region, only Taiwan did not rise today. China's CSI 300 rose by 3.3% this week, the biggest rally since last November. After snapping a three-day rally yesterday, Europe's Stoxx 600 is recovering today. Its roughly 1.4% rally this week is the most in two months. US equity indices are firmer ahead of the expiration of futures and options today. European benchmark 10-year yields are 2-5 bp softer today, while the 10-year US Treasury yield is firm near 3.73%. Gold recovered from a three-month low set yesterday near $1925 to settle near $1958. Follow-through buying lifted it to near $1965 in the European morning. The week's high was set near $1971 on Tuesday. July WTI reached almost $71 yesterday. The week's low was set on Monday around $66.80. It stalled at its 20-day moving average yesterday and is testing the $70 area ahead of the US open.
Asia Pacific
There are three developments
in Japan to note. First,
as widely expected, the BOJ stood pat. There was some hint that policy could
change at next month's meeting. BOJ Governor Ueda acknowledged that a big shift
in the central bank's inflation projections could prompt a change in policy,
and at next month's meeting new forecasts will be presented.
Second, as the dollar
climbed to new highs for the year, Japanese officials stepped on the first rung
of intervention escalation ladder. Chief Cabinet Secretary Matsuno cautioned
that excessive fluctuations in the foreign exchange market are undesirable. He threatened intervention by
warning that the government would respond to "unwarranted" moves.
Yet, three-month implied vol is subdued. Earlier this month, it reached about
8.8%, the lowest April 2022. It briefly traded above 14% when the US banking
stress emerged in late Q1 23. Japan intervened last year when it was closer to
13%, peaking in late October 2022 near 14.8%. The yen's weakness is, as we have
noted, not simply expressed against the dollar but on many crosses as well. On
the OECD's measure of purchasing power parity, the yen is more undervalued now
than it was when officials convened at the Plaza Hotel in 1985 to drive the
dollar down and lift the European currencies and yen. The fundamental driver of
the yen's weakness is the divergence of interest rates.
Third, Prime Minister
Kishida pushed back against speculation that he was soon going to call a snap
election. While the
opposition's submission of a no-confidence motion could give the prime minister
cover, he apparently will not take it. And there is little chance that the
no-confidence motion will succeed. The boost in the polls Kishida drew from the
strength of the economy in Q1 and the successful G7 summit he hosted, is being
unwound a bit due to the problematic launch of national ID cards, scandals
involving his son, who is also a close aide, and a rift with the junior coalition
partner, Komeito, over redrawing constituency lines.
After finishing the North
American session near its lows (~JPY140.30), the dollar was sold to JPY139.85
in early Asia Pacific trading. It recovered to JPY141.40 after the BOJ outcome, a little shy of
yesterday's high before consolidating in the European morning. Initial support
is seen near JPY140.75. Around JPY141.00, the dollar is up about 1.2% this
week, recouping and more the losses of the past two weeks. The Australian
dollar's gains have been extended $0.6900, which meets the (61.8%) retracement
of the decline from the early February high (~$0.7160) to the low at the end of
May (~$0.6460). Momentum indicators are stretched, and the upper Bollinger
Band (~$0.6890) has been frayed. The Aussie has a six-day advance in tow coming
into today. It looks vulnerable, and close below $0.6860 could set up a
correction next week. The best thing for the Chinese yuan is a general
pullback in the dollar. This is what happened yesterday, and the greenback
posted a key reversal against the yuan and follow-through selling today was
seen. The dollar rose to new highs for the move yesterday (~CNY7.1805) and then
sold off, taking out and settling below Wednesday's low (~CNY7.1470). Today,
the dollar fell to almost CNY7.1070. China is one of the few countries
providing policy support and this could encourage foreign buying of Chinese
stocks. The dollar's reference rate was set at CNY7.1289. The median forecast
in Bloomberg's survey was for CNY7.1280.
Europe
The ECB delivered a hawkish
message with its 25 bp hike that brought the deposit rate to 3.50%. Lagarde indicated that barring a
significant surprise, the ECB would hike rates at the July 27 meeting. The
market leans strongly toward one more hike after that this year. The ECB's
hawkish stance was also underscored by the staff's forecast update, which saw
headline and core CPI measures raised across through 2025. In fact, the 2025
inflation forecasts were lifted slightly and further above the 2% medium-term
target. The 2025 CPI is now seen at 2.2% (from 2.1%) and the core forecast
edged up to 2.3% from 2.2%. At the same time, the ECB's staff shaved this
year's growth projection to 0.9% from 1.0% and next year's GDP growth to 1.5%
from 1.6%. Its 1.6% forecast for 2025 GDP was unchanged.
The euro rose 1% yesterday,
its biggest gain in four months. It rose slightly above $1.0950. The four-day rally saw the euro
settle above its upper Bollinger Band (~$1.0905). Follow-through buying today
was limited to a little more than $1.0960 but it appears to be stalling ahead
of the weekend. Initial support may be near $1.0920. Sterling punched
above $1.28 today for the first time since last April. It has closed
above its upper Bollinger Band for the past two sessions and has held above it
today (~$1.2755). This week's 1.75% rally (near $1.28) is the biggest weekly
advance since last November. Ahead of $1.30, the next chart area may be around
$1.2875. The market is pricing in a BOE hike next week and nearly 125 bp before
the end of the year. It is hard to envision the market discounting a more
aggressive path.
America
The bevvy of US data
reported yesterday were mixed but elicited minor reactions as the market
participants continued to contemplate the implications of the FOMC meeting. The odds of a July hike are still around
60%-65%. The two-year yield reached nearly 4.80% in the immediate aftermath of
the Fed's statement on Wednesday, the highest level since the bank stress
erupted in March. Yesterday's high print in yield was 4.78%. Claims about the
Fed losing credibility are often too subjective, but there does seem something
amiss now. The Fed's median forecast was that two more hikes are needed but the
implied year-end rate has risen about and note that effective Fed funds rate (a
weighted average of the transactions) is at 5.08% since the May rate hike. The
January Fed funds futures contract has the year-end effective rate near 5.20%,
suggesting some skepticism about the median Fed dot for two hikes more hikes
this year.
From the vantage point of
the central bank the resilience of retail sales (expected -0.2% and instead
grew by 0.3%) speaks to the strength of demand. Industrial output was weaker than
expected, falling by 0.2%, but it was not due to manufacturing, which increased
by 0.1% increased of declining as had been projected. Weekly initial jobless
claims were flat at 262k, but the four-week moving average crept up to its
highest level since November 2021. The recent string of data, including yesterday's
deluge, prompted the Atlanta Fed's GDP tracker to ease to 1.8% from 2.2% on
June 8. The driver was softer real household consumption and government
spending. The FOMC statement and projections today's preliminary June
University of Michigan survey is bound to have little impact even if consumer
inflation expectations edged lower.
The dramatic 22.5% drop in
Canada's May housing starts after almost a similar gain in April shows the
volatility of the time series. Existing homes sales rose in May but the 5% increase was
less than half of what the market (median forecast in Bloomberg's survey)
expected. April manufacturing sales edged up (0.3%) instead of decline as had
been anticipated. Canadian rates tracked US rates lower, but this did not
prevent the Canadian dollar from rising to its best level since last November.
The US dollar fell to nearly CAD1.3225. The Canadian dollar's nearly 2.6% gain
this month has stretched momentum indicators. That said, a break of CAD1.3200
leaves little on the charts ahead of CAD1.30. The dollar is trading quietly
today in almost a CAD1.3210-CAD1.3240 range. Some near-term back and filling
would not be surprising. Initial resistance is seen near CAD1.3280. Meanwhile,
the greenback's downside momentum against the Mexican peso stalled in the
middle of the week near MXN17.08, its lowest level since 2016. The
attractive carry means that even a sideway moves is unlikely to cause the peso
bulls much consternation. The high set yesterday was slightly above MXN17.25. Recall
that the dollar settled near MXN17.28 last week. Barring a strong recovery
today, i7.t will be the fourth consecutive week the dollar has fallen against
the peso. It has advanced in only one week since the end of April. It is
beginning to look set for a period of consolidation for which we initially
target MXN17.35-MXN17.50.
Reviewed by Marc Chandler
on
June 16, 2023
Rating:
