Overview: The greenback did not strengthen yesterday
in Asian and European turnover despite the deteriorating conditions in the
Middle East, but it did rally as North American participants entered the fray. Indeed,
the Dollar Index rose from a marginal new four-day low to a marginally new
four-day high. The safe haven bid seen in gold and oil, was reflected in the
foreign exchange market by the strength of the Swiss franc, the only G10
currency to appreciate against the US dollar, and the Japanese yen, which lost the
least among the others. The dollar is mostly firmer today, though it is in a
narrow range against the Japanese yen holding slightly below JPY150. The Australian and New Zealand dollars are leading the losses, following disappointing Australian jobs data and the broad
risk-off mood. Among emerging market currencies, the South African rand and
Mexican peso are the heaviest.
Equities and bonds remain under
pressure. China and Hong Kong markets tumbled more than 2% while other large
bourses in the region were off by more than 1%. Europe's Stoxx 600 is off for
the third consecutive session and weakness in the US index futures suggest the
same fate is in store for American markets. The BOJ upgraded its assessment of
six of nine regions in its quarterly report released earlier today and yields
on the 10-year JGB reached a new high near 0.83%. European benchmark yields are
mostly 1-2 bp higher, though the 10-year Gilt yield has risen by five basis
points. The 10-year US Treasury yield is risen another five basis points to
near 4.97%. If sustained, this would be the fourth consecutive daily increase
for a cumulative gain 35 bp this week. Geopolitical tensions override a
stronger dollar and higher interest rates to underpin gold, which reached
almost $1963 yesterday, just shy of a (61.8%) retracement of the losses since
the high for the year was set in May near $2063. It is consolidating quietly so
far today almost $5 on either side of $1950. December WTI is pulling back after
stalling near $88.60 yesterday and it is traded near $85.60 in the European
morning. Recall that last week it settled at $86.35 and was a little below $84
on October 6 before the Hamas attack.
Asia Pacific
Japan's exports rose last
month on a year-over-year basis for the first time in three months. The 4.3% increase led by auto, and medical
supplies. The decline in imports that began in April moderated in
September, generating a small surplus of about JPY62.5 bln. The deficit in
September 2022 of JPY2.1 trillion. Through September, Japan's trade deficit was
about JPY7.9 trillion compared with about a JPY14.3 trillion deficit in the
first nine months of last year. Separately, the weekly Ministry of Finance
portfolio flows showed foreign investors to re-investing in Japanese assets. They
bought JPY1.26 bln of Japanese stocks and nearly JPY950 bln of Japanese bonds. Meanwhile,
Japanese investors continued to buy foreign bonds (~JPY800 bln) and equities
(~JPY180 bln).
Australia reported
disappointing September jobs data. Overall job growth of 6.7k was about a third of
expectations, and it lost nearly 40k full-time positions, the most since
October 2021. Full-time position grew by an average of about 23k in the first
eight months of the year and about 51k in the January-August 2022 period. In
the last three months, the number of full-time jobs has fallen by about 53k.
The drop in the participation rate to 66.7% from 67.0% helps explain the
decline in the unemployment rate to 3.6% from 3.7%. Although the Australian
dollar was sold on the news, the futures market showed a small increase in the
odds of a hike at the November 7 central bank meeting to about 31% up from less
than 25% yesterday and about 7% at the end of last week.
The dollar drew slightly
closer to JPY150. To
de-mystify the level, the market needs to move back and forth across it. The
rise in long-term US rates, as the BOJ tried to slow the increase in JGBs
yields by purchasing them in an unscheduled operation provides cover. The bar
for intervention in the domestic bond market is lower than for the foreign
exchange market. Pressure is not just building on dollar-yen rate but also
euro-yen. The convergence of the five- and 50-day moving averages slightly
below JPY158 illustrate the effect of the ostensible dollar cap at JPY150. There
are around $900 mln in options that expire there today and another $1.1 bln
expire next Tuesday. Still, given cat-and-mouse game, we look for the break of
JPY150 outside of Tokyo hours. The selling pressure in North America
yesterday saw the Australian dollar fall through Tuesday's lows after having
seen follow-through buying in the local session yesterday. Although an
outside day was recorded, the Aussie settled barely above Tuesday's low. Still,
follow-through selling today saw the $0.6300 level frayed. Little stands in the
way of a return to year's low set earlier this month near $0.6285. Last
October, it bottomed around $0.6170. The greenback crept higher against the
Chinese yuan and is approaching CNY7.32. If sustained, this would be
the fourth consecutive dollar advance, and since returning from the holiday
last Monday, the yuan has risen in two of the nine sessions. The PBOC set the
dollar's reference rate at CNY7.1795, the same as yesterday. The average in
Bloomberg's survey was for CNY7.3176, up from CNY7.3085 yesterday. Lastly, note
that Indonesia hiked its seven-day reverse repo rate by 25 bp to 6.0%. Most had
expected to it standpat as it has done since delivering the last hike in
January. The rupiah fell by about 0.5%.
Europe
On a seasonally adjusted
basis, the eurozone's August trade surplus rose to almost 12 bln euros from 3.5
bln in July. Today, the
current account surplus was reported, and it was 27.7 bln. In August 2022, a
34.9 bln current account deficit was reported, which was the largest shortfall
since monetary union. The surplus peak this year was in June near 35.8 bln
euros, which was the largest since February 2021.
Tomorrow, the UK will report
retail sales volume, which is expected to have fallen by 0.4%. It would be the second monthly fall in Q3,
the first time that has happened this year. Still, UK retail sales are holding
up better than last year, rising slightly (~0.2%) this year through August
after falling by an average of 2.1% a month in the first eight months of 2022. So
far this week, the UK reported a small decline in average wage pressure and
firmer than expected CPI. Still, the odds of a rate hike at the next BOE
meeting on November 2 has eased to about 20% from slightly above 28% at the end
of last week. Pricing in the swap market for the last meeting of year in
December is practically flat, implying a little less than a 50% chance of a
hike.
The euro was tagged for
about half-of-a-cent in the North American session, taking the single currency
slightly through $1.0525. It
has held the low today. Perhaps, the North American participants saw that
neither Asia nor Europe were able to extend the euro's gains scored in North
America on Tuesday despite the strong retail sales report. Today's high has
been slightly below $1.0550 and it needs to resurface above $1.06 or remain
vulnerable to a pull lower. A break of last Friday's low near $1.0495
re-targets the low for the year set on October 3, just below $1.0450. Sterling
was turned back from forays above $1.2200 (where GBP1.6 bln in options expire
today) and returned to the lower end of its recent range in the $1.2125-35 area.
It settled poorly and follow-through selling has seen it slip to $1.2090. A
convincing break signals a test on the October 4 low near $1.2035. Ahead of it,
the lower Bollinger Band is near $1.2060.
America
Today's US data may be a bit
anti-climactic after the retail sales, industrial production, and housing
starts reported so far this week. The high-frequency data includes weekly jobless claims, the
October Philadelphia Fed survey, existing home sales and the index of leading
economic indicators. The reports are not typically market movers. The takeaway
from the recent string of data is that US economic activity was particularly
robust in Q3. The Atlanta Fed's track is at 5.4% and many banks revised up their
Q3 GDP forecasts as well. Still, ahead of Federal Reserve Chair Powell's talk
at the NY Economic Club later today, the market has about a 6% chance of a
November hike and a little more than a 40% chance of a hike before the end of
the year (last meeting is December 13). A week ago, the implied odds were about
8% and around 32% respectively.
Canada's industrial product
and raw material price indices are not the stuff that typically moves the
exchange rate or interest rate expectations. Tomorrow's retail sales report (expected
to fall by 0.1% after a 0.3% gain in July) is the last data point ahead of the
Bank of Canada meeting on October 25. The softer than expected CPI readings
reported on Tuesday dampened the odds of a hike from about a 38% chance at the
end of last week to about 15% chance now. The swap market has also downgraded
the odds of a hike before the end of the year to about 37% from slightly more
than 60% at the end of last week. Mexico also reports August retail sales
tomorrow. They have risen on average 0.4% in the first seven months of the
year, down from 0.7% average in the same period in 2022.
The risk-off mood leaves the
Canadian dollar vulnerable, and the US dollar settled above CAD1.37, which
blocked the upside in recent days. It also corresponds with the (61.8%) retracement of the leg
down since the seven-month highs seen earlier in October near CAD1.3785. Little
seems to stand in a way of a re-challenge the high. It has stalled in Asia and
European turnover today around CAD1.3740. The greenback jumped from
around MXN18.00 to nearly MXN18.31 in the North American morning yesterday and
consolidated in the upper half of the range in the afternoon. The risk-off
mood and the liquidity the peso offers contributes to the periodic bursts of selling
pressure. Still, the peso was the worst performing emerging market currency
yesterday, falling about 1.25%. It reached almost MXN18.40 in the European
morning. The high from earlier this month was a little below MXN18.49. A move
above MXN18.50 could target the MXN18.75 area next.
Reviewed by Marc Chandler
on
October 19, 2023
Rating:
