• The US dollar is trading quietly in narrow ranges as the market awaits US jobs data tomorrow.
• Australia reported a record trade surplus, well above expectations, despite China’s boycott of a variety of its products to protest Canberra’s pro-US foreign policy. The Australian dollar is trading at its best level in nearly a month.
• Reports suggest the US may propose converting the tariffs on European steel and aluminum to quotas, which will not sit well in Brussels either.
• ADP missed estimates yesterday, and although some economists seem to have revised down their estimates for tomorrow’s report, the month-to-month fit is poor at best. Separately, US August auto sales were considerably weaker than expected. It seems more a supply than demand problem, but will nevertheless weigh on retail sales and consumption figures.
• The US reports weekly jobs claims and factory orders. The other data, including the economically important unit labor costs and productivity, are derived from earlier reports.
Overview: The markets are mostly in a holding pattern so far today, ahead of tomorrow’s US jobs data and the PMI services and final composite readings. Equities on balance are firmer, and the dollar is softer. In Asia Pacific, Japan, China, Hong Kong, and India, equities advanced, while, among the large markets, South Korea, Australia, and Taiwan slipped. The Dow Jones Stoxx 600 is posting its first back-to-back gain in a couple of weeks, led by consumer discretionary, industrials, and health care. US futures indices are posting small gains. The bond market is subdued, with the US 10-year gravitating a little below 1.30%. European benchmark rates are 2-3 bp softer. Australia’s 2-year continues to flirt with zero, but the Australian dollar, helped by a record trade surplus, is leading the major currencies higher, with the other dollar-bloc currencies in tow. Higher inflation and the prospects of another rate hike later this year did not help the South Korean won, which is the weakest of the emerging market currencies today. The liquid and freely accessible currencies are higher, helping the JP Morgan Emerging Market Currency Index extend its gains for the fifth consecutive session. Gold has been confined to a narrow $1810-$1816 range, while oil is little changed within yesterday’s range. Iron ore slipped for a third session, confirming the end of the six-day rally on Tuesday. Copper has steadied after yesterday’s 2.2% fall.
China has boycotted several of Australia’s product groups primarily to protest Canberra’s pro-American foreign policy, but its impact remains modest at best. Australia reported a record trade surplus in July of A$12.1 bln. To put it in perspective, consider that this year’s trade surplus is averaging nearly A$9.5 bln a month. In the same period last year, the average was A$6.5 bln. The seven-month average in July 2019 was A$5.9 bln and A$1.2 bln in July 2018. Rising prices helped compensate for some declines in volume, as with iron ore. Coal and natural gas soared. The latter hit a one-month high of A$1.2 bln, a jump of almost 40% for the month. Exports rose 5% on the month, and imports rose by 3%, both of which were stronger than expected.
South Korea reported firmer than expected August CPI, and this keeps another central bank rate hike before the end of the year in view. The 0.6% increase in the headline rate was above forecasts and kept the year-over-year rate unchanged at 2.6%. Many economists had expected a 2.4% pace. The core rate ticked up to 1.8% from 1.7%. The market appears to be pricing in another 25 bp hike in Q4.
Tomorrow, China reports the Caixin services and composite PMI. The disappointing “official” PMI warns of downside risks to the Caixin series and underpins expectations that the PBOC will ease policy formally (reserve ratio reduction?) and informally (promote more targeted credit expansion?). Japan and Australia see their final PMI readings. Recall that the preliminary reports showed both composites below the 50 boom/bust level. Japan has reported one reading above 50 since January 2020. For Australia, August was the second consecutive reading below 50, and it might be sufficient to steady the central bank’s hand from tapering its bond purchases. The RBA meets next week.
The dollar is straddling JPY110.00. It barely moved more than 10-pips away from it. The five and 20-day moving averages converge just below. Relevant option expirations today are minor, but tomorrow, there are options for almost $1.3 bln at JPY110 that expire. Still, given the proximity to the US jobs report that often injects volatility into the market, we suspect the options have been neutralized. The Australian dollar finished last week slightly above $0.7310, and it is now approaching $0.7400. A band of resistance is seen in the $0.7405-$0.7425 area. The intraday momentum studies are stretched, and new highs may not be sustained in North America. The Chinese yuan traded mostly within yesterday’s range but softened within it, falling for the first time in five sessions, if one can call a 0.03% decline a fall. The PBOC set the dollar’s reference rate at CNY6.4594, compared with the median in Bloomberg’s survey for CNY6.4584.
Seven months after Biden became the US president and the odious steel and aluminum tariffs on national security grounds remain in place against Europe. The Trump administration bequeathed a chit to Biden’s team for which it is trying to extract the biggest concession. The EU has suspended escalating its retaliation until November. Reports suggest the Biden administration is mulling quotas, which Europe is likely to resist. However, the fact that the protectionism is being done in the name of national security is difficult to object to at the WTO.
The eurozone’s July PPI rose by 2.3%, well above expectations, and appears to be the largest monthly increase on record. Excluding energy, producer prices still rose 1% on the month. The only large category that showed a decline in prices was non-durable goods. The eurozone sees the final PMI tomorrow. The flash reading of the composite fell for the first time since January from its cyclical high in July of 60.2 to 59.5. It also will report July retail sales, where Germany’s miss (-5.1% vs. -1.0% forecast) and France’s consumer spending drop (-2.2% vs. 0.2% expected) underscores the downside risks.
The euro has been confined to the upper end of yesterday’s range (~$1.1795-$1.1855) and has not been below $1.1835. If sustained, it will be the first session since August 5 that it has remained above $1.1800. The next big target is $1.19, and the euro has not closed above it since late June and has only traded above it once. The euro has risen in the past four sessions and is struggling to sustain the upside momentum in what could be the fifth consecutive advance. Sterling recovered from a three-day low near $1.3730 yesterday, but the $1.3800 cap continues to hold. It reached a two-week high near $1.3808 on Tuesday but has not closed above $1.3800 since August 16. There are options at $1.3815-$1.3820 for about GBP730 mln that expire tomorrow.
Although we argue that the ADP private-sector job estimate does a poor job tracking private-sector job growth in the non-farm payroll report on a month-to-month basis (though it is considerably better in the medium term), some economists think otherwise. The new contributions to the Bloomberg survey made yesterday were all weaker than the prevailing median. The median expectation for private-sector job growth now sits at 610k, down from 700k at the end of last week. The median forecast for the headline is at 725k, well off the 943k reported in July and the 938k reported in June. This shows economists recognize that job growth slowed in August. Only three of the 65 forecasts in the Bloomberg survey look for more than 900k.
Still, ahead of tomorrow’s employment report, a full slate of US economic reports is due. Weekly initial jobless claims are expected to have fallen after last week’s (for the week ending August 20) unexpectedly rose (slightly, 4k). July factory orders are new too, and a 0.3% increase is expected at a 1.5% gain in June. The preliminary durable goods orders were already reported, so today is the final estimate. Similarly, July’s advanced goods trade balance has also been reported, so today’s overall trade report contains little new information. The same could be said for unit labor costs and productivity reports. These are derived from the Q2 GDP report. Lastly, we note that the August auto sales were dismal. At 13.06 mln vehicles as a seasonally-adjusted annual rate, it was the fourth consecutive monthly decline and the lowest since last June. This is likely to filter into other high-frequency data points, including retail sales and personal consumption expenditures.
Canada reports its merchandise trade balance. The disruption of the auto sector and fewer railcar loadings will be evident as the trade surplus is expected to be nearly halved from June’s C$3.2 bln surplus. Canada also sees July building permits. They are forecast to slow from the heady 6.9% surge in June. Mexico reports domestic vehicle sales today and July leading economic indicators. These do not typically move the markets. Brazil sees July industrial output figures, and a 0.7% decline is expected after a flat June report. Finally, note that Moody’s cut Peru’s rating to Baa1 (= BBB+ at S&P and Fitch), citing political risk. The outlook was cut to negative from stable.
For the fourth session, the US dollar is hovering around CAD1.26 and continues to trade within Tuesday’s range (~CAD1.2570-CAD1.2655). The intraday momentum studies give little reason to expect a break today. More like, it comes tomorrow with the US employment report. While the Canadian dollar is going sideways, the Mexican peso has been trending higher. In fact, the peso is extending its advancing streak for the fifth consecutive session today. The greenback settled below MXN20.00 yesterday for the first time since August 16. The next important chart point for the dollar is near MXN19.85, the low from August 16. The Brazilian real’s three-day rally, the longest in over a month, ended yesterday, with a 0.65% setback. Look for it to be better bid today.
Bannockburn Global Forex