Overview: The dollar is better bid today. It is rising against
nearly all the G10 currencies, with the Antipodeans bearing the brunt, after a
softer than expected Australian inflation report. The yen has steadied after
extending its losses to new lows for the year. Emerging market currencies are
also mostly lower, though the Mexican peso is edging higher for the fourth
consecutive session.
The large Asia
Pacific bourses rallied with the exception of China and South Korea. Europe's
Stoxx 600 snapped a five-day drop yesterday and is extending the recovery today.
US equity futures are paring yesterday's gains. European 10-year yields are
mostly 2-3 bp lower, though Italy's yield is flat and the yield of the 10-year
Gilt is off four basis points. The US 10-year Treasury yield is slightly below
3.75%. Note that the results of the Fed's bank stress tests will be reported
later today. Gold is slipping lower, and near $1907, it is the lowest since
mid-March. August WTI held above this month's low (~$67) and has snapped back
to near $68.45 in the European morning.
Asia Pacific
The pain
threshold of the PBOC with the falling yuan appears to have been approached,
given the signal of the recent fixings. Yet, as we have suggested, intervention is best framed as an escalation
ladder. The setting of the dollar's reference rate is a low rung on the ladder
and perhaps not so dissimilar from the verbal intervention by Japanese
officials and its lower dollar fix ended today. It was meant as a cautionary
signal to market participants, and arguably, a signal to its trading partners
that no trade advantage is being sought. There is no race to the bottom. Yet,
at best it is a mild rebuke as the divergence of monetary policy appears to be
the main consideration for asset managers and speculative forces. Separately, a
US congressional delegation, led by the chair of the US House Armed Services
Committee arrived in Taiwan yesterday and met with Taiwan's president earlier
today. This, probably even more than US President Biden referring to Xi as a
dictator, likely irks Beijing. Nevertheless, US Treasury Secretary Yellen will
reportedly visit Beijing early next month as part of the resumed high-level
contact. Meanwhile, press reports suggest that the Biden administration is
preparing a new screen to limit US investment in China's advanced technology. More
controls on technology exports are also reportedly under considerations and
this is weighing on some company shares in this space.
Australia's
newly issued monthly CPI reading show price pressure moderated more than
expected and this further takes pressures off the central bank ahead of next
week's meeting. It fell to 5.6% in
May from 6.8% in April. The median forecast in Bloomberg's survey
was for 6.1%. On this measure, CPI was 6.3% higher year-over-year in March,
while the traditional quarterly measure put it at 7.0% at the end of Q1. The
RBA surprised the market earlier this month with a 25 bp hike. The record of
the meeting showed it was a close call, and from that the market took away the
idea that the bar for back-to-back hikes was high. The futures market sees less
than a 20% chance of a hike next week, but a move is fully discounted by the
end of Q3. A quarter-point hike would bring the overnight cash target rate to
4.35%. The year end rate is seen closer to 4.50%, up from around 4% at the end
of last month. Australia's two-year yield fell for the third consecutive
session for a cumulative decline of about 15 bp.
The rhetoric of
Japan's Vice Minister of International Affairs Kanda has ratcheted up today,
warning that officials are monitoring developments "with a sense of
increased urgency" and will "respond appropriately" if the moves
become excessive." The
dollar initially extended yesterday's gains and rose to about JPY144.25. Steady-to-softer
US yields and, perhaps, caution in front of $1.1 bln option that expires
tomorrow, helped the dollar stabilize. It is in roughly a quarter-of-a-yen
range in either side of JPY144.00. The softer than expected inflation report
is weighing on the Australian dollar. Recall, it rallied from the year's
low at the end of May (~$0.6460) to $0.6900 in the middle of June. Today's
losses have met the (61.8%) retracement of the rally near $0.6625. It has
stabilized in the after the initial sell-off and is hovering near $0.6640 in
the European morning. Nearby resistance is seen in the $0.6660-70 area. The
PBOC set the dollar's reference rate at CNY7.2101 today, slightly above
expectations (~CNY7.2098) after it lower (which limited the upside, given the
2% band). The reluctance of the PBOC to send a consistent message and
the greenback's firm tone, sent the yuan to new lows for the year. The dollar
climbed to CNY7.2465. Last year's dollar high was set near CNY7.3275, and there
seems little now to prevent a return toward it.
Europe
The outcome of
next month's ECB meeting is hardly dispute. A quarter-point hike is largely discounted. The issue
is the September meeting. The hawks are pushing hard while the doves are
worried about recession. It seems too early to pre-commit to a September hike.
At that meeting, the staff will update its economic forecasts. In the swaps
market, the odds of a September hike are near 55% today, down from nearly 60%
at the end of last week. The marginal new information today includes a
deterioration in German consumer confidence (July GfK to -25.4 from -24.4), but
a slight pick-up in French consumer confidence (85 vs. 83) and stronger than
expected Spanish retail sales (6.6% year-over-year from 5.1% in April).
Separately, Italy reported a 0.1% increase in June CPI, which saw the
year-over-year rate fall to 6.7^ from 8.0%. Lastly, the Italian government name
Panetta as Visco's replacement at the head of the Bank of Italy. Panetta has
been on the ECB's executive board and his move to the head of the Bank of Italy
as long been rumored. It still needs to be approved by the Italian president.
In turn, which will allow the Meloni government to name a new person to replace
Panetta on the ECB's board.
Spain holds its
general election on July 23. Polls
show that even though the economy is among the strongest in the eurozone, the
ruling Socialists, under Prime Minister Sanchez are trailing behind the
center-right People's Party. Yesterday, the government extended the 3.8 bln
euro subsidies and tax breaks that were set to expire at the end of June. Polls
show the PP could secure almost 155 seats in the 350-member chamber. Vox, a
nationalist party, is seeing its support rise and it could win 40 seats, given
the center-right a clear majority. More broadly, there seems to be a shift
toward the right in Europe in recent contests. Over the past weekend, in
Greece, the far-right is jostling for advantage in the aftermath of the demise
of the Golden Dawn, which has seen its former leaders jailed. Three far-right
parties garners about 13% of the popular vote, securing 34 of 300 seats. In
Germany, the governing center-left coalition has been hobbled by miscues and
disagreements, and over the weekend, the right-wing AfD scored its first
electoral victory becoming the district administrator. The latest surveys show
the AfD is polling better than the SPD nationally.
The euro reach
nearly $1.0980 yesterday. It is
consolidating today in about a 15-pip range on either side of $1.0950. Turnover
is quiet and the market may lack near-term conviction ahead of the eurozone's
preliminary June inflation estimate and the US PCE deflators at the end of the
week. Month- and quarter-end considerations may be also dampening interest. Sterling
is within its well-worn range seen in past three sessions of roughly
$1.2685-$1.2760. It tested the upside yesterday and has come back
offered today. There are options for GBP715 mln that expire today at $1.2665. A
push through there could target the $1.2625-40 area.
America
After nearly
every high-frequency economic data point yesterday came in better than expected,
the market modestly upgraded its view of the trajectory of Fed policy, which
helped the dollar recover in North America after a mostly softer start in Asia
and Europe. The odds of a hike
next month edged up to almost 75% chance from a little more than 70% before the
weekend. The implied year-end effective rate rose 5.31% yesterday. It is the
highest closing implied yield since the banking stress hit in early March. If
the Fed makes good on its two quarter-point hikes in H2, fair value is closer
to 5.57%-5.58%. The two-year note settled slightly firmer near 4.76%, having
recovered from an intrasession low around 4.65%. May durable goods orders
rose 1.7%. The median in Blomberg's survey project a 0.9% decline. FHFA house
price index rose by 0.7%in April, a little better than expected, and new home
sales jumped 12.2% (median forecast was for a 1.2% decline). It was third
consecutive monthly gain, and the best since last August. It follows better
than expectations housing starts (21.7% vs. -0.1%) and existing home sales
(0.2% vs. -0.7%). It lends credence to ideas that the US housing market is
bottoming. The Conference Board's measure of consumer sentiment was also
stronger than expected.
Today's US
reports may be less impactful. Wholesale
and retail inventories typically do not impact trading activity, though feed
into GDP forecasts. The May advance estimate of the US goods trade may draw
some attention. Through April, the goods trade balance has averaged $90.3 bln a
month. Last April, the average was $109.1 bln. Partly this reflects lower
prices for some goods. However, the composition of the US goods imports is
changing, with other countries making up for the decline of goods imports from
China. Still, in the bigger picture, given the dollar's overvaluation and grow
differentials, the US trade deficit continues to widen. Note that the goods
deficit averaged $70-$72 bln a month in 2018-2019 and widened to a monthly
average of a little more than $75 bln in 2020 and nearly $89.3 bln in 2021.
Last year the goods deficit averaged $98.1 bln a month. Note that Census
Department estimates that almost $207 bln of US goods imports in 2022 came from
affiliates of US companies abroad. These numbers are meant to capture goods
that US companies actually produced abroad and not simply assembled. US
businesses in China alone account for about a third. Mexico and Canada account
for another third. Indeed, this is something to bear in mind when seeing
Mexico's non-oil exports to the US increased by nearly 11.5% from a year ago while
shipments to the rest of the world have fallen by 3.5%.
Canada's
headline May CPI was in line with expectations. Given the base effect, the 0.4% increase translated
into a decline in the year-over-year rate to 3.4% from 3.5%. However, the
underlying core measures, which the Bank of Canada recently underscored their
importance, eased a little more than expected. The median core rate slipped to
3.9% from a revised 4.3% (initially 4.2%), while the trimmed core eased to 3.8%
from 4.2%. The three-month moving average of these underlying rates, which was
cited recently by BoC Governor Macklem, slipped to 3.72% from 3.83%. Despite
some intraday volatility Canada's two-year yield eased yesterday to about
4.59%, bringing the three-session decline to about 15 bp. The odds of hike next
month were also little changed near 57%, which is the least since the Bank of
Canada delivered a surprise hike earlier this month.
The US dollar
recorded a key upside reversal against the Canadian dollar yesterday by making
a new nine-month low and then recovering to close above the previous session's
high. Follow-through buying today
lifted the greenback to CAD1.3235. A move above CAD1.3240 targets last week's
high near CAD1.3270 and, possibly, the CAD1.3290-CAD1.3320 band. Meanwhile,
the US dollar is quietly bleeding lower against the Mexican peso. It
has slipped lower for the past three consecutive sessions and is near MXN17.05
in the European morning. The multi-year low was set in the middle of the month
near MXN17.0250.
Reviewed by Marc Chandler
on
June 28, 2023
Rating:
