Overview: A powerful short squeeze has lifted the
yen by the most in two months this week. The dollar's push today below JPY143
was encouraged by the stronger than expected wage growth. The US jobs report
will test its strength. The PBOC fixed the yuan sharply higher today and it is
the only emerging market currency that is higher on the day, ahead of the Latam
open. The dollar has not drawn much support for the surge in US yields. The
10-year yield came within a whisker of the year's high set in March near 4.09%
and the two-year yield set a new multiyear high near 5.12% yesterday, bolstered
by a series of stronger than expected data. Both are firm today but off
yesterday's highs. The euro, Swiss, franc, and Canadian dollar are slightly
softer today, with the yen and Antipodeans the strongest.
Higher yields took a toll on
equities yesterday and follow-through selling saw all the large bourses in Asia
Pacific fall. The Stoxx 600 in Europe is flat after being tagged for 2.3%
yesterday, the most in four months. US index futures are softer. Benchmark
10-year yields are 1-3 bp higher in Europe, after the Antipodean yield jumped
12-13 bp to play catch-up. The 10-year JGB yield approached 0.45%, which it has
not settled above since late April. Gold is in a narrow range around $1913
after holding $1900 in yesterday's test. August WTI is edging higher and
reached $72.40, a two-week high on the extension of output cuts from Saudi
Arabia (and maybe Russia) and falling US inventories.
Asia Pacific
Japan's labor cash earnings
jumped 2.5% in May from a year ago. It was twice what economists expected. In May 2022, it had
risen by 1.0% year-over-year and in May 2021, it was 1.9% higher over the
previous 12 months. When adjusted for inflation, the 1.2% decline real cash
earnings are the least of the year. While officials must be pleased with the
surge in in labor earnings, they must be disappointed that it did not translate
to stronger spending. Household spending slumped 4% from a year ago. It is
slightly better than April's 4.4% decline. The 2.5% year-over-year decline in
May, while better than the 4.4% decline in April, it is still weaker than any
month last year and H2 22.
Given the tit-for-tat
US-China sanctions that seem to be escalating, Treasury Secretary Yellen's
visit to China, where she won't meet with Xi, seemed to be more about signaling
than substance. Yellen's
trip follows Secretary of State Blinken's visit and will be followed by climate
envoy Kerry. Some press reports indicate that Yellen signaled that tariffs
imposed by the Trump administration will be rescinded. Yet, the sanctions
imposed by the Biden administration look set to escalate, probably after
Yellen's trip is over. More export/sales restrictions on chips and cloud
services have been reported in the press.
The stronger Japanese wages
spurred another round of yen short covering, sending the greenback below JPY143
for the first time in two weeks. There are about $630 mln in options expiring there today and near
$1.05 bln on Monday. The 20-day moving average, which the dollar has not traded
below since mid-June is around JPY142.80 and the (38.2%) retracement of the
last leg up that began on June 9 (~JPY138.75) is found by JPY142.66. The
dollar's pullback against the yen as occurred despite higher US rates, but the
test of the yen's recovery may be seen following the US jobs report. Support
for the Australian dollar near $0.6600 held again. It has not been able to rise
above $0.6650 and the week's high slightly above $0.6700. The highs were
recorded in the European morning and the intraday momentum indicators are
stretched. Ahead of next week's central bank meeting, the New Zealand dollar is
the strongest of the G10 currencies, rising nearly 0.95% this week, followed by
the yen's roughly 0.9% gain. The Aussie is nearly about a 0.33% loss. Over
the past 100 and 1000 sessions, the Chinese yuan and yen move in the same
direction against the US dollar about 2/3 of the time. Today is not an
exception. The yuan strengthened for the fourth session this week. It is up
almost 0.25% today and about 0.3% for the week. For the last three months, the
yuan rose one week a month. The PBOC set the dollar's reference rate
aggressively below market expectations (CNY7.2054 vs. CNY7.2455). Lastly China
reported a $16.5 bln increase in June foreign reserves to $3.19 trillion. Of
note, it added about 23 tons of gold (value of roughly $1.5 bln).
Europe
German May industrial output
disappointed, falling by 0.2%, despite yesterday's unexpected 6.4% surge
factory orders. Earlier
this week, France and Spain reported stronger than expected industrial output
figures for May. French industrial production jumped 1.2%. The median forecast
in Bloomberg's survey was for a 0.2% decline. It was led by a 1.4% jump in
manufacturing output. Economists had expected a decline. It was the second
consecutive monthly gain after falling in Q1. Spain's industrial production
rose by 0.6% in May, edging above the 0.4% median forecast in Bloomberg's
survey. Italy will report its figures on July 11, and the aggregate report is
due July 13.
The US 2-year premium over
Germany rose to 178 bp briefly yesterday. before settling at 170 bp. It was the most since late February. The
premium is a little wider today. The year's high was set on February 6 near 187
bp. The lowest the premium got so far this year was about 112 bp on April 24. The
euro topped out April 26. It recovered from a marginal new three-week low but
peaked at $1.09, where the near-term trendline, drawn off the June 22 high
(~$1.1010) and June 27 high (~$1.0975), and July 3 high (~$1.0935) was found. Today,
the euro has been turned back from $1.09, where about 900 mln euro in options
expire today and another one billion euros are struck at $1.0920 that expire
Monday. Buying on pullbacks was still evident yesterday as the single currency
recovery smartly from a three-week low near $1.0835 despite the strong US data
and risk-off. Sterling enjoyed a big outside up day by trading on both
sides of Wednesday's range and then settling above its high. While the
five-day moving average is drifting further below the 20-day moving average for
the euro, it has crossed higher again for sterling, where it has whipsawed this
week. Yesterday's high was near $1.2780, a two-week high. It is consolidating
in about a quarter-of-a-cent below $1.2750 today. A push above yesterday's high
targets the $1.2850 area approached in the second half of June.
America
A string of better-than-expected
US data, and especially about the labor market has expectations running high
for the nonfarm payroll report today. Challenger jobs cuts in June moderated to 40k from
January's peak of over 100k. The ADP estimate of private sector job growth
surged by 497k, more than twice the median forecast in Bloomberg's survey. Although
weekly jobless claims rose, the four-week moving average edged lower to stand
at a three-week low (~253k). The employment component of the ISM services
survey rose to 53.1 from 49.2. It is the highest since February and the second
highest since March 2022. The one disappointment was with JOLTS job openings,
but here the lower-than-expected number was blunted by an upward revision in
the April series. The decline was the largest in the three-months, but the 9.8
mln openings remains well above pre-pandemic levels. Moreover, the quit rate,
rose to the most in nearly a year, which is seen as a sign of job security.
Fed Chief Powell has often
argued that there is not one labor market reading that captures the
multidimensional and that officials review many different metrics. That suggests that barring a significant
downside surprise, the June nonfarm payroll report will not have much impact on
expectations for a hike late this month. Given that strength of yesterday's
reports, it may take more than a 225k increase, which is the median forecast in
Bloomberg's survey to surprise the market. Moreover, growth of more than 217k
jobs will translate to the second consecutive monthly increase in the
three-month average and more than 239k would do the same for the six-month
average.
Canada also reports its June
employment data. It has
lost full-time positions in April and May (cumulative loss of ~39k). Indeed,
since the January jump of 121k full-time jobs, ever month has been weaker than
the previous month. While US average hourly earnings are seen slowing to a 4.2%
year-over-year pace (from 4.3%), Canada's hourly wage rate for permanent
employees may slow to 4.6% (from 5.1%). The Bank of Canada meets on July 12. In
Bloomberg's survey of 21 economists, 12 look for a 25 bp hike and nine see it
standing pat. Similarly, the swaps market is pricing in almost an 60% chance. A
weak employment report would likely see the odds fall.
Mexico reports June CPI
figures today. The
year-over-year pace of headline and core CPI are expected to continue declining
and the readings for the second half of the month after lower than the first
half. This suggests the momentum is in the right direction, but even with the
anticipated decline, the headline rate is still more than 100 bp above the
upper end of 3% target (+/-1%). Banxico meets next on August 10. Its overnight
target rate is 11.25%. It is not seen cutting until Q4, by which time CPI will
likely be closer to 4%. Indeed, Mexico's CPI rose at an annualized rate of
3.05% in the first five months of this year.
The poor Canadian May trade
figures (C$3.44 bln deficit compared with median forecasts of a C$1.2 bln
surplus, the largest shortfall since October 2020, and a downward revision to
the April surplus that halved it to less than C$900 mln) coupled with risk-off
mood, (equities sold off sharply) and a jump in US rates, delivered the largest
loss to the Canadian dollar in more than a month. The greenback reached CAD1.3370, a little
shy of the (50%) retracement objective of last month's slide, and today it
edged up slightly through CAD!.3385. A break above CAD1.3400 could spur a move
toward the next retracement target (61.8%) near CAD1.3450. The Mexican peso
got clocked. Its 1.3% loss was the largest since early March. The greenback
had fallen to its lowest level since the end of 2015 on Wednesday (~MXN16.9810)
and reached a high yesterday of MXN17.3820. Today, a marginal new high near
MXN17.3960 was recorded. A combination of risk-off, the jump in US rates, and
unwinding some carry positions appears to fuel the move that saw the US dollar
meet the (38.2%) retracement objective of the last leg lower than began from
about MXN18.00 on May 23-24. The next retracement (50%) is near MXN17.49. Given
that the macro considerations have not changed (carry, relatively low vol
currency, strong external position, institutional strength and independence of
the central bank and Supreme Court) remain in place, we suspect that the peso's
pullback will entice new buyers.
Reviewed by Marc Chandler
on
July 07, 2023
Rating:
