Overview: For the first time in more than a week,
North American dealers will take to their posts with the dollar softer against
all the G10 and most of the emerging market currencies. Despite stepped up
efforts by Chinese officials and a firmer yen, the yuan remains on the
defensive and is one of the handful of emerging market currencies softer on the
day. Stocks and bonds are mostly higher too. The yuan might not be benefitting
from a softer dollar, but Chinese shares, both on the mainland and in Hong Kong
rallied alongside nearly all the regional markets, though India is struggling.
Europe's Stoxx 600 is up a little more than 1%. If it is sustained, it would be
the largest advance of the month. US index futures are also trading higher. Interest
will be on the US regional banks after S&P's downgrades late
yesterday.
Although Asia Pacific bonds played
catch-up after the yield gains in Europe and the US yesterday, European and US
yields have come back softer. European yields are off mostly 3-7 bp and the
peripheral premium is slightly narrower today. The US 10-year yield is off
three basis points to about 4.30% and the two-year yield is slightly below 5%. The
softer dollar and easier rates are helping lift gold back above $1900. The
200-day moving average is around $1907.60. October WTI reversed lower yesterday
after spiking to $81.75. It is now below $80 a barrel. Meanwhile, with a strike
vote as early as tomorrow in Australia, worries about supply disruption
continues to lift the European natural gas futures benchmark. After rallying
50% in the past three weeks, it settled nearly 7.4% higher yesterday and is up
another 3.6% today.
Asia Pacific
The market continues to digest the
implications of the failure of Chinese banks to pass through the cut in the PBOC's
benchmark one-year Medium-Term Lending Facility rate through to prime
borrowers. Meanwhile,
in recent days, several large banks have cut their forecasts for Chinese growth
this year below the 5% target. Some observers seem to be making a virtue out of
necessity and square the circle by claiming Beijing is doing this to break
belief in growth at any cost and squeeze out speculation from the property
market. Yet, officials seem to have stepped their soft power, encouraging banks
to boost lending and resist selling yuan.
Japanese officials seemed to have missed
an opportunity to break the back of the yen's downside momentum. Caution last Thursday and Friday
over the possibility of intervention helped arrest the eight-day slide in the
yen, but officials have not delivered. News that Japan's Prime Minister Kishida
and Bank of Japan Governor Kishida met to discuss financial conditions and the
weak yen earlier today helped steady the yen after rising US rates had lifted
the greenback to JPY146.40. Separately, the labor ministry announced before the
weekend that hourly minimum wage will be lifted starting October 1 to an
average of JPY1004 (~$6.92), a JPY43 increase per hour. It is slightly more
than the advisory panel recommended (JPY41 to JPY1002). There is some variance
among the prefectures. Lastly, after the BOJ doubled the cap on the 10-year JGB
at the end of July to 1.0%, many thought that this would lead to Japanese
investors selling foreign bonds and repatriating funds. Indeed, global yields
have risen but MOF weekly data show Japanese to have been net
buyers of foreign bonds and the yen has weakened. Foreign investors, on the
other hand, have sold more Japanese bonds in the past two weeks (JPY2.83
trillion or ~$19.5 bln) than any two-week period since January,
The dollar reached JPY146.40 yesterday
toward the end of the European session. The dollar did briefly dip below JPY145 before the weekend, but
this looks to offer pretty solid support in the coming days, with the help of
about $3.8 bln in options struck there that expire between today and Thursday. Japan's
10-year yield is near 0.66% where it peaked on August 3. While BOJ could offer
to buy 10-year bonds at the market, as it did earlier this month, might not
help steady the yen for long. The Australian dollar recorded its
session low yesterday as Europe was closing, slightly below $0.6390, but
rebounded back to the session high near $0.6420 and extended the gains to
almost $0.6450 today. It looks poised to settle above the five-day
moving average (~$0.6415) for the first time since August 7. A move now above
$0.6460 would target the $0.6520-40 area. The yuan continues to
struggle. Chinese officials not only set a lower dollar reference rate
but have also engineered a liquidity squeeze in the Hong Kong market, sending
HIBOR to its highest level since 2018, which pushes up funding costs for
shorting the offshore yuan. Today's refence rate was set at CNY7.1992 compared
with the average projection in Bloomberg' survey of CNY7.3103. It is among the
widest gaps. Yesterday was the third consecutive session it eked out a small
gain, which is the longest advance in a little more than a month. But, despite
the stepped-up official efforts and the firmer Japanese yen, the yuan is softer
today and the greenback is approaching CNY7.30.
Europe
The eurozone has a light economic release
schedule this week. After
today's June current account, Wednesday's release of the preliminary PMI is the
other highlight. The manufacturing PMI may stabilize around July's 42.7 reading.
It has not been above the 50 boom/bust level since June 2022, and it has fallen
for the past six months. It is at its lowest level since May 2020. While
services had fared better, they too are softening. The services PMI has a
three-month fall in tow, and at 50.9 in July it was the weakest reading this
year. It is likely to have softened further this month. The composite spent H2
22 below 50 but held above the threshold for the first five months of this
year. It is likely to extends fall this month.
Today's UK figures on public sector
borrowing do not typically move the market. The Office for Budget Responsibility
projects the deficit to increase to 5.1% of GDP this year from 4.4% last year,
but this might still be assuming a 0.2% economic contraction this year. The BOE
now projects a 0.5% expansion, while the median forecast in Bloomberg's survey
is for 0.3% growth. The flash August PMI, to be reported tomorrow, is expected
to see the manufacturing PMI extend its retreat for the sixth consecutive month
and the 45.0 reading would be the lowest since 2020. The service PMI has slowed
for the past three months, and likely extended the slowdown into August. At
51.5 in July, it has remained above 50 since it resurfaced above it in
February. This has helped keep the composite reading above 50, but it may be
closer to it this month.
The euro's nearly 0.20% gain yesterday was
the most since August 4 and the second biggest advance this month. It settled above the five-day moving
average for the first time since July 26. It is near $1.0885 today.
Follow-through buying lifted the euro to $1.0930. Last week's high was near
$1.0960 and this needs to be overcome to suggest anything constructive from a
technical point of view. Note that the 20-day moving average is found near
there and the (50%) retracement of the sell-off from this month's high
(~$1.1065 on August 10) is around there, as well. Sterling traded
firmly but remains mired in a range. Last week's high was slightly
above $1.2785 and sterling came within a fifth of a cent of it yesterday and
tested it today. Given the rate outlook (swaps market has ~70 bp of tightening
discounted for this year), sterling may be a favorite for those trying to pick
a dollar top. The daily momentum indicators are turning up. Sterling has not
settled above its 20-day moving average since July 26. Today could be the day. The
moving average is found near $1.2755 today. Note that today or tomorrow, the
five-day moving average looks set to move above the 20-day moving average for
the first time since late July as well.
America
Fed Chair Powell's speech at Jackson Hole
on Friday is the week's highlight. Today sees, existing home sales, where a small decline is expected
after falling near 3.3% in June. It tends not to be a market mover. The same
can be said of the Philadelphia Fed's non-manufacturing activity survey and the
Richmond Fed survey. Also, today, preliminary benchmark revisions to US
payrolls will be announced by the Bureau of Labor Statistics. Downward
revisions could see a loss of 400k-500k, but the issue is whether it is larger
enough to change the general perception of the tightness of the US labor
market. The final revisions will be incorporated in the next January's data
(reported in February 2024). The judgement that the labor market is tight (but
easing) is based on several different metrics, but, of course, job creation is
key one. Recall that Moody's cut the ratings of several US banks a couple of
weeks ago and S&P has also cut the rating of several regional US banks late
yesterday, citing the impact of higher interest rates and migration of deposits
within the banking system. Wednesday sees the flash PMI (likely softer)
and new home sales (likely a small increase after a 2.5% decline in
June).
The climb is US rates continues. The two-year yield tested 5%. Since the
end of April, the two-year yield has fallen in only four of the 16 weeks.
Non-commercials hold near a record net short position in the futures market.
The record was set in the reporting week through July 25 at 1.119 mln
contracts. In the week ending August 15, the net short speculative position
(non-commercial) was 1.117 mln contracts. Turning to the 10-year note,
speculators have a net short position of 746.9k contracts. The record was set
at the end of May (850.4k contracts). As of August 15, they had extended the
net short position for the third consecutive week to stand near 747k contracts.
The greenback found support
near CAD1.3500 recovered quickly toward the pre-weekend high near CAD1.3575
yesterday. Though
the US dollar pulled back in late dealings, it failed to close below the
five-day moving average near CAD1.3535. The last time it closed below the
five-day moving average was August 1. It is around CAD1.3540 today, and the
greenback is trading near CAD1.3525 in the European morning. We suspect it will
take a break of CAD1.3465-70 to take the pressure off the upside. The
US dollar is pushing below MXNN17.00 after dipping below it briefly yesterday
for the first time in a week. While talk from Jackson Hole at the end
of the week may pose headline risk, the peso, with is attractive carry and low
relatively low volatility may draw some capital ahead of the US jobs data
(September 1). The dollar is near MXN16.9450 in the Europe. Initial support is
seen in the MXN16.90-91 area but the multiyear low set in late July was near
MXN16.6260.
Reviewed by Marc Chandler
on
August 22, 2023
Rating:
