Overview: The US dollar is weaker against all the G10 currencies today. The New Zealand dollar is the strongest, which might fit into the narrative that the carry trades are making a comeback, but the yen and Swiss franc are the next strongest in the G10. And for the second consecutive week, Japanese investors were net buyers of foreign bonds. Rather than new carry trades, we suspect that it is a dollar move. The euro is trading near $1.10, and sterling reached a new three-week high above $1.29. Most greenback is also trading with a heavier bias against most emerging market currencies. The Mexican peso is an exception, and it is slightly softer in a narrow range inside yesterday's price action.
Asia Pacific and European shares traded higher while US index futures are little changed. Most of the large markets in the Asia Pacific region rose by more than 1% today, led by the 3% rally in Japan's Topix. Europe's Stoxx 600 is advancing for the fourth consecutive session, reaching its best level since August 1. A higher close today would be the eighth gain in the past ten sessions. European benchmark 10-year yields are 2-4 bp softer today and the 10-year Treasury yield is four basis points lower near 3.88%. It was practically flat on the week coming into today. Lower rates and a weaker dollar help keep gold firm (~$2450-$2468). It is up almost 1.5% this week. September WTI poked above $80 earlier this week and set new lows for the week today near $76.20. A break of $76 could spur another $1 drop.
Asia Pacific
The weekly Ministry of Finance data showed Japanese investors continued to buy foreign bonds (JPY1.54 trillion, ~$10.5 bln) last week. Japanese investors sold about JPY328 bln of foreign equity. Many expected Japanese institutional investors would be repatriating overseas portfolio investments given the unwinding of yen carry trades and the narrowing of interest rate differentials. We argued that the carry trade by foreign investors was more vulnerable than domestic investors because the former often used leverage while the latter did not. Foreign investors, for their part, bought almost JPY2 trillion of Japanese bonds and stocks last week. The economic calendar turns quieter next week. Japan and Australia see the flash August PMI. Japan reports its July trade balance. Despite the yen's steep undervaluation, Japan continues to run a trade deficit. The trade deficit in H1 24 was about JPY3.24 trillion (~$21.3 bln). Japan reports July CPI figures, but the Tokyo report on July 25 gave the signal. The headline rate may slip (2.7% from 2.8%), but the core rate, which exclude fresh food may have ticked up (2.7% from 2.6%). The measure that excludes fresh food and energy likely soften below 2% for the first-time since September 2022.
The jump in US rates following the US retail sales and weekly jobless releases lifted the US dollar to nine-day high near JPY149.30 yesterday. That is slightly below the (38.2%) retracement objective of the decline from last month's multiyear high (~JPY162) found near JPY149.45. It has come back softer today and is testing the JPY148.25 area in the European morning. Support is seen ahead of JPY148.00. Australian dollar extended its recovery off the low near $.6570 seen in the local session yesterday and recorded sessions highs in North America near $0.6635. RBA Governor pushed back against speculation of a rate cut this year. The Australian dollar is poised to challenge the $0.6650, which may spur the next leg up. The drop in the yen dragged the Chinese yuan lower. In the offshore market, the dollar reached CNH7.1830, but a stronger yen today has seen it slip toward CNH7.1680. The PBOC set the dollar's reference rate at CNY7.1464 (CNY7.1399 yesterday).
Europe
The eurozone reported June trade figures today. Given that Q2 GDP is behind us, today's report is notable as a reminder that the regional trade balance has recovered. It averaged about almost 18 bln euros a month in H1 24. In H1 23, the eurozone recorded an average monthly shortfall of almost 500 mln euro. In H1 19, before the pandemic, Russia's invasion of Ukraine, and the jump in inflation, the average monthly trade surplus was about 15 bln euros. For its part, the UK finished a data-intense week with a modest increase (0.6%) in July retail after a 0.9% decline in June (revised from -1.2% initially). Still, when everything is said and done, more was said than done. The swaps market shaved the odds of BOE rate cut next month to about 35% from almost 45% a week ago. It is discounting 43 bp of cuts in the remainder of the year, which is about three basis points less than last Friday.
The euro is showing resilience. It fell after the stronger US data but held above the (61.8%) retracement of the last leg up from around $1.0880 on August 8 to almost $1.1050 on Wednesday. It recovered to the $1.0990 area. It is in a roughly $1.0970-90 range today. The euro is still being bought on modest pullbacks. Sterling is more impressive. After pulling back on the US data (to ~$1.28), sterling recovered to the highs seen Tuesday and Wednesday around $1.2870. And today, sterling pushed above $1.29 for the first time since in three weeks. That area marks the (61.8%) retracement of the losses since the July 17 high (~$1.3045). With the momentum indicators trending higher, a strong close puts sterling in a good position to rechallenge the $1.3000-50 area.
America
The resilience of the US consumer, reflected in the stronger than expected July retail sales, and the second consecutive decline in weekly jobless claims (to their lowest level in five weeks) encouraged the market to further scale back what seemed like stale speculation that the Federal Reserve will kick-off its easing cycle next month with a half-point cut. The odds still seem high at about 30%, but the futures market had a 50 bp cut nearly fully discounted on August 5. The market has less than 100 bp of easing discounted for this year for the first time in two weeks. The contraction in July industrial output and downward revision to the June data helped steady the market. The US reports July housing starts and permits today. Since May 2023, housing starts have been in a sawtooth pattern, alternating between gains and falls. In June, housing starts rose by 3%, and are due to pullback in July. In H1 24 housing starts are running at about a 2.5% slower pace than in H1 23. The preliminary August University of Michigan consumer survey may draw some attention. It fell for four consecutive months through July and at 66.4, it was the lowest since last November. If the 5–10-year inflation expectation falls below 3%, it would be the first time since March. It was at 2.9% in December 2023. Next week's calendar features the FOMC minutes, the flash PMI, and new and existing home sales. Fed Chair Powell's presentation at Jackson Hole is seen likely to provide additional guidance for a rate cut next month. Canada reports July housing starts, and June portfolio flows today, which tend not to elicit strong market reactions. Next week's highlight is the July CPI. The headline and underlying measures are expected to ease, but the market already has priced in with full confidence a rate cut at the last three meetings of the year. Next week's highlight from Mexico is on Thursday when the CPI for the first half of August is reported, followed by the minutes of the Banxico meeting, which in a 3-2 vote saw the central bank deliver its second rate cut of the year.
The US recovered from CAD1.3670, nearly a one-month low on Wednesday to almost CAD1.3740 yesterday before being sold back to slightly below CAD1.3700. The exchange rate has returned to levels that prevailed before the recent drama. The US dollar was bought again below the figure and is trading quietly today in a narrow range (~CAD1.3715-35). There may be scope for additional near-term US dollar losses, but they will likely be limited. The greenback extended is downtrend against the Mexican peso yesterday. It saw MXN18.6350 for the first time in a couple of weeks and settled below the 20-day moving average (~MXN18.75) for the first time since July 23. It is confined to a narrow range so far today (~MXN18.6250-MXN18.67). The MXN18.40-50 area may be a reasonable near-term target.
Reviewed by Marc Chandler
on
August 16, 2024
Rating:
