Overview: The Bank of Japan Governor Ueda hinted the
world's third-largest economy may exit negative interest rates before the end
of the year. This sparked the strongest gain in the yen in a couple of months
and lifted the 10-year yield to nearly 0.70%. In an uncoordinated fashion,
Chinese officials stepped their rhetoric and indicated that corporate orders to
sell $50 mln or more will need authorization. This helped arrest the yuan's
slide. The Australian dollar is up the among the G10 currencies and is often
particularly sensitive to Chinese developments. All the major currencies are
firmer against the dollar today. The same is true for emerging market
currencies, where only the Indian rupee, Philippine peso, and Turkish lira, are
nursing minor losses.
Outside of Japan, Hong Kong,
and Taiwan, the largest bourses in the Asia Pacific rose today. The MSCI Asia
Pacific Index is snapping a four-day fall. Europe's Stoxx 600 ended a seven-day
slide before the weekend and is extending its gains by about 0.5% today. US
index futures are trading higher after they also settled higher before the
weekend. Benchmark 10-year yields are mostly 2-3 basis points higher, which put
the 10-year US Treasury a little below 4.30%. Gilts are under-performing, and
the 10-year yield is up nearly five basis points. A weaker dollar but firmer
interest rates has allowed limited gains in gold. A base has been formed in
recent sessions around $1915-$1917. It briefly traded above $1930. This month's
high was set slightly above $1950. October WTI continues to consolidate. It
remains in last Tuesday's range (~$85-$88).
Asia Pacific
We may never know why
China's Xi did not attend the G20 meeting. Several reasons have been suggested. Some
argued that on the heels of the BRICS summit, it was a snub at the G20, but
sending a premier, for the first time in 11 gathering, and actively
participating in the shaping of the final statement, much to the US chagrin,
does not exactly seem an insult. Others framed it as a snub of India's Modi,
but, of course, Modi was at the BRICS summit too. There have been reports that
Xi faced domestic pressure from the elites and in recent weeks, several of Xi's
appointments have disappeared or been replaced, though Chinese politics often
are inscrutable from the outside. Others have noted Xi's graying hair and
raised questions of his health. In any event, the G20 summit is seen as a
success despite Xi and Putin's absence, and a joint statement was agreed upon. It
managed to sidestep some controversy by forging unanimous support around the UN
principles of territorial integrity and opposition to the use of force. The
statement declared that countries that use or threaten to use nuclear weapons
are "inadmissible", which seemed like a thinly veiled knock-on Russia.
That said, compromises included a milder reference to the "war in
Ukraine" rather than the "war on Ukraine, " was somewhat less
ambitious on de-carbonization. Also, since by 2026, all the members would have
held the rotating presidency, the cycle begins a new with the US in 2026. China
objected but seemingly relented.
Much of the focus on the
Bank of Japan's monetary policy has been on the Yield-Curve Control. The BOJ doubled the cap on the 10-year
bond to 0.50% at the end of last year and doubled it again to 1% in late July. We
have noted that rather than sell foreign bonds, Japanese investors have been
replacing the one sold last year. Getting away from YCC and looking at the very
long-end of the sovereign curve, the 30-year yield has risen by about six basis
points this year. The 40-year bond yield has fallen by less
than five basis points, and that is after rising more than 40 bp since the end
of June. While expectations for a change at the September 22 BOJ meeting are
low, a year-end meeting may be a different story. BOJ Governor Ueda suggested
that by then a decision about the need for negative policy rate (currently
-0.10%) could be made. He seemed to suggest a new phase of monetary policy. The
Yield-Curve Control adjustment was aimed to "change the balance between
the effects and side effects" of monetary easing measures. Now, the focus
is on "a quiet exit, " seeking to minimize the market impact.
After settling last week on
its high for year, closing slightly north of JPY147.80, the greenback opened
sharply lower (~JPY147.05) in response to Ueda's comments. Friday's low was near JPY146.60 and the
dollar took it out, dipping briefly below JPY146.00, a six-day low. The
JPY145.75 area corresponds to a (61.8%) retracement of this month's gains. Since
the low was recorded, the dollar has bounced to about JPY146.50. The 20-day
moving average is near JPY146.30, and the dollar has not closed below it since
late July. The Australian dollar settled near its lows before the weekend,
little changed on the session, near $0.6375. It opened around $0.6410 and
slipped back a little below $0.6380 before surging to almost $0.6445. It has
steadied shy of resistance in the $0.6465 area. The intraday momentum in
indicators have already turned down. A close below $0.6420 would be
disappointing. Chinese lending last month surged after being depressed in
July. Aggregate financing rose to CNY3.12 trillion from CNY528.2 bln, well
above the projected CNY2.69 trillion. While bank loans rose (CNY1.36 trillion
from CNY346 bln), the jump in lending was driven by non-banks. However, the
yuan's sharp recovery sparked by the tightening of controls as the PBOC
reportedly will require permission to buy $50 mln or more. The PBOC also issued
a statement threatening action to counter one-sided moves and claimed that
speculation needed to be extinguished. According to media reports, state-owned
banks were dollar-sellers today, but it is not clear if they were acting on
their own account, executing customer business, or acting on behalf of officials.
The PBOC set the dollar's reference rate at CNY7.2148 compared with the average
estimate in Blomberg's survey for CNY7.3391. That would cap the dollar to trade
at CNY7.3590. Against the offshore yuan, where the onshore band is mostly
honored, the dollar traded as high as CNH7.3635. The dollar fell to almost
CNY7.27 before stabilizing and returning to almost CNY7.30.
Europe
Greece's 10-year bond yields
about 3.95%, more than 30 bp below the 10-year US Treasury. The yield has fallen by more than 55 bp
this year while the German yield has risen by around five basis points. DBRS,
one of the four rating agencies recognized by the ECB, upgraded Greece's debt
rating late last week to investment grade (BBB). The ECB takes the highest
rating among the four companies, and DBRS's move means that Greek bonds will no
longer be subject to the higher haircut (larger discount) in the ECB's
refinance operations. Moody's will announce the results of its review at the
end of the week. Its Ba3 (= BB-) seems out of line. It has a positive outlook. S&P's
BB+ rating will be review next month, while Fitch (BB+) will announce the
result of its review on December 1. Separately, Fitch lifted its outlook for
Turkey from negative to stable.
The euro opened firmer but
remains well within the pre-weekend range. Before the weekend, it had been squeezed higher in late
European activity but ran out of steam a little ahead of the resistance we
identified near $1.0750. Today's high has been above $1.0740. Last week's low was
about $1.0685. There are options for nearly 1.25 bln euro at $1.0665 that
expire tomorrow. The net speculative long euro position in the futures market
was cut for the sixth week in the past seven, but this has more to do with new
shorts being established rather than longs being cut. In fact, the bulls have
added to the gross long euro position for three of the past four weeks for a
cumulative add of about 8k contracts. Over the past four reporting weeks, the
gross short position has risen by over 21k contracts. Sterling is holding
above low set at the end of last week ($1.2445-50). It reached $1.2515
before the weekend and reached $1.2530 today, a three-day high. A move above
the $1.2560 area may be needed to suggest anything more than some sideways
consolidation. The net speculative sterling position in the futures market is
little changed over the past several weeks. In the week ending August 1, the
net long position was about 49.6k contracts. At the end of the week to
September 5, it stood at 46.4k contracts. The gross longs are virtually unchanged,
and the gross shorts have risen a little.
America
The de-dollarization and the
de-globalization memes have sucked most of the oxygen from other broad
discussions and obscures key geopolitical developments. On the sidelines of the G20 meeting, the
US, India, Middle East, and the EU signed a deal to build a network of rails
and sea routes: The India-Middle East-Europe Economic Corridor. It will
integrate ports and rail from India to Europe, through the UAE, Saudi Arabia,
Jordan, and Israel. The project is ambitious and will develop energy
infrastructure, facilitate the production and transport of green hydrogen, and
includes a new undersea cable boosting telecom and data transfers. Separately,
the EU and US are also supporting a new initiative in Africa, the "Lobito
Corridor," a trans-African project to boost transport connections between
the Democratic Republic of Congo, Zambia, to the Lobito Port in Angola.
Seemingly, less appreciated,
a US initiative with Iran appears to be yielding favorable results. The most Iranian oil in five years
is hitting the market and might be another reason the Saudis and Russian's
extended their oil cuts. The US has relaxed the enforcement of sanctions. Iran
appears to be slowing the production of weapons grade uranium, which was the
conclusion of the UN watchdog's report, as well as some other measures to build
trust. There has been secret diplomacy between Washington and Tehran, which
involved so prisoner releases and freeing up frozen funds. Lastly, the US and
India re-affirmed the agreement for the "maintenance and repair of
forward-deployed US Navy assets and other aircraft and vessels."
This follows recent commercial agreements such as GE's partnership with an
Indian aeronautics company to make jet engines in India and Micron's deal to
build a $2.75 bln semiconductor fabrication and testing plant in India.
Canada August employment and
wage data keeps the Bank of Canada in the picture and the swaps market
reflected a slightly greater chance of a hike in one of the last two meetings
of the year. While the
rise in wages caught the attention of many observers, the rise of total hours
(0.5%), the most in six months, suggests a rebound in economic momentum. The
greenback has pushed through the pre-weekend low near CAD1.3600, where options
for around $665 mln expire today. A break of the CAD1.3570 area, and ideally a
close below it, would boost confidence a near-term high may be in place. The
dollar has rose nearly 2.9% against the Mexican peso last week after a 2% gain
the previous week. The high last week was near MXN17.7080. The low
since the high was about MXN17.4235. Since we do not think the macro drivers
have changed, we look for the price action itself to boost the chances that the
short squeeze has run its course. So far today, the peso is sidelined. The
dollar is in a narrow MXN17.4965-MXN17.5940 range, well inside the range seen
in recent days. A close below MXN17.3950 would be a preliminary sign that the
dollar's recovery is ending.
Reviewed by Marc Chandler
on
September 11, 2023
Rating:
