Overview: The dollar is mixed against the G10
currencies. It is confined to narrow ranges ahead of today's CPI report. The
Russian ruble is the strongest of the emerging market currencies following the
imposition of new capital controls, forcing many exporters to repatriate their
foreign earnings. After posting a key upside reversal at the end of last week,
gold continues to recover. It nearly $1883 so far today, the best level in more
than two weeks. November WTI is steadied after yesterday's 2.9% drop. It
settled near $82.80 at the end of last week and traded slightly below it today,
before recovering. Reports indicate that API estimated a 12.9 mln barrel build
in US stocks.
Goosed by the China's sovereign
wealth fund boosting its stake in large banks, mainland stocks participated in
the rally in Asia Pacific equities today. All the large bourses outside of
India rose led by more than 1% gains in Tokyo, Hong Kong, and Seoul. It is the
fifth consecutive session the MSCI regional index has risen. Europe's Stoxx 600
is rising for the third straight session, which is the longest advance since
late August. US index futures are trading higher. The S&P 500 and NASDAQ
have four-day rallies in tow. Benchmark 10-year yields are mostly a little
firmer today. The 10-year US Treasury yield is near 4.57%, up a one basis point.
European yields are 1-2 bp firmer, though the Italian bonds are holding their
own. Their premium over German bunds has narrowed by about 10 bp since the end
of last week.
Asia Pacific
The US reported a
larger-than-expected rise in September producer prices yesterday (0.5% rise on
the month for a 2.2% year-over-year pace). Japan's producer prices fell by 0.3% in
September, allowing the year-over-year rate to slow to 2.0% from a revised 3.3%
in August (initially 3.2%). The 12-month pace has slowed every month this year
after peaking in December at 10.6%.
China reports September PPI
and CPI tomorrow. Producer
prices has been falling on a year-over-year basis beginning last October
and, but the deflation has been moderating in Q3. The 12-month decline bottomed
in June at -5.4%. In August, it was a -3.0%. It is seen at -2.4% in September.
We suspect that the slower decline in producer prices may also take some
pressure off profits. China flirted with deflation in consumer prices. They
were flat year-over-year in June and fell to -0.3% in July. However, deflation
forces are ebbing, and the CPI rose 0.1% in the year through August. It is
expected to have risen by 0.2% in the 12-months through September. Today's
focus in China was on the decision to have the sovereign wealth fund increase
its holdings of the country's largest banks for the first time in eight years. The
CSI 300 recorded the low for the year at the start of the week as the mainland
markets re-opened from the extended holidays. Separately, Beijing reportedly
reached an agreement with Sri Lanka on debt ahead of the IMF and the Paris Club
negotiations, which hoped to strike a deal without China at the sidelines of
the World Bank/IMF annual meetings, currently underway. The terms of the
agreement have not been disclosed. Sri Lanka owes about 40% of its bilateral
debt to China (and 16% to India).
Despite the soft US 10-year
yield, the dollar rose to a three-day high against the Japanese yen yesterday
of almost JPY149.35. It
has held below JPY149.30 today and has spent little time below JPY149. There
are options for $800 mln at JPY149.50 that expire today. Still, the market
seems reluctant to re-challenge the JPY150 level. The greenback continues to
trade in the range from October 3 (~JPY147.45-JPY150.15). The range this week
has been about JPY148.15-JPY149.35. The actual (historic) three-month
volatility is near 7.6%, the lowest since the April 2022. The
Australian dollar traded on both sides of Tuesday's range yesterday but the
close was neutral, though lower on the day. In fact, the loss snapped
a five-day advance for the Aussie, the longest in four months. The low, set in
North America yesterday was within a few hundredths of a cent of the (38.2%)
retracement of the gains from the October 3 low for the year at $0.6385. It
still managed to close above the 20-day moving average (~$0.6405). It is
trading quietly today in about a quarter-cent range below $0.6430. The
greenback is trading quietly against the Chinese yuan (~CNY7.2920-CNY7.3035). We
note that the offshore yuan is spending more time trading firmer than the
onshore yuan and this may be indicative of less downside pressure. Still, the
PBOC remains vigilant and set the dollar's reference rate at CNY7.1776,
slightly lower as is the pattern. The average projection in Bloomberg's survey
was for CNY7.2946.
Europe
The UK economy grew by 0.2%
in August, recovering some of the 0.6% decline (revised from -0.5%) in output
in July. Industrial
production fell 0.7% (and July was revised to -1.1 from -0.7%). Manufacturing
output was reduced by 0.8%, more than twice the contraction economists expected
after the July series was revised to -1.2% from -0.8%. Services rebounded by
0.4% after a 0.6% (initially -0.5%) decline in July. Construction output fell
by 0.5% after it contracted by 0.4% (initially -0.5%) in July. The trade
deficit practically doubled to GBP3.4 bln from a revised GBP1.4 bln deficit in
July (from -GBP3.4 bln). The UK expanded by 0.2% in Q2 and the median forecast
in Bloomberg's monthly survey sees it stagnating in Q3. To avoid a contraction,
the economy must expand by around 0.4% this month.
The Bank of England meets on
November 2 and the swaps market has about a 25% chance of a hike discounted and
a little less than 50% chance of a hike before the end of the year. Still, next week sees the employment
report and CPI, which will likely impact expectations. Meanwhile, the IMF has
weighed in sees one more rate hike (to 5.50%) before finishing. While it noted
"subdued growth momentum" and "cooling labor market," the
IMF expressed concern about the persistence of inflation. The IMF tweaked its
forecast for UK growth this year by 0.1% to 0.5% but cut next year's to 0.6%
from 1.0%. The Bank of England sees the economy growing by 0.5% this year and
next. The forecasts diverge more inflation. The Bank of England forecasts CPI
at 5.0% this year and 2.5% next year. The IMF, which forecast the average rate,
puts CPI at 7.7% this year and 3.7% in 2024. Through August, the UK's CPI has
averaged 8.7% this year.
The euro reached $1.0635 in
early North American trading yesterday and reached $1.0640 today. That is its highest level since September
25. The five-day moving average is pushing above the 20-day moving average for
the first time since late July. It also met the (38.2%) retracement of the
losses since late August's high. The next retracement (50%) is near $1.07. The
North American market appears to be leading the euro's recovery. Look for
support in front of $1.06. Sterling's performance has been stronger,
though it is lagging today. In fact, today, the euro is snapping a
seven-day decline against sterling. Cable bottomed last week near $1.2035 and
reached almost $1.2340 yesterday. It is consolidating in a narrow range, mostly
below $1.2330 today. It is straddling the $1.23 area near midday in Europe. It
surpassed the (38.2%) retracement of this leg lower and the halfway mark is
near $1.2390. The five-day moving average crossed above the 20-day for the
first time since July 26.
America
The firmer than expected US
September PPI may have given the market pause ahead of today's CPI. Headline CPI has risen for the past two
months, and most look for a small decline (to 3.6% from 3.7%), which is to say
there is scope for disappointment. The median forecast in Bloomberg's survey
sees the core rate continuing to slow. The core rate peaked at 6.6% last
September and has fallen every month since, but March. It was at 4.3% in August
and the median forecast looks for it to slow to 4.1%. A 0.3% increase
translates to a 3.2% annualized increase in the core rate in Q3, down from 4%
in Q2 and 5.2% in Q1. The futures market goes into the report with about a 15%
chance of a hike at the FOMC meeting that concludes on November 1. It has about
a 1-in-3 chance of a hike before the year's out. Looking further afield, there
is about an 80% chance of a cut discounted by the end of H1 24. Unlike Fed's
dot plot that showed the median with two cuts penciled in for next year, the
futures market sees three cuts. The FOMC minutes from last month's meeting that
seemed to fully endorse the soft-landing scenario failed to provide fresh insight
and there was little reaction to their publication.
This week's deluge of Treasury
offering concludes today with $180 bln of four- and eight-week bills and $20
bln of 30-year bonds. US
auctions continue to be well over-subscribed, which is at least a prima facia
case for demand. Moreover, the bid-cover needs also to be understood in the
context of the increase in supply. Perhaps, on ideas that the Fed may be done
raising rate, demand for the three-month bill, sold on Tuesday, was the
strongest in four months. It paid two basis points, annualized, more than the
six-month bill (5.34% vs. 5.32%). The four-month bill sold yesterday (5.35%)
drew a 3.37 bid-cover, which was higher than recent auctions. Primary dealers
had to take most of the new three-year note (4.74%) in a year (~22%) and there
the bid-cover of 2.56 was the lowest since February. The 10-year note sale
received a bid-cover of 2.50 which was higher than the average of the past six
re-opening auctions. Primary dealers were left with 18.7%, the most this year.
The US dollar consolidated
against the Canadian dollar yesterday to snap a four-day pullback. The greenback peaked near CAD1.3785 before
the weekend and fell to CAD1.3570 on Tuesday. That low held yesterday, and it
traded back to almost CAD1.3625. Nearby resistance is seen near CAD1.3650. Some
try to link the Canadian dollar's weakness yesterday to the 2%-plus drop in the
price of crude oil. However, we note that the Canadian dollar's loss yesterday
of about 0.1% was less than the other dollar-bloc currencies. Also, the 30-day
rolling correlation of the changes in the exchange rate and WTI is about 0.3
and the correlation was briefly inverse in late September. The greenback is in
narrow range today below CAD1.3605 but mostly above CAD1.3580. A break of the
CAD1.3560 area would signal the next leg down toward CAD1.3500 and CAD1.3460. After
rising by 1.5% on Tuesday, the Mexican peso rose another 2/3 of 1%
yesterday. After peaking last week, a little shy of MXN18.48, the
dollar's low yesterday was near MXN17.7860. The dollar is traded to slightly
below MXN17.77 today to briefly slip below the 200-day moving average
(~MXN17.7830). Mexico's President AMLO endorsed the central bank's decision to
reduce its hedging program. This speaks to the strength of the peso and the
lack of need for the facility. One of the planks of the bullish narrative for
the peso has been the near-shoring/friend-shoring meme. Yesterday, the
government unveiled large tax breaks to capitalize on this trend. The
government decree was directed at ten sectors, including semiconductors,
batteries, motors, and pharma. The tax benefit ranges from 56% to 89% and will
be available through the end of next year.
Reviewed by Marc Chandler
on
October 12, 2023
Rating:
