Overview: The BOJ's failure to do anything or
further ideas that an exit of the negative target rate, despite the firm CPI
report helped the dollar recover the ground lost yesterday against the yen. The
focus has returned to "intervention watch" and the market continues
to press for the official pain threshold. Sterling is the weakest of the G10
currencies, off another 0.5% today following the BOE's decision not to hike
yesterday. The dollar-bloc currencies enjoy a firmer tone. Emerging market
currencies are mostly firmer, including the Chinese yuan.
Reports that Beijing is
considering reducing some capital controls helped lift Chinese and Hong Kong
equities today. Taiwan and Australian equities also advanced, while the other
large bourses headed south. Europe's Stoxx 600 is extending yesterday's 1.3%
drop, while US index futures are slightly higher. Yesterday's 1.6% drop in the
S&P was the largest drop in six months and it was unable to recover from
the gap lower opening. That gap (~4375-4401) has technical significance.
European bond yields are narrowly mixed, but UK Gilts continue to rally. The US
10-year Treasury yield is slightly softer near 4.48%. Gold has come back firmer
after falling more than 0.5% yesterday (its largest loss in around three weeks)
and is near the 200-day moving average ($1925). November WTI has steadied and
looks to snap a three-day decline. It is back above $90 a barrel and looks
poised to settled higher for the fourth consecutive week.
Asia Pacific
The Bank of Japan did not change its stance, and Governor Ueda gave little hint that a change in rates is possible before the end of the year, as he did earlier this month. Indeed, he suggested those remarks were intended simply to keep the BOJ options open. The dollar, which had fallen to around JPY147.30 yesterday recovered to back toward the recent highs near JPY148.40. Japanese officials underscored they are prepared to counter excessive fx moves.
Before the BOJ's meeting
concluded, Japan reported August CPI figures, which were largely anticipated by
the Tokyo CPI previously reported came in a little firmer. The headline rate slipped to 3.2% from
3.3%. The core rates were unchanged. Excluding fresh food, Japan's CPI remained
at 3.1% and the measure excluding both fresh food and energy stayed at the
cyclical high of 4.3%. Separately, the flash PMI came in softer. The
manufacturing PMI eased to 48.6 from 49.6 and the services PMI stands at 53.3,
down from 54.3. This saw the composite fall to 51.8 from 52.6. Lastly after
buying the most foreign bonds since 2020 in the week ending September 8
(~JPY3.6 trillion or ~$24.5 bln), Japanese investors bought another JPY885.5
bln. Meanwhile, while foreign investors bought JPY438 bln of Japanese bonds,
they dumped JPY1.58 trillion of Japanese stocks, most in four years.
Australia's flash PMI showed
the service sector grew (50.5 vs. 47.8), while the manufacturing sector slump
deepened (48.2 vs. 49.6). Manufacturing
new orders were the weakest since May 2020. The composite rose above 50 (to
50.2 from 48.0) for the first time in three months. The central bank meets on
October 3 and the market sees practically no chance of a change in rates.
Yesterday, the dollar traded
on both sides of Wednesday's range but the close was within the range, which
removed much of the technical significance of the outside day. The broad range may be best explained by short
covering of the yen ahead of the BOJ meeting. The dollar is trading back above
JPY148.00 as the market continues to test the official resolve. The dollar
settled near JPY147.85 last week and has only falling in one week since the end
of July. The Australian dollar peaked before the FOMC meeting outcome
near $0.6510 and found some bids near $0.6385 yesterday. It settled at
$0.6415. It is trading with a firmer bias today and is knocking around $0.6440.
To help stabilize the technical tone, the Aussie needs to get back above the
$0.6465 area. However, the intraday momentum indicators are stretched in the
European morning, suggesting some back and filling in early North American
activity. Reports suggesting China is considering lifting some capital controls
helped the yuan steady today. The greenback has been in about a 35-pip range on
either side of CNY7.30. The dollar's reference rate was set at CNY7.1729. The
average in Bloomberg's survey was CNY7.3028 and the gap with the fix was the
widest yet. Offshore liquidity is being squeezed.
Europe
Following the flurry of
European central bank meetings yesterday, the preliminary September PMI lost
some of its luster. Norway,
where we thought there was scope for surprise, turned out to be the least
surprising. Sweden hiked but was more cagey about another hike, lifting its
policy path by 10 bp. Milquetoast. It announced it would liquidate a quarter of
its currency reserves, which was unexpected. The Swiss National Bank stood pat,
surprising economists. But the swaps market did not think a hike was the most
likely scenario, but the franc sold off hard anyway. The market went into the
BOE meeting with an almost 50/50 outlook after the soft August CPI. In a 5-4
vote, where Governor Bailey cast the deciding vote, the BOE stood pat. It cut
Q3 GDP forecast to 0.1% from 0.4%. However, it increased the pace of the
balance sheet unwind to GBP100 bln in the fiscal year beginning next month from
GBP80 bln this fiscal year.
The eurozone flash September
PMI was mixed. The
manufacturing PMI slipped to 43.4 from 43.5 and the services PMI edged up to
48.4 from 47.9. The composite stands at 47.1, up from 46.7. New orders softened
to 44.5 from 44.6, which is the lowest since November 2020. Germany's
preliminary readings were poor but better than August. The manufacturing PMI is
at 39.8 (from 39.1). The services PMI is at 49.8 (47.3). The composite rose to
46.2 from 44.6, the first uptick since April. France moved in the opposite
direction. Its PMI fell. The manufacturing tumbled to 43.6 from 46.0. The
services PMI is at 43.6, down from 46.0. The composite now stands at 43.5
compared with 46.0 in August, a new low since late 2020.
The UK reported August
retail sales. After
falling a revised 1.1% in July (initially -1.2%), UK retail sales rose 0.4% in
August, slightly less than the median projection in Bloomberg's survey. The
flash PMI was disappointing. While the contraction in manufacturing eased (44.2
from 43.0), the contraction in services deepened (47.2 from 49.5). The
composite PMI fell to 46.8 from 48.6, a new three-year low.
After posting an outside
down day on Wednesday, the euro extended its decline to almost $1.0615
yesterday, a six-month low, and retested it today. Since the low was recorded, the euro's
high has been about $1.0650. The price action, however, is uninspiring and an
important low does not seem in place. Sterling was punished for the
BOE's failure to deliver a hike, which was roughly 50% discounted. Yesterday's
six-month low was near $1.2240 has been taken out today, and a marginal new low
closer to $1.2230 has been recorded. Like the euro and yen, sterling recovered
into the close of the European session to trade a little above $1.2300. It
spent the North American afternoon in about a 10-tick range and settled a
couple of hundredths of a cent below $1.23, and today, was sold when it briefly
poked above it. Nearby support is seen near $1.22, but the next important
target is the $1.2000-$1.2075 area.
America
US data was mixed yesterday.
The Q2 current account
deficit was slightly smaller than expected but it was inconsequential. Weekly
jobless claims were lower than expected and the four-week average (217k) is the
lowest since February. Continuing claims fell to their lowest since January. The
September Philadelphia Fed survey was showed a sharp deterioration (to -13.5
from 12.0) and existing home sales fell for the third consecutive month,
defying expectations for a small gain, after falling nearly 5.5% in the
previous two months. The August index of Leading Economic Indicators continued
it uninterrupted decline that goes back to Q1 22. Attention today turns to the
preliminary September PMI, where economists expect slightly firmer readings. Still,
the market is trying to adjust to the signal by the FOMC sees an economy
growing faster than its non-inflationary speed limit, requiring policy to be
restrictive for longer. The Fed funds futures strip does not have the first
fully discounted in late Q3 24. By comparison, the swaps market has the first
ECB cut fully discounted by early Q3.
Canada reports July retail
sales today. Somewhat
better numbers than June are expected when retail sales rose 0.1%, driven by
autos. With them, retail sales fell by 0.8%. The swaps market has almost an 80%
chance of another Bank of Canada rate hike by the end of the year. No cut its
priced through Q3 24. Inflation for the first half of September will be
reported by Mexico today. The bi-weekly reading may accelerate slightly,
but the downtrend in the year-over-year rate should continue. The central bank
meets next week, but policy is expected to be steady well into next year. The
swaps market seems to be pushing the first cut into Q2 24.
The US dollar popped up to
almost CAD1.3525 yesterday. The
week and month's low were set on Tuesday near CAD1.3380. The greenback's
momentum stalled, and it settled slightly below CAD1.3485. It is trading with a
heavier bias but is holding above yesterday's low near CAD1.3450. Support now
is seen around CAD1.3440, but the US dollar looks set to trade higher in North
America today. After briefly dipping below MXN17.00 before the outcome
of the FOMC meeting, the dollar reached MXN17.25 yesterday. That is a
little shy of the (38.2%) retracement of the leg down from the nearly
four-month high set on September 7 around MXN17.7080. The next retracement
(50%) is slightly above MXN17.35. It is consolidating in the European morning
mostly MXN17.16.
Reviewed by Marc Chandler
on
September 22, 2023
Rating:
