Overview: After tumbling headlong this week, the
dollar appears to be broadly consolidating ahead of the weekend Among the G10
currencies, the Canadian dollar's 1.2% gain is the least and it made new
10-month highs earlier today The beleaguered Scandis soared The Norwegian
krone's 6.6% advance followed by the Swedish krona's 5.8% surge led the major
currencies The Dollar Index is off about 2.4% this week ahead of the North
American session It is the largest loss since last November. Among emerging
market currencies, the Hungarian forint (~5%) and South African rand (~4.5%)
led the way. Only the Chilean peso, Turkish lira, and Argentine peso fell. The
lower dollar and softer rates helped lift gold to $1963 today. It settled near
$1925 last week. As the greenback stabilized today, the yellow metal slipped
back to around $1955.
Most Asia Pacific bourses but
Tokyo advanced today Taiwan
and South Korea led today's advance, but Hong Kong's 5.7% advance leads the
week's surge Europe's Stoxx 600 is stalling after rallying for the past five
sessions The slippage today leaves it up a little more than 3% to nearly offset
last week's decline. Several large US banks report earnings today. The index
futures are sporting minor losses today. After a sharp drop in yields in recent
days, European and US benchmark 10-year yield are mostly a little firmer (1-3
bp) The 10-year Treasury yield is up 2.5 bp to 3.79% and the two-year yield is
3.5 bp higher to 4.66% Broadly speaking, the moves this week have been
statistically quite large and we suspect a bit exaggerated. The consolidative
tone with some back-and-filling may be needed.
Asia Pacific
Even after the surge in
lending last month, Beijing seems to recognize the need for additional measures
to support the economy. Officials are suggesting more, targeted measures for the property
market will be forthcoming. Still, after shaving the one-year medium-term
lending facility rate last month by 10 bp to 2.65%, it is unlikely to announce
another cut when it set first thing Monday. Shortly after the MLF rate is set,
China will announce Q2 GDP and details from June. While the economy appears to
have slow some momentum as the quarter progressed, economists expected China to
report quarter-over-quarter growth of 0.8%. That follows a 2.2% expansion in Q1
and leaves the world's second-largest economy on track to achieve the 5% growth
target this year.
Japan revised May's
industrial output figures to show a 2.2% decline from -1.6% initially. It was the first decline since January. On
a year-over-year basis, the 4.2% (rather than 4.7%) increase was the first
since last October. Japan's economy grew but 2.7% at an annualized rate in the
first quarter and is seen slowing to around a 1% in Q2. Economists in
Bloomberg's survey see it slowing a bit more in Q3. Meanwhile, as the yen
rallied recently implied one-month volatility reached 11.6% on Wednesday, the
highest since mid-April. It eased nearly one percentage point yesterday as the
yen's recovery slowed. It is straddling the 11% area today. It has remained
below its 200-day moving average (~12%) since mid-April. It bottomed on June 22
near 8.4%, a few days before the dollar topped (June 30).
The dollar held below JPY139
yesterday and eased to new session lows in late turnover yesterday, slipping
below JPY138. The
JPY138.25 area corresponds to the (38.2%) retracement of the dollar's rally
from the JPY127.25 low seen in mid-January to the year's high set on June 30
near JPY145.05. The dollar's losses were extended to JPY137.25 in Asia today
before rebounding to JPY138.50. The 200-day moving average is near JPY137.10 The
dollar settled the past two sessions below the lower Bollinger Band (~JPY138.15
now) A move back above JPY139.00 would lift the tone, but expectations for an
adjustment in the Yield Curve Control are running high and may limit the
dollar's upside. The Australian dollar approached $0.6900; the
four-month high set in mid-June. There are options for A$805 mln at
$0.6900 that expire today. It is holding above $0.6860 amid today's
consolidation. Recall that last week, it has retested $0.6600. The next
technical target is near $0.7000. The move has been so quick, that Australian
dollar is fraying its upper Bollinger Band (0.6885). Deputy Governor Bullock
was named Governor Lowe's successor The substance of policy is not seen
changing when she takes the reins in September, but a change at the helm was
thought necessary to implement the reforms that have been announced that
include fewer meetings, regular press conferences, and a committee that set
monetary policy The greenback gapped lower against the Chinese yuan and briefly
slipped below CNY7.12 to its lowest level in nearly a month (June 16) The
yuan's 1.2% gain this week is the most in six months We do not think it is
coincidence that the yuan's recovery this week took place as the as the dollar
fell broadly Still, the PBOC continued to set the dollar's reference rate
higher than expected (CNY7.1318 vs. CNY7.1425).
Europe
The news stream from Europe
is light ahead of the weekend. The eurozone reported May's trade figures, a 900 mln euro deficit
was recorded. The eurozone's trade balance averaged a 2.3 bln euro deficit this
year through May, roughly 1/10 of the size seen in the year ago period. Late
yesterday, Germany reported a current account surplus of almost 9 bln euros in
May after a 22.4 bln euro surplus in April (revised up from 21.8 bln
euros). Germany's current account surplus is driven by its trade account.
In the first five months of the year, Germany has recorded a 77 bln euro trade
surplus (up from a 32 bln euros surplus in Jan-May 22). The current account
surplus so far this year is a little more than 101 bln euros (~88.5 bln euros
in the comparable year-ago period). The key development this week has been
financial asset rally and the 2%+ appreciation of the euro. The 3.1% rally in
the Stoxx 600 this week was the most since the end of Q1. Benchmark 10-year
yields fell 15-24 bp and the peripheral premiums mostly fell. Two-year yields
fell 9-15 bp, and the peripheral premiums also fell.
For its part, the euro
rallied about 2.4% this week, making it the best weekly performance since last
November. It is
fifth weekly gain in the past six. The euro punched through $1.12 in the US yesterday
and reached $1.1245 today. The next notable technical area around $1.1275, the
(61.8%) retracement of the euro's decline from the early 2021 high near
$1.2350. The move has been very sharp and at its best yesterday, the euro was
more than three standard deviations above its 20-day moving average (the Bollinger
Band is set at two standard deviations). Today, the upper Bollinger Band is
near $1.1180. Sterling continued to plough ahead. It was
probing $1.26 at the end of June and has broken above $1.31 for the first time
since last April. The move has been quick, and sterling settled above its upper
Bollinger Band for the third consecutive sessions yesterday. It is found near
$1.3080 today, while sterling found support around $1.3095. While the
$1.3200-50 may hold psychological significance, the next important chart area
may be closer to $1.3325-50.
America
Softer than expected
producer prices, on the heels of the softer CPI and the disappointing jobs
report has fueled a sharp decline in US rates and dropped the boom on the
dollar. The Dollar
Index is having its worst week since the end of Q1 2020, falling nearly 2.5%. A
trade-weight dollar index fell by closer to 1.7%, which was the largest weekly
decline since November 2020. Bannockburn's
World Currency Index, a GDP-weighted basket of the 12 largest economies has
risen by about 1.2% this week, its best week since mid-January, reflecting the
strength of the large economies' currencies against the dollar.
The weighted average of
transactions in the Fed funds market, its effective average, rather than middle
of the target range, is what Fed funds futures contract settles against. It stands at 5.08%. Assuming a 25 bp hike,
for which the CME
FedWatch Tool estimates is about 95% discounted for the end of the
month, the effective average will for the Fed funds rate will be about
5.33%. The January 2024 contract (FOMC meeting concludes on January 31, making
it a good proxy for the year-end rate) implied yield is 5.31%, down about 11 bp
since before the last Friday's employment report. In the last two sessions
alone the US two-year yield has fallen by almost 25 bp Now, near 4.66%, it is
about 45 bp below its July 6 high As an aside, we note that St. Louis Fed
Bullard unexpectedly announced he will step down next month and take an
academic post Earlier this year, the Fed lost an important voice in Brainard,
and now from the opposite side of many debates, Bullard Still, the substance of
policy is unlikely to be impacted
The US dollar briefly traded
below CAD1.31 today, a new low since last September However, the greenback recovered to near
CAD1.3140 It is consolidating in the European morning. Position adjustment
ahead of the weekend could see CAD1.3160-75. Note that the lower Bollinger Band
is slightly below CAD1.31 today The US dollar set new multiyear lows against
the peso near MXN16.81 in the middle of the week It recorded a slightly
higher low yesterday (~MXN16.8265), and so far, today, has not traded below
MXN16.8340. The dollar settled the last two sessions below the lower Bollinger
Band, found near MXN16.8760 today. Given the quieter economic calendars ahead
of the FOMC, ECB, and BOJ meetings in the last week of the month, the peso
looks like an attractive place to park funds ideally on a dollar move above
MXN17.00
Disclaimer
Reviewed by Marc Chandler
on
July 14, 2023
Rating:
