RBA Holds Fire, Greenback Rebounds
The dollar has come back bid. It is rising against all the major currencies today. The Reserve Bank of Australia left rates steady and the poor Chinese Caixin PMI is weighing on the Australian dollar, which is off about 1.25% today. Sterling is the best G10 performer, off about 0.1%. Perhaps, the BOE’s meeting on Thursday is helping to deflect some of the selling pressure. Emerging market currencies are also nearly all lower, led by the South African rand and South Korean won. The greenback’s gains are weighing the gold, which is consolidating in yesterday’s range but looks heavy. After yesterday’s surge to $82, September WTI is a little lower and is trading around $81.30 in the European morning.
It seems like a risk-off day, though Asia Pacific equities were mixed. Japan, Taiwan, South Korea, and Australia, of the large bourses posted gains. Europe’s Stoxx 600 is off by slightly more than 0.60%, which, if sustained, would be the largest loss in two-and-a-half weeks. US index futures are nursing modest losses. Benchmark 10-year yields in Europe are a little firmer. The US 10-year Treasury is practically flat near 3.96%, showing little reaction to the largest deficit that the Treasury projected yesterday. Australia’s 10-year yield is off almost nine basis points following the RBA’s decision. The 10-year JGB yield is flat slightly below 0.60%.
Governor Lowe led the Reserve Bank of Australia to maintain steady policy with the cash target rate of 4.10%. The Bloomberg survey of economist showed a slight lean toward a hike, but the swaps market had priced in only a small chance (15%) of a move. The Australian economy is slowing, and price pressures are easing. Today’s final July manufacturing PMI was confirmed at 49.6 from 48.2 in June. It has not been above the 50 boom/bust level since February. Lowe’s terms ends after the September meeting, and Bullock will replace him. The market is not convinced the RBA’s tightening cycle is over. From an institutional point of view, it may be preferable for Bullock, who is perceived as more dovish than Lowe, to deliver the final hike. The futures market is pricing in about a 70% of a quarter point hike in Q4.
Japanese and Chinese data have been rendered less relevant by official action. The BOJ doubled the cap on the 10-year JGB to 1.0% before the weekend and then stepping into the market yesterday buying around $2 bln of JGBs at market prices. Governor Ueda indicated last week that he did not think the yield would reach the cap, but after yesterday’s operation, the question is now about the intent of the BOJ. Is the intervention aimed to allow a smooth adjustment or is there a level that the BOJ does not want it to rise above. We suspect it is smoothing operation, but like the fx intervention last October, the BOJ’s move is timed to coincide with a top in US yields. Under this hypothesis, the next week or so are important. A combination a strong, even if slowing, jobs report, coupled with next week’s July CPI report, where the headline rate is seen rising for the first time since June 2022 when it peaked may spur an increase in US yields. The 10-year Treasury yield has settled above 4% three-times this year. Japan’s final July manufacturing PMI was revised to 49.6 from the preliminary reading of 49.4, but still softer than June’s 49.8. China’s data is also irrelevant and has been superseded by government efforts to support household consumption, high-tech investment, and the property market. The Caixin manufacturing PMI slipped fell to 49.2 from 50.5, a six-month low. China also reported that home sales are off by a third this year.
After recovering from almost JPY138 on the BOJ’s Yield Curve Control to almost JPY141.20 before the weekend, the dollar rose to nearly JPY142.70 yesterday to JPY142.85 today. The next technical target is near JPY143.25, though the upper Bollinger Band is higher (~JPY144.35). Support now is seen around JPY142.00. The Australian dollar tested the $0.6900 area in mid-July that had stalled it in mid-June. It has been chopping lower since and is approaching the bottom end of the two-month trading range near $0.6600. So far, the low is about $0.6625 and there are options for about A$620 mln at $0.6620 that expire today. Note that the lower Bollinger Band is slightly below $0.6600. The dollar gapped higher against the Chinese yuan today. It reached a high yesterday near CNY7.1530, and today’s low is slightly above CNY7.1590. The high from the second half of last week (~CNY7.1555) and then CNY7.1830 offer nearby resistance. The PBOC set the dollar’s reference rate at CNY7.1283. The average estimate in Bloomberg’s survey was CNY7.1463. It has set the dollar stronger than the market projections consistently since late June. Given the policy divergence and the dollar’s strength against the other major currencies, Chinese officials seem content to moderate the yuan’s decline, not reverse it.
The eurozone’s final July manufacturing PMI was in line with the preliminary reading, falling to 42.7 from 43.4. It is the lowest since May 2020, and has not been above 50 since June 2022. China’s recovery from the end of zero-Covid has disappointed. Economic activity in Europe has also disappointed since avoiding an energy crisis last winter. However, policymakers in Europe appear to be less responsive. German has been exceptionally hard hit. It manufacturing PMI stands at 38.8, down from 40.6 in June. France’s ticked up to 45.1 from the 44.5 flash reading, but below June’s 46.0. Italy’s manufacturing PMI edged up to 44.5 from 43.8, while Spin’s slipped to 47.8 from 48.0.
The UK’s manufacturing sector is also contracting. The July manufacturing PMI fell to 45.3, slightly better than the preliminary estimate of 45.0, but still below June’s 46.5. It has not been above 50 since last July. However, do not expect it to deter the Bank of England from hiking rates later this week. The swap market is pricing in around a 30% chance of a 50 bp hike and about 28.5% of the 56 economists survey by Bloomberg project a half point hike. We suspect the risk is somewhat greater and wonder whether the majority put too much weight on one CPI print. The BOE’s goal is curbing price pressures, which remain the most elevated within the G7 economies at 7.9% (and 6.9%) core rate. In the current context, it seems less concerned about the meager growth. Counting this week’s meeting, there are four meeting remaining this year and the swaps market is fully pricing in 75 bp of hike (which would bring the base rate to 5.75%). Expectation peaked on July 6 (before the softer June CPI on July 19) near 6.35%. Sterling’s high was recorded between the interest rate peak and the CPI near $1.3140 on July 14.
The euro has been turned back from the $1.1050 area approached before the weekend and yesterday. It has been pushed to almost $1.0965 today. Last week’s low set last Friday was closer to $1.0945. The trendline connecting the May and July low is found near $1.0960 today. We suspect there is potential toward the $1.0880 area in the coming days, with $1.10 offering the nearby cap. Sterling is confined to a narrow range of less than a third of a cent below $1.2840. Last Friday’s low was around $1.2765. Resistance may be encountered between $1.2840 and $1.2860. The market seems wary of selling sterling too heavily before the BOE meeting.
As Fed Chair Powell acknowledged at the press conference that followed last week’s FOMC meeting, the Survey of Senior Loan Officers continued to see a tightening of credit standards and weaker loan demand. It began before the bank stress erupted in March, and in some ways, a desired and expected consequence of the tightening of monetary policy. We argued that Japanese and Chinese data is of little consequence in light of the policy action. The UK’s data is most unlikely to impact the Bank of England’s decision later this week. Today’s bevy of US data are also unlikely to impact September rate expectation. Although this week’s focus is on the labor market, the June JOLTS report is unlikely to tell us anything we did not already know. Job openings remain elevated by the historical record but have declined in four of the five months through May. The manufacturing PMI and ISM reports are expected to have held below the 50 boom/bust level. Construction remains a bright spot in the economy. This includes public works, but also the boom in manufacturing construction, which has also been encouraged by government action. July auto sales will also be reported. In H1 23, auto sales averaged 15.35 mln (seasonally adjusted annual rate). In H1 22, they averaged 13.73 mln. Strong auto production (20% annualized pace) helped lift Q2 GDP (~0.5 percentage points). Note that labor negotiations get under way later this week and strong auto earnings are emboldening the United Auto Workers.
Canada and Mexico see their July manufacturing PMI, but they are not typically market movers. For Canada, the highlight is Friday’s July employment report, and it will be hard to match the nearly 110k full-time posts filled in June. Yesterday, Mexico reported its economy expanded by 0.9% quarter-over-quarter in Q2, a bit stronger than expected and nearly matching the 1.0% growth of Q1. The IMEF survey data is expected to show the economy has begun Q3 with good momentum. In addition to the attractive carry offered by the 11.25% overnight rate, the peso has also been buoyed by a favorable external balance that has featured record exports and work remittances. In the first five months of the year, Mexico has reported $24.67 bln worker remittance compared with $22.35 in the first five months of 2022 and about $19.19 bln in the Jan-May 2021 period. Mexico recorded a trade deficit of $6.34 bln in H1 23, which was half the shortfall of H1 22 (~$12.79 bln).
The US dollar’s outside down day against the Canadian dollar yesterday did not see any follow-through selling. On the contrary, the greenback rebounded from around CAD1.3150, yesterday’s low, to CAD1.3260 today and it does not look done. The risk extends toward CAD1.3300, where nearly $2 bln of options expire at the end of the week. Initial support now may be near CAD1.3220. The US dollar fell to multiyear lows against the Mexican peso at the end of last week (~MXN16.6260) and is continues to consolidate with the range seen last Friday (that extended to almost MXN16.95). Look for new buyers to emerge as that area is approached. Note that Brazil’s central bank meets late tomorrow and is expected to deliver its first cut in the cycle. Most look for a 25 bp move that would bring the Selic to 13.50%.
Bannockburn Global Forex