Dollar Proves Resilient and Even Strong UK GDP Figures Hardly Dents It
The dollar’s resilience after initially selling off in response to the as-expected CPI was impressive. A quieter tone is dominating today and most of the G10 currencies are +/- 0.15%. While the dollar is consolidating, the underlying tone is still firm. For the week, it has risen against all the major currencies and the Dollar Index is up nearly 0.6% this week, its fourth consecutive weekly gain. The greenback is rising today against most of the emerging market currencies as well.
The US quarterly refunding has been successfully completed and both the US and China’s July CPI have been published. The net result is that the US benchmark 10-year yield is off about five basis points this week to a little below 4% and the two-year yield is up less than two basis points. The US Treasury sold more than $500 bln of paper ($103 bln coupons and $410 bln of bills). The chances of a Fed hike next month were downgraded slightly to 10%. The US 10-year premium over China narrowed a little but is still over 130 bp. The deflation in China, on the heels of other disappointing data is encouraging speculation for a rate cut and/or a cut in reserve requirements. The dollar is holding above CNY7.20. China’s CSI 300 plunged by 2.3% today, which led most of the regional markets lower, except Japan, where the weaker yen helped bolster equities. Europe’s Stoxx 600 is giving back most of yesterday’s 0.8% gain, while US index futures are narrowly mixed. The 10-year JGB yield was steady near 0.58%. European benchmark yields are mostly 4-5 bp higher, but the stronger than expected UK GDP figures has sent 10-year Gilt yields 10 bp higher to 4.45%. The US 10-year Treasury yield is slightly softer near 4.08%. Gold is consolidating its recent losses and found support near $1910. It is the third weekly loss for the yellow metal. September WTI posted a possible key downside reversal yesterday after approaching $85. Follow-through selling today saw it reach $82.25. Its six-week rally is at risk and must close above $82.82 to extend it.
China’s lending figures for July were unexpectedly low. New yuan loans (banks) increased by almost CNY346, which is less than half of the CNY780 bln projected. Aggregate lending (includes “shadow banks” non-bank financial institutions) rose by CNY528.2 bln, down from CNY4.22 trillion in June and well below the CNY1.1 trillion expected. July is often a weak month, but these figures are exceptionally low. Last July, aggregate lending stood at CNY778.50 bln, Recently, Chinese officials encourage regional governments to expedite the borrowing under this year’s quotas. The data can only fuel speculation that officials will provide more financial support, such a cut in rates and/or a reduction in required reserves.
Japan will report Q2 GDP first thing Monday morning. It is seen matching Q1 growth of 0.7%, but the quality is likely poorer. The details are expected to show more inflation (3.8% year-over-year vs. 2.0% in Q1), less consumption (flat after 0.5% quarter-over-quarter), less business spending (0.4% vs. 1.4% quarter-over-quarter). Inventories may have shaved 0.3 percentage points off GDP (added 0.4 percentage points to Q1 growth). Net exports are seen contributing 0.9 percentage points, the most since Q3 20, after trimming Q1 GDP by 0.3 percentage points.
There are three takeaways from Japan this week and two of them are what did not happen. First, after buying bonds twice last week at market prices, the BOJ stayed on the sidelines this week. The 10-year (generic) yielded between 0.57% and 0.64% this week. In the previous week, the yield reached almost 0.66%. Second, the latest MOF portfolio flow data showed that despite the increase in domestic rates, Japanese investors continued to buy foreign bonds and did so at a pace slightly faster than this year’s average in the first week after the Yield Curve Control was adjusted. Third, the dollar has risen every session this week against the yen. Despite the 1.7% dollar gain to its best level in a month, implied volatility fell, with the one-month falling below 9% for the first time since late June.
The jump in US 10-year yields despite the as expected CPI figures may have helped spur the dollar’s advance to JPY144.80 yesterday. It made a new marginal high today near JPY144.90, holding below the high for the year, set in late June slightly above JPY145. A little more than $750 mln in options struck at JPY145 expire today. The next interesting technical area is around JPY146.00-JPY146.15. Last year’s high was set on October 21 (~JPY152), the same day that the US 10-year yield peaked (~4.33%). Initial support around JPY144.40. The Australian dollar, which sold off sharply yesterday from about $0.6615 to $0.6515, made a marginal new low (~$0.6510) before stabilizing. It is trying to snap a three-day pullback, but looks set to finish the week lower, to extend the weekly downdraft to its fourth consecutive week, the longest since February. The low for the week was set on Tuesday, just below $0.6500. The corrective upticks stalled near $0.6535. Resistance is seen in the $0.6540-50 area. Meanwhile, the dollar rose to nearly CNY7.24, its highest level in a month. It is the fifth gain in the past six sessions. The PBOC set the dollar’s reference rate at CNY7.1587. The median projection in Bloomberg’s survey was CNY7.2078.
UK GDP data were unexpectedly strong. June GDP rose by 0.5% after a 0.1% contraction in May. Economists looked for 0.2% growth. Industrial output surged by 1.8% in June, led by a 2.4% jump in manufacturing output, well above expectations. Construction output was also strong, rising 1.6% (after a 0.3% decline). Economists had expected a flat report. Services output rose by the expected 0.2%, while the trade deficit fell. The June performance lifted the British economy by 0.2% in Q2. The median forecast in Bloomberg’s survey was for the economy to have stalled after expanding by 0.1% in Q1. Private consumption rose by 0.7%, the strongest since Q1 22. Government spending rose 3.1%, more than three-times the projected and the most since Q2 21. Capital formation was flat, which was better than the 0.7% decline forecast and total business investment rose by 3.4%. The market had already strongly priced in a hike next month and today’s data helps solidify expectations.
The euro briefly rallied after the US CPI data to reach $1.1065, a two-week high before reversing low and dipping below $1.0980 before bottoming. It did manage to hold above Wednesday’s low (~$1.0950), where options for 1.85 bln euros expire today. The euro still appears to be forging a bottom since pulling back from the year’s high in the middle of last month (~$1.1275). Last week’s low was slightly above $1.0910. Still, while there has not been follow-through euro selling today, the corrective upticks were uninspiring, stalling in front of $1.1005. Sterling’s price action was ugly; it posted a big outside down day and its settlement below $1.2700 was the lowest since late June. The speed at which it came off setting a seven-day high near $1.2820 was stunning. Follow-through selling today was limited to about $1.2665. The stronger-than-expected GDP figures saw sterling recover to almost $1.2725 before stalling. Initial support now may be near $1.2680. A break of $1.2600 would likely trigger stops even though the daily momentum indicators still to be bottoming.
The July US CPI was mostly as expected. Both the headline and core rates rose by 0.2%. The significance of the back-to-back 0.2% increase both rates is that one of the leading hawkish Fed governors, Waller, has said a series of 0.2% increases would be sufficient for him to consider that inflation is on its way back to target. Still, the year-over-year headline pace increased for the first time since June 2022 to stand at 3.2% (3.0% in June). The year-over-year core rate slipped to 4.7% from 4.8%, as anticipated. Of note, housing, and owners’ equivalent rent both increased sequentially (0.3% from 0.2% and 0.49% from 0.45%, respectively). This helped lift core services (0.35% vs. 0.25%). Excluding shelter, core services rose by 0.2%. Fed Cahir Powell has often cited this measure. It has risen by 2.9% at an annualized pace over the past six months. It fell from 5.3% in January-February to below 4% in June.
Today, attention turns to the PPI. Here, too, a 0.2% increase is expected in the monthly headline and core rates. Note that the headline year-over-year rate has fallen every month but one (June 2022) since peaking at 11.7% last March (the same month the Fed began its tightening cycle). It stood at 0.1% in June, but the base effect warns of a rise today. Last July, US PPI fell by 0.3%. Barring an outright decline this month, the year-over-year pace is likely to pick up next month too. There are some components of the PPI that economists use to help forecast the PCE deflator, which is due August 31.
The central bank of Mexico left its policy rate steady at 11.25% and seemed to be in no hurry to cut rates, even though it shaved its Q3 CPI forecast to 4.7% from 5.0%. Recall that on Wednesday, Mexico reported that its July inflation fell to 4.79% from 5.06%. Its Q4 23 CPI forecast is 4.6%, which seems conservative. The central bank see inflation 3.1% at the end of next year. These are changed from a month ago. It called the inflation outlook “very complex.” It sees the balance of risks to inflation biased to the upside. It sees pressure from energy and agriculture prices the main sources of upside risk, while recognizing that the greater than expected appreciation of the peso posed downside risks to inflation.
The US dollar continues to trade within Tuesday’s broad range (~CAD1.3365-CAD1.3500). It fell to a touch below CAD1.3375 yesterday but then snapped back sharply, making new highs late in the session near CAD1.3445 and extended to CAD1.3455 today. It is straddling the 200-day moving average found at CAD1.3450. We had suggested that the spike to CAD1.3500 seen Tuesday exhausted the greenback buying. We still suspect it will hold ahead of the weekend. Turning to the performance against the Mexican peso, the US dollar traded below MXN17.00 yesterday for the first time in six sessions. It briefly traded below the 20-day moving average (~MXN16.9185) but amid its broad recovery, the dollar reached new session highs in to the close near MXN17.15. The greenback has steadied today and barely traded above MXN17.1350. The low so far is about MXN17.0530. Mexico reports June industrial production figures today, but the general risk-appetite and broader dollar movement may be more important. Separately, Brazil reports IPCA inflation today and the year-over-year rate may rise for the first time since last June. The central bank does not meet until September 20 and an uptick is the inflation reading may not stand in the way of another rate cut (from 13.25%).
Bannockburn Global Forex