Consolidative Tuesday

Overview: The US dollar is mostly consolidating so far today with a slightly heavier bias against the G10 currencies and most emerging market currencies. The larger than expected Chinese trade surplus did not lift the yuan. The greenback is trading above its 20-day moving average against the Chinese yuan for the first time since late July. Sterling is rising for the first time in three sessions after a strong jobs report. The Canadian dollar is the laggard among the major currencies. 

Asia Pacific equities were mixed, with Japan, South Korea, and Taiwan, among the larger bourses unable to find traction. Europe's Stoxx 600 snapped a five-day drop yesterday but is trading with a heavier bias today. US index futures are trading around 0.25%-0.40% lower, paring yesterday's gains. Benchmark 10-year bond yields are mostly firmer in Europe, but mostly less than a single basis point. The US rates are also slightly higher. The US Treasury sells $58 bln of three-year notes today ($39 bln 10-year notes tomorrow and $22 bln 30-year bonds on Thursday). Gold is hovering in a narrow range above $2500. October WTI edged through yesterday's high to poke above $69 a barrel before it was sold back to almost $67.50. The year's low set at the end of last week was near $67.15. The Energy Information Agency, the International Energy Agency, and OPEC will update their monthly outlook this week. 

Asia Pacific

It is a light week for Japanese economic data. Tomorrow's look at August machine tool orders may be the highlight outside of the MOF's weekly portfolio investment report, which has shown Japanese investors have been consistent buyers of foreign bonds and stocks since the yen's dramatic recovery from its lowest level since end of 1986. The Bank of Japan meets on September 20, and there is a little chance of a policy move. There is a somewhat greater chance of a move at the following meeting on October 31 (at which the BOJ will update its economic projections), but most expect at least a 10 bp rate hike at the last meeting of the year (December 19). Australia's economic diary this week features several surveys. The central bank meets on September 24. The Reserve Bank of Australia has pushed against speculation of a rate cut, and only slowly is the futures market coming around. The probability of a rate cut by the end of the year has slipped below 80%. China reported a larger than expected August trade surplus of $91 bln, up from almost $84.7 bln in July. Exports are 8.7% highest year-over-year, which is the most since July 2022 (August 2023 were off 8.5%). Exports to the US were up 5.1%, which is the most since September 2022. Shipments to the EU rose 13.8% (21.5% to Germany, 24.2% to France). Imports slowed to 0.5% from 7.2% year-over-year increase in July. 

Against the Japanese yen, the dollar peaked yesterday in early North American trading near JPY143.80. However, as US 10-year rates surrendered their early gains, the dollar pulled back toward JPY142.60. Still, the dollar spent Monday within last Friday's range (~JPY141.80-JPY144.00) and it is consolidating in a narrow range today (~JPY142.85-JPY143.70). It may need to rise back above JPY144.50 to raise the prospect that a near-term low is in place. The Australian dollar found support yesterday in both the local session and again in North American dealings slightly in front of the (38.2%) retracement of the losses since the late August high (~$0.6825). That retracement is found near $0.6645, and it held today. A move above $0.6700-20 would lift the technical tone. The dollar rose to about CNH7.1255 yesterday, a four-day high and teased the 20-day moving average (~CNH7.1250) for the first in more than a month. It extended the gains today, despite China's larger than expected trade surplus. The dollar rose to slightly above CNH7.1320. Against the onshore yuan, the dollar closed the gap from created by last Thursday's low opening. The PBOC set the dollar's reference rate at CNY7.1136 (CNY7.0989 yesterday). This is largest increase in the dollar fixing (~0.20%) since early January. 

Europe

The jobs data reinforces the sense that economic momentum that allowed the British economy to lead the G7 in H1 24 is continuing into Q3, and this is expected to be confirmed by tomorrow's July GDP and details. Earnings growth slowed. The unemployment rate dipped. Employment accelerated. The three-month year-over-year measure of average weekly earnings fell to 4.0% in July (from 4.5%). This is the slowest pace since November 2020. Excluding bonus payments, average weekly earnings slowed to 5.1% (from 5.4%), the lowest since June 2022. The 265k increase in employment over the past three months is the most since May 2022, and more than twice the median forecast in Bloomberg's survey. The three-month unemployment rate slipped for the second consecutive month, and at 4.1% it is the lowest since January. The unemployment claimant count surged in July by 135k (revised to 102k), the most since Covid, but moderated in August to nearly 24k. The Bank of England meets next week (September 19), and the market perceives little chance of a change in policy. Still, a cut is full discounted for the next meeting (November 7). Meanwhile, today's Norwegian CPI will encourage the market to push against the hawkishness of Norges Bank that also meets next week (September 19). The 0.9% decline in headline CPI offsets the past two months of gain, and that means on a three-month annualized, Norway's CPI has fallen by 0.8%. The underlying rate (adjusts for tax changes and excludes energy, fell by 0.7%. The underlying rate has risen 1.2% at an annualized rate over the past three months. The central bank has pushed back against market speculation of a rate cut but the market sees roughly a 40% chance of a cut at the November 7 meeting, and it is fully discounted at the December 19 meeting. 

After settling about 0.25% lower before the weekend, the euro fell by another 0.3% yesterday. It found support ahead of last week’s low (~$1.1025), which is hold today too. The five-day moving average has more decisively broken below the 20-day moving average for the first time in a month and daily momentum indicators are still falling, warning that it may be early pick a bottom. There are large options that expire at $1.10 today (~1.6 bln euros) and Thursday (2.35 bln). Sterling's outside down day before the weekend saw follow-through selling yesterday that took it slightly below $1.3070. It slipped a little under $1.3060 today before steadying. Still, it took out the 20-day moving average on a closing basis yesterday for the first time since mid-August and mostly has remained below it today (~$1.3095). The $1.3035 area corresponds to the (38.2%) retracement of last month's rally. The (50%) retracement is near $1.2965. The daily momentum indicators are trending lower, and depending on the price action, of course, the five-day moving average could cross below the 20-day moving average later this week.

America

What could be the only debate between the US presidential candidates will be held tonight. The national polls and developments in the swing states show a tight race. With delinquency rates rising and the labor market cooling, consumer credit was expected to slow in July, but instead it jumped by $25.5 bln, the most since November 2022. The increase was greater than any economist in Bloomberg's survey projected. Revolving credit increase by $10.6 bln, the most in five months, while non-revolving credit rose by $14.8 bln, the most in more than a year. This seemed to reflect the disruption of a computer system for auto sales in June and the recovery in July. Through July, consumer credit has risen by about $70 bln. In the same period last year, it had risen by almost $105 bln. With three FOMC meetings left this year, the Fed funds futures are pricing in 111 bp of cuts. This is equivalent a 25 bp cut next week, more than an 80% chance of a 50 bp cut at the November 7 meeting, and about an 85% chance of another 50 bp cut. 

Unlike several other of the G10 currencies, there was no follow-through selling of the Canadian dollar after the pre-weekend sell-off. The pre-weekend US dollar high was a smidgeon above CAD1.3580 and yesterday's pullback was limited to a little below CAD1.3550, in a consolidative session that stocks and oil rebound. Initial support likely around CAD1.3540. The US dollar continues to butt against the CAD1.3580 area, and break could target the CAD1.3600-20 area initially. The greenback posted an inside day against the Mexican peso yesterday. The rise in US equities after the pre-weekend sell-off may have helped steady the peso, which had posted its lowest settlement of the year. The first decline in Mexico's headline inflation in six months did not weigh on the peso, even though it would seem to increase the chances of a rate cut when the central bank meets on September 26. Last week's high was near MXN20.15 and it looks to be retested. Meanwhile, the Colombian peso remained on the defensive. The dollar rose by 1.65% against the Colombian peso, its biggest single-day advance in three months. The softer than expected CPI reported before the weekend, took a toll. The dollar is at its best level since last October (~COP4256). The resolution of the truckers' strike puts the government back at square one to address the fiscal hole. President Petro lacks a majority in congress. The central bank meets at the end of the month. Its easing cycle began last December, and through July it had cut its key repo rate by 250 bp to 10.75%. The swaps market is pricing in an aggressive 130 bp of cuts in the next three months, and around 375 bp over the next 12 months. 

 

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