Consolidation Featured, but the Yen and Mexican Peso are Under Pressure, While PBOC Fixed the Dollar Lower

Overview: The week is winding down and the US dollar is mostly consolidating against the G10 currencies. Two exceptions stand out. First, sterling is the only G10 currency higher on the day. It follows the BOE's cautious hold yesterday and stronger than expected retail sales today. The other exception is the Japanese yen, where the BOJ stood pat and did not seem to have the urgency after a move next month, even though the national CPI ticked up. Japanese investors bought the most foreign bonds last weeks in four months. The greenback is mixed against emerging market currencies today. Here, the highlights include a new low for the week for the Mexican peso, and the biggest decline in the dollar's reference rate by the PBOC this year (~0.48%). 

The surge in US equities yesterday helped lift Asia Pacific stocks today. The Nikkei, Hang Seng, and Indian indices rose more than 1%. However, US index futures are softer and Europe's Stoxx 600 is giving back nearly half of yesterday 1.4% gain. Benchmark 10-year yields are lower by 1-2 bp in Europe and a fraction of that for US Treasury yield, which is near 3.71%. Gold reached a new record high today of almost $2613. It is up a little more than 1% this week after advancing 3.2% last week. November WTI is consolidating in a narrow range (~$70.70-$71.20) after rising 1.8% yesterday. It is up almost 5% this week, the largest weekly gain since February, apparently on fears of a widening Middle East conflict and hopes that the Fed (and other central banks) easing policy will strengthen demand. 

Asia Pacific

The Bank of Japan did not change policy at the conclusion of today's meeting, but it retained its tightening bias. The signal from top BOJ officials has been clear and consistent. Barring new shocks, provided the economy continues to evolve as it expects, the BOJ is prepared to continue to raise rates. This is seen as a gradual process. The swaps market leans toward a 10 bp hike in December followed by another 15 bp in H1 25. Still Governor Ueda seemed to play for time, noting that the upside risks in prices have eased on the yen just as the August CPI confirmed the uptick in CPI first since in the Tokyo estimate a few weeks ago. The BOJ also raised its assessment of consumer spending. The latest MOF weekly reported showed Japanese investors bought JPY2.1 trillion of foreign bonds last week, the most since May. Japanese investors have been net buyers of foreign bonds and stocks since the BOJ's intervention. This is to say, the BOJ bought yen and Japanese investors have sold it. In the CME futures market, non-commercials had their largest gross long yen position in nearly 8 years as of September 10 and the smallest gross short yen position since January 2023. This produced the largest net long yen position since September 2016.

The dollar's range against the yen yesterday was set in the local session between about JPY142 and JPY144. The dollar initially traded down to JPY141.75 in Asia Pacific trading today before recovering and reaching nearly JPY144.00 again in the European morning. The US 10-year yield rose for the third consecutive session yesterday and will settle higher this week for the first time in three weeks. The same is true for the dollar against the yen. The Australian dollar is the best performer in the G10 this week. It is up about 1.6% this week as it consolidates in a about a quarter of a cent above $0.6800. It posted a bullish outside day yesterday by trading on both sides of Wednesday's range and settling above its high, but there has been no follow-through buying today. Bloomberg's data have it matching but not taking out the high for the year (January 2, slightly below $0.6840). The next important chart area is around $0.6870-$0.6900. While we often underscore the high correlation between the yuan and yen, there a dramatic uncoupling yesterday and today. While the yen weakened by nearly 0.5% yesterday, the yuan appreciated by almost 0.35%. Today, the yen is off around 0.8% while the offshore yuan is up 0.3%. Still, the dollar settled at its lowest against the yuan since mid-2023 yesterday. The PBOC set the dollar's reference rate at CNY7.0644 (CNY7.0983 yesterday). The 0.48% change in the fix is the most this year. The closest appears to have been in January when it lifted the reference rate by 0.33%. 

Europe

The Bank of England held off cutting rates at back-to-back meetings, even though the economy unexpectedly stagnated for the second month in July and the August CPI was a little below its projections. Still, the market 50 bp of has almost a 65% chance that 50 bp of cuts will be delivered before the end of the year. The swaps market had been 100% confident in recent days through Tuesday, when the market began paring the odds. Indeed, the odds were shaved again after today's stronger than expected retail sales. UK retail sales rose 1.0% in August, more than twice what the market expected, and the July series was revised to 0.7% from 0.5%. Excluding gasoline, retail sales rose by 1.1% (1.0% in July). The average gain of both measures through July this year was about 0.6%. Next week's highlight for the UK and eurozone is the preliminary estimate of September PMI. The odds of an October cut by the ECB were downgraded this week to about a 25% chance from around a 45% chance at the end of last week. Sweden's Riksbank meets on September 25 and a 25 bp cut, which would be the third cut in the cycle is widely expected. The two meetings in Q4 are expected to result in at least another 50 bp of cuts, but the swaps market see a nearly 50/50 chance that there is half-point cut in at least one of the meetings. 

The euro was bought yesterday on two intraday pullbacks. The first was in early Asia Pacific activity when it plunged to about $1.1070. It was snapped up and driven to the session high near $1.1180. The second pullback was in early North America. The euro was sold to almost $1.1115, where new buyers emerged, and lifted it back toward $1.1170. The euro is trading quietly today between about $1.1150 and $1.1180. The immediate target is last month’s high, slightly north of $1.12. Above there is last year's high around $1.1275, which is also the (61.8%) retracement of the decline from the early 2021 high (~$1.2350) to the low in the sterling/Gilt crisis in 2022 ($0.9535). Sterling reached new highs since Q1 22 today near $1.3340. Yesterday, it pulled back to $1.3220 in the North American morning before recovering to around $1.3285 in the afternoon. A close above $1.3330 area could open the door to $1.35 but note that it is fraying the upper Bollinger Band (~$1.3295). 

America

Canada reports July retail sales today. The headline is expected to be flattered by stronger vehicle sales were a drag in June. Excluding autos, Canada's retail sales were flat in the first half as gains in Q2 offset the weakness in Q1. Still, this not what drives the Canadian dollar or interest rate expectations. The weakness in the labor market (a loss of almost 66k full-time posts in August and the outright decline in the August CPI (-0.2%) plays into official concerns about the economic outlook. The is still scope for the underlying core rates of inflation to moderate, but central bank is paying more attention to the downside risks to growth. The swaps market has nearly 75 bp of cuts discounted for the remainder of the year (up from 64 bp after the employment data on September 6). Next week's highlight is the July monthly GDP after a flat June. The United States economic diary for next week is chock full of survey data, but the highlight is personal income and consumption data, alongside the deflators. The CPI and PPI reports remove of a chance that the PCE deflator, which the Fed targets, will a surprise outside the rounding. The headline deflator is expected to slow to 2.3% from 2.5%, while the core measure may nudge up to 2.7% from 2.6%. Despite the softening of the labor market, consumption remains firm. It rose by an average of 0.5% a month in the three months through July. This is slightly better than the same year ago period and the monthly average this year is 0.4% (0.5% average in 2023). Mexico's highlight next week is the central bank meeting. Including next week's meeting, there are three meetings remaining in the year and the swaps market has 50 bp of cuts fully discounted. 

The US dollar traded in a broad range against the Canadian dollar yesterday (~CAD1.3535-CAD1.3645). It settled lower to snap a five-day advance. A break of support near CAD1.3520 could signal a return to the late August lows around CAD1.3440, but the near-term consolidation may be the most likely scenario. The Canadian dollar remains a laggard. It is the worst performer among the G10 currencies so far this month, off about 0.5% against the US dollar. The New Zealand dollar is the second worst with a 0.20% loss. Meanwhile, the greenback continued to base against the Mexican peso. yesterday, but is at new highs for the week today. After falling last week and into this week, the dollar has been moving broadly sideways between MXN19.06-MXN19.40, and most of the time above MXN19.16. It rose to almost MXN19.49 today. A move above MXN19.50 would target MXN19.60 initially but possibly, MXN19.74. At the same time the dollar found some demand after extending its recent decline to BRL5.40. It penetrated on an intraday basis for the fourth time in Q3 without settling below.  

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