Overview: As US markets prepare to re-open from yesterday's holiday, the dollar
is trading mostly higher, though the euro and yen are steady to slightly firmer.
Narrow ranges are prevailing. The Canadian and Australian dollars are
exceptions and are off about 0.3%. Emerging market currencies are mostly lower,
including Russia, China, South Africa, and Turkey. Final service and composite
PMIs were mostly revised lower in Japan, Australia, and the eurozone, while the
Caixin readings were lower than expected.
Asia Pacific equities were weaker, led by
a nearly 1.6% drop in the Hang Seng and almost a 1.9% fall in mainland shares
that trade in HK. Europe's Stoxx 600 is off 0.6% after rising less than 0.1%
yesterday. US index futures are trading heavily. European benchmark 10-year
bonds are mostly 3-4 bp lower, though UK 10-year Gilt yield is off less than
one basis point. US 10-year year Treasury yield is near 3.84%, down a little
less than two basis points. Gold is firm near Monday and Tuesday's high
(~$1930). A break above $1935 would help lift the technical tone. August WTI is
trading above $71, seemingly encouraged by Saudi Arabia extending the unilateral
1 mln bpd cut into next month and Russia saying it will cut output by 500k bpd
(though many observers are skeptical of Moscow's promises).
Asia Pacific
China's Caixin service PMI was weaker than
expected. It fell to 53.9
from 57.1. Economists expected a pullback to 56.2. This dragged the composite
stands at 52.5 from 55.6. The official composite PMI is at
52.3. China's largest banks cut dollar deposit rates again. Reports indicate
that several large banks cut the premium offered over SOFR (5.09%). Recently
they cut one-year dollar deposit rates to 5.7% from 6.0%. Retail dollar
deposits were cut earlier to about 2.8% from 4.5%-5.0%. One-year yuan deposit
rates are 1.65%. Beijing is not content with the recovery and promise to
provide more support and the focus is on the Politburo meeting at the end of
the month.
Meanwhile, ahead of Treasury Secretary
Yellen's visit to Beijing (July 6-9) tensions are escalating rather than
receding. US
officials and the media try to frame the visit as a bid to improve relations.
Yet, actions speak louder than words. The US is preparing new sanction on
Chinese access to cloud computing services, which would require
pre-authorization before serving Chinese firms. The US is also reportedly
moving close to sell semiconductor chips to China without a license. In turn,
China has announced new export licensing program for gallium and germanium
(starting August 1), which have numerous civilian and military use, including
chip fabrication and radar, and electric vehicles. US, Europe, and Japanese
sanctions on chips and fabrication equipment will force Beijing to develop the
capacity on its own. Similarly, even drafting the new program will likely spur
the redoubling of US and other G10 countries efforts build the critical materials
and processing infrastructure. This is to say that sanctions will expedite the
de-coupling/de-risking.
Japan's final services and composite PMI
were slightly softer than the preliminary estimates. The services PMI slipped to 54.0 from the
flash estimate of 54.2 after 55.9 record peak in May. It is the first decline
in the services PMI since last November. The composite PMI fell to 52.1 from
54.3 in May and the flash estimate of 52.3. The focus is elsewhere.
Specifically, Japanese officials have stepped up their verbal intervention and
the Nikkei reported earlier this week that Tokyo is discussions with the US
Treasury. Last year's intervention was criticized by some in Washington but in
the Treasury's latest report on the international economy and foreign exchange
market, Japan was dropped from the watch list.
As was generally expected, the Reserve
Bank of Australia kept is cash target rate steady yesterday at 4.10%. Before the central bank meets again on
August 1, Governor Lowe's fate at the helm is expected to be announced. His
term ends in September. An announcement was expected last month, and the
Treasury now says an announcement is likely this month. The standpat decision
spurred the market to push out the next hike to October, while recognizing a little
better than 80% chance it is delivered in September. The year-end rate is seen
near 4.48%, the lowest in about three weeks. The final services and composite
PMI were also softer than he preliminary estimates at 50.3 and 50.1(from 50.7
and 50.5, respectively. Tomorrow, Australia reports May trade figures. Exports
fell by an average of 0.5% in the first four months of the year. In the Jan-Apr
2022 period, exports rose by an average of 4.4% a month. Remember, it is not
just about quantities but prices too. Imports rose 0.1% on average this year
and averaged 2.1% a month in the first four months of last year.
The dollar briefly and barely traded above
JPY145 on June 30. As
more market participants draw cautious with the dollar near levels at which
there was intervention last week, and Japanese officials escalate their
rhetoric, the greenback is consolidating. There are nearly $1.1 bln of options
that expire there at the end of the week. Initial support is seen in the
JPY143.80-JPY144.00 area. Despite the RBA's hold decision, yesterday,
the Australian dollar pushed above $0.6700 to a five-day high. It
stopped just shy of the (38.2%) retracement of the decline since peaking at
$0.6900 on June 16 found slightly above $0.6710. There are no follow-through
buying today and the Aussie eased to $0.6665. Support is seen in the $0.6640-50
area. There are almost A$1.5 bln of $0.6700 options that expire on
Friday. The preliminary signs Chinese officials are seeing of
stabilizing the yuan is at risk. The dollar peaked on June 30 near
CNY7.2690 and pulled back to almost CNY7.21 yesterday. After the weak Caixin
PMI, the dollar rose to CNY7.2455. Officials needed to drive the dollar below
the CNY7.1980-CNY7.2000 area. If Beijing makes it clear that it does not
want a one-way market, or through the fix makes clear, it does not want a weak
yuan, and banks (state-owned and otherwise) buy yuan, should that be considered
intervention? It seems similar to Fed officials in September 2021 indicating
that it would soon be removing monetary stimulus, and the financial
institutions sold US Treasury and the two-year note rose more than 50 bp before
the Fed delivered its first hike. The PBOC set the dollar's reference rate at
CNY7.1968 compared with expectations of CNY7.2149.
Europe
On Monday, it was announced that the
eurozone's manufacturing PMI was revised to 43.4 from the flash reading of
43.6. Today the
service PMI was shaved to 52.0 from 52.4 (flash) and 55.1 in May. It was the
second consecutive decline. The composite PMI slipped below the 50 boom/bust
level to 49.9. The preliminary estimate was 50.3. It was below 50 in H2 22 but
had been above it in H1 23. The new news was not in Germany and France, where
the preliminary PMI estimate is fairly accurate, but in Italy and Spain, for which
there is no flash estimate. Italy's services PMI fell to 52.2 from 54.0, while
the composite fell to 49.7 from 52.0. The composite was above 50 since the end
of last year. Spain fared better. The services PMI dropped to 53.4 from 56.7
and the composite stands at 52.6, down from 55.2. Both were below expectations.
Separately, France and Spain reported stronger than expected May industrial
production figures. In France, spurred by a 1.4% surge in manufacturing output
(median forecast in Bloomberg's survey was for a 0.3% decline), industrial
production rose 1.2%. In Spain, industrial output rose by 0.6%, besting
forecasting for a 0.4% rise.
The UK's flash manufacturing PMI was
upgraded from 46.2 to 46.5. The
service PMI did not enjoy the good fortune and unchanged at 53.7. It was 55.2
in May. The composite was unchanged from the flash estimate of 52.8 (54.0 in
May). Last June it stood at 53.7. Meanwhile, at the Bank of England, Megan
Greene has replaced Silvana Tenreyro as an external member on Monetary Policy
Committee. Tenreyro was a dove and has dissented from the recent string of rate
hikes, including last month's decision to hike by 50 bp, preferring a steady
rate. Greene appears to be less dovish and wrote in a column for the Financial
Times on July 3 that "It would be a mistake for central bankers to take
comfort in the notion that inflation and rates will automatically go back to
the low levels we saw before the pandemic." She cited several
structural reasons to expect the nominal policy rate will settle higher than
the market assume. Yet, outside of Japan, is there a major central bank that
"inflation and rates" will automatically return to pre-Covid levels?
Still, the strawman reveals that Greene will likely be aligned with the more
hawkish members, like Catherine Mann.
The euro was initially sold to a three-day
low slightly below $1.0870 but recovered to almost $1.0910. For the most part, the euro has remained
in last Friday's trading range this week (~$1.0835-$1.0930). The 20-day moving average
is near $1.0885, and while it has been frayed on an intraday basis, the euro
has not closed below it since June 9. Still, the five-day moving average
(~$1.0890) looks poised to slip below the 20-day moving average (~$1.0885) from
the first time since June 12. The moving averages crossed for sterling for
the first time in a month yesterday. Sterling is confined to about a
quarter of a cent today above $1.2695. Last Friday's high was slightly above
$1.2725. Initial support is seen in the $1.2680-90 area.
America
The US has a fully economic diary today. First is May factory orders and a final
read on durable goods orders. Often economist emphasize the orders data
excluding transportation and/or defense. However, given the recovery of Boeing
orders (and the supply chain) and US arms orders in the aftermath of Russia's
invasion of Ukraine, the inclusive measure be preferable. Consider that in the
three months through May, durable goods orders rose by an average of 2.1% a
month. This is the most since September 2020. While clearly, there are some
economic indicators, like the inversion of yield curve, the contraction of
money supply (M2) and the pace that the index of leading economic indicators
that are recessionary, there are other indicators, like job growth, housing,
durable goods shipments, and the service sector that point to a growing
economy. The US will sell $46 bln of a 17-week. Monday's 3- and 6-month bills
auctions were well received (at 5.23% and 5.26%, respectively), with indirect
bidders taking the most since mid-April. Including a 42-day cash management
bill, the US sold $172 bln of bills on Monday and another $190 bln between
today's sale and tomorrow's (4- and 8-week bills). Also, more US auto sales
figures are due today. Lastly, the FOMC minutes from the last month's meeting
will be released, where the Fed stood pat but signaled two more hikes might be
appropriate.
A risk that looms, which everyone seems to
be aware of, comes from commercial real estate. Last week, the Federal Reserve, the Office
of the Comptroller of the Currency, the National Credit Union Administration,
and the FDIC issued "guidance" that asked banks and credit unions to
work with "creditworthy borrowers" during time of financial stress.
The regulators said that financial institutions should provide short-term
"accommodations" (e.g., deferring payments, accepting partial
payments, or modifying a loan) before the loans become problematic. This is a
powerful use of authority, which sometime eludes those focusing on formal
mechanisms. Beijing seems particular adept at such informal uses of power much
to ire of its critics.
The US dollar tested CAD1.3200 area
yesterday, slipping through last Friday's low by a few pips. However, the support held, and the
greenback has bounced toward last week's highs (~CAD1.3285). The five-day
moving averaging is edging above the 20-day moving average for the first time
since early June. The next area of resistance is seen in the CAD1.3300-20 area.
There are options for almost $1 bln at CAD1.3300 that expire Friday. The west
coast port strike (now in the fifth day) is seen hurting Canadian exports and
weakening the economy, compounding the headwinds from the fires. On the back
of stronger survey data, the Mexican peso rose to a marginal new 7 1/2 year
high yesterday but is consolidating so far today. The US dollar fell
to about MXN17.0170 yesterday. Still, it takes a break of MXN17.00 to signal a
breakout from the trough it has been stuck in since the middle of June. Technical
support at multi-year is elusive, but a break could target the MXN16.50 area. The
carry is sufficiently rich, and the currency volatility is low enough to still
reward peso longs in a sideways market.
Reviewed by Marc Chandler
on
July 05, 2023
Rating:
