Greenback’s Pullback is Extended, but Getting Stretched
Today’s Financial Markets Highlights
• The US dollar is broadly lower, but the intraday technical indicators are stretched, cautioning against chasing it in early North American turnover.
• Emerging market currencies are firm with the notable exception of the Turkish lira, where the president dismissed three central bank officials, while retaining the governor.
• China’s CPI was softer than expected at 0.7% year-over-year, while producer prices accelerated to 10.7% from 10.5%.
• Australia lost 138k jobs last month and the participation rate dropped to 64.5% from 65.2%. However, with the lockdowns easing, the market looked through the data and took the Australian dollar to its best level since early last month, above $0.7400.
• Supply chain disruptions are spurring cuts in German growth forecasts for this year and most of it is being pushed into next year.
• US CPI remains elevated but annualized pace in Q3 is well below what was experienced in Q2. Attention turns to the PPI today.
• Chile surprised the market for the second time by hiking more than expected. The 125 bp move yesterday lifts the target rate to 2.75%. Inflation is running above 5%.
Investors seem undeterred by the firm oil and gas prices and have taken stocks and bonds higher today. Stronger risk appetites are also evident in the foreign exchange market, where the dollar is weaker against most currencies. The JP Morgan Emerging Market Currency Index is higher for a third day after falling for the previous six. The strong recovery in US equities yesterday encouraged the MSCI Asia Pacific Index to extend its advance. It has now risen in five of the past six sessions. Europe’s Dow Jones Stoxx 600 gapped slightly higher, and US futures indices are poised to also gap higher. The US 10-year yield that had pushed above 1.60% at the end of last week and early this week has eased to about 1.53%. European benchmark yields are also softer. Poor employment data help push Australia’s 10-year yield down six basis points to 1.62%. The dollar is trading heavily, led by the Antipodeans and Scandi currencies. The euro is above $1.16 to reach its best level since October 4. Sterling is punched above $1.37 to set a new high for the month. After nesting for a few sessions, the Canadian dollar is at its best level since early July. Turkey’s president dismissed three members of the central bank’s decision-making team, sending the lira to new lows, a notable exception to the firm emerging market currencies. Gold is consolidating yesterday’s sharp reversal that led to its biggest advance in six months. It is testing the 200-day moving average around $1795. November WTI remains firm, holding above $80 after the API estimated that US oil inventories rose by over five million barrels, which, if confirmed by the EIA, would be the biggest increase in more than six months. The CRB Index slipped yesterday, and it was the first back-to-back decline this month.
While many countries are wrestling with strong increases in consumer prices, China is not one of them. The September CPI slipped to 0.7% year-over-year. It is the fourth consecutive decline. An important factor continues to be the weakness in food, and especially pork prices. The decline in food prices accelerated to -5.2% in September year-over-year from -4.1% in August and -3.7% in July. Non-food prices are also tame. They rose by 2.0% year-over-year and have been around that pace for the past prior few months. The core rate, excluding food and energy, rose by a modest 1.2%, unchanged for August and slightly lower than in July. Producer prices are a different story. They accelerated to a 10.7% year-over-year pace, up from 9.5% in August and somewhat faster than expected. Rising energy prices, including record-high coal prices, were the main driver.
The market is looking through Australian jobs data. It shed 138k jobs in September, which is more than expected, and follows a 146k loss in August. The participation rate plunged to 64.5% from 65.2%, helping to moderate the unemployment increase to 4.6% from 4.5%, lower than anticipated. A bright spot was that almost 27k full-time positions were created. The lockdowns are easing, and economic activity is likely to improve going forward.
The lower chamber of Japan’s Diet was formally dissolved today to prepare for elections at the end of the month. Prime Minister Kishida has not been in office for more than a few weeks, but the dominance of the LDP means that it will retain a majority. Still, the LDP likes to work in a coalition with a small party that seems to signal a cooperative stance. Kishida is struggling to strike the right chord and has talked about a “new capitalism” whose meaning is vague. He has played down an initial overture toward raising capital gains tax and now seems to be focusing on boosting pay for some public sector workers and strengthening the tax break for companies that increase wages. A sizeable fiscal stimulus bill is now expected after the election.
The dollar is consolidating its recent surge against the Japanese yen. It stalled Tuesday and Wednesday near JPY113.80. Today it has not been able to resurface above JPY113.60. Initial support is seen around JPY113.20. Options at JPY113.00 expire today and tomorrow (~$900 mln and $870 mln, respectively). A little more than a week ago, the Australian dollar was trying to establish a foothold above $0.7300. To it is poking above $0.7400 and is at its best level since September 7. The highs made around then (almost $0.7480) are the next important technical target. The move is getting stretched, and we note that the upper Bollinger Band is near $0.7395 today. The greenback fell to its lowest level against the Chinese yuan yesterday (~CNY6.4270) and steadied today in a narrow range (~CNY6.4325-CNY6.4405). The PBOC’s fix today seemed to have been a signal of the official discomfort with the move. The reference rate was set at CNY6.4414, while the bank models (Bloomberg survey) projected CNY6.4370. Lastly, we note that the Monetary Authority of Singapore tightened policy by increasing the slope of the foreign exchange band.
Leading research institutes in Germany cut their growth forecasts for this year and boosted next year’s projections due to supply chain disruptions. Previously they looked for a 3.7% expansion, and that has been downgraded to 2.4%. Most of that was simply pushed into next year’s forecast, lifted to 4.8% from 3.9%. The IMF did something similar this week with its new forecasts, cutting this year’s forecasts (for the UK, Japan, and Canada, as well as Germany).
While denying that Russia is using gas to gain political leverage in Europe, Russian President Putin continues to draw a connection between the Nord Stream 2 pipeline and more gas supplies. The pipeline is built but needs to be certified by Germany before it can become operative. The problem is that EU rules do not allow the pipeline and the gas to be owned by the same entity (in this case, Gazprom). The pipeline is controversial in Europe and the US. The Biden administration dropped most of the threats issued by the Trump administration. Still, US Senator Cruz is holding up dozens of appointments to force Biden to strengthen US objections. Putin has argued that Gazprom has delivered all the gas it was contracted, and after it finishes rebuilding its domestic holdings, it will be able to send more to Europe. Also, Putin is seeking long-term contracts, while Europe trades short-term contracts on its exchanges.
Turkey’s Erdogan dismissed three central bank members while keeping Governor Kavcioglu in place, who was appointed in March. One official that was dismissed voted against the September 23 100 bp rate cut. Since the rate cut, the lira has fallen 5%, and the hawkish tilt to the FOMCmeeting that concluded the day before the cut. The politicization of monetary policy takes a toll on the lira, which in turn fans inflation. Today is the sixth consecutive session that the lira has fallen. There has been speculation over the past week or so that Kavcioglu was going to be replaced. The lira is off about 0.6% today, which brings the year-to-date drop 18.6%, the most among emerging market currencies.
The euro rose a little more than 0.5% yesterday, its biggest gain in nearly two months. It stalled just below $1.16, but follow-through buying has lifted it to almost $1.1625 today. Options for about 1.5 bln euros at $1.16 expire today. The 20-day moving average is near $1.1635, and that is the next immediate target, though the intraday momentum indicators are stretched. Above, there is the $1.1670 area, the (38.2%) retracement of the drop since early September, when it had traded briefly above $1.19. Sterling rose about 0.5% yesterday also and snapped a three-day slide. Continued buying today has lifted it above $1.37 for the first time in nearly three weeks. Resistance is seen in the $1.3735-$1.3750 area. The intraday momentum indicators are stretched for sterling as well. If it does setback in North America, initial support will likely be found in the $1.3660-$1.3680 band.
US inflation remains elevated, but it is not accelerating. Consider that the headline CPI rose at an annualized pace of less than 5% in Q3 after a nearly 9.5% pace in Q2. The core rate is similar. In Q3, it rose at an annualized rate of about 2.5%. In Q2, it rose at a nearly 10% pace. Attention turns to producer prices. They appear to have accelerated. The headline pace is expected to have increased to 8.7% from 8.3%, and the core may have sped up to 6.5% from 6.3%. Whatever the linkages between producer and consumer prices may be, it is far from linear. There is a reason why central banks target consumer prices, not producer prices. On balance, the FOMC minutes did not offer much fresh insight into the Fed’s thinking. Tapering is expected to begin next month. The pace we suggested of around $15 bln a month seems fair still. Recall that from the Summary of Economic Projections, we already knew that two more officials (now 9) think a hike next year would be appropriate. Nine did not as of the September meeting.
The Biden administration appears to be stepping up efforts to use the “bully pulpit” to help ease the supply chain disruptions and high energy prices. The large West Coast ports are going on a 24/7 schedule to ease the congestion. Another half dozen companies, including Federal Express and UPS, agreed to expand deliveries. In addition, the administration reportedly reached out to oil and gas companies to help lower fuel costs. Separately, OPEC expressed skepticism over the lasting demand for oil and revised its consumption estimate this year.
Chile surprised the market by hiking rates 125 bp yesterday to 2.75%. In August, it hiked by 75 bp, which was also more than expected. Inflation stands at 5.3%, well above target, while the economy grew 1% in Q2 and 3.4% in Q1. The economy has grown 18% year over year. The government is debating about allowing a new pension withdrawal, which could access around $20 bln. Over in Peru, the sol has reacted strongly positive to the shift by President Castillo to a more moderate stance and replaced the prime minister who is less interested in redrafting the constitution. The sol rallied 1.7% yesterday, sending the dollar to its lowest level since late July.
The US dollar has broken lower against the Canadian dollar. It is trading below CAD1.24 for the first time since early July. Based on technical patterns, we have been looking for CAD1.2300. Today’s low, slightly below CAD1.2380, approaches the (61.8%) retracement of the greenback’s gains since the multi-year low was recorded on June 1 near CAD1.20. The trajectory of the policy mix toward looser fiscal policy and tighter monetary policy tends to be supportive of the currency. Note that the yield on the three-month interest rate futures contract (June 2022 BA futures) rose for seven sessions through yesterday. It is consolidating those gains so far today. The dollar is extending the past two days of losses against the Mexican peso. The greenback finished last week near MXN20.70, its fourth consecutive weekly advance. It dipped below MXN20.51 today, and there is an option for $300 mln at MXN20.50 expiring today.
Bannockburn Global Forex