Overview: The dollar has
come back bid. It is rising against all the major currencies today. The Reserve
Bank of Australia left rates steady and the poor Chinese Caixin PMI is weighing
on the Australian dollar, which is off about 1.25% today. Sterling is the best
G10 performer, off about 0.1%. Perhaps, the BOE's meeting on Thursday is
helping to deflect some of the selling pressure. Emerging market currencies are
also nearly all lower, led by the South African rand and South Korean won. The
greenback's gains are weighing the gold, which is consolidating in yesterday's
range but looks heavy. After yesterday's surge to $82, September WTI is a
little lower and is trading around $81.30 in the European morning.
It
seems like a risk-off day, though Asia Pacific equities were mixed. Japan,
Taiwan, South Korea, and Australia, of the large bourses posted gains. Europe's
Stoxx 600 is off by slightly more than 0.60%, which, if sustained, would be the
largest loss in two-and-a-half weeks. US index futures are nursing modest
losses. Benchmark 10-year yields in Europe are a little firmer. The US 10-year
Treasury is practically flat near 3.96%, showing little reaction to the largest
deficit that the Treasury projected yesterday. Australia's 10-year yield is off
almost nine basis points following the RBA's decision. The 10-year JGB yield is
flat slightly below 0.60%.
Asia
Pacific
Governor
Lowe led the Reserve Bank of Australia to maintain steady policy with the cash
target rate of 4.10%. The Bloomberg survey of economist showed a slight
lean toward a hike, but the swaps market had priced in only a small chance
(15%) of a move. The Australian economy is slowing, and price pressures are
easing. Today's final July manufacturing PMI was confirmed at 49.6 from 48.2 in
June. It has not been above the 50 boom/bust level since February. Lowe's terms
ends after the September meeting, and Bullock will replace him. The market is
not convinced the RBA's tightening cycle is over. From an institutional point
of view, it may be preferable for Bullock, who is perceived as more dovish than
Lowe, to deliver the final hike. The futures market is pricing in about a 70%
of a quarter point hike in Q4.
Japanese
and Chinese data have been rendered less relevant by official action. The BOJ
doubled the cap on the 10-year JGB to 1.0% before the weekend and then stepping
into the market yesterday buying around $2 bln of JGBs at market prices. Governor
Ueda indicated last week that he did not think the yield would reach the cap,
but after yesterday's operation, the question is now about the intent of the
BOJ. Is the intervention aimed to allow a smooth adjustment or is there a level
that the BOJ does not want it to rise above. We suspect it is smoothing
operation, but like the fx intervention last October, the BOJ's move is timed
to coincide with a top in US yields. Under this hypothesis, the next week or so
are important. A combination a strong, even if slowing, jobs report, coupled
with next week's July CPI report, where the headline rate is seen rising for
the first time since June 2022 when it peaked may spur an increase in US yields.
The 10-year Treasury yield has settled above 4% three-times this year. Japan's
final July manufacturing PMI was revised to 49.6 from the preliminary reading
of 49.4, but still softer than June's 49.8. China's data is also
irrelevant and has been superseded by government efforts to support household
consumption, high-tech investment, and the property market. The Caixin
manufacturing PMI slipped fell to 49.2 from 50.5, a six-month low. China also
reported that home sales are off by a third this year.
After
recovering from almost JPY138 on the BOJ's Yield Curve Control to almost
JPY141.20 before the weekend, the dollar rose to nearly JPY142.70 yesterday to
JPY142.85 today. The next technical target is near JPY143.25, though the upper
Bollinger Band is higher (~JPY144.35). Support now is seen around JPY142.00. The
Australian dollar tested the $0.6900 area in mid-July that had stalled it in
mid-June. It has been chopping lower since and is approaching the bottom
end of the two-month trading range near $0.6600. So far, the low is about
$0.6625 and there are options for about A$620 mln at $0.6620 that expire today.
Note that the lower Bollinger Band is slightly below $0.6600. The
dollar gapped higher against the Chinese yuan today. It reached a high
yesterday near CNY7.1530, and today's low is slightly above CNY7.1590. The high
from the second half of last week (~CNY7.1555) and then CNY7.1830 offer nearby
resistance. The PBOC set the dollar's reference rate at CNY7.1283. The average
estimate in Bloomberg's survey was CNY7.1463. It has set the dollar stronger
than the market projections consistently since late June. Given the policy
divergence and the dollar's strength against the other major currencies,
Chinese officials seem content to moderate the yuan's decline, not reverse
it.
Europe
The
eurozone's final July manufacturing PMI was in line with the preliminary
reading, falling to 42.7 from 43.4. It is the lowest since May 2020, and
has not been above 50 since June 2022. China's recovery from the end of
zero-Covid has disappointed. Economic activity in Europe has also disappointed
since avoiding an energy crisis last winter. However, policymakers in Europe
appear to be less responsive. German has been exceptionally hard hit. It
manufacturing PMI stands at 38.8, down from 40.6 in June. France's ticked up to
45.1 from the 44.5 flash reading, but below June's 46.0. Italy's manufacturing
PMI edged up to 44.5 from 43.8, while Spin's slipped to 47.8 from 48.0.
The
UK's manufacturing sector is also contracting. The July
manufacturing PMI fell to 45.3, slightly better than the preliminary estimate
of 45.0, but still below June's 46.5. It has not been above 50 since last July.
However, do not expect it to deter the Bank of England from hiking rates later
this week. The swap market is pricing in around a 30% chance of a 50 bp hike
and about 28.5% of the 56 economists survey by Bloomberg project a half point
hike. We suspect the risk is somewhat greater and wonder whether the majority
put too much weight on one CPI print. The BOE's goal is curbing price
pressures, which remain the most elevated within the G7 economies at 7.9% (and
6.9%) core rate. In the current context, it seems less concerned about the
meager growth. Counting this week's meeting, there are four meeting remaining
this year and the swaps market is fully pricing in 75 bp of hike (which would
bring the base rate to 5.75%). Expectation peaked on July 6 (before the softer
June CPI on July 19) near 6.35%. Sterling's high was recorded between the
interest rate peak and the CPI near $1.3140 on July 14.
The
euro has been turned back from the $1.1050 area approached before the weekend
and yesterday. It has been pushed to almost $1.0965 today. Last week's low set
last Friday was closer to $1.0945. The trendline connecting the May and July
low is found near $1.0960 today. We suspect there is potential toward the
$1.0880 area in the coming days, with $1.10 offering the nearby cap. Sterling
is confined to a narrow range of less than a third of a cent below $1.2840. Last
Friday's low was around $1.2765. Resistance may be encountered between $1.2840
and $1.2860. The market seems wary of selling sterling too heavily before the
BOE meeting.
America
As
Fed Chair Powell acknowledged at the press conference that followed last week's
FOMC meeting, the Survey of Senior Loan Officers continued to see a tightening
of credit standards and weaker loan demand. It began before the bank stress
erupted in March, and in some ways, a desired and expected consequence of the
tightening of monetary policy. We argued that Japanese and Chinese data is of
little consequence in light of the policy action. The UK's data is most
unlikely to impact the Bank of England's decision later this week. Today's bevy
of US data are also unlikely to impact September rate expectation. Although
this week's focus is on the labor market, the June JOLTS report is unlikely to
tell us anything we did not already know. Job openings remain elevated by the
historical record but have declined in four of the five months through May. The
manufacturing PMI and ISM reports are expected to have held below the 50
boom/bust level. Construction remains a bright spot in the economy. This
includes public works, but also the boom in manufacturing construction, which
has also been encouraged by government action. July auto sales will also be reported.
In H1 23, auto sales averaged 15.35 mln (seasonally adjusted annual rate). In
H1 22, they averaged 13.73 mln. Strong auto production (20% annualized pace)
helped lift Q2 GDP (~0.5 percentage points). Note that labor negotiations get
under way later this week and strong auto earnings are emboldening the United
Auto Workers.
Canada
and Mexico see their July manufacturing PMI, but they are not typically market
movers. For Canada, the highlight is Friday's July employment report, and
it will be hard to match the nearly 110k full-time posts filled in June. Yesterday,
Mexico reported its economy expanded by 0.9% quarter-over-quarter in Q2, a bit
stronger than expected and nearly matching the 1.0% growth of Q1. The IMEF
survey data is expected to show the economy has begun Q3 with good momentum. In
addition to the attractive carry offered by the 11.25% overnight rate, the peso
has also been buoyed by a favorable external balance that has featured record
exports and work remittances. In the first five months of the year, Mexico has
reported $24.67 bln worker remittance compared with $22.35 in the first five
months of 2022 and about $19.19 bln in the Jan-May 2021 period. Mexico recorded
a trade deficit of $6.34 bln in H1 23, which was half the shortfall of H1 22
(~$12.79 bln).
The
US dollar's outside down day against the Canadian dollar yesterday did not see
any follow-through selling. On the contrary, the greenback
rebounded from around CAD1.3150, yesterday's low, to CAD1.3260 today and it
does not look done. The risk extends toward CAD1.3300, where nearly $2 bln of options
expire at the end of the week. Initial support now may be near CAD1.3220. The
US dollar fell to multiyear lows against the Mexican peso at the end of last
week (~MXN16.6260) and is continues to consolidate with the range seen last
Friday (that extended to almost MXN16.95). Look for new buyers to emerge as
that area is approached. Note that Brazil's central bank meets late tomorrow
and is expected to deliver its first cut in the cycle. Most look for a 25 bp
move that would bring the Selic to 13.50%.
Reviewed by Marc Chandler
on
August 01, 2023
Rating:
