Dollar Eases, Stocks and Bonds Advance
For the first time in more than a week, North American dealers will take to their posts with the dollar softer against all the G10 and most of the emerging market currencies. Despite stepped up efforts by Chinese officials and a firmer yen, the yuan remains on the defensive and is one of the handful of emerging market currencies softer on the day. Stocks and bonds are mostly higher too. The yuan might not be benefitting from a softer dollar, but Chinese shares, both on the mainland and in Hong Kong rallied alongside nearly all the regional markets, though India is struggling. Europe’s Stoxx 600 is up a little more than 1%. If it is sustained, it would be the largest advance of the month. US index futures are also trading higher. Interest will be on the US regional banks after S&P’s downgrades late yesterday.
Although Asia Pacific bonds played catch-up after the yield gains in Europe and the US yesterday, European and US yields have come back softer. European yields are off mostly 3-7 bp and the peripheral premium is slightly narrower today. The US 10-year yield is off three basis points to about 4.30% and the two-year yield is slightly below 5%. The softer dollar and easier rates are helping lift gold back above $1900. The 200-day moving average is around $1907.60. October WTI reversed lower yesterday after spiking to $81.75. It is now below $80 a barrel. Meanwhile, with a strike vote as early as tomorrow in Australia, worries about supply disruption continues to lift the European natural gas futures benchmark. After rallying 50% in the past three weeks, it settled nearly 7.4% higher yesterday and is up another 3.6% today.
The market continues to digest the implications of the failure of Chinese banks to pass through the cut in the PBOC’s benchmark one-year Medium-Term Lending Facility rate through to prime borrowers. Meanwhile, in recent days, several large banks have cut their forecasts for Chinese growth this year below the 5% target. Some observers seem to be making a virtue out of necessity and square the circle by claiming Beijing is doing this to break belief in growth at any cost and squeeze out speculation from the property market. Yet, officials seem to have stepped their soft power, encouraging banks to boost lending and resist selling yuan.
Japanese officials seemed to have missed an opportunity to break the back of the yen’s downside momentum. Caution last Thursday and Friday over the possibility of intervention helped arrest the eight-day slide in the yen, but officials have not delivered. News that Japan’s Prime Minister Kishida and Bank of Japan Governor Kishida met to discuss financial conditions and the weak yen earlier today helped steady the yen after rising US rates had lifted the greenback to JPY146.40. Separately, the labor ministry announced before the weekend that hourly minimum wage will be lifted starting October 1 to an average of JPY1004 (~$6.92), a JPY43 increase per hour. It is slightly more than the advisory panel recommended (JPY41 to JPY1002). There is some variance among the prefectures. Lastly, after the BOJ doubled the cap on the 10-year JGB at the end of July to 1.0%, many thought that this would lead to Japanese investors selling foreign bonds and repatriating funds. Indeed, global yields have risen but MOF weekly data show Japanese to have been net buyers of foreign bonds and the yen has weakened. Foreign investors, on the other hand, have sold more Japanese bonds in the past two weeks (JPY2.83 trillion or ~$19.5 bln) than any two-week period since January,
The dollar reached JPY146.40 yesterday toward the end of the European session. The dollar did briefly dip below JPY145 before the weekend, but this looks to offer pretty solid support in the coming days, with the help of about $3.8 bln in options struck there that expire between today and Thursday. Japan’s 10-year yield is near 0.66% where it peaked on August 3. While BOJ could offer to buy 10-year bonds at the market, as it did earlier this month, might not help steady the yen for long. The Australian dollar recorded its session low yesterday as Europe was closing, slightly below $0.6390, but rebounded back to the session high near $0.6420 and extended the gains to almost $0.6450 today. It looks poised to settle above the five-day moving average (~$0.6415) for the first time since August 7. A move now above $0.6460 would target the $0.6520-40 area. The yuan continues to struggle. Chinese officials not only set a lower dollar reference rate but have also engineered a liquidity squeeze in the Hong Kong market, sending HIBOR to its highest level since 2018, which pushes up funding costs for shorting the offshore yuan. Today’s refence rate was set at CNY7.1992 compared with the average projection in Bloomberg’ survey of CNY7.3103. It is among the widest gaps. Yesterday was the third consecutive session it eked out a small gain, which is the longest advance in a little more than a month. But, despite the stepped-up official efforts and the firmer Japanese yen, the yuan is softer today and the greenback is approaching CNY7.30.
The eurozone has a light economic release schedule this week. After today’s June current account, Wednesday’s release of the preliminary PMI is the other highlight. The manufacturing PMI may stabilize around July’s 42.7 reading. It has not been above the 50 boom/bust level since June 2022, and it has fallen for the past six months. It is at its lowest level since May 2020. While services had fared better, they too are softening. The services PMI has a three-month fall in tow, and at 50.9 in July it was the weakest reading this year. It is likely to have softened further this month. The composite spent H2 22 below 50 but held above the threshold for the first five months of this year. It is likely to extends fall this month.
Today’s UK figures on public sector borrowing do not typically move the market. The Office for Budget Responsibility projects the deficit to increase to 5.1% of GDP this year from 4.4% last year, but this might still be assuming a 0.2% economic contraction this year. The BOE now projects a 0.5% expansion, while the median forecast in Bloomberg’s survey is for 0.3% growth. The flash August PMI, to be reported tomorrow, is expected to see the manufacturing PMI extend its retreat for the sixth consecutive month and the 45.0 reading would be the lowest since 2020. The service PMI has slowed for the past three months, and likely extended the slowdown into August. At 51.5 in July, it has remained above 50 since it resurfaced above it in February. This has helped keep the composite reading above 50, but it may be closer to it this month.
The euro’s nearly 0.20% gain yesterday was the most since August 4 and the second biggest advance this month. It settled above the five-day moving average for the first time since July 26. It is near $1.0885 today. Follow-through buying lifted the euro to $1.0930. Last week’s high was near $1.0960 and this needs to be overcome to suggest anything constructive from a technical point of view. Note that the 20-day moving average is found near there and the (50%) retracement of the sell-off from this month’s high (~$1.1065 on August 10) is around there, as well. Sterling traded firmly but remains mired in a range. Last week’s high was slightly above $1.2785 and sterling came within a fifth of a cent of it yesterday and tested it today. Given the rate outlook (swaps market has ~70 bp of tightening discounted for this year), sterling may be a favorite for those trying to pick a dollar top. The daily momentum indicators are turning up. Sterling has not settled above its 20-day moving average since July 26. Today could be the day. The moving average is found near $1.2755 today. Note that today or tomorrow, the five-day moving average looks set to move above the 20-day moving average for the first time since late July as well.
Fed Chair Powell’s speech at Jackson Hole on Friday is the week’s highlight. Today sees, existing home sales, where a small decline is expected after falling near 3.3% in June. It tends not to be a market mover. The same can be said of the Philadelphia Fed’s non-manufacturing activity survey and the Richmond Fed survey. Also, today, preliminary benchmark revisions to US payrolls will be announced by the Bureau of Labor Statistics. Downward revisions could see a loss of 400k-500k, but the issue is whether it is larger enough to change the general perception of the tightness of the US labor market. The final revisions will be incorporated in the next January’s data (reported in February 2024). The judgement that the labor market is tight (but easing) is based on several different metrics, but, of course, job creation is key one. Recall that Moody’s cut the ratings of several US banks a couple of weeks ago and S&P has also cut the rating of several regional US banks late yesterday, citing the impact of higher interest rates and migration of deposits within the banking system. Wednesday sees the flash PMI (likely softer) and new home sales (likely a small increase after a 2.5% decline in June).
The climb is US rates continues. The two-year yield tested 5%. Since the end of April, the two-year yield has fallen in only four of the 16 weeks. Non-commercials hold near a record net short position in the futures market. The record was set in the reporting week through July 25 at 1.119 mln contracts. In the week ending August 15, the net short speculative position (non-commercial) was 1.117 mln contracts. Turning to the 10-year note, speculators have a net short position of 746.9k contracts. The record was set at the end of May (850.4k contracts). As of August 15, they had extended the net short position for the third consecutive week to stand near 747k contracts.
The greenback found support near CAD1.3500 recovered quickly toward the pre-weekend high near CAD1.3575 yesterday. Though the US dollar pulled back in late dealings, it failed to close below the five-day moving average near CAD1.3535. The last time it closed below the five-day moving average was August 1. It is around CAD1.3540 today, and the greenback is trading near CAD1.3525 in the European morning. We suspect it will take a break of CAD1.3465-70 to take the pressure off the upside. The US dollar is pushing below MXNN17.00 after dipping below it briefly yesterday for the first time in a week. While talk from Jackson Hole at the end of the week may pose headline risk, the peso, with is attractive carry and low relatively low volatility may draw some capital ahead of the US jobs data (September 1). The dollar is near MXN16.9450 in the Europe. Initial support is seen in the MXN16.90-91 area but the multiyear low set in late July was near MXN16.6260.
Bannockburn Global Forex