Overview: Strong Nvidia's earnings after the US
markets closed yesterday helped lift Asia Pacific markets today. All the large
bourses were higher but India. Hong Kong, South Korea, and Taiwan indices rose
more than 1%. Europe's Stoxx 600 is higher for the fourth consecutive session
and US index futures are higher, led by the NASDAQ. European benchmark bond
yields have extended yesterday's PMI-induced decline and are mostly 1-2 bp
lower. The 10-year Gilt yield is off nearly 6 bp after falling more than17 bp
yesterday. The yield is off a little more than 25 bp this week. The 10-year
Treasury yield is flat near 4.19%. In addition to $150 bln in bills (four- and
eight-week bills), the US Treasury will sell $8 bln 30-year TIPS, where demand
is suspect.
The BRICS have invited Saudi Arabia, UAE, Iran, Ethiopia, and Argentina to join as of the new year has been overshadowed by the plane crash that had been carrying the Wagner leader Prigozhin It does not appear that new initiatives about a dollar alternative for saving or trade have been launched. Promises to boost local currencies bilateral trade have been made for at least a decade with marginal results at best. Yesterday's dollar losses are being trimmed and the greenback is firmer against all the G10 currencies, with the Scandis and Antipodeans the heaviest. Emerging market currencies are more mixed. Many Asia Pacific currencies are firmer, while the Chinese yuan is little changed. Central European currencies are mostly softer. With rising inflation, Turkey is seen hiking the one-week repo rate to around 20% (from 17.50%) imminently. Gold is firm after rising $18 yesterday. It is higher for the fourth consecutive session. Oil has steadied after falling by nearly 1% yesterday. October WTI is trying to snap a three-day decline.
Asia Pacific
Japanese investors sold a small amount of
foreign bonds for the second consecutive week. In the past two weeks through August 18,
they sold a cumulative JPY597 bln (~$4 bln) after having bought almost twice as
much in the first week after the Yield Curve Control was adjusted at the end of
July. Since the BOJ first doubled the 10-year cap at the end of last year, the
weekly MOF data shows Japanese investors have bought nearly JPY13.4 trillion
(~$98 bln) of foreign bonds. This offers a prima facia case that Japanese
investors are not the source of the selling pressure that has lifted yields
this year. Last week, Japanese investors bought (~JPY185.6 bln) of foreign
equities, ending a seven-week sell-off. For their part, foreign investors
bought JPY1.13 trillion of Japanese bonds, the most since April. On the other
hand, they sold JPY741 bln of Japanese equities, the most since March.
If there is a desire among developing
countries to accelerate the use of local currencies, one of the India's leading
entrepreneurs (Anil Agarwal) said that Beijing must reduce its trade imbalance
with other developing nations. India's trade deficit with China was around $85 bln but the other
Brazil, South Africa, and Russia, had trade surpluses with China. There is
nothing outside the BRICS that prevent the use of their currencies for
bilateral trade. Yet, earlier this year, Russia indicated it had too many
Indian rupee and did not want to be paid for its oil in rupee by India. They
reportedly settled on the UAE dirham, which is pegged to the dollar (like a
stable coin in the crypto world). As is well known, the Chinese yuan is not
fully convertible (it does not trade 24-hours a day and the exchange rate are
closely managed). The BRICS bank, the New Development Bank has been in
operation for around seven years. Its officials have acknowledged that it is
dollar dependent. The CFO, Leslie Maasdorp told Bloomberg that "The bank's
capital is in US dollars. Our reporting currency is US dollars. So, the US
dollar is hot coded in the DNA of the bank." Of the $30 bln in loans the
NDB has made less than $6 bln has been in local currency. If the share of local
currency borrowing rises to 30% in the next few years, which is an explicit
goal, it is still not a game-changer, and is in line with the proportion at the
World Bank.
The drop in US rates helped the yen extend
its recovery, rising to an eight-day high after disappointing US flash PMI. The dollar fell through the neckline of a
possible double top pattern we have been monitoring around JPY145.00, but there
has been no follow-through dollar selling today and the greenback rebounded to
around JPY145.45 by late morning turnover in Europe, despite the flattish US
yields and softer JGB rates. Nearby resistance is seen around JPY145.70. The
Australian dollar snapped an eight-day losing streak last Friday with the
smallest of gains (2/100 of a cent). It has risen in the first three
sessions this week, and this is enough to get the oversold daily momentum
indicators to curl up. However, it stalled in front of the next important
technical area near $0.6490 and has returned to around $0.6445. Support is seen
near $0.6425. The broad US dollar sell-off and drop in US rates may have
done more to help steady the yuan than the most of Beijing's efforts. The
dollar is remains within the range set on Tuesday (~CNY7.2675-CNY7.2975). The
PBOC fixed the dollar at CNY7.1886 today compared with the average estimate in
Bloomberg's survey of CNY7.2812 (range of projections CNY7.2689-CNY7.2883). That
puts the top of the 2% band near CNY7.3325. The PBOC still appears to be
engineering a squeeze in the offshore market.
Europe
Often, even if not always, the
euro-dollar's exchange rate seems to be sensitive to changes in short-term
interest rate differentials, for which we use the two-year government
obligations as proxy. The
US premium rose above 200 bp yesterday before the disappointing US flash PMI.
It is a new high for the year. When the euro bottomed near $0.9535 at the end
of last September, the US two-year premium was a little above 250 bp. It peaked
around 265 bp a bit more than a month after the exchange rate bottomed. More
recently, the euro's high for the year was recorded on July 18 near $1.1275.
The US premium had narrowed to a two-month low slightly less than 150 bp on
July 13. The differential, which was still a little wider yesterday, even if
off its intrasession high, needs to pull back to boost the chances that the
euro holds $1.08. Yet, today, it has risen to new highs around 205 bp.
The euro held slightly above $1.08 yesterday and
rose to $1.0870. This simply retraced half of the losses from Tuesday's high
($1.0930) to Wednesday's low (~$1.0805). The $1.0880 area corresponds to the
next retracement (61.8%) and the euro has stopped just in front of it today. It
is in about a quarter-cent band above $1.0850 today. We suspect consolidation
is likely ahead of the Fed Chair Powell's speech at Jackson Hole Friday around
10:00 am ET. Sterling recovered after the US PMI nearly everything it
lost on the UK's disappointing PMI. It held important technical
support near $1.2600 and bounced to about $1.2730 before running out of gas. It
closed firmly above $1.2700, but it no follow-through buying has seen in slip
back toward $1.2665. The price action in the past two sessions has covered the
dominant two-cent range ($1.2600-$1.2800). Neither bulls nor bears can be happy.
America
While the US flash August PMI
disappointed, July new home sales surprised on the upside, rising to the best
level in over a year. In
addition, the preliminary estimate of the benchmark revisions to nonfarm
payrolls was smaller than expected at 306k (expectations were for 400k-500k).
There were 358k fewer private sector jobs and 52k more government jobs. The
significance should not be exaggerated. It amounts to around a 0.2% change in
the level of March 2023 employment of 155.5 mln. Nor does it change the
underlying picture of a resilient labor market that is gradually slowing.
Weekly jobless claims and continuing claims have risen since the July
employment surveys were conducted, suggesting the risk of a soft employment
report next Friday. The early call is for a 160k increase in nonfarm payrolls,
which would be the least since the end of 2020, and would lower the three-month
moving average to 177k, which is slightly more than half of the three-month
average in January (334k). July durable goods orders are also on tap tomorrow.
A slowing of Boeing orders and delivers will make for a soft read, but even
when defense and aircraft orders are excluded durable goods orders in July may
be flat or nearly so.
The Jackson Hole symposium kicks off
tonight. Powell's
speech tomorrow is of key interest, of course, and between today and tomorrow
four other Fed officials speak. The futures market is discounting about a 10%
chance of a Fed hike next month and less than a 50% chance of a hike in
November. It is difficult to see the pendulum of market sentiment become more
dovish. So even though the market often hears Powell more dovish (than the FOMC
statement, for example), there does not seem much room this time. The theme of
the conference is "Structural Shifts in the Global Economy." Many
think that "de-globalization" is among the factors putting the world
in a high inflation environment. The Fed's Summary of Economic Projections
showed after hiking rates twice in the H2 23, the median forecast by Fed
officials was that as many as four cuts would be appropriate next year (even
though the median forecast did not see the PCE deflator falling below 2% until
after 2025). Even if the Atlanta Fed's GDP tracker is exaggerating by half Q3
growth (its 5.8% projection will be revised today) it still points to another
quarter of growth above the non-inflationary pace seen by the Fed (1.8%).
Powell may explain the need to have rates at restrictive levels for some time,
but will it resonate? The market as nearly three cuts fully priced in by the
end of Q3 24, with about an 80% chance the first cut is next May.
The US dollar reversed lower against the
Canadian dollar after briefly poking above CAD1.36. The disappointing US PMI more than offset
the unexpectedly large decline in Canada's June retail sales, excluding auto
(-0.8% vs. median forecast in Bloomberg's survey for a 0.3% gain). A
potentially bearish shooting star candlestick was created. US dollar selling
today has been limited to about CAD1.3510, and it has rebounded to about
CAD1.3550. Nearby resistance is seen around CAD1.3560. A break of the
CAD1.3475-CAD1.3500 area could signal the start of a deeper correction. Although
a weaker US economy may weigh on Mexico's, the market's initial response is to
bid the peso, with 11.25% overnight rates, higher. The US dollar fell
to MXN16.7850. Recall it settled last week near MXN17.0560 and has not closed
below MXN17.00 since August 1 until Tuesday. The multiyear low was set in late
July around MXN16.6260. The greenback has steadied and has ticked up a little
above MXN16.84 ahead of the CPI figures for the first half of August. Some may
be initially confused if the biweekly rate accelerates while the year-over-year
rate falls (both headline and core). It might not matter much as monetary
policy is solidly on hold at the next central bank meeting on September 28. Meanwhile,
the greenback has been testing BRL5.00 at the end of last week and earlier this
week. Amid the broader dollar pullback yesterday, the dollar fell to BRL4.8465,
nearly a two-week low. The 1.6% slide in the greenback was the largest loss in
four months. Given the firmer dollar tone today, it could recover toward
BRL4.90-BRL4.92.
Reviewed by Marc Chandler
on
August 24, 2023
Rating:
