Euro Edges Higher

Overview:  The US dollar has mostly steadied at the start of the week after last week's sharp losses. The yen, euro, and Swiss franc are enjoying a firmer tone, but only the euro has thus far extended last week's gains, and then, only marginally. Uninspiring data from China pressed the yuan lower, while the firm euro is helping the central European currencies. A typhoon shut Hong Kong markets and Japan's markets were closed for a national holiday. The Ukraine grain-export deal was ended by Russia after it agreed to a two-month extension in mid-May. This is help spur a rally in grains, with wheat futures up 3.25% after rallying 4.5% in the last two sessions. Corn is up almost 2% after rally 6% in past two sessions. 

Asia Pacific equities were mixed after the MSCI benchmark rose 4.4% last week. Europe's Stoxx 600 is off about 0.5%. It slipped by about 0.1% before the weekend but gains 2.9% last week. US index futures are nursing small losses. Benchmark 10-year bonds are rallying. Yields are off 3-5 bp in Europe and the US 10-year Treasury yield is around six basis points lower near 3.77%. The two-year yield is down five basis points to slip below 4.72%. It had peaked near 5.11% on July 6. Gold rose by a little more than $30 last week. Today, it found support ahead of $1950 and is pushing near $1960 in the European morning. August WTI reversed lower before the weekend after peaking near $77.30. It settled near $75.40 and was sold to $73.85 today. The $73.40 area the (38.2%) retracement of the rally that began in late June near $67. 

Asia Pacific

China reported that growth in Q2 was 0.7%, largely in line with expectations, following a 2.2% expansion in Q1. However, the year-over-year pace disappointed at 6.3% rather than 7.1%, (up from 4.5% in Q1), puts growth in H1 about 5.5% above H1 22, not 6.1%. China's economy is arguably on track to meet the 5% target. Industrial output was a bit better than the Bloomberg survey projected, 4.4% year-over-year and 3.8% year-to-date year-over-year. However, retail sales disappointed. They rose 3.1% year-over-year, down from 12.7% in May and less than the 3.3% expected. The year-to-date year-over-year rate was 8.2%, slowing from 9.3%. Many of China's critics argue that consumption is too week in the world's second-largest economy They typically arrive at this conclusion by showing that consumption as a percentage of GDP lags behind other countries What the critics are  actually picking up is large share of investment China's consumption per capita is actually rising rapidly It rose by over a third over the last five years, faster than other large economies, from about CNY18.3k at the end of 2017 to CNY24.5k at the end of 2022. Fixed asset investment and property investment slowed sequentially. Lastly, as expected, the PBOC left the one-year medium-term lending facility rate at 2.65%, following last month's 10 bp reduction. It did reduce the amount of funds provided to CNY103 bln from CNY237 bln, which was about CNY3 bln more than maturing. That was the least since November. 

The UAE and India formally announced over the weekend that they will use their respective currencies to settle bilateral trade. The agreement was even bigger than that Not only are they committed to interlinking payment and messaging systems, but also card switches (UAESWITCH and RuPay), which will allow mutual recognition of domestic credit cards. Currently, India pays the UAE dollars for its oil. In addition to bilateral trade flows (estimated at nearly $85 bln in the fiscal year April 2022 through March 2023), UAE employs some 3.5 mln Indians and the workers send home the equivalent of about $20 bln a year, accounting for about 18% of India's total worker remittance inflows in 2020-21. The impact on the US dollar is unlikely to be detectable. Moreover, the UAE dirham is pegged to the dollar, so while the de-dollarization camp tries to claim the narrative, it is a bit more complicated. Recall that India had been paying rupee to Russia for its oil purchases, but Moscow declaring it had enough rupee and India began paying in dirham, which seem similar to a stable coin in the crypto world.

Despite posting a key reversal ahead of the weekend, there was no follow-through buying of dollars against the yen today. In fact, it is spent little time above the JPY138.80 pre-weekend settlement and eased to nearly JPY138.30. Friday's low was around JPY137.25. Consolidation still looks to be the most likely scenario in North America. The Australian dollar was turned back from $0.6900 last week, which is also what capped it last month. Follow-through selling today saw it approach $0.6800. The risk is on the downside, and the next support area is seen closer to $0.6780. The dollar gapped higher against the Chinese yuan. The pre-weekend high was slightly above CNY7.1460 and today's low is about CNY7.1495. The PBOC set the dollar's reference rate at CNY7.1326 (slightly above Friday's fix of CNY7.1318) compared with the median in Bloomberg's survey for CNY7.1384.

Europe

As expected, the UK formally joined the Comprehensive and Progress Trans-Pacific Partnership. It may be largely symbolic as the UK has agreements with most of the members and it is expected to produce minimal tangible results. Perhaps, it was the acknowledgment by UK Business and Trade Secretary Badenoch that a UK-US free-trade agreement was unlikely that was ultimately more important. It had been one of the post-Brexit goals. It also brings to the fore the next in line to be considered for membership, China, which will be a more difficult decision. The UK joining the CPTPP may add another voice to objecting to China's ascension Japan, Australia, New Zealand, do not seem keen. Neither is the next year's chair, Canada.

Separately, the UK's Defense Secretary Wallace indicated he would step down in the next cabinet reshuffle expected in a couple of months. He had wanted to be considered to replace Stoltenberg as the Secretary General of NATO, but reports suggest he did not get the US support. Wallace is also engaged in an internal fight with Home Secretary Braverman about reassigning UK troops to the Border Force. She requested 750 soldiers and Wallace offered only 250. The media speculated that Treasury chief secretary Glen or Security Minister Tugendhat are possible successors of Wallace. From another angle, Wallace's departure shows the challenge for the Tory Party. Already around 40 Tory MPs have indicated plans not to seek re-election, and more are expected to join them.

The account of June's ECB meeting was released last week. It left lift doubt of a quarter point hike next week (July 27) and suggested the bar was low for a September hike. The swaps market implies almost a 95% chance of a hike this month and nearly 2/3 chance of a hike on September 14. The market is less sanguine about the Federal Reserve. The Fed funds futures market also shows a little more than a 90% chance of a hike at the FOMC meeting that concludes on July 26. However, the discrepancy is stark for the outcome of the next meeting (September 20). The market sees less than a 10% chance of a hike then. 

For the second consecutive session, the euro is holding above $1.1200. It managed to post a higher high and higher low for the seventh consecutive session. On the top side, the $1.1275 is the next important chart area. It traded to almost $1.1250 so far today. Note that the upper Bollinger Band is near $1.1225 today. Sterling, on the other hand, has seen some follow-through selling after it settled on new session lows ahead of the weekend slightly below $1.3095. Today's low is around $1.3065, so far, and is back within the Bollinger Band (upper band is about $1.3115). There is scope for a bit more slippage today. Initial support may be seen in the $1.3020-40 area.

America

US semiconductor companies seem to sense an opportunity to shape the Biden administration's new initiative that seeks to extend the restrictions on certain chips and fabrication equipment to China shortly. Several, including CEOs of Intel, Qualcomm, and Nvidia will be lobbying the administration and some in Congress, according to reports, to push for guard rails on the still deteriorating relationship with China. Being cut out of their largest market will have knock-on effects on their own product development and undercut other policy goals, like extending US technological leadership, while not doing much to thwart China's technological developments as the apparent success of Huawei and ZTE illustrate. Other reports indicated that using 14 nm chip-fabrication equipment, Chinese companies have been able to implement tweaks that allow 7 nm chips.

This is still not the cutting edge. The TSMC plant being built in Arizona is expected to produce 4 nm chips next year. The second plant that is projecting 2026 completion will be able to produce 3 nm chips. Reports suggest that Qualcomm gets 60% of its revenue for China for supply parts to cell phone manufacturers. An estimated quarter of Intel's sales are in China, while Nvidia gets around 20% of its revenue from China. Separately, Treasury Secretary Yellen, at the G20 meeting in India, said that while the US should look for ways to de-escalate tensions with China, reducing the tariffs imposed by the Trump administration would be "pre-mature."  Those tariffs were imposed in response to Beijing's unfair trade practices, which continue Yellen did confirm that the four-year review of the tariffs was nearly finished. A political sub-text is that lifting the tariffs would be politically controversial, and the latest YouGov polls show a statistical dead-heat between Biden and Trump. 

The week's economic reports begin slowly. In the US, the NY state manufacturing activity survey is due today. It is the first of surveys for July. The Philadelphia's Fed's will be reported Thursday. The NY survey is expected to deteriorate (-3.5 median in Bloomberg's survey from 6.6 in June). It averaged -12.9 in H1 23 and -6.3 in H2 22. It tends not to be a market-mover, but used alongside the other regional Fed surveys, including tomorrow's NY Fed's July services business activity survey, to anticipate the PMI, which has a greater ability to impact the capital markets. Tomorrow's June retail sales and industrial production figures will help fine tune Q2 GDP forecasts. As of July 10, the Atlanta Fed's GDPNow puts Q2 growth at 2.3%. For its part, Canada reports May portfolio flows. Through April this year, the net inflows have slowed to a trickle. In the first four months of the year, Canada reported net inflows of slightly less than C$5 bln. In the same period last year, foreign investors bought a net of nearly C$97 bln of Canadian stocks and bonds. 

The US dollar posted a potential key reversal against the Canadian dollar before the weekend. It made a new low since last September near CAD1.3095 and rebounded to close above the previous session's high (~CAD1.3195). It settled near CAD1.3215 and briefly poked above CAD1.3230 today. The CAD1.3240 area is the (50%) retracement of the greenback's fall from the July 7 high (~CAD1.3385). The next retracement (61.8%) is CAD!.3275. The US dollar had flirted with the lower Bollinger Band in the last two sessions, but the rebound has seen it fray the middle of the band, the 20-day moving average (~CAD1.3225). Meanwhile, the greenback slipped to a new low against the Mexican peso today, slightly below MXN16.7080. It has snapped back to almost MXN16.80. There may be some scope for additional dollar gains into the MXN16.83-5 area, but we suspect the dollar is vulnerable against the peso in North America today.

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