Overview: The US dollar is trading with a slightly
heavier tone in the European morning. It has stalled in front of JPY145.90,
where the BOJ intervened last September and ahead of CNY7.30, which some
observers think Chinese officials are defending. We are less convinced that
either central bank has drawn a line at a particular level and suspect it is
too early to be confident that the greenback has peaked against either. On the
back of yesterday's wage figures and today's CPI, sterling has extended
yesterday's gains marginally. The greenback is softer against most emerging
market currencies today.
It is hard to call today a
risk-on day, though. Asia Pacific bourses were lower, with Japan, Hong Kong,
Australia, and South Korean markets shedding more than 1%. After falling nearly
1% yesterday, Europe's Stoxx 600 is up less than 0.1% near midday. US index
futures are narrowly mixed. Benchmark 10-year rates are mostly lower. Japan's
10-year yield slipped fractionally to 0.62%, while most European yield are 1-2
bp lower. The 10-year Gilt is an exception. The yield is about two basis points
firmer. The 10-year US Treasury yield is off three basis points to 4.18%. The
weaker dollar and softer yields are helping gold steady above $1900 after
dipping below it yesterday. Crude oil is nursing yesterday's losses. API saw
another large drawdown in US inventories. The tightness in the physical market
is being blunted by the concerns over Chinese growth.
Asia Pacific
Many market participants are
skeptical about the veracity of Chinese data, but with a large degree of
schadenfreude accepted the weakness of the series of data yesterday that was
reinforced by an unexpected 15 bp cut in the one-year Medium-Term Lending
Facility to 2.50%. It
was the largest cut since April 2020, and signals heightened official concern.
It likely tips a cut in the loan prime rates next week. Earlier today, China
reported that newly built commercial residential buildings saw prices slip last
month. It is the first back-to-back decline this year. Outside of the setting
of the loan prime rates, China's economic calendar is light until the end of
the month's PMI report. A cut in required reserves could take place at any
time. Separately, a wealth management firm, part of the shadow banking sector,
Zhongrong International Trust has been failing to make payments in several
products since last July and reports suggest at least 30 products are now
overdue. Separately, many commentators are drawing attention to the further
draw down in China's holdings of US Treasuries. US data showed a decline of
$11.3 bln in June to bring this year's decline to almost $23 bln. However,
before concluding this is an example of de-dollarization, note that China
prefers agency bonds, which pay a premium over Treasuries. Bloomberg reports
that since the start of 2021, China has made net sales of nearly $15 bln of
Treasuries but has bought slightly more than $225 bln of agency bonds.
Japan reports July trade
figures the first thing tomorrow. The trade balance typically (14 of the past 20 years) deteriorates
in July, but the median forecast in Bloomberg's survey is for an ever so slight
improvement from JPY43.1 bln in June. We noted that the yen is historically
weak. A trade-weighted index of yen is off by 12.8% this year. The yen is at
its lowest level against the euro since 2008 and against sterling since 2015.
It is trading at record lows against the Swiss franc. Yet, in July exports are
forecast (median in Blomberg's survey) to have contracted (year-over-year) for
the first time since November 2020. The contraction of imports (each month
in Q2) likely accelerated. The median forecast is a for a 15.2% drop after
June's 12.9% tumble.
The dollar stalled in front
of JPY146 yesterday and remains below it today. The dollar's seven-day rally against the
yen may be challenged today. The market may be turning cautious as both the
exchange rate and the 10-year JGB are near levels that saw BOJ intervention
last September (~JPY145.90 last September). If intervention is best understood
as an escalation ladder, then Japanese officials have begun climbing the
ladder. Japan's Finance Minister Suzuki said that he is watching the foreign
exchange market "with a high sense of urgency," and that
"appropriate action" would be taken if the moves were judged
excessive. Initial support may be around JPY144.80-JPY145.00. The
Australian dollar's has a six-day losing streak in tow, which, matches the
longest since the early days of the pandemic. That streak may also end
today, but only after the Australian dollar fell a little through $0.6430. A
close above $0.6485 may help stabilize the tone, but it needs to resurface
above $0.6535-50 to suggest a low is in place. There are options for nearly
A$1.5 bln at $0.6550 that expire tomorrow. The dollar is rising against the
Chinese yuan for the fifth consecutive session. Reports suggest officials
have requested some funds to avoid selling equities. They previously requested
the same about the yuan. The dollar quickly filled the opening gap and traded
as high as CNY7.2980, stopping just shy of CNY7.30 (like the dollar did ahead
of JPY145.90), which is level that some think China is defending. The dollar
has not fallen below 7.30 against the offshore yuan, CNH. The dollar's
reference rate was set at CNY7.1986 compared with average projections in
Bloomberg's survey for CNY7.2769. Note that that top of the dollar's 2% band is
near CNY7.3425 today.
Europe
On the heels of yesterday's
reported surge in June's average labor income, the UK reported a sharp slowing
in July's CPI. The
headline rate fell by 0.4% on the month, which given the base effect, saw the
year-over-year rate fall to 6.8% from 7.9%. Even though both measures were 0.1%
higher than the median forecast in Bloomberg's survey, it brings the
three-month annualized pace to a lowly 1.6%. Headline CPI rose at an annualized
pace of around 8.8% in Q2 and 5.2% in Q1. The BOE sees it ending the year at
5.0% and 2.5% at the end of next year. The core rate is stickier and is now
above the headline rate for the first time since March 2021 (6.9% vs. 6.8%). Deflation
in producer prices is evident. Output prices have slowed since last July and
finally turned negative last month (-0.8%). Input prices were falling on a
year-over-year basis in June and extended that in July (-3.3%).
The euro recorded
yesterday's session high a little above $1.0950 after US
retail sales report but the momentum could not be sustained. The euro bled back slightly through $1.09
in dull dealings in the North American afternoon. There is little to suggest a
low is in place and perhaps, the $1.0850-$1.0950 may mark the immediate
range. The strong wage data helped sterling rise through Monday's high
($1.2715) yesterday, but it stalled a touch above $1.2750. It too
tended lower in the North American afternoon yesterday and briefly slipped
below $1.27. However, today, it has extended its recovery to about $1.2765, but
the intraday momentum indicators are stretched, suggest scope for limited gains
in early North American dealings before UK markets close for the day. Sterling
has been rangebound in the first half of August between roughly $1.2620 and
$1.2840. A breakout does not look imminent.
America
The broad gains in July
retail sales, which account for a little more than a third of US consumption,
bodes well for Q3 growth. As we have suggested, economists will likely be revising up Q3
GDP, which according to Bloomberg stand at 0.7% (median). Year-over-year growth
was projected at 1.6% this year and it too will likely be revised higher. Fed
officials are in a similar position. Their median forecast in June was for 1%
this year. We suspect that it will be raised and the Fed's median PCE deflator
forecast of 3.2% may be lowered next month. The Fed officials may also shave
the 4.1% unemployment projection. The Atlanta Fed's GDP tracker now sees 5%
growth this quarter up for 4.1% a week ago. Attention today turns to housing
starts and permits, which likely stabilized after falling in June. A similar
pattern may be evident in the industrial production figures: July stabilizes
after soft June data. The minutes from last month's FOMC meeting will be
released, and the key may be a sense of where the bar is for the second rate
hike that officials suggested in June. The futures market is pricing in about a
10% chance of a hike next month. The January 2024 Fed funds futures contract's
implied yield is about 5.41%. The effective average rate is 5.33% since the
July hike. The market then is pricing in about a 32% chance of a hike this
year, which seems a little low given the prospect for a possible reacceleration
of the economy and higher food and energy prices.
Canada's July CPI rose by
0.6%, twice the pace expected by the median forecast in Bloomberg's survey. It lifted the year-over-year rate to 3.3%
from 2.8%. For the first time in three years, Canada's headline inflation is
above the US rate. The base effect warns of another rise what this month's data
are reported in September. Specifically, the CPI fell by 0.3%
last August. Even if it is replaced by a 0.1% increase, which would match the
smallest increase this year, the headline rate would rise to about 3.7%. Still,
the underlying core rate was largely in line with expectation and a three-month
moving average of them, which is the measure Bank of Canada Governor Macklem
cited, slipped slightly below 3.50% from a little more than 3.90%. The swaps
market shows about a 33% chance of a hike next month.
The US dollar tested the
CAD1.3500 level seen last week. It pulled back and found support ahead of CAD1.3440 and returned
to the highs late yesterday. Last week, when the US dollar traded CAD1.3500 it
settled near the middle of the range, but yesterday, it settled near session
highs. It suggests the upside momentum is still strong. It reached CAD1.3510
earlier today and pulled back to almost CAD1.3475 where it has found bids in
the European morning. The CAD1.3570 area is representing the (61.8%)
retracement of the greenback's losses since the March 10 high (~CAD1.3860) may
be the next target. The US dollar rose to a four-day high against the
Mexican peso (~MXN17.1880) amid the risk-off mood. It is consolidating
in a narrow range today (~MXN17.0675-MXN17.1580). We had suggested
that the immediate band of resistance extended toward MXN17.20, but maybe it is
a bit higher. Last week's high was near MXN17.2845. Above there, the June and
July highs beckon (~MXN17.3960-MXN17.4280). A close below MXN17.00, which the
dollar has not managed to do since August 1, and ideally below MXN16.99, where
the 20-day moving average is found, could signal a near-term top is in place.
Reviewed by Marc Chandler
on
August 16, 2023
Rating:
