Overview: Corrective
forces helped the dollar stabilize yesterday and it enjoys a firmer today. The
euro has slipped below $1.09, and the dollar has resurfaced above JPY149.00. The
FOMC minutes seem dated by the more than 30 bp decline in the US 10-year yield,
the 7% rally in the S&P 500 and roughly 3% drop in the Dollar Index. The
implied year-end 2024 Fed funds rate has fallen by 10 bp to 4.51% (5.33%
currently). The Japanese government downgraded its economic outlook for the
first time in ten months. While the recovery is judged to still be intact, some
parts have "paused", it said. The dollar's gains against the are the
most in a week. The greenback is also firmer against most emerging market currencies
too.
Benchmark 10-year yields are little
changed, though Gilts are underperforming ahead of Chancellor Hunt's Autumn
Statement shortly. The 10-year US Treasury yield is near 4.39%. While the
Nikkei posted an outside up day, most of the other large regional markets were
sold, dragged lower by the tech sector. Tech is less represented in Europe and the
Stoxx 600 is recouping yesterday’s minor loss and a little bit more. US index
futures have turned higher from earlier losses. Gold jumped 1% yesterday and
reached about $2007.60. It is consolidating in mostly a $5-band on either side
of $2000. A rise in US oil inventories (~9 mln barrels estimated by API) is
helping cap the price of crude today. The January WTI contract is has traded on
both sides of yesterday's range (~$76.90-$77.90). The market may be reluctant
to take on new positioning ahead of the upcoming OPEC+ meeting.
Asia Pacific
The dollar fell to four-month lows
against the Chinese yuan. When the yuan moves, the sheer size of the state-owned Chinese
banks are typically involved. The US Treasury's recent
report on the international economy and the foreign exchange markets
said: "Additionally, multiple press reports provide evidence of
state-owned banks taking actions that resist depreciation pressure—including
increasing dollar sales in exchange for RMB in the onshore and offshore spot
and forward markets—with some reports explicitly tying this behavior to
instructions from the Chinese authorities." Leaving aside if such press
reports truly provide evidence for their claims, often citing unnamed people
who are not authorized to speak, making such claims nearly impossible to
verify. Some press reports suggest that state-owned banks are swapping yuan for
dollars in the offshore market and then selling the dollars onshore.
Ostensibly, the hope was to force exporters, who have been holding on to their
dollars, to sell. Are we to conclude that the PBOC intervened? It does not seem
reasonable to conclude that all the foreign exchange transactions by China's
large banks are on behalf of the central bank. They obviously conduct
commercial transactions on behalf of clients and likely trade for their own
account. In any event, the sharp appreciation of the yuan is seen giving the
PBOC room to maneuver and a cut in reserve requirements seems consistent with
recent efforts that focused on liquidity provisions more than reducing interest
rates.
Tomorrow, Australia sees the preliminary
November PMI. The
manufacturing PMI was last above the 50 boom/bust level in February and at 48.2
in October, it was near the year's low. The services PMI was mostly above 50 in
H1 but at 47.9 in October, it is also near the year's low. The composite PMI
slumped to 47.6 in October (from 51.5), which is the low this year. The Reserve
Bank of Australia insists that the remaining inflation challenge is
"increasingly homegrown and demand driven" and Governor Bullock
argued that it is precisely because of this that "more substantial
monetary policy tightening is the right response to inflation that results from
aggregate demand exceeding the economy's potential to meet that
demand." The market is not there. The futures market has about a 23%
chance of a hike discounted by the middle of next year. That is a little less
than a week ago.
Early Friday, Japan reports its national
CPI figures for October and sees its preliminary PMI. The signal on Japanese price
pressures comes from the Tokyo CPI, which is released a few weeks before the
national estimate. Although the weightings are different, the Tokyo CPI is a
fairly accurate guide. The year-over-year headline and core rates accelerated
by 0.5% (to 3.3%) and 0.2% (to 2.7%), respectively. The measure that excludes
both fresh food and energy eased to 3.8% from a revised 3.9% (initially 3.8%).
Note that BOJ officials had the Tokyo CPI in hand when it met at the end of
last month. The national figures should show a little less acceleration in the
headline pace (to 3.4% from 3.0%) and a similar rise as Tokyo in the measure
excluding fresh food (3.0% vs. 2.8%), while the ex-fresh food and energy may
slow to 4.1% (from 4.2%). Japan's manufacturing PMI has been above 50 once this
year and that was in May. Japan's manufacturing sector likely continued to
contract in November. Japan's services PMI has been above 50 for the entire
year but is has fallen in four of the past five months, and its 51.6 reading in
October was the lowest of the year. The composite PMI has also held above 50
this year, and after declining in September and October, it stands at 50.5 the
lowest this year.
The dollar gradually recovered from the
JPY147.15 low reached yesterday in late Asia Pacific turnover. The session high was recorded in
North America near JPY148.60. The dollar appears to have forged a bullish
hammer candlestick pattern. Follow-through buying lifted the greenback to
JPY149.35 today. The JPY149.50 is around the (50%) retracement of the leg down
from the November 13 high near JPY151.90. The next retracement (61.8%) is by
JPY150.10, slightly below the 20-day moving average (~JPY150.25). According
to Bloomberg, the Australian dollar came within 1/100 of a cent of its 200-day
moving average at $0.6590 yesterday. It retreated until it found bids
near $0.6545, around 1/10 of a cent above Monday's low but was fell to almost
$0.6525 today before recovering to $0.6560 in early European turnover. Nearby
resistance is seen near $0.6570. The Chinese yuan is snapping a six-day
advance. The dollar had fallen to about CNY7.1265 yesterday and its upticks
today have entered the gap created by yesterday's sharply lower opening. The
gap extended to Monday's low (~CNY7.1640). The dollar has traded slightly above
CNY7.1540 today. The PBOC set the dollar's reference rate at CNY7.1254, the
weakest since June. The average projection in Bloomberg' survey was CNY7.1432.
In the offshore market, the dollar tested the 200-day moving average near
CNH7.13 yesterday and today. It has recovered to around CNH7.1640.
Europe
There are three European highlights in the
remainder of the week. First, the Dutch are voting today, and it will have a new prime
minister after 13 years of leadership by Rutte and the People's Party for
Freedom and Democracy (VVD). Rutte will remain caretaker until a new government
is in place and it could take some time. Running to replace Rutte is a woman
and a former refugee who is embracing a restrictive immigration policy. A
center-left bloc of Labor and Green Left is running neck-to-neck with the VVD.
However, the strong polling by the Party for Freedom (PVV), led by the
anti-immigration and nationalist Wilders, makes it a three-way contest. One
poll earlier this week had the PVV slightly ahead of the VVD.
Second, Sweden's Riksbank meets
tomorrow. In
Bloomberg's survey, 13 of the 21 economists look for the Riksbank to deliver a
25 bp hike to bring the repo rate to 4.25%. The swap market is less sanguine,
and it has about a 50% chance of a hike discounted. We are more inclined to see
the Riksbank standpat. The economy is contracting, and inflation is falling.
Moreover, the currency has been on a tear since the central bank announced on
September 21 that it would "hedge" part of its reserves by selling $8
bln and 2 bln euros. The krona has rallied about 7.2% against the dollar and
4.6% against the euro.
Third, the eurozone and UK see their flash
PMIs tomorrow. They
are not expected to change by much, which reinforces the sense that the euro
and sterling's recent appreciation is more about the dollar than positive
economic impulses from Europe. Economists expect the eurozone to stagnate in Q4
after contracting by 0.1% in Q3. The ECB's forecast of 0.7% growth this year
still looks a bit optimistic. The UK economy stagnated in Q3, and the median
forecast in Bloomberg's monthly survey sees the British economy flat in Q4 and
Q1 24. The median projection of 0.5% growth this year matches the BOE's
forecast.
The euro is tired. It brought in the last buyers as it rose
above the previous session's high for the fourth consecutive day yesterday and
met the (61.8%) retracement of its decline from the July high (~$1.0960) and
overshot it by 5/100 of a cent before it turned tail and slipped back to $1.09.
Follow-through selling to it slightly below $1.0885. It requires a break of
$1.0875 to signal anything of technical importance. It has since been capped
near $1.0920. The consolidative/corrective pressures we anticipated do not seem
finished. Sterling fared better than the euro and is inside yesterday's
range (~$1.2500-$1.2560). It retained its bid tone even after reaching
almost $1.2560, its highest since September 6. However, the (50%) retracement
of its losses since the mid-July high is still a little way off near $1.2590.
The (61.8%) retracement, like the euro fulfilled, is about $1.2720 for
sterling. The key event of the day for the UK, Hunt's fiscal statement is
awaited but the details appear to have largely been leaked. He reportedly will
make permanent an investment tax break ("fully expensing" investment)
and cut the national insurance (payroll tax). We expect limited market
reaction.
America
The US economy is slowing, and the
immediate question is the magnitude. Due to tomorrow's US holiday, today's reports include
weekly jobless claims, October durable goods orders, and the final November
University of Michigan consumer survey. Recall that in the week ending November
10, weekly initial claims rose for the third week in the past four, to 231k, a
three-month high. Continuing claims rose for the eighth consecutive week, and
at 1.865 mln, it is the most in nearly two years. A small decline in initial
claims would not surprise while the rise in continuing claims is consistent
with slower hiring. A slowing of the labor market is not just about wages, but
also demand. Note that the early forecasts for this month's nonfarm payrolls
are coming in around 175k, which, while better than the initial October
estimate of 150k, it would still see the three- and six-month averages decline.
Durable goods orders are volatile but on
average declined by 0.4% a month in Q3. Through September, durable goods orders have averaged a
0.6% gain this year, twice the average for the same 2022 period. We already
know that Boeing's orders were almost halved from September's 224, though
deliveries increased (34 vs. 37). The median forecast in Bloomberg's survey
anticipates a 3.2% decline, which would be the second steepest decline since
April 2020 (The biggest decline was July's 5.6% hit.). Excluding defense and
aircraft orders, durable goods orders are seen edging up by 0.1% after a 0.5%
gain in September.
The University of Michigan's consumer
survey may have hit peak interest when Fed Chair Powell cited a preliminary
estimate (that was later revised lower) to help explain why the central bank
decided to hike by 75 bp rather than the 50 bp it had previously signaled. The preliminary measure of the
one-year expectation and the five-to-10-year projection rose by 0.2% to 4.4%
and 3.2%. The increase runs a bit counter-intuitive given the steady decline in
average retail gasoline prices since the end of September, without fail to the
lowest level since mid-January. In early October, the two-year breakeven
(difference between the yield of the conventional two-year note and the
inflation protected security) reached six-month high near 2.35% and is now near
2.16%. The 10-year breakeven reached a seven-month high a little shy of 2.50%
in mid-October and was near 2.28% yesterday, the lowest in more than two
months.
Canada's October CPI
probably did not change any minds about anything. The 0.1% increase was expected as was the
decline to 3.0% year-over-year. The underlying core measures eased slightly.
Short-term Canadian rates were little changed. The US dollar slipped to a
three-day low near CAD1.3680. It is trading quietly inside yesterday's
(~CAD1.3680-CAD1.3730) range. The trendline that forms the lower edge of a
potential symmetrical triangle is around CAD1.3670 today, while last week's low
was closer to CAD1.3655. The greenback recovered against the Mexican
peso but only after falling to about MXN17.0660, its lowest level in
two months. It managed to rise through Monday's high (~MXN17.2530) but settled
below it, neutralizing the technical damage. It has come down from a high on
November 10 of almost MXN17.94. The dollar is consolidating quietly mostly
between MXN17.18 and MXN17.25 ahead of Mexico's September retail sales report. A
modest increase after August's 0.4% decline is expected. Still, a move now
above around MXN17.28 could signal a corrective phase and the first target is
in the MXN17.40-50 area.
Reviewed by Marc Chandler
on
November 22, 2023
Rating:
