The Dollar and Oil Steady After Yesterday’s Advance
Bonds and stocks are mostly heavier today and the dollar has turned mixed. Oil prices are consolidating after soaring to new highs since late last year on the longer than expected extension of Saudi Arabia’s extra cut of one million barrels a day. Since July, it has been extending it by one month at a time. Yesterday, it extended it through Q4. Russia, who had previously indicated intentions on reducing its exports by 500k barrels, announced it was extended a 300k barrel a day cut also through the end of the year. October WTI’s eight-day rally is under threat today. It is consolidating largely in a $86-$87 range today. Note that the average price of US retail gasoline is slightly lower than where it was a month ago but is still relatively high for this time of year (~$3.80 a gallon).
Stepped-up warnings by Japanese officials have may have helped steady the yen. The dollar is narrowly mixed against the G10 currencies and is =/+ about 0.15%. Most emerging market currencies are lower. Of note, the Mexican peso remains under pressure as stale longs get squeezed out. The peso is off about 0.7% today, making it the weakest of the majors. Over the last five sessions, it is off nearly 4.7%. Equities in the Asia Pacific region were mixed. Japan, Hong Kong, and India are higher. China’s Shanghai and Shenzhen composites eked out a small gain, but the CSI 300 slipped by around 0.2%. The Stoxx 600 in Europe is off by about 0.65%, which would make it the sixth consecutive losing session if sustained. US index futures are heavier. European benchmark yields are slightly higher, while the US 10-year yield is flat slightly above 4.25%. After testing $1950 at the end of 4last week, gold is eased to almost $1922.60 today, a six-day low. The 200-day moving average is near $1917.
Australia report Q2 GDP expanded by 0.4%, in line with expectation, and Q1 growth was revised to 0.4% from 0.2%. The year-over-year rate stands at 2.1%, a little less than the 2.4% pace in Q1. 1.6% from 2.3%. It is the slowest growth since the contraction was reported in the last three quarters of 2020. The median forecast in Bloomberg’s survey sees the year-over-year growth to slow to below 1% in Q4. The Reserve Bank of Australia forecasts 1.3% growth this year and the IMF puts it at 1.6%. Tomorrow, RBA Governor Lowe is expected to give a final speech as before stepping down toward the end of next week. July trade figures are also due on Thursday.
Since the pre-US jobs low near JPY144.45, the dollar has shot up to JPY147.80, a new high for the year. It made a marginal new 10-month high in Asia today before steadying. Japan’s Finance Ministry stepped up its intervention rhetoric, using key word signals, including “watching the market with a high sense of urgency” and threatening to counter “speculative moves” with appropriate action. We have suggested initial potential toward the secondary highs set last November in the JPY148.40-85 area, ahead of the multiyear high set last October 21 near JPY152, ostensibly with the help of BOJ intervention. One notable difference between then and now is that one-month implied volatility is hovering around 9.2%, well below the 50-day moving average, near 10%. On October 21, 2022, it reached nearly 17%. The 10-year JGB yield was around 0.25%. Since then, the BOJ has doubled the cap twice to 1.0% and the yield is now near 0.66%. The 30-year yield, which is not capped settled at 1.61% last October 21, and is now near 1.67%. There is some speculation that BOJ intervention could focus on the 10-year JGB if it threatens the 0.70% level. The yen is threatening its recent lows against the other major currencies. The Australian dollar is consolidating after falling to new lows for the year yesterday (slightly below $0.6360). According to Bloomberg, it made a new low by 1/100 of a cent today, before bouncing on the GDP figures and briefly traded above $0.6400. Nearby resistance is seen in the $0.6400-20 area. The measuring objective of the double top at $0.6900 projects to $0.6300. One metric that captures the divergence between the US and Australia is that the US two-year premium over Australia has nearly doubled since the mid-July 60 bp. The premium has not been more than 120 bp since the bank stress erupted in March. The dollar settled above CNY7.30 for the first time this year and remains above it today. It reached slightly above CNY7.3215. This is the highest the dollar has been since it peaked last November near CNY7.3275. There are two key drivers of the yuan’s weakness and observers seem to disagree on which is more significant. First, the disappointment with the Chinese efforts to reanimate the economy. The second is the dollar’s broad strength. The PBOC set the dollar’s reference rate at CNY7.1969. The average projection in Bloomberg’s survey as for CNY7.3108. The gap between the two is the largest yet. The top of today’s band is about CNY7.3408. The high in the offshore market so far today has been CNH7.3278. Last year’s high was CNH7.3749.
Retail sales in the eurozone fell by 0.2% in July, matching the June decline. Details for Q2 GDP will be reported with tomorrow’s revisions, but EMU consumption looks lackluster, may have risen by 0.1% after a 0.8% increase in Q1. Consumption could contract this quarter. Separately, after reporting a heady 7% rise in June factory orders, which was revised to 7.6%, German orders collapsed by 11.7% (median forecast in Bloomberg’s survey was for a 4.3% decline. Recall that Airbus had received 902 aircraft orders in June. Hamburg hosts a major plant while there are several smaller facilities in the rest of Germany. The drop, like the increase in July was due to major orders. Without these, factory orders would have risen by 0.3%. Germany will report July industrial output figures tomorrow. Industrial production is expected to have fallen for the third consecutive month and four of the past five. The UK’s August construction PMI slipped to 50.8 after jumping to 51.7 in July (from 49.8 in June). Still, it was a better than expectations, which were for a drop back below the 50 boom/bust level.
The euro was beat down to nearly $1.0705 yesterday. There are large options expiring tomorrow (1.6 bln euros) and Thursday (1.3 bln euros) at $1.07. Early in the North American session, a brief attempt on the upside faltered near $1.0750, were 1.45 bln euros in options expire today. Today’s high has been 2/100 of a cent below there. The euro settled below its lower Bollinger Band (~$1.0735) for the first time since mid-May. It comes in today near $1.0720. A break of $1.07 targets the $1.0600-35 area. Sterling was sold to almost $1.2525 yesterday, its lowest level since mid-June. It frayed its lower Bollinger Band (~$1.2555) but managed to settle slightly above it. There are options struck at $1.25 for nearly GBP1.4 bln that expire today. The euro posted an outside down day against sterling. It looks poised to last month’s low near GBP0.8490, the lowest level since last August. Recall that last year’s low for the euro was almost GBP0.8200, which was the low since the UK referendum in 2016. Note that Poland’s central bank meets later today, and many look for the first rate cut, a quarter-point move to 6.50%.
Today is the busiest day of the week for North America. The US is expected to report a wider July trade deficit. Although the trade deficit widened in Q2 over Q3m it is smaller than H2 22. Indeed, the average monthly trade shortfall H1 23 (~68.2 bln) and is the smallest on a six-month rolling basis since July 2021. The combination of the dollar’s strength and growth differentials are typically associated with a wider US trade deficit. The US also sees the final services and composite PMI, which will be overshadowed by the ISM services index, though they normally track each other closely, as one might expect. Late in the session, the Federal Reserve’s Beige Book, the anecdotal survey ahead of the FOMC meeting will be released. The market sees practically no chance of a hike at the conclusion of the Sept 20-21 meeting and the chances of a November hike continue to be cut. It stands now a little below 45%. It was near 70% at the start of last week.
Shortly after Canada’s July merchandise trade deficit is reported, the Bank of Canada’s meeting concludes. After hiking at the past two meetings, the chances of another hike were never very high, and after the unexpected contraction in Q2 GDP reported last week, the odds fell further. The swaps market shows practically no chance of a hike today, down from around a 1-in-4 chance seen at the start of last week. The market is looking at the first rate cut in early Q3 24.
The US dollar set the session high against the Canadian dollar yesterday in Europe near CAD1.3670. It came off in North America but found support near CAD1.3600. There are options for nearly $1.5 bln set there that expire today. The dollar made a marginal new high and remains firm. Some still view the Canadian dollar as a petro-currency, but during oil’s recent surge the correlation has lessened. The 30-day correlation of changes in the exchange rate and WTI is about 0.24, the lowest in six months. Around 0.40, the 60-day correlation is near its lowest in five months. Support is seen in the CAD1.3570-CAD1.3600 area. A move above CAD1.3670, which is also the late April high, could spur another leg up toward CAD1.3800. The greenback frayed the upper Bollinger Band (~CAD1.3650) but settled within it. The upper Bollinger Band is slightly above CAD1.3660 today. The shakeout of the Mexican peso continues. It began last week with the central bank’s announcement of plans to reduce its currency hedge facility. The dollar was trading near MXN16.75-80 before the announcement and shot up to MXN17.10. Yesterday, it reached almost MXN17.46, and today jumped to MXN17.6740. Nearby chart resistance is seen in the MXN17.73-77 area. The dollar closed well above its upper Bollinger Band (~MXN17.3555) yesterday and remains above it (~MXN17.4410) now. Lastly, note that Chile’s central bank cut the overnight target rate 75 bp to 9.50% as expected. It is the second cut in the cycle. It began the easing cycle in July with a 100 bp cut.
Bannockburn Global Forex