Overview: The dollar is sporting a softer
profile today against all the G10 currencies but the Swedish krona. The
Riksbank sounded more dovish than previously, signaling the possibility of a
cut in each of the last three meetings of the year. The dollar has sustained its
push above JPY160 against the Japanese yen. Most emerging market currencies are
also firmer, with the notable exception of Türkiye and South Africa. Türkiye is
expected to keep its one-week repo rate steady today at 50%, while the Czech
central bank is seen delivering a quarter-point cut. (to 5.0%). The central
bank of Mexico meets later today and will hold the interest rate target at
11.00%.
Equities are under pressure
today. All the large bourses fell in the Asia Pacific region but India. The
losses were led by a 2% slide in the Hang Seng and a nearly 2.4% drop in the
index of mainland shares that trade there. Europe's Stoxx 600 is off for a
third consecutive session, which if sustained, matches the longest losing
streak of the year. US index futures are trading lower. Bond markets are also
under pressure. The 10-year JGB has risen for six straight sessions, and a
little above 1.07% it is approaching the year's high set at the end of May near
1.10%. European benchmark yields are more 2-3 bp higher. The US 10-year
Treasury yield is firm a little above 4.33%, after increasing by eight basis
points yesterday, the most in nearly three weeks. Gold found support below
$2300 and is trading firmer after falling in three of past four sessions. August
WTI has been chopping between $80 and $82 for the past five sessions and looks
poised to push higher. It has not been above $82 since late April.
Asia Pacific
The two key developments are
the dollar holding above JPY160 and the continued decline in China's 10-year
yield to fresh 20-year low near 2.20%. Chinese officials appear increasingly concerned about the
decline in rates, and reports suggest the PBOC has threatened to sell some of
its bond holdings. Japanese officials have put the market on notice it is
prepared to intervene, if necessary, at any time. Some market participants
played down the risk of material intervention until after the US PCE deflator
tomorrow. The April and May intervention took place in thin markets, and if
this is to boost the impact, intervention early Monday, is also a risk. Japan
's May retail sales rose twice as much as economists expected (1.7% vs. 0.6%)
but April's 1.2% gains was revised to 0.8%. Tomorrow, Japan reports May
unemployment and Tokyo's June CPI. China reported May industrial profits rose
3.4% year-to-date, year-over-year, down from 4.3% in April. In May 2022, the
comparable figures were -18.8%. China's prowess for producing goods is not the
same as generating profits. Maximizing profits may require reducing production
and capacity.
After bumping up against
JPY160 for the previous three sessions, the dollar was bid above it in the
European morning yesterday and peaked a little north of JPY160.80 in North
America. It has held
yesterday's high so far today and consolidated above JPY160.30. The dollar
has risen in 11 of the past 13 sessions. Yesterday's move was arguably facilitated by
the first back-to-back increase in the US 10-year yield in nearly three weeks,
though the market seemed to have been itching to challenge Japan's resolve when
yields were softer. Some of the dollar buying may have been related to the $2.1
bln of JPY160 options expire tomorrow. The dollar reached levels not seen since
1986, making chart resistance meaningless. The higher-than-expected
monthly Australian CPI (4.0% in May, the highest since last November, the third
consecutive increase) which boosted market odds of a rate hike, failed to push
the Australian dollar outside of its one-cent-range. The gains to
nearly $0.6690 were not sustained, and the Aussie spent most of the North
American session in around a 10-tick band on either side of $0.6650, the
midpoint of the range. It is firm today but inside yesterday's range. Given
the dollar's broad strength, and especially its move against the yen, Chinese
officials will have to make more of an accommodation. It set the
dollar's reference rates at CNY7.1270 (CNY7.1248 yesterday). It was the seventh
day of a higher dollar fix, matching last year's longest streak. The dollar
traded to almost CNH7.3080 against the offshore yuan, a new high for the year
yesterday and is consolidating today, straddling CNH7.30. Chinese officials
claim to desire exchange rate stability. On its CFETS index, the yuan has been
in less than a 5% range for the past 18 months.
Europe
Neither M3 nor the EU's
confidence surveys are much of a focus for the market in general and
specifically now. The
French election, and the possibility that the outcome spurs fresh economic
challenges to not only France, which was downgraded by S&P to AA- before
the EU Parliament election, but the eurozone more broadly. The euro, which was
trading near $1.09 at the start of the month, was sold to a new low since early
May yesterday near $1.0665. It is in about a quarter-of-a-cent range below
$1.07 today. Meanwhile, it will surprise no one that Sweden's Riksbank stood
pat after it delivered its first rate cut last month (to 3.75% from 4.0%). The
government claimed victory in the anti-inflation fight earlier this week. May
inflation was a little higher than expected, but nothing particularly
worrisome. Indeed, the Riskbank suggested that it could cut rates two or three
times during H2 24, which is exceptionally aggressive given that there are
three meetings left this year. Previously it signaled two cuts. The market was
a bit more dovish than the central bank. Yesterday, the swaps market had two
more cuts fully discounted this year and about a 30% chance of a third. The
odds of a third cut have fallen to about 10% today.
The break of the June euro
low failed to trigger a new round of selling. After the low was set the euro recovered
to around $1.0695 before consolidating in a narrow range in the North American
afternoon. It is probing the 1.07 area in the European morning, and may extend its recovery
in North America today. Resistance is seen around $1.0720. Given the proximity of the French election and the
range of unfavorable outcomes, the euro is arguable proving itself resilient.
It set a nine-day high against the Swiss franc (~CHF0.9600) and settled at its
best level against sterling since June 7 (slightly above GBP0.8460). The euro
is trading at its best level against the Swedish krona since June 10
(~SEK11.3440) and settled above its 20-day moving average, which it has not
done since mid-May. The euro traded higher against the central European
currencies as well. After knocking on $1.27 on Monday and Tuesday
without much penetration, it was if the sterling bulls gave up. Sterling
fell slightly below $1.2620 yesterday for the first time in five weeks and
nicked the lower Bollinger Band. It made a marginal new low today, a little
below $1.2615, but has recovered to the $1.2650 area. Nearby resistance is in $1.2670 area. A couple retracement
targets converge near $1.2600. A break would look ominous. Lastly, we note that
the Czech central bank is expected to cut its repo rate shortly to 5.0% from
5.25%. It would be the fifth cut in the cycle that began last December. The
last three cuts were for half of a point.
America
Out of the slew of US
economic data today, weekly jobless and claims and May durable goods orders. Jobless claims are elevated and the
four-week moving average, used to smooth out some of the noise, is at its
highest level since last September. San Fran Fed President Daly earlier
this week warned that the labor market is near an inflection point. The June
nonfarm payrolls will be released on July 5. The early call is for around 185k,
which if true, would produce the lowest quarterly average (~207k) since Q2 20.
The lack of new orders for Boeing will weigh on durable goods orders, which may
have fallen for the first time since January. Other reports include another
look at Q1 GDP, May goods trade and inventories, pending home sales and the
Kansas Fed's manufacturing survey. The Atlanta Fed's GDP tracker will be
updated after the reports from 3% as of June 20. The median forecast in
Bloomberg's monthly survey is 2%. Mexico reports its May trade balance (a
smaller deficit than April's $3.75 bln shortfall is expected) and later in the
session, the central bank will almost certainly announce it stood pat, leaving
the overnight target at 11.0%. The swaps market is discounting a rate cut later
this year, likely in Q4. President-elect Sheinbaum confirmed yesterday that the
forums for judicial reforms will start today.
The US dollar approached the
lower end of its range against the Canadian dollar on Tuesday. It reached CAD1.3625 and has not closed
below CAD1.36 since April 5. Yesterday's recovery to almost CAD1.3710
yesterday met a retracement objective of the decline from the June 14 high
(~CAD1.3780). It is consolidating today after making a marginal new high. Emerging
market currencies were out of fashion yesterday, and as has been the case
recently, Latam currencies leading the way. The dollar rose to its
best level since November 2022 against the Brazilian real (~BRL5.5260). The
greenback extended its recovery off Monday's low against the Mexican peso
(~MXN17.8750) and reached above MXN18.36 yesterday, which met the (38.2%)
retracement objective of the dollar's decline since approaching MXN19.00 on
June 12. The dollar is consolidating in a tight range around MXN18.31 in quiet
turnover so far today.
Reviewed by Marc Chandler
on
June 27, 2024
Rating:
