Overview: Encouraged by the continued stream of US data, which
suggests that the world's largest economy is accelerating, the US 10-year yield
is approaching last year's 4.33% high, and the dollar's run has lifted it to
new highs for the year against the Japanese yen, Chinese yuan, and the
Australian and New Zealand dollars. Even a rate hike by Norway did not stop the
dollar from rising against the krone. The greenback is firmer against most of
the major currencies but has steadied in the European morning against the yen,
Swiss franc, and Canadian dollar. Disappointing employment data from Australia
has kept the pressure on the Aussie, which spiked lower $0.6365 before buying
emerged. The dollar gapped higher against the Chinese yuan, the sixth day of
gains, and is holding above CNY7.30. The market is unpersuaded by the
aggressive fixings by the PBOC. Gold is consolidating its recent losses that
pushed the yellow metal below $1900.
Most of the large bourses in the Asia Pacific region fell, but China and
Taiwan were the chief exceptions. Europe's Stoxx 600 is lower for the third
consecutive session, and without a strong recovery, it will post its third
straight weekly loss, the longest of the year. US index futures are slightly
firmer. Meanwhile, the bond market sell-off continues. The 10-year JGB yield
edged up to nearly 0.64%, its recent high. European yields are most 3-5 bp
higher and the US 10-year Treasury yield is near 4.29%, up almost four basis
points. Lastly, September WTI has steadying after falling by about 4.5% over
the past three sessions. US commercial oil inventory fell by 6 mln barrels, to
the lowest level since January as refiners processed the most since January
2020 and exports remain strong. US weekly output is at a post-pandemic high of
about 12.7 mln barrels a day.
Asia Pacific
According to the OECD's model of purchasing power parity, the yen is more
than 49% undervalued. On a trade-weighted measure, it is off almost
29% since the pandemic struck to reach its lowest level in more than a
quarter-of-a-century. A couple of days ago, Japan reported that net export
contributed 1.8 percentage points to Japanese Q2 growth, which leaving aside
the Covid distortions, was the most since 2009, another crisis-distorted year. Yet
today's merchandise trade report showed the balance fell back into deficit last
month. Exports fell (-0.3%) on a year-over-year basis for the first time since
February 2021. Imports fell (-13.5%) for the fourth consecutive month on a
year-over-year basis and the 15.2% is the biggest decline since September 2020.
Separately, many thought that after the BOJ's adjustment of the 10-year yield
cap at the end of last month, Japanese investors would sell foreign bonds and
repatriate funds. Yet, Japanese investors have been buying after last
December's adjustment. The MOF weekly portfolio flow data showed that Japanese
investors sold JPY334 bln of foreign bonds (~$2.3 bln) after the previous
week's buying was revised to JPY1.12 trillion (from JPY438 bln).
Australia's July disappointing employment report did not change
expectations that the central bank will stand pat when it meets on September 5,
but it did drive the Australian dollar to new lows for the year. Australia
lost 24.2k full-time jobs in July after gaining 38k in June. The unemployment
rate rose to 3.7% from 3.5%. The median forecast in Bloomberg's survey was for a
rise to 3.6%. Counting part-time, Australia lost 14.6k jobs. Economists had
expected an increase of 15k. The participation rate also slipped lower (66.7%
vs. 66.8%).
The US dollar rose to about JPY146.40 in the North American afternoon
yesterday. It rose above the level that the BOJ is believed to have
intervened in September 2022. In Asia today, the dollar extended the gains
slightly to about JPY146.55, before coming off. Initial support now is seen
around JPY146.00. There was some congestion last November in the JPY148.40-85,
but the high last October was almost JPY152.00. Many observers are on
"intervention watch" but the rhetoric still has not escalated to the
point that would suggest intervention was imminent. The dollar's rise also
seems somewhat more orderly than last September and October, when the greenback
often traded above its upper Bollinger Band. Benchmark three-month implied volatility
averaged (20 day) was above 11% last September and October. It is now below
10%. In terms of one-direction moves, last October the dollar went on a 12-day
run that ended with the BOJ's intervention on October 21. The dollar has risen
for the last eight consecutive sessions. The Australian dollar is falling
for its eighth straight session today, with a cumulative loss of about
2.60%. The employment data does not change anything. The break of %0.6400
could spur another cent decline, though the trendline connecting the pandemic
low (~$0.5510) and last year's low (~$0.6170) comes in near $0.6375. The Aussie
took it out, falling to $0.6365, but is testing $0.6400 in late European
morning turnover. The dollar gapped higher on Monday against the Chinese
yuan and has not looked back. It gapped higher today, above the perceived
cap at CNY7.30 and reached nearly CNY7.3175. Given the greenback's broad
strength and the economic and financial divergence with the US, further gains
are likely. Acknowledging the purposeful opaqueness of Chinese actions, we
think Chinese officials are moderating the pace of the yuan's decline more than
trying to reverse it. Last year's dollar high was set almost two weeks after
the dollar peaked against the yen. The high was recorded on November 1 near
CNY7.3275. The PBOC set the dollar's reference rate at CNY7.2076 and the
average expectation in Bloomberg's survey was CNY7.2994. The gap between the
two has trended higher as the dollar appreciated.
Europe
The eurozone recorded its second monthly trade surplus since September
2021. The June surplus of 412.5 bln was more than three times greater than
expected. This enabled it to record an average monthly surplus of 1.6 bln euros
in Q2 after a deficit of 175 bln euros a month in Q1. It is the first quarterly
surplus since Q3 21. The broader measure of trade, the current account, will be
reported next week (August 22). It has recovered more than the trade balance.
The current account was in deficit from April through October last year before
swinging back into surplus. In the first five months of the year, the eurozone
recorded an average monthly current account surplus of 10 bln euros. In the
Jan-May 2022 period, it recorded an average monthly deficit of 2.5 bln euros. Before
the pandemic, the eurozone's current account surplus was 2.2% of GDP. Last year
the deficit was 0.7% of GDP, the first deficit since 2011 and the largest since
2008. The ECB projects that the surplus will be 1.1% of GDP this year, rising
to 1.5% next year.
Today is a bit a reprieve for the UK, which has reported key employment
and inflation reports already this week. Tomorrow, the UK sees July retail
sales. The bulk of June's increase will be unwound. The median forecast in
Bloomberg's survey calls for a 0.6% decline (volume terms) after a 0.7%
increase in June. That would put the year-over-year rate at -2.1% (from -1.0%)
and snaps a three-month improvement. At the end of last week, the swaps market
was not fully confident that the BOE would hike rates at the September 21
meeting. After the jobs and inflation data, the market not only has a 25 bp
hike discounted but a 25% chance of a 50 bp move,
The euro is extending its losing streak into the fifth consecutive
session today and reached almost $1.0860, its lowest level for the fourth
consecutive session yesterday and reached its lowest level since July 6. Yesterday,
it settled below $1.09 for the first time in a month. Last month's low was
set near $1.0835, and the (61.8%) retracement of the rally from the year's low
set in mid-March (~$1.0515) is around $1.0805. The 200-day moving average is
closer to $1.0785, and the trendline connecting the March and May lows is found
by $1.0755. Sterling was the only G10 currency to hold its own against the
surging greenback yesterday and this may be a function of the swing in BOE
expectations after the string of recent data. It has come back a little
softer and it is in a narrow range (~$1.2705-$1.2745). Sterling is going nowhere
quickly against the US dollar. Nearby support is seen around $1.2675-85. Norway's
central bank, Norges Bank, delivered the expected 25 bp hike (to 4%) and
signaled another hike next month to finish the cycle. However, the hike has not
helped the krone much. It is lower for the sixth consecutive session against
the dollar and euro.
America
The string of stronger than expected US data continued with yesterday's
July housing starts 3.9% increase and 1.0% rise in industrial output. The
June data were revised lower, but the upside surprise in July sufficient to
offset it. The gain in industrial output and manufacturing (0.5%) snapped a
two-month decline. The FOMC minutes read more hawkish than expected and the
expectations for the year-end Fed funds rate edged higher to about 34%, which
still seems low given that strength of the recent data. The Atlanta Fed's GDP
tracked moved up to 5.8% yesterday. Given the margin of error at this stage of
the quarter, is seems to be stronger than Q2's 2.4% pace and well above the
median forecast in Bloomberg's survey of 0.7%.
Today attention turns to weekly jobless claims, which rose to a five-week
high in the week through August 4 (248k). The four-week moving average
of 231k is nearly 10% below the high seen in June (almost 257k). The
Philadelphia Fed's August business outlook is expected to improve marginally.
Then there is the index of Leading Economic Indicators, which are all but
ignored by the market. The index has been declining without fail since the
start of Q2 22 and the pace of decline over the past six months (-8.1%), faster
than point last year, has in the past only been seen in recessions.
Canada reports June portfolio flows. In the first five months of the
year, StatsCan has reported a net inflow of about C$15 bln. In the Jan-May 2022
period, Canada drew nearly C$100 bln of net portfolio flows. Canada's
S&P/Toronto Stock Exchange Composite Index rose nearly 3% in June and the
10-year government bond yield rose by about eight basis points to 3.26%.
The US dollar traded well above CAD1.35 yesterday for the first time in
two months. The "stars" are aligned against it. The US dollar
rose broadly, risk appetites were squeezed, oil prices tumbled, and US rates
rose. The gains were extended to almost CAD1.3555 today. The CAD1.3570 is the
next technical target, though the upper Bollinger Band is slightly higher
(CAD1.3585). Above there, CAD1.3600 attracts before the April-May highs, closer
to CAD1.3650-60. The greenback is edging higher against the Mexican peso. It
reached nearly MXN17.2080 today, its best level since August 8 when it reached
about MXN17.2845. The peso's recent softness seems more a function of the
broader risk climate than a specific Mexican development. Once that diminishes,
we suspect the demand for the peso will resurface. Initial dollar support today
may be seen in the MXN17.10-12 area.
Reviewed by Marc Chandler
on
August 17, 2023
Rating:
