Overview: The market continues to resist the Fed's
signal that another 50 bp of hikes may be necessary to ensure inflation is
headed toward its target. Previously, the market had rate cuts priced in, and
it took some time for the Fed's push back to be accepted. The market converged
with the Fed, and this helped the dollar recover. We suspect a similar pattern
to play out again. The market does not have even one of the two Fed hikes
discounted. As it moves in this direction, we look for the dollar to get better
traction. Today's it is mixed but mostly stronger. It is reversing lower
against the yen after reaching new highs for the year. Like yesterday, the
dollar-bloc currencies and Scandis are the heaviest. Emerging market currencies
are mostly lower. The Mexican peso, which reached new multiyear highs before
last weekend is the heaviest, with around a 0.3% pullback.
Equity markets are lower, and the Hang Seng and mainland stocks that trade there were the hardest hit and the cut in the loan prime rates were widely expected and specifics on new stimulus measures has been light. Europe's Stoxx 600 is off almost 0.40% today after falling more than 1% yesterday. US equity index futures are trading heavily. European bond yields are mostly 2-3 bp lower, though the UK Gilts, which have underperformed recently, after rallying today, with the 10-yield off five basis points. The 10-year US Treasury yield is up a couple of basis points near 3.79%. Gold is trading in around a $5 range on either side of $1950. August WTI reached an eight-day high near $72.40 before succumbing to some profit-taking that pushed it back toward $71.80 in the European morning.
Asia Pacific
Following a cut in deposit
rates, and the PBOC reduction in the 7-day repo rate and the benchmark one-year
medium-term funding rate, Chinese banks shaved the one- and five-year loan
prime rates by 10 bp. Small
beer. New and larger fiscal efforts are expected and the fact that these have
been discussed but not delivered is a source of angst and weighed on Chinese
equities and the yuan yesterday and today. Separately, US Secretary of State
Blinken met with is counterpart and Chinese President Xi. This might set the
stage for a Biden-Xi meeting later this year. Still, the key question is if
this marks a substantive change in the relationship. Without being cynical,
there are good reasons to suspect that neither side is going to change their
behavior. The first test could be next month's Northern Atlantic Treaty
Organization's summit. NATO recently authorized an office be established in
Japan. Japan was invited to the July summit and China sees it as evidence of
the "containment" strategy and cautioned Japan from attending. We
note that China's Premier Li made his first foreign trip, while Blinken was in
Beijing. It was to Germany.
The minutes from the Reserve
Bank of Australia's meeting from earlier this month at which the central bank
delivered a surprise 25-bp rate hike indicated that it was a "finely
balanced decision." The market's take was that the minutes were less hawkish
than expected, even though the RBA noted that service price inflation was not easing,
and goods disinflation was less than in some other countries. Last week's
stronger than expected employment report underscores that the RBA monetary
cycle is not over. The odds of a hike next month slipped from about 50% to
about 33%, according to the futures market. The market remains fairly confident
of a hike in August, but the odds slipped slightly. Another hike remains
largely priced in for Q4.
The dollar rose to JPY142.25
a new high for the year. However,
it ran into a wall of sellers and the greenback pushed back to yesterday's lows
(~JPY141.45). There are options for $2.1 bln at JPY142.00 that expire today. A
close below yesterday's lows would be a bearish technical development
(potential key reversal). The Australian dollar peaked at $0.6900 before the
weekend and after settling lower then has proceeded to pare the gains. It
bottomed near $0.6460 at the end of May. Today's low was slightly below
$0.6790. The first set of expiring options today are struck at $0.6775 (~A$670
mln). The initial retracement target is around $0.6730. Since the session low
was recorded, the Aussie has held below about $0.6815. The greenback
bottomed before the weekend near CNY7.1060, and after rising yesterday and
today, it is knocking on last week's high (which was also the high for the
year) near CNY7.1800. We have noted potential toward CNY7.20 but this may
be too conservative, and above there, the next area is around CNY7.24. That
said, we note that the PBOC set the dollar's reference rate at CNY7.1596, lower
than the CNY7.1628 that was anticipated.
Europe
The eurozone unexpectedly
reported a 7.1 bln euro trade deficit in April. The median forecast in Bloomberg's survey
projected a 17.5 bln euro surplus. The deterioration was not a function of
Germany. It reported an 18.4 bln trade surplus, about 15% larger than expected.
The French deficit of 9.7 bln euros was more than 25% larger than projected.
Italy and Spain also reported significant deterioration in their April trade
account. The current account figures reported today showed a small surplus of 4
bln euros, which compares with a 17.7 bln euro deficit last April. The euro
area recorded a current account surplus of almost 74 bln euros in Q1 23 after
near 600 mln euros in Q1 22. Separately, construction spending in the eurozone
stabilized in April after falling 2.4% in March. Economists in Bloomberg's
survey expect the euro area economy to expand by 0.1% here in Q2 after
contracting by 0.1% in Q4 22 and Q1 23.
UK politics dominated the
start of this week with "Partygate" embarrassment playing out. After a lengthy debate yesterday, the House
of Commons endorsed (354-7) the privileges committee's finding that former PM
Johnson lied to parliament, and it was on his birthday to boot. Another
Tory MP resigned over the weekend, bringing it to at least three and possibly
four (a resignation was threatened but has not been acted upon). At least two
byelections will be held next month. Today, the House of Commons will hold a
post-Covid hearing. Tomorrow the UK reports May CPI figures and on Thursday,
the BOE is expected to hike 25 bp. The swaps market has about a 15% chance of a
50 bp move instead.
The euro peaked near $1.0970
before the weekend and has found support yesterday and today near $1.0905-10. It reached a high today in late Asia
Pacific turnover near $1.0945. We like it lower, and a break of the $1.09 area
could see $1.0860. That said, the daily momentum indicators have not turned
lower yet. A close below the five-day moving average (a little above $1.0910),
which it has not done in nearly two weeks could be a signal of a coming correction.
For its part, sterling peaked at the end of last week a little shy of
$1.2850. Today is set a three-day low near $1.2765. The price action looks
somewhat more constructive than for the euro, which makes sense ahead of the
BOE meeting on Thursday. Initial support in North America may be seen near
$1.2740.
America
The Federal Reserve had told
the market through various channels that it was not considering a rat cut this
year. The market
resisted. We anticipated that the market would converge with the Fed rather
than the other way around and that this would help the dollar recovery from
those March lows. Last week, the Fed's updated forecasts indicated that another
50 bp increase this year would be appropriate. The market is resisting. It does
not even have one more hike discounted. We think it begrudgingly will, and that
this will also help the dollar recover from its recent decline. Today's May
housing starts and permits pose headline risk but are unlikely to drive
sentiment. That said, there seems to be some signs that the housing market is
bottoming. Homebuilder sentiment reached an 11-month high this month, exceeding
expectations. Limited supply, especially single-family houses, has apparently
helping spark optimism from builders. The survey found a quarter of builders
have reduced prices to boost sales, down from the peak of 36% last
November.
The US dollar fell to new
lows for the year yesterday against the Canadian dollar near CAD1.3175. It is holding above CAD1.3200 today.
Nearby resistance is seen in the CAD1.3245-65 area, with stronger resistance at
previous support around CAD1.3300. A pullback in US stocks warns of a risk off
session, which may challenge the Canadian dollar bulls. The horrific heat
wave in Mexico may hinder economic activity. Today, it reports April retail
sales, and a small gain is expected. The US dollar recorded new multiyear lows
near MXN17.0250 at the end of last week and continues to consolidate in its
trough. Yesterday's high was around MXN17.1720, and, so far today, the high has
been about MXN17.1440. A move above MXN17.19 would confirm a near-term low is
in place. The central bank meets Thursday and is widely expected to standpat.
Reviewed by Marc Chandler
on
June 20, 2023
Rating:
