Overview: The US dollar's losses have been extended
ahead of the June CPI. At the same time, speculation that the Bank of Japan
will adjust policy later this month saw the yen extend its gains for the fifth
consecutive session. Sterling made new highs since last April, while the Swiss
franc has risen to its best levels in about 2 1/2 years. The Dollar Index
gapped lower and through the trendline drawn off the April and May lows. The
greenback has steadied a little in the European morning. Given the move, there
is risk of "sell-the-rumor, buy-the-fact" type of activity. Emerging
market currencies are also mostly higher, including the Chinese yuan, which is
at its best level in three weeks.
The yen's strength is weighing
on the Nikkei, while indications of more economic support from Beijing are
helping lift Chinese and Hong Kong equity markets. Other large bourses in the
Asia Pacific region advanced with India being an exception. The Stoxx 600 in
Europe is advancing for the fourth consecutive session, and US index futures
are also enjoying a firmer tone. European benchmark 10-year rates are mostly
3-4 bp lower, though the yield on 10-year Gilts is off more than five basis
points. The US 10-year Treasury yield is off about three basis points to 3.94%.
The two-year yield is around 4.86%, having peaked near 5.11% last week. Gold is
trading around $1935 and traded above $1940 for the first time since June 20. Focus
in the oil market has shifted to supply and August WTI is trading above $75 a
barrel and is approaching the 200-day moving average near $75.55.
Asia Pacific
China's June lending figures
reported late local time yesterday were stronger than expected. The CNY4.22 trillion (~$590 bln) was the
strongest in three month. Bank lending rose by ~2 1/4 times over May to CNY3.05
trillion, while lending for non-bank entities (shadow banks) rose nearly
six-fold (from a small base) to CNY1.17 trillion. The macro data focus now
turns to the June trade figures. Through May, China has recorded an average
monthly surplus of $71.9 bln compared with $56.4 bln in the first five months
of 2022 and $38.3 bln in same period in 2021. The larger trade surplus is not a
function of stronger exports. Indeed, exports have fallen on a year-over-year
basis for the six of the past eight months and are expected to have contracted
by 10% year-over-year in June. Imports have also fallen for six of the past
eight months.
Japan reported a 0.2%
decline in June producer prices. It was the second consecutive monthly decline. At an annualized
rate, Japan's PPI fell by 1.6%% in H1 23. It rose at a 9.4% annualized rate in
H2 22. Still, the focus in on the consumer prices, but next week's national
figures for last month are less important than the July Tokyo CPI due a few
hours before the BOJ meeting concludes on July 28. Speculation that the BOJ
will adjust policy has intensified over the past week or so. Most observers are
focused on the yield-curve control, which caps the 10-year yield at 0.50%. Some
see the steepness (the most since 2015) of the five-year to 10-year curve an
indication that the market is pricing in an adjustment. There are a few other
elements, including the midpoint of the band for the 10-year JGB, the negative
overnight rate (-0.10%), and the easing bias that also could be adjusted.
The dollar's sell-off
against the yen is extended for the fifth consecutive session today, and near
JPY136.65 is down around 3.35% this month. The greenback has seen our JPY139.50 target and steadied
near JPY139.30. The JPY140 area may now become nearby resistance. A convincing
break of JPY139.50 would target the JPY138.45-75 area next. As widely expected,
the Reserve Bank of New Zealand stood pat with the cash target rate at 5.5%. The
central bank has previously signaled its intention to keep rates steady until
May next year. The New Zealand dollar made a new high (~$0.6240) since mid-June
after the decision but has reversed lower. It is likely to find support in the
$0.6180-90 area. The Reserve Bank of Australia announced it would implement
several reforms (two-day meetings, but eight instead of 11 a year, and the
quarterly statement would be released at the conclusion of board meeting). Governor
Lowe seemed to play down the need for further tightening but did not shut the
door. Either an extension of his term or a successor is expected to be
announced over the next couple of weeks. The Australian dollar initially
advanced to $0.6740 before it too reversed lower. It is finding support near
$0.6680 in the European morning. If it has not recorded the session low,
it looks close. The recovery of the Japanese yen has coincided (and we have
suggested, not coincidentally) with the recovery of the yuan, which reached a
three-week high today. It has risen by about 0.9% this month. The
dollar has spent the entire session (thus far) below the 20-day moving average
(~CNY7.2060) for the first time in three months. The PBOC set the dollar's
reference rate at CNY7.1765 compared with expectations for CNY7.1912. The next
target may be in the CNY7.1500-CNY7.1680 area.
Europe
Tomorrow, the eurozone
reports aggregate industrial production for June. Of the large national reports, only
Germany disappointed. Output fell by 0.2% while economists expected a flat
report. France was expected to report a 0.2% decline in industrial production
but instead it surged 1.2%. Italy's also surged. The 1.6% gain compares with
expectations of 0.6% and recovers most of the 2.0% decline posted in May. Spain's
recovery from the 1.9% contraction in industrial output in May was not quite as
impressive, but the 0.6% gain surpassed the 0.4% median forecast in Bloomberg's
survey. Separately, May trade figures are due Thursday. So far only Germany and
France have reported their national figures and deterioration in the former
(14.4 bln euros vs. 16.5 bln euros in April) was largely offset by the
improvement in latter (-8.42 bln euros vs. -10.6 bln euros in April). Tomorrow,
the UK reports May GDP figures, and details. Weaker industrial output,
services, and construction are seen driving a 0.3% contraction.
The euro is holding above
$1.10 today, and if sustained, it would be the first time in two months. On the top side, it traded slightly above
$1.1035. There is little meaningful resistance in front of the late April and
early May high near $1.1100. The greenback extended its losses against the
Swiss franc to levels not seen since early 2021. Today's low is about
CHF0.8765 and that low from January 6, 2021, was a little below CHF0.8760,
which itself was the lowest since the franc's cap (euro floor) was lifted in
early 2015. Sterling extended is rally to almost $1.2970 today before
pulling back nearly a half-of-a-cent. It found new bids in the European
morning around $1.2925. We look for sterling to have another run at $1.30, and
above it, the next chart resistance may be in the $1.3150 area. Its strength
appears to be a function of both the more aggressive hikes anticipated from the
Bank of England and the weakness of the dollar.
America
There are two highlights in
today's North American session: the US CPI and the Bank of Canada decision. The median forecast in Bloomberg's survey
looks anticipates a 0.3% gain in both the headline and core measures of US CPI.
That would mean that at an annualized rate US CPI rose by about 3.6% in H1 and
the core rate around 4.8%. Recall that headline inflation peaked last June at
9.1% and with a 0.3% rise this June, the year-over-year rate can fall to about
3.1%. The core rate peaked at 6.6% last September and a 0.3% gain last month
will bring the year-over-year rate to 5.0%. The firmness of prices and the
Fed's rhetoric have persuaded the market to price in a hike later this month
with high confidence. The issue is trajectory of policy from there. The market
continues resist ideas of another hike. The Fed funds futures have about a 16%
chance of a September hike discounted. The year-end effective target rate
(January Fed funds futures) is about 5.375%. The current effective average rate
is 5.07%-5.08%. The key question is what will it take to persuade the market of
another hike? Perhaps a combination of stronger inflation readings and note the
base effect may point in this direction as early as the July CPI print (August
10). Recall that in July 2022, CPI was unchanged on the month. Lastly, note
that that SEC is expected to announce new rules for money markets. It will the
third try to put this important aspect of the capital markets on solid footing
since 2008. The last reforms in 2016 failed to prevent a crisis in 2020, which
resulted in the Fed's emergency assistance facility.
The market leans toward a
rate hike today by the Bank of Canada, though part of the expectation may
reflect that last month's hike surprised many participants. Most of the data since then does not
necessarily make a compelling case for back-to-back hikes. Price pressures,
including the underlying measures that Governor Macklem pointed to, eased. April's
monthly GDP disappointed by being flat. Canada also reported a significant
deterioration its May trade balance and revisions that halved its April
surplus. The main exception was last week's June jobs report that saw an
outsized 109k jump in full time employment (though almost half seemed to be
from part-time positions). Still, unemployment rose by 0.2% to 5.4% and wage
growth slowed more than expected. The Canadian economy surprised the Bank of
Canada and investors by expanding by 3.1% in Q1 at an annualized pace, but
economists see it slowing to less than 1% in Q2 and set to nearly stagnate in
the second half. Note that the full economic impact of the wildfires and the
West coast port strike, which has entered its second week, and estimated to be
costing around C$500 mln a day, has not been felt. There are reports suggesting
that there are around 300 vessels at Vancouver and Prince Rupert ports and
another 73 scheduled to arrive shortly. Given the strike activity, only 2-5
ships can be processed at a time. Diversions to the US could cost time and
money and US union dockworkers are resisting unloading cargo that is headed to
Canada to show solidarity.
If the Bank of Canada does
not hike, we expect knee-jerk decline in Canadian dollar that could see the
greenback test CAD1.3300 area. After peaking before the weekend near CAD1.3385, the
greenback tested the CAD1.3200 area, which is the low seen last week. The
CAD1.3180 area may offer mild support ahead of the nine-month low set in late
June near CAD1.3115. The US dollar slipped against the Mexican peso to a
four-day low (~MXN17.0145). The multiyear low was seen last in the middle
of last week around MXN16.9810. The strength of the peso and the recovery of
the Brazilian real yesterday suggests that surge in yen and Swiss franc does
not necessarily mean the end of carry trade strategies, and instead lends
credence to ideas that this is a dollar move.
Reviewed by Marc Chandler
on
July 12, 2023
Rating:
