Overview: The greenback remains under pressure. The yen's short squeeze continues, and strong wage growth has helped lift sterling to new highs since last April. Among the G10 currencies, only the Australian and New Zealand dollars are unable to sustain gains through the European morning. Emerging market currencies are also advancing, with a couple of exceptions, including the Turkish lira despite reports on foreign equity inflows. The weaker dollar and softer yields have sent gold to its best level in around three weeks slightly below $1940. It has found support last week ahead of $1900.
Encouraged by talk of more
stimulus from China, Asia Pacific equities rallied, though the yen's recovery
meant that Tokyo did not participate very much. South Korea and Taiwan led the
regional advance. In Europe, the Stoxx 600 is rising modestly for the third
consecutive session and US index futures are trading with a firmer bias. Benchmark
10-year bond yields are pulling back. Australian and New Zealand yields are
played catch-up today and were off more than 10 bp. Europe's benchmark yields
are down 3-4 basis points. The 10-year Treasury yield is near 3.95%. Yesterday's
high was almost 4.09%. The US two-year yield is also lower around 4.83%. It
peaked last week at nearly 5.12%.
Asia Pacific
Today and tomorrow, the NATO
summit will be held in Vilnius, Lithuania. Leaders from Japan, South Korea, Australia, and New
Zealand will also attend. As noted previously, the US and Japan have been
pushing to open a NATO representative office in Tokyo. France is pushing
against it and appears to have some less-high profile allies, perhaps for the
same reason that then-Senator Biden cautioned against extending NATO to
Russia's border. There is the Five Eyes (intelligence sharing among the US,
Australia, New Zealand, Canada, and the UK. There is the Quad (US, Japan,
India, and Australia). There is AUKUS (US, UK, and Australia). To this, one
needs to add the dozens of US military bases in the area (In a recently issued report the
US Congressional Research Service identified the US had 66 major military sites
in the Asia Pacific area and that does not count smaller bases, training areas
and other facilities. It is not like one needs to be paranoid to think there is
a pattern. Moreover, imagine how the US would react and the domestic economic
and political consequences if Beijing had even a tenth of those resources.
Later this month the Biden administration is expected to announce new curbs on
American investments in China. Beijing's actions on germanium and gallium
should be seen as warning shot. Until the de-risking is further along, the
vulnerabilities are significant. Note that Turkey and Hungary have lifted their
opposition to Sweden joining NATO. Sweden made assurances about the Kurds and
the US agreed to sell Turkey F-16 fighter jets.
The short squeeze continued
to lift the Japanese yen. The
greenback briefly traded above JPY145.00 on June 30, settled last week near
JPY142.20 and reached nearly JPY140.40 today. It is trading a tight range near
the lows in the European morning. The next area of chart support is seen in the
JPY139.50-JPY140 area. The JPY141.00 area now offer first resistance. The
$0.6700 area again blocked a stronger advance in the Australian dollar. It has
been bumping against it without closing above it here in July. That area
also corresponds to the 200-day moving average. The (38.2%) retracement of its
losses from the high set in mid-June near $0.6900 comes in a little a higher
(~$0.6710). Beijing is signaling more support for the economy and continues to
resist yuan weakness. The PBOC set the dollar's reference rate at
CNY7.1886, well below market expectations (Bloomberg survey) for CNY7.2152. The
greenback briefly traded below the 20-day moving average found near CNY7.2035
today. It has not closed below the moving average in nearly three-months. We
argue that Beijing's efforts to steady the yuan have been helped by the
stronger Japanese yen.
Europe
There are two reports from
Europe to note today. First,
German investor sentiment is deteriorating, seemingly reflecting the economic
weakness. The current assessment fell for the third consecutive month, and at
-59.5 (from -56.5), it is poorest this year. The expectations component also
moved lower for the third month in a row to stand at -14.7 (from -8.5). Second,
the latest UK employment data were reported. Job growth is slowing, the
claimant count rose, and the unemployment rate rose to 4.0% from 3.8%. However,
the Bank of England will be concerned what is sees as elevated wages. Average
weekly earnings accelerated to 6.9% (from a revised 6.7% that was originally
reported as 6.5%), the highest since August 2021. Excluding bonuses, the 7.3%
(was unchanged after the upward revision in the May series from7.2%). The swaps
market is pricing in an almost 80% chance of a 50 bp hike when the BOE meets
next in early August and is leaning to another 50 bp hike in September.
The euro, which recorded a low
near $1.0835 four sessions ago, reached its best level in two months earlier
today slightly above $1.1025. It has seen some profit-taking and is now around
$1.10. Initial support
may be around $1.0980, but it may take a break of $1.0950 to suggest a near-term
top is in place. The market does not seem quite ready to challenge the $1.11
area that stalled the single currency in April and May. Sterling rose to a
new high since last April yesterday, near $1.2870 and extended those gains
today to almost $1.2915. Initial resistance is seen near $1.30, with
nearby support around $1.2850. Recall sterling bottomed last September near
$1.0350.
America
The US Treasury sold another
$123 bln in 3- and 6-month bills yesterday. Today, it comes back for more: $38 bln in one-year
bills, and $50 bln of a 42-day cash-management bill. It will also sell $40 bln
in 3-year notes. Tomorrow, it will sell four-week bills and $32 bln 10year
notes. Thursday sees 4- and 8-week bills and $18 bln sale of 30-year bonds. The
rebuilding of the Treasury's General Account appears to be causing less
tightening of financial conditions than feared as the use of the Fed's reverse
repo facility has declined and banks reserves have edged up. The week's big
events still lie ahead. The June CPI is on Wednesday, as is the Beige Book,
followed by the June PPI. Wednesday, the Bank of Canada meets, and the swaps
market sees about a 66% chance of a quarter-point hike (to 5.0%).
The US dollar posted a key
downside reversal against the Canadian dollar after the divergent employment
reports before last weekend. Follow-through US dollar selling yesterday was limited, but it was
extended a bit more today to about CAD1.3245. The pre-weekend high was near
CAD1.3385. The 20-day moving average is found around CAD1.3235 and there is
congestion in the CAD1.3200-20 area, which is likely to hold into tomorrow's US
CPI and Bank of Canada meeting. The Mexican peso has recovered quickly from
last week's profit-taking that saw the greenback rise to almost MXN17.3960. It
reached nearly MXN17.03 yesterday and is consolidating so far today, reaching
nearly MXN17.10. Last week's low by MXN16.98 has not been seen the end of 2015.
Note that there are some chunky options at MXN17.00 that expire Thursday and
Friday.
Reviewed by Marc Chandler
on
July 11, 2023
Rating:
