Overview: The US dollar is stabilizing a bit but
only after extending its gains initially It reached almost JPY149.20, while the
euro slipped to $1.0570 before recovering to straddle $1.06 in the European
morning. Sterling sank a little through $1.2170 but stabilized to return to
almost $1.2200. The Australian dollar tested last week's low slightly below
$0.6390 before resurfacing above $0.6400. The US dollar toyed with CAD1.3500,
where there is a large option expiry today. Emerging market currencies are
mostly lower, but the Hungarian forint (overnight deposit to converge with base
rate today at 13%) and the Chinese yuan are notable exceptions.
The equity rout continues. Several
large bourses in the Asia Pacific region, including the Nikkei, Hang Seng,
Taiex, and Kospi are off more than 1%. Europe's Stoxx 600 is off for the fourth
consecutive session. US index futures are extending yesterday's sell-off. Benchmark
10-year yields are mixed. Yields in the US, UK, Germany, and France are
slightly lower, while the peripheral European yields are higher, led by a three-basis
point increase in Italy and Greece. The 10-year US Treasury yield is near 4.50%.
In addition to $60 bln cash management bill, the US Treasury is also selling
$48 bln two-year notes. At the previous auction, the high yield for the
two-year was 5.02%. It is now near 5.12%. Gold tested $1909 today, having been
turned back from $1950 last week. This month's low is near $1901. November WTI
slipped to an eight-day low near $88.20. It peaked a week ago near $92.45. It
is recovering in the European morning and looks poised to returned to the
$89.50-$90.00 area.
Asia Pacific
Bank of Japan Governor Ueda
and Deputy Governor Uchida indicated yesterday that uncertainties around wage
growth and inflation mean that it is not clear that inflation has reached 2% on
a sustainable basis. They
continue to preach patience. Ueda apparently sees no contradiction between
toward his two claims: 1) "The BOJ won't conduct policy to directly
influence foreign exchange rates," and 2) "It's desirable it moves in
a stable manner and reflects economic fundamentals." It is difficult
to argue that the exchange rate is not reflecting fundamental factors. The US
10-year premium over Japan is at a new high for the year near 382 bp. Last
year's peak in late October was a little below 400 bp. That said, the gross
short speculative position in the IMM futures is around 147.3k contracts
(JPY12.5 mln yen per contract, or almost $84k), which is larger than last
September-October, when Japan intervened materially to sell dollars and buy yen.
Still, one-week implied volatility fell below 6.6% yesterday, its lowest level
since Q1 22 but has come back a little firmer today, slightly above 8%.
The Thai Baht has eclipsed
the yen as the weakest currency in the Asia Pacific region here in September. It is off 3.7% compared with the yen's
2.3% decline. The new government's efforts to support the economy and in
particular measures to ease the cost-of-living squeeze contributed to the
sell-off of Thai bonds, which dragged the baht down. Domestic consumption and
the improved outlook for tourism (visa requirements for visitors from China and
Kazakhstan for five months have been waived starting yesterday). The central
bank meets first thing Wednesday and the officials previously warned that
higher food and energy prices may require higher rates. A quarter-point hike to
2.50% is expected. Earlier this month, Thailand report August CPI rose faster
than expected (0.55% month-over-month for a 0.88% year-over-year rate, up from
0.38% in July.
The market pushed the dollar
to almost JPY149.20 today as the broader gains and jump in US rates is seen
dampening the likelihood of imminent intervention. It remains in a narrow range and has
not traded below JPY148.70. The JPY150 level may hold some psychological
significance but last year's multiyear high was set closer to JPY152.00. Moreover,
the fact that Japan's policy rate remains at minus 0.1% means
that Japan gets little sympathy from other G7 members. The Australian dollar
has been capped near $0.6450 for the past three sessions. The Aussies
traded slightly below $0.6390. It looks poised to retest the year's low set
earlier this month near $0.6355. The measuring objective of the double top from
June and July (~$0.6900) is $0.6300. This still seems to be a reasonable target.
The secondary low after the multiyear low last October (~$0.6170) was about
$0.6270. Meanwhile, speculators in the futures market have accumulated what
appears to be a record-large, short Australian dollar position (~97k
contracts). Yesterday, the Chinese yuan fell to its lowest level
in two weeks and today is its consolidating in a narrow range. The dollar
has traded between roughly CNY7.3020 and CNY7.3120. At best, Chinese officials
can moderate the pace of the yuan's decline but given the dollar's strength,
the policy divergence, and the ongoing property developer woes, which seem to
be eclipsing official economic and financial measures. The PBOC set the
dollar's reference rate at CNY7.1727, the same as yesterday (average forecast
in Bloomberg's survey was CNY7.3133). The top of the 2% band is about CNY7.3160.
The dollar briefly traded above the onshore band against the offshore yuan
(reached almost CNH7.3170).
Europe
The eurozone's August M3
month supply is due tomorrow and is expected to have contracted by 1%
year-over-year, the second consecutive decline. The last time M3 was contracting on a
year-over-year basis was in 2010, but this decline is steeper. Note that US M2
money supply is also contracting year-over-year. In July, it was down 3.7%
year-over-year. The highlight of the week is the preliminary September CPI on
Thursday. A 0.5% increase translates into a 3.6% annualized increase in Q3, the
same as in Q2 and down from 6% in Q1. Due to the base effect, the
year-over-year rate is seen falling to 4.5% from 5.2% and another sharp decline
is expected next month as well. Last September, eurozone consumer prices surged
by 1.2% and in October, by 1.5%. With conservative assumptions, the eurozone
headline CPI can fall toward 3.5% by the end of next month. Core inflation is
expected to fall from 5.3% in August to 4.8% in September. Slower inflation
will reinforce the belief, reflected in the swaps market, that the ECB's
tightening cycle is over.
With a 10-week losing streak
in tow, the euro slide continues. Indeed, the euro has not settled higher for a single session since
last Monday. It settled every day last week below $1.07 and broke below $1.06
yesterday, which should now act as resistance (may be up to $1.0615). The euro
met the (38.2%) retracement of the rally from the multiyear low last September
(~$0.9535). The next retracement (50%) is near $1.04. Note that for the third
consecutive session, the euro closed above its upper Bollinger
Band against the Swiss franc (~CHF0.9655). It is trading near a two-month high
after the Swiss National Bank surprised many by standing pat last week. We do
not expect the move to be sustained and are awaiting a reversal in the price action.
Sterling does not have the euro's 10-week slide, but it trades poorly, just
the same. It extended its push lower yesterday by trading below $1.22 for
the first time in six months but settled slightly above. Today, its losses have
been extended slightly below $1.2170. There is little standing in the way of a
move toward $1.2075, the (38.2%) retracement of its rally from the record low
last September and the $1.20 area, which is measuring objective of the head and
shoulder pattern carved in June through August. Initial resistance now maybe
near $1.2225. Lastly note that Hungary is expected to cut is overnight deposit
rate today to bring into to the base rate of 13%, which signals the end of its
emergency measures implemented in 2022 to stabilize the forint. Ahead of the
rate decision, the forint has steadied after falling for the past six sessions
against the euro.
America
US high-frequency data
reports today include house prices (narrowly mixed), new home sales (softer
after a 4.4% increase in July), and the Conference Board's September consumer
confidence (slightly softer). The Philadelphia Fed's non-manufacturing survey, the Dallas Fed's
services survey, and the Richmond Fed's survey round out today's report. While
there may be some headline risk, these reports are unlikely to change views on
the US economy. US yields and the dollar remain firm. Some observers have
expressed concerns about the demand for US debt, and the US Treasury is raising
$158 bln in coupons this week and even more in bills. Yet, the concern seems
misplaced or exaggerated. Recent bill and coupon demand has been strong, and
the bid-cover has been robust. Even last week's 20-year bond sale, which is not
the more popular tenor, was over-subscribe 2.7x.
Meanwhile, the US still
appears headed for partial government shutdown. There are some efforts, of course,
to avert it, but they lack sufficient support. A House proposal of a stop-gap
measure cuts spending by more than 25%, which is unacceptable to the Senate. A
bipartisan bill in the Senate will not get the support of much of the Freedom
Caucus in the House. Four appropriations bills are making progress:
State, Agriculture, Homeland, and Defense.
The Canadian dollar
continues to consolidate. The
greenback held below CAD1.3500, where options for $1.2 bln expire today. It is
the only G10 currency that has appreciated (~0.15%) against the greenback this
month. It has been aided by the swing in expectations with the swap market
discounting about a little more than an 85% chance of a hike in Q4. Initial
support is now seen in the CAD1.3435-50. The risk-off mood taking a toll on
the Mexican peso. Its 1% decline yesterday was second only the Colombian
peso among emerging market currencies. It is off another 0.3% today. The
greenback's gains met the (61.8%) retracement of the dollar from the month's
high (~MXN17.7080) to last week's brief slippage below MXN17.00. The dollar
poked above MXN17.45 yesterday, and approached MXN17.5670 today, where sellers
emerged to push it back to almost MXN17.37. Still, the shake out does not
appear over. Nearby resistance is seen in the MXN17.60 area. The dollar quickly
filled the opening downside gap against the Brazilian real yesterday (the
pre-weekend high was slightly below BRL4.9380) and then advanced to nearly
BRL4.97. It has not closed above BRL5.0 since for almost four months. Above there,
the 200-day moving average is near BRL5.0265, and the dollar has not traded
above it since late March.
Reviewed by Marc Chandler
on
September 26, 2023
Rating:
