|• The US dollar remains firm amid heightened concern that the recovery trade since the vaccine was announced last November is being unwound. |
• Japan’s CPI was in line with expectation, but the headline and core uptick was a function of higher energy prices. There are no policy implications.
• The minutes from the recent RBA meeting showed a flexible stance toward bond purchases, which given likely economic fallout from the extended lockdown, may be implemented.
• The newest member of the Bank of England (Catherine Mann, former OECD chief economist, takes office later this year) opined that US inflation appears transitory, but if the Fed raises rates early, pressure will increase on the BOE to do likewise.
• The US reports June housing starts and permits. Both remain at elevated levels even if off the recent peaks.
• Canada will open its border to vaccinated people in the US on August 9 and from other countries about a month later
Overview: The capital markets have begun stabilizing after yesterday’s dramatic moves. The MSCI Asia Pacific Index did, though, see follow-through selling, and the third consecutive loss saw the benchmark close below its 200-day moving average for the first time in a year. Europe’s Dow Jones Stoxx 600 is posting small gains to snap a four-day drop. US futures are also trading higher. The US 10-year Treasury yield sank to 1.17% yesterday in heavy volume, 60 bp off its March peak. It finished below its 200-day moving average for the first time since early November. The 30-year bond yield fell to five-month lows. Both yields are little changed today, while European yields are 2-4 basis points lower, setting new three-month lows across the board. The yield of the Antipodean benchmarks fell 6-7 bp. The dollar remains firm against all the major currencies, with the Australian and New Zealand dollars and Norwegian krona continuing to bear the burden and are off around 0.5%. The yen continues to be resilient, while the Canadian dollar has steadied. Emerging market currencies are mixed. Eastern and Central European currencies are heavy, while most freely accessible emerging market currencies are higher. The JP Morgan EM currency index is slightly higher, continuing its sawtooth pattern of alternating gains and losses for the past week and a half. Gold recovered from the push below $1800 yesterday to approached $1820. Crude is broadly steady after the September WTI contract fell 7.3% yesterday in response to the OPEC+ deal and fears that demand may soften amid the covid surge. Copper is around 1% higher after falling 2.8% yesterday. Lumber snapped an eight-day drop yesterday.
Japan’s June CPI came in as expected. The headline rose by 0.2% year-over-year after falling 0.1% in May. The core measure, which excludes fresh food, is also 0.2% higher after a 0.1% gain in May. The BOJ targets this core measure. At last week’s meeting, the forecast was lifted to 0.6% this fiscal year (through March 2022) from 0.1%. The key is energy prices. If fresh food and energy were excluded, Japan’s deflationary condition was unchanged, off 0.2% year-over-year. There do not seem to be clear policy implications.
Vietnam and the US agreed to avoid trade sanctions, though the heavy lifting had already been done. Recall that at the end of last year, the Trump administration cited Vietnam (along with Switzerland) as a currency manipulator, but the Biden administration dropped this designation a few months ago (April). In the joint statement yesterday from Vietnam after a teleconference with US Treasury Secretary Yellen, Vietnam admitted no wrongdoing while committing Hanoi to a more flexible currency regime over time while securing macroeconomic and financial stability. What is essentially a reiteration of the G20 position is sufficient to give the Yellen sufficient ammo to close the probe of Hanoi’s trade practices without resorting to tariffs. The US is Vietnam’s largest export market. Vietnam’s bilateral goods trade surplus is growing quickly, partly due to the new regional division of labor in Asia, which itself is being shaped by the US sanctions and tariffs on Chinese-produced goods. The US goods deficit with Vietnam was almost $56 bln in 2019 and swelled to nearly $63.5 bln last year. Through May, the 2021 shortfall was slightly more than $44.5 bln. Despite the growing trade surplus, Vietnam is a poor country, where GDP per capita of about $2715 is 1/24 of that in the US. While seeking to block “unreasonable and restrictive” acts that harm American business interests, if the Biden administration wants to re-assert leadership and check China, it needs to find ways to mend fences. This is one such way. Consider the policies of the US or Europe when its per capita income was the same as Vietnam’s.
As widely expected, China left its Loan Prime Rate steady at 3.85% for the one-year and 4.65% for the five-year. However, the market continues to grapple with the PBOC intent. The surge in aggregate lending was reported on July 9 (CNY3.67 trillion up from CNY1.93 trillion in May). A week later (July 15), followed by an unexpected cut in the required reserve ratio. It seems like an aggressive turn of policy, but officials seem to be playing down the significance.
The dollar fell to two-month lows against the yen yesterday, slightly above JPY109.00 amid the powerful risk-off move. There is an option at JPY109 for about $435 mln that expires today. However, the dollar has come back better bid, peaking in early European turnover near JPY109.75. The JPY110.10-JPY110.20 offers important resistance now. Below JPY109.00, chart support is seen in the JPY108.60-JPY108.80 area. The tightening lockdown in Australia, coupled with the minutes from the recent central bank meeting that discussed the flexibility of its bond purchases, has seen the Australian dollar extend its slide to fresh lows near $0.7310. The RBA meets on August 3 and may respond to the economic threat posed by the virus and lockdowns. Recall that at the end of last October, before the US election and vaccine, the Aussie was trading around $0.7000. The greenback unwound yesterday’s gains against the Chinese yuan. The PBOC set the dollar’s reference rate at CNY6.4855 today, a touch firmer than Bloomberg’s survey of bank models projected (CNY6.4851). For nearly a month now, the dollar has been confined to about a CNY6.45-CNY6.50 range.
The eurozone’s current account surplus in May fell to 11.7 bln euros from 22.1 bln in April. Seasonal influences seem to dominate. Consider that the average monthly surplus with year has been 27.25 bln euros, while twice the average for the period in 2020, the average in the first five months of 2019 was about 25.5 bln euros.
Catherine Mann, who joins the Bank of England late this year, spoke to a parliament committee earlier today. The former OECD economist supported claims that the rise in US price pressures was likely temporary but warned that if the Federal Reserve were to hike rates sooner, it would likely add pressure to the BOE to move as well. Separately, the same day that the UK lifted its social restrictions and mask-wearing mandates, the US raised travel to the UK to its highest alert, warning that the surge in the virus puts even vaccinated travelers at risk.
The euro fell to a new three-month low yesterday near $1.1765 but recovered to nearly $1.1825 in early North American turnover and settled at $1.1800. Today, it found support near $1.1770 in late Asian turnover. There is an option for a little more than a billion euros at $1.18 that expires today. Note that there is a 1.32 bln euro option struck at $1.17 that expires tomorrow. A move above the $1.1825-$1.1835 area would help stabilize the tone. Yet, ahead of Thursday’s ECB meeting, the market will likely be cautious. Sterling was sold through its 200-day moving average (~$1.3700) for the first time since last September. Follow-through selling saw it dip below $1.3630 before finding a bid. However, sellers emerged on the bounce toward $1.3675. A break of $1.3600 would signal another half a cent loss that would see sterling test the (50%) retracement of the rally from early last November.
The National Bureau of Economic Research made it official yesterday: the covid recession that began in February 2020 ended two months later in April. It was the shortest recession on record, and although it does not use the rule of thumb of two consecutive contracting quarters is a recession, the economy did contract in Q1 20 and Q2 20. If the duration was a record, so was the magnitude. At annualized rates, the world’s largest economy contracted by 5.0% in Q1 and a breath-taking 31.4% in Q2, during which time NBER says the economy had was already beginning to recovery in May and June. While output has been recouped, the Federal Reserve does not project the labor market to fully recover until 2023. To reanimate the economy, monetary and fiscal policy were deployed in size; the full consequences have yet to be seen and are still being debated.
The US reports June housing starts and permits data today. Housing starts fell in three of the first five months of the year but remain at elevated levels. They averaged (seasonally adjusted annual rate) 1.577 mln in the first five months and stood at 1.572 mln in May. The average for the first five months of 2020 was 12.88 mln, and in 2019 12,35 mln. Permits have softened slightly during this period as high prices of materials and difficulty securing labor saw slower activity. However, May’s permits of 1.683 mln are still high historically. Separately, the infrastructure legislation is being pushed forward, and negotiations are coming to a head.
Canada will reopen its border to vaccinated people from the US on August 9 and do so for people traveling from other countries in early September. Canada’s economic calendar is quiet until Friday’s May retail sales report. Mexico reports its biweekly CPI figures on Thursday, followed by retail sales on Friday. Note that the communist candidate Jadue lost a primary vote in Chile ahead of the November, and local stocks rallied, though the peso was no match for the dollar and slipped by around 0.5%.
The US dollar surged a little above CAD1.28 yesterday to trade a five-month high. The pullback today has been limited to the CAD1.2735 area. The market appears to be waiting for US leadership today. A push below CAD1.2700 today would help stabilize the tone, but a $400 mln option expires tomorrow. Steadier equities and commodities may be supportive of consolidation. The dollar settled near MXN20.0750 yesterday, the highest close in nearly a month. The greenback is slightly softer today and is finding support near MXN20.00. The broad risk appetite seems to be the key. The month’s high for the dollar was set closer to MXN20.1620, and the 200-day moving average is found near MXN20.2220.
Bannockburn Global Forex