Overview: The dollar's gains were initially extended before a consolidative tone emerged. The euro has been sold to $1.0460 and has returned to almost $1.05. Sterling fell to nearly $1.2060 and has recovered though has stopped short of $1.2100. The dollar edged closed to JPY150 but stalled near JPY149.95 and has held above JPY149.65. The Australian dollar near $0.6300 and the greenback rose to CAD1.3725.
Benchmark 10-year yields are firm, though a
well-received 10-year JGB auction was well received and the 10-year JGB yield
slipped slightly. European yields are 1-5 bp firmer, with yields rising more in
the periphery than core. UK 10-year Gilt yield is bucking the trend nearly two
basis points lows at 4.55%. The 10-year US Treasury yield is up a couple of
basis points to push against 4.70%. Equities are struggling. Japan and
Australia markets fell by more than 1% and the Hang Seng was greeted with a
2.7% drop as it returned from the long holiday weekend. Europe's Stoxx 500 has
yet to find solid footing after falling a little more than 1% yesterday. US
index futures are little changed. Gold's losses were extended to nearly $1815
today, the lowest since March. It has stabilized but it is still sporting a
small loss, the seventh consecutive session with a higher close. November WTI
extended its drop to almost $87.75 today, the lowest level since mid-September,
but is has come back bid in Europe to trade near $89.00.
Asia Pacific
The Bank of Japan efforts to slow the
yield rise underscores the wider differential with the US. The 10-year differential is above 390 bp. Last year's
high was near 400 bp. The US premium has not been above there since 2001. The
US two-year premium is over 500 bp. It peaked around 515 bp last month, the
highest since 2000. Separately, the correlation between changes in the exchange
rate and the Japanese stocks is around 0.22, about half of the year's peak in
early July. Still, the rising yields saw firm demand at today's 10-year JGB
note auction. Perhaps a bigger challenge will be the JPY900 bln (~$6 bln)
30-year bond sale on Thursday, though the yield reached a new high today a
little more than 1.77%. Yesterday, the BOJ announced an extra bond buying
operation tomorrow.
As widely expected, the Reserve Bank of
Australia kept its overnight cash target rate at 4.10% at new Governor
Bullock's first meeting. It has been
there since the hike in June (from 3.85%). The futures market downgraded the
chances to 40% from 50% of a 25 bp hike before the end of the year. The Reserve
Bank of New Zealand meets first thing Wednesday. Its cash target rate is at
5.50%. Year-over-year CPI in Q2 was 6.0%, the same as Australia. The swaps
market sees practically no chance of a hike this week but does have a nearly
60% chance of a hike at the next meeting at the end of November. Year-to-date,
the Aussie and Kiwi have performed similarly, losing 7.3% and 7.0% against the
US dollar respectively, though last month, NZD was the strongest in the G10, up
about 0.5%. The Aussie is off about 0.75%.
The market does not think that Japan can
have it both ways in the current environment: cap the 10-year bond yield and
prevent yen weakness. With the
announcement of more BOJ bond purchases announced for Wednesday, the market
lifted the dollar closer to JPY150 (~JPY149.95). Today's low in late Asian
turnover was near JPY149.65. The Australian dollar met a wall of
sellers at the end of last week near $0.6500, the upper end of the range that
goes back to mid-August. It was sold slightly through $0.6365
yesterday and settled on its lows. It made a new low for the year today near
$0.6305. The measuring objective of the dollar top (June and July near $0.6900
and neckline around $0.6600) is $0.6300. There may be support near $0.6270, but
last year's low near $0.6170 will draw increasing attention. The
greenback is pushing higher against the offshore yuan. Since the close
of the mainland markets, the dollar has traded between CNH7.2810 before the
weekend to CNH7.33 today, which was slightly above last week's high (CNH7.3270).
This year's high was set on September 8 near CNH7.3680.
Europe
The news stream is light, and sentiment
remains poor. We remain struck
by the discrepancy between the talk of de-dollarization and its continued
strong showing in the foreign exchange market. Instead, whether looking at
SWIFT volumes or share of world's GDP, rather than de-dollarization, it is
de-Europeanization. Or the rise of China is eroding Europe's position more than
the US. The euro has not closed higher on a weekly basis since mid-July, an
11-week losing streak. It settled slightly below $1.0575 last week. Sterling
has fallen for the past four weeks but has risen in two weeks since mid-July.
Since July 14, the euro has fallen by about 6.5% and sterling has tumbled by
around 7.4%, which roughly matches the yen's losses over the same period.
The euro looks headed for $1.04, which is
the (50%) retracement of the rally from the multiyear low set at the end of
last September near $0.9535. Below
there, the next retracement (61.8%) is near $1.02. The momentum indicators are
overextended but have been so more than a month. The euro slipped below $1.0480
in late North American dealings yesterday and follow-through selling today took
it to $1.0460. Before feeling comfortable picking a bottom to the euro, we want
to see some climactic sell-off and/or a reversal pattern of some sort. Sterling
is met the (38.2%) retracement of its rally from last September's record low
near $1.0350. It is found near $1.2075, and today's low is about
$1.2060. The head and shoulders target is $1.20. Sterling finished yesterday's
North American session below $1.21. A month ago, it was fraying $1.26. The
(50%) retracement of its recovery closer to $1.1750 and the low for the year
was set in early March slightly above $1.1800.
America
Many continue to see weakness in the US
economy below the surface, but the surface data continues to be in stark
contrast with other high-income economies. The September manufacturing PMI final reading was
49.8, up from the flash reading of 48.9 and 47.9 in August. Even though it is
still below the 50 boom/bust level, it is the highest since April. The
manufacturing ISM was also stronger-than-expected at 49.0 (47.6 in August).
Employment was strong and new orders (49.2 vs. 46.8) is the strongest since
August 2021. Construction spending rose 0.5%, as expected in August, but the
July series was revised to 0.9% from 0.7%. If the economy were re-accelerating,
isn't this what it would look like? The Atlanta's Fed's GDP tracker (4.9%)
suggests that is what happened in Q3. The median forecast in Bloomberg's
monthly survey sees Q3 growth at 3%, the fastest pace in seven quarters. The
real issue is what happens going forward. The headwinds have been well
broadcast: tightening of credit conditions, and bite of high rates, and
extended credit card balances, the resumption of student loan servicing, the
higher energy prices, the low savings, the expanding UAW strike ad rising
debt-stress metrics. Yet, until the data begins reflecting these headwinds, the
trend in interest rates and the dollar may continue. For today, the JOLTS is expected
to slow a little and September auto sales. August auto sales fell and are
expected to have bounced around half back in September to about 15.4 mln
vehicles (SAAR), which is roughly the year's average through August (13.6 mln
in the first eight months last year).
Weaker Canadian manufacturing PMI (47.5 vs. 48.0) and softer Mexican data (manufacturing PMI 49.8 vs. 51.2 and $5.56 bln worker remittance vs. $5.65 bln) provided added weight their respective currencies amid the greenback's broad gains. The US dollar extended its pre-weekend surge against the Canadian dollar, reaching CAD1.3680 (~CAD1.3380 last Thursday). Follow-through activity today lifted the greenback to CAD!.3715, taking out last month's high (CAD1.3695). The trend line from the 2020 high (~CAD1.4670), October 2022 high (~CAD1.3975), and the March 23 high (~CAD1.3865) is found now near CAD1.3735. The momentum is strong, perhaps too strong as the US dollar frays the upper Bollinger Band (~CAD1.3705). The greenback tested MXN17.35 support before the weekend and traded above MXN17.69 yesterday. It reached nearly MXN17.7230 today before pulling back. Initial support may be around MXN17.58. Still, there is little standing in the way of a another run at last week's high (MXN17.8170) and the 200-day moving average, a little over MXN17.83. The US dollar marginally managed to take out last week's high against the Brazilian real as it rose to almost BRL5.08. It was the fourth consecutive session that the dollar settled above its 200-day moving average (~BRL5.02). The dollar is at its highest level since the end of May spike to about BRL5.1275 and settled at its highest level since April.
Reviewed by Marc Chandler
on
October 03, 2023
Rating:
