The Greenback Stabilizes After Pre-Weekend Drop
The US dollar is mostly firmer after selling off hard before the weekend in response to the jobs data. Ranges are mostly narrow, but the Australian and New Zealand dollars are the heaviest following news of China’s deflation. Emerging market currencies are mixed, but of note the liquid, freely accessible currencies, South African rand, Hungarian forint, and Mexican peso are atop the leader board. Despite repeatedly lower US dollar fixes by the PBOC, the yuan continues to trade softly.
Asia Pacific equities were mixed. Many of the large markets fell, including Japan, South Korea, Taiwan, Australia, and New Zealand. On the other hand, China, Hong Kong, India, and many smaller equity markets rose. Europe’s Stoxx 600 is hovering around little changed levels. US index futures are trading mostly lower after pulling back before the weekend. Benchmark 10-year yields are mostly firmer, and Japan’s 10-year yield is edging closer to the 0.50% cap. European yields are 2-3 bp higher. The 10-year Treasury yield is little changed, holding slightly above 4%, while the two-year yield is off a couple of basis points to 4.91%. It was turned back from over 5% on the back of the employment report. Gold is trading quietly (~$1919-$1927) within Friday’s range. August WTI traded at $74 for the first time since early June but has returned to the $73 area in slow turnover.
US Treasury Secretary Yellen reportedly met for 5 hours with China’s Vice Premier He. The length of time is supposed to signal the seriousness of talks. Secretary of State Blinken previously met with his counterpart Foreign Minister Qin and that talks were also said to have last five hours. Yellen also met with Pan Gongsheng, who is expected to be the next governor of the PBOC. Conventional wisdom is that it is better to talk than not, and Yellen herself suggested that the goal was to revive engagement by which she appears to mean more talks. Climate envoy Kerry is going to China shortly. The tensions do not arise because the two sides do not understand the other’s redlines. What is most desired is not talk for talks sake and reiterating well known positions but a change in behavior. Indeed, the rapid succession of senior US officials visiting Beijing is taking place at the same time that tensions are escalating. China, claiming national security concerns, announced on the eve of Yellen’s visit new export licensing requirements for germanium and gallium and not a retaliation for US-led semiconductor chip and equipment ban. More US actions are expected shortly, including limits on American investment in China.
Meanwhile, unlike other major economies, rising prices are not a problem for China. On the contrary, producer prices extended their decline from -4.6% year-over-year in May to -5.6% in June. That is the sharpest decline 6 1/2 years. It also points to weak profitability. Consumer prices were flat year-over-year, down from 0.2% in May. Month-over-month, Japanese consumer prices fell by 0.2%, for the fifth consecutive monthly decline. Excluding food and energy, consumer prices rose 0.4% from a year ago. Goods prices were off 0.5%, while service prices slowed for the second consecutive monthly to stand at 0.7%. Other central banks with such numbers would most likely ease policy, but after reducing rates by 10 bp last month, officials are not seen cutting the benchmark one-year medium-term lending facility next week from its current 2.65%. In turn, that means that the loan primes rates are unlikely to be cut by banks either.
The BOJ raised its assessment of three of nine regions and acknowledged wage and price increases have broadened. This is another piece that is falling into place for an adjustment of policy later this month. The dollar rose slightly above JPY143, where 1 bln in options expire tomorrow where it met a wall of sellers, sending the greenback to toward JPY142.25, where is found some support in the European morning, ahead of the pre-weekend low closer to JPY142.10. It looks like it may be comfortable on the JPY142-handle in North America today. The Australian dollar tested the $0.6700 area, which corresponds to the 200-day moving average and where A$330 mln in options are set to expire today. It is trading inside last Friday’s session, when is saw a low near $0.6620. Last week’s low was about $0.6600. And this likely marks the near-term range. The PBOC again set the dollar’s reference rate considerably below market expectations (CNY7.1926 vs. CNY7.2122). However, it is not succeeding to do much by steady the yuan. The dollar traded roughly between CNY7.2190 and CNY7.2410. for the most part, it has remained within the range set last Wednesday (CNY7.2145-CNY7.2500).
The Dutch government collapsed. An election is likely in September or October. Rutte has been PM since 2010, making him among the longest-serving EU leader. His four-party government fell on Rutte’s move to limit the family reunions issued for refugees from warzones to 200 per month. Two of the coalition parties pushed strong safe harbor for asylum seekers and their families. At the same time, as we have seen in other eurozone member, the right has made advances in the Netherlands. A farmer-citizen party, (the Netherlands is the world’s second largest exporter of agriculture goods) has become the largest party in the upper house of parliament.
Separately, the latest INSA survey shows public dissatisfaction with the Germany’s coalition government at a record high of 70%. A record low of 40% said they would support one of the coalition parties in an election. Support for the AfD, the right nationalist party, has surpassed that of the SPD. While an election does not need to be called before last 2025, the unpopularity of the government may constrain its policy options going forward. France’s Macron is not doing much better. An Elabe survey from late June/early July showed a 60% disapproval rating. Le Pen has capitalized on the social unrest following the police shooting an immigrant teenager. Her law-and-order message seemed to be approved by a higher percentage than Macron’s response. Italy is already governed by a right-wing coalition. Spain goes to the polls on July 23 in a snap election. Several polls point to the Socialist-led government will be replaced by one headed by the center-right People’s Party. After the recent regional elections, VOX seems to be in a position to form coalition governments with the PP in several regions, but the outcome of this month’s election will likely determine the outcome. A potential ally for the PP, the pro-market Ciudadanos Party, imploded in recent regional elections as many defected to the PP.
The euro is trading firmly. It has not traded below $1.0940 and is recording new session highs in Europe. The initial target is $1.0980, where options for 850 mln euros expire today. Last month’s high was set on June 22 near $1.1010. That needs to be taken out to lift the tone. However, the gains in the European morning are stretching the intraday momentum indicators. Sterling is trading quietly in the upper end of last Friday’s range, holding for the most part above $1.2800. It set a new high for the year before the weekend, according to Bloomberg, by 1/100 of a cent, just shy of $1.2850. Chancellor Hunt’s Mansion House Speech later today is the immediate focus, as sterling large consolidates its pre-weekend advance.
The strong employment data on last Thursday may prove to mark the end of this phase of the market’s convergence with the Fed’s forward guidance. The day before the April employment data were reported om May 5, the year-end effective Fed funds rate was near 4%. It has trended lower for the past two months and reached about 5.46% on July 6. Fair value if one expected the Fed to deliver the two hikes signaled in the dot plot is 5.58%. Fair-value if there was one hike, and a hike later this month is seen as nearly a 90% likelihood, is 5.23%. The takeaway from the employment data and the revisions is that the labor market is losing momentum and by the time the Fed’s next meeting after July in late September, the Fed will have two more jobs reports to digest. Private sector job growth slowed to 149k, the least in two-and-a-half years. Even more telling, in H1, the private sector created the fewest jobs for any six-month period since September 2020. Moreover, economists expected the annual revisions to be announced next month will show weaker jobs growth. It is true that wage growth remained elevated at 4.4% year-over-year, and that is part of the reason the market is confident of a hike this month. Tomorrow’s June CPI is likely to push in the same direction as slowing labor growth. Headline CPI is expected to slow to 3.1%. The core rate is seen easing to 5%, which would be the slowest since November 2021.
The Bank of Canada meets Wednesday. Canada created nearly three times the jobs the median forecast in Bloomberg’s survey projected (59.9k vs. 20k). Full-time positions jumped by almost 110k. On the other hand, the unemployment rate rose to 5.4% from 5.2% and hourly wages for permanent workers slowed to 3.9% from 5.1% year-over-year, the least since April 2022. The employment data followed a string of disappointing data, including a flat April GDP and the largest trade deficit since October 2020. The swaps market has about a 66% chance of a hike. Part of this seems to be precautionary. On the eve of the June 7 hike, the swaps market leaned against it (~45% chance).
The US dollar posted a bearish key reversal before the weekend by making a new high for the move (~CAD1.3385) and then selling off and closing below the previous day’s low. However, there has been no follow-through US dollar selling and it recovered a little through CAD1.3300 from about CAD1.3270. Our concern is that if the Bank of Canada does not deliver the expected hike, the Canadian dollar could be vulnerable. The US dollar was squeezed to MXN17.3960 before the weekend but was sold back to MXN17.0735. News of an explosion on a Pemex oil platform that was responsible for 700k barrels of oil a day helped the greenback recover to almost MXN17.16. Most the oil capacity was recovered within about 24 hours according to reports. The dollar retested the pre-weekend low against the peso in Europe. It looks like it can hold today.
Bannockburn Global Forex