Tech Sell-Off Continues

Gold, which peaked last week near $1877, has been dumped to around $1793. The tech sell-off in the US carried into the Asia Pacific session, and Hong Kong led most markets lower. The local holiday let Japanese markets off unscathed, though the Nikkei futures are off about 0.4%. Australia and India managed to post minor gains as the MSCI Asia Pacific Index fell for the fourth time in five sessions.

Europe’s Stoxx 600 has slid around 1.5% today, its fourth consecutive decline, but has clawed back nearly half the gains It is the longest retreat in two months. US futures are lower, with the NASDAQ leading the move. Near 1.64%, the US 10-year yield is at the upper end of this month’s range. Last month it reached 1.70%. European bond yields are mostly 4-6 bp higher, and peripheral spreads have widened a little.

The dollar is sitting in the middle of the major currencies. The dollar bloc, sterling, and the Norwegian krone, which are the risk-on, levered to growth currencies, are weaker. The euro, yen, and Swiss franc are little changed but firmer. The dollar briefly traded above JPY115.00 in Asia, without Tokyo, before being pushed back. The steady euro has taken some pressure off most of the regional currencies.

The Turkish lira has been in a virtual freefall following President Erdogan’s spirited defense of his efforts to drive down rates. There was around 10 lira to the dollar in the middle of November. Today, at its peak, there is about 12.48 lira to the dollar.

Asia Pacific

Over the weekend, Japan expressed willingness to cap its strategic reserves. Press reports indicated yesterday that India is amenable to coordinating a release of some of its oil stocks. South Korea may also participate. It has been under consideration for a couple of weeks, at least, in the US, and China appears willing to repeat September’s release of crude from its reserves. However, it seems naive to have expected OPEC+ to simply standby. January WTI posted a bearish outside down day ahead of the weekend by trading on both sides of the previous day’s range and settling below the previous session’s low.

Follow-through selling yesterday took it down about $1.20 from the close, but when OPEC+ announced that a coordinated release of the oil could prompt it to reconsider its own plans. It is to meet next week to review its strategy. Through yesterday’s low, January WTI had retreated by nearly 11% from the October 25 higher near $83.85. A band of resistance is seen between $78 and $80.

OPEC+ had previously agreed to boost output by 400k barrels a day per month to restore pre-pandemic output levels. That said, not all the members can produce their quota, leading to a shortfall. OPEC+, the IEA, and EIA all seem to agree that supply-demand considerations shift in next year, and the market will once again be in oversupply.

Moreover, OPEC+ argues that the real dislocation is not with oil as its with gas. The US imports about 2.9 mln barrels a day, India, about 4.2 mln, and Japan, about 3.1 mln barrels a day. South Korea imports around 2.5 mln barrels a day. Together it is around 12.7 mln barrels a day of imports. If together, 100 mln barrels are released, about eight days of imports would be covered. This is a high estimate. India, for example, has indicated it may release 5 mln barrels.

Australia’s flash November PMI was better than expected. Manufacturing edged up to 58.5 from 58.2, while services rose to 55.0 from 51.8. This produced a 55.0 composite reading, a gain from 52.1 in October. Recall, the pandemic and lockdown led weakness in the economy in the May-August period. The composite PMI bottomed in August at 43.3.

It has risen for three months but remains well off the peak in April of 58.9. Separately, New Zealand real retail sales were hit in Q3 by the social restrictions, but the drop was not quite as bad as feared. Reall retail sales fell 8.1% after a 3.3% increase in Q2. Economists (Bloomberg median) had anticipated a 10.5% pullback. The RBNZ meets the first thing tomorrow and is widely expected to hike 25 bp, to lift the cash rate to 0.75%. There is still a slight bias toward a larger move in the swaps market.

The dollar briefly traded above JPY115.00 for the first time since March 2017. We note that Japanese dealers were on holiday and did not participate in the move. As risk-off sentiment took over, the dollar was sold back to JPY114.50. Resistance in Europe has been found near JPY114.80. Note that there is an option for about $980 mln at JPY115.50 that expires tomorrow. The Australian dollar initially edged lower to almost $0.7210, its lowest levels since October 1 before steadying. A break of $0.7200 signals a retest of the late September low near $0.7170. Initial resistance is seen in the $0.7230-$0.7250 area.

The PBOC is sending plenty of verbal signals that it does not want to see strong yuan gains, and today’s fixing underscores that point. The dollar’s reference rate was set at CNY6.3929, wider than usual above the market expectation (Bloomberg) for CNY6.3904. The greenback is firm inside yesterday’s range. Caution is advised here as the PBOC could escalate its disapproval.

Europe

The flash EMU November PMI was better than expected. The aggregate manufacturing PMI rose to 58.6 from 58.3. The market anticipated a decline. The service PMI rose to 56.6 from 54.6, also defying expectations for a sequentially weaker report. The composite snapped a three-month slide and rose to 55.8 from 54.2. The cyclical peak was in July at 60.2.

A flash release is made for Germany and France. Germany manufacturing slowed slightly (57.6 from 57.8) and held up better than expected (Bloomberg median 56.9). Services actually improved (53.4 from 52.4). The composite rose to 52.8 from 52.0 to end a three-month downdraft after peaking in July at 62.4. French numbers were even better.

The manufacturing PMI rose to 54.6 from 53.6. The service PMI rose to 58.2 from 56.6. The composite improved to 56.3 from 54.7 to snap a four-month fall. Recall that yesterday the Bundesbank warned that the German economy may practically stagnate this quarter and that inflation may approach 6% this month.

The UK’s flash PMI was more mixed. The manufacturing PMI had been expected to have slowed but instead improved for the second consecutive month (58.2 from 57.8). Services were nearly as weak as anticipated slipping to 58.6 from 59.1. The composite eased slightly to 57.7 from 57.8, ending a two-month recovery from the June-August soft patch. Meanwhile, Prime Minister Johnson’s rambling speech yesterday hurt people’s ears, and in terms of substance, the changes to social care funding that may result in lower-income people having to sell homes to pay for support did not go over well. It is spurring talk of a possible cabinet reshuffle.

The euro has edged to a new low for the third session today, slipping to almost $1.1225 before catching a bid that lifted it back to $1.1275. There is an option for around 765 mln euros at $1.1220 that expires today. The nearby cap is seen in the $1.1290-$1.1310 area. The euro may struggle to sustain upticks ahead of tomorrow’s US PCE deflator report (inflation to accelerate). Sterling met new sellers when it poked above $1.3400. It has ground lower in the European session, and sterling fell to almost $1.3355. Note that the low for the year and month was set on November 12, slightly above $1.3350. We see little chart support below there until closer to $1.3165.

America

We suspect many pundits exaggerated the link between the renomination of Powell for a second term and the sell-off in US debt and technology shares. First, it was not a surprise. Second, it assumes a substantive difference in the conduct of monetary policy between Powell and Brainard. There isn’t. The difference was on regulatory issues and on the role of climate change. Third, the idea that the Fed may accelerate its bond purchases next month was sparked by the high CPI reading on November 10.

Yesterday, Bostic joined fellow Fed President Bullard. Two governors (Clarida and Waller) also seem to be moving in that direction (Waller may be faster than Clarida). The fact or the matter, nearly all of the high-frequency data for October, including employment, auto sales, retail sales, industrial production, and inflation, came in higher than expected. The US sees the preliminary November PMI today. It is expected to have risen for the second consecutive month after fall June-September.

The reception to yesterday’s US two- and five-year note auctions was relatively poor. The higher yields (compared with the previous auctions) did not produce better bid-cover ratios. Today’s the Treasury comes back with $55 bln seven-year notes and re-opens the two-year floater. Many observers see the debt ceiling constraint being likely an early 2022 problem rather than this year. Still, tomorrow’s sale of the four-week bill may be the test. Recall that at last week’s auction, the 4-week bill yield doubled to 11 bp.

Europe’s virus surge and social restrictions became a market factor last week. Many think that the US is a few weeks behind Europe. The seven-day infliction rate in the US rose 18% week-over-week. Several states, including Colorado, Minnesota, and Michigan, are being particularly hard hit. Nationwide 59% of Americans are reportedly fully vaccinated. However, it leaves about 47 mln adults and 12 mln teens unvaccinated.

The risk-off mood and the drop in oil prices are helping the US dollar extend its gains against the Canadian dollar. The greenback, which started the month below CAD1.24, is now pushing close to CAD1.2750 to take out last month’s high. A move above here would target CAD1.28 and then the September high near CAD1.2900. Still, the market is getting stretched, and the upper Bollinger Band is slightly below CAD1.2730.

The risk-off mood does not sit right with the Mexican peso either. The dollar settled above MXN21.00 yesterday, its highest close in eight months. The same forces have lifted it to MXN21.1250 today. However, the anticipated gain in September retail sales (0.8% Bloomberg median after a flat report in August) may not give the peso much support if the risk-off continues. The high for the year was set on March 8 near MXN21.6360.

This article was written by Marc Chandler, MarctoMarket.

CPI Shocker Lifted the Greenback, which now needs to Take a Breath

The dollar rallied, and new highs for the year were recorded against the euro and sterling. The dovish tapering announcement by the Fed on November 3 was completely unwound as the December 2022 Fed funds futures returned to the high-yield mark of 66 bp ahead of the weekend.

The two-year yield rose from about 39 bp at the start of the last week to almost 55 bp. The volatility of the bond market (the equivalent of the VIX for the S&P 500) surged back to the year’s high (above 78%). Ultimately, the idea that R-star, the real short-term interest rate when the US economy is at full capacity and inflation stable, has continued to trend lower will likely cap nominal rates. Equities wobbled, and the S&P 500 snapped an eight-day advance, and the NASDAQ’s 11-day rally stalled. US equities stabilized and posted modest gains in the past two sessions.

The rise in price pressures requires the Federal Reserve to be more flexible to address a range of possible outcomes. The pace of the tapering is the main constraint on policy. The FOMC statement committed the Fed to reduce the bond-buying by $15 bln in November and December. While it anticipated that the pace would continue, it reserved the right to adjust the rate.

This is likely to be the focus in the run-up to the mid-December meeting. To finish QE in March, as St. Louis Fed’s Bullard, a noted hawk, has argued, the Fed would need to double its pace of tapering to $30 bln a month starting in January. What is at stake is when the Fed’s rate hike cycle can begin, not the terminal rate, which is expected to be below 2%.

Dollar Index

The CPI saw the Dollar Index surge to convincingly surpass the (38.2%) retracement target of the decline from the March 2020 high (~103) to the January 6 low (~89.20). That retracement (~94.55) had been penetrated briefly before, but it did not stick. This time, the Dollar Index rose to new highs for the year, slightly above 95.25. The next retracement (50%) is found a little above 96.00, and the (61.8%) objective is almost 97.75. The momentum indicators suggest a high is not yet in place, but the move since the mid-week CPI shocker, above the upper Bollinger Band (~95.00) warns against chasing it. That said, initial support is likely in the 94.60-94.75 area.

Euro

The euro was driven below $1.15 after the US CPI report and failed to resurface above this previous floor, which now acts as resistance. A low near $1.1435 was recorded ahead of the weekend. Neither the MACD nor Slow Stochastic is over-extended, but, as we saw with the Dollar Index, the exchange rate is outside the Bollinger Band (slightly below $1.1465) and settled below it for the third consecutive session ahead of the weekend. There is little chart support until the $1.1290-$1.1300 area is approached. Moreover, if the euro has carved out some kind of topping pattern, the risk may extend toward $1.10.

Japanese Yen

From around mid-September through mid-October, the dollar broke out of the old JPY109-JPY111 range rate to reach JPY114.70 on October 20. It consolidated at lower levels and approached JPY112.70 on November 9. The jump in the US CPI reported the following day lifted the greenback to JPY114.00, and it reached JPY114.30 before the weekend.

We often experience the dollar-yen exchange rate as a pair often rangebound. We had anticipated a JPY113-JPY115 range and would allow about a half a yen range or so violation. The MACD has flatlined, while the Slow Stochastic has turned higher. Although the fit is not perfect, we still look at US yields for directional cues.

British Pound

Sterling had been turned lower on November 4 from $1.37 by the BOE, who caught the market leaning too far over its skis, arguably encouraged to do so by official rhetoric. Its attempt to recover was stalled near $1.36, and the US inflation jump set it to new lows for the year. The low ahead of the weekend was slightly below $1.3355.

The MACD is entering oversold territory, while the Slow Stochastic, which leveled off, seems to be slipping into over-extended territory as well. After closing for two sessions below the lower Bollinger Band, it finished the week back above it (~$1.3355). A close above $1.3400 would suggest a consolidative phase lies ahead. Last December, sterling record lows $1.3135-$1.3185, and the risk is for this area to be tested.

Canadian Dollar

Since the US CPI surprise, the Canadian dollar has been the weakest of the major currencies, falling around 0.75% against the greenback. It was the third consecutive weekly decline for the Loonie, which was preceded by a five-week advance. The US dollar posted an outside up day in the middle of last week on the back of the CPI news. It rallied from slightly below CAD1.2390 to a little above CAD1.25.

On Thursday, when US and Canadian banks were closed for holidays, the dollar rose to almost CAD1.2600 and made a marginal new high ahead of the weekend. This met the (50%) retracement of the US dollar’s decline since the CAD1.29 level was approached a couple of days before the September 22 FOMC meeting. The Slow Stochastic is over-extended, though the MACD has more scope to run. Here too, the market moved quickly, and the greenback settled the past two sessions above the Bollinger Band (~CAD1.2555). The CAD1.2480 area may offer initial support.

Australian Dollar

The Australian dollar recorded the low for the year on August 20, near $0.7100. It recovered into early September (~$0.7480) before being turned back to $0.7170 by the end of the month. The Aussie launched another advance last month that carried to around $0.7555 and the 200-day moving average. It has come under new pressure this month and fell to nearly $0.7275 ahead of the weekend, meeting the (61.8%) retracement target of the overall rally since August 20.

It closed on a firm note above $0.7300. The Slow Stochastic is over-extended and could turn up next week. The MACD is still pointing lower. After settling out the Bollinger Band on Wednesday and Thursday, the Aussie moved back into it (~$0.7300) ahead of the weekend. Initial resistance is seen in the $0.7335-$0.7355 band.

Mexican Peso

The US CPI boosted the dollar by nearly 1.6% against the peso, the most in five months. It was the only advance of the week, but it was sufficient for the greenback to close around 0.6% stronger. The high for the week (~MXN20.7225) was recorded in the hours after the central bank delivered its fourth quarter-point rate hike. Banxico showed no appetite to increase the pace, unlike other regional central banks, even though CPI is still accelerating.

Still, the greenback slightly exceeded the (61.8%) retracement target (~MXN20.70) of its decline from the November 3 high (~MXN20.98) to the November 9 low (~MXN20.2515) before retreating ahead of the weekend. Support is seen around the 20-day moving average (~MXN20.42). Among emerging market currencies, the Brazilian real (~2.3%) and the Chilean peso (1.6%) fared best. The Hungarian forint (~-2.9%) and the Turkish lira (-2.75) saw the largest losses. The JP Morgan Emerging Market Currency Index fell by about 0.40% last week, the eighth weekly decline in the past ten.

Chinese Yuan

One would not know it by reading much of the free financial press, but the Chinese yuan is the strongest currency in the world this year. Its 2.3% advance eclipses the Canadian dollar, the only major currency stronger against the US dollar on the year (~1.3%). The tensions in Europe and the pullback in oil prices saw the Russian rouble tumble almost 2.3% last week. It was knocked from its perch as the top performer, allowing the yuan to pull ahead. The dollar settled last week, slightly under CNY6.38, its lowest close since May 31, when it recorded a three-year low (~CNY6.3570).

The trend line connecting the 2014 dollar-low and 2018 low is frayed in May and June but essentially held. It is now being violated more convincingly. Sentiment toward investment in China has become in fashion again. The NASDAQ Golden Dragon Index that tracks Chinese companies that trade in the US rallied nearly 7% last week. China’s 10-year yield of 2.80% may not sound particularly exciting, but it is the only benchmark that has not sold off this year. The yield has fallen 20 bp.

This article was written by Marc Chandler, MarctoMarket.

Greenback has Legs Ahead of the Fed and Jobs

The pre-weekend and month-end activity may have exaggerated the greenback’s gains, but we suspect ahead of the FOMC meeting and the US jobs data that is the direction. Our understanding of the technical condition also favors a stronger dollar.

The jump in Australian rates may help explain why the Aussie was the strongest of the majors (~0.75%). However, the trajectory of monetary policy does not offer satisfying insight into other currencies. The underperformance of the Norwegian krone (~-1.0%), where the central bank will most likely hike rates next week, for example.

It seems almost as if the markets have concluded that most major central banks are behind the inflation curve. It expects that officials will move to correct the situation rather quickly regardless of the respective declaratory policies. This gap lends itself to policy challenges.

The Reserve Bank of Australia did not defend its bond target in the past week, though it did so on October 22. With little official guidance, the market took Australia’s two-year yield up more than 61 bp last week (to 0.715%), and more than a third was recorded ahead of the weekend. The divergence may lend itself to increased volatility, but so far, the volatility is confined mainly to the credit markets.

At the same time, the coupon curves generally flattened. There is some recognition that the rate hikes will be delivered in most major countries simultaneously as fiscal support is reduced. It is as if the great uncertainty leads many to swing between central banks slow to respond to the inflation risk and fear that they may choke off the recovery by acting against the price pressures. We suspect that the US dollar will trade higher next week as the market anticipates a hawkish Federal Reserve and a strong jobs report.

Dollar Index

The year’s high was set on October 12 near 94.55 and gently trended lower, reaching almost 93.25 on October 28. That move looks to have been completed. The pre-weekend move to around 94.30 appears to signal another run at the highs. The MACD is poised to turn higher, while the Slow Stochastic has already done so. The 94.50 area corresponds to a (38.2%) retracement of its decline since March 2020. The next retracement (50%) is a little above 96.00.

Euro

The euro rose by the most in five months on October 28 and reached almost $1.17, its best level of the month. But it most certainly was not a harbinger of a strong rally. Instead, it seemed to be related to some position squaring ahead of month-end. It surpassed the (38.2%) retracement objective of the slide that began in early September found around $1.1670 but could not quite make it to the next retracement (50%) near $1.1710.

The single currency could not hold above $1.16 ahead of the weekend, and support in the $1.1585 was easily violated. It quickly dropped to $1.1530, just ahead of the year’s low of near $1.1525. Like we saw with the Dollar Index, the MACD is set to turn lower and join the Slow Stochastic, which rolled over last week. The next downside target is slightly below $1.1500, and a convincing break could signal another two-cent move.

Japanese Yen

The dollar approached a two-and-a-half-week low against the yen near JPY113.25 as the US 10-year yield approached 1.50% on October 28, corresponding to the (38.2%) retracement of October’s rally and the 20-day moving average. The greenback quickly recovered and rose to around JPY114.10 before the weekend, though it closed slightly below.

The price action helps mark out the range we have been anticipating, JPY113.00 on the downside and JPY114.50-JPY115.00 on the upside. The MACD and the Slow Stochastic are still falling. Barring the LDP and its coalition partner Komeito losing its majority, the election is unlikely to drive the exchange rate. However, many observers suspect an exceptionally poor showing for the LDP could lead to a larger supplemental budget.

British Pound

Sterling rallied a little more than four cents from the late September low to the recent high around $1.3835, but it came to an end in a dramatic fashion. The weekly loss was modest (~0.55%), and it was fully accounted for before the weekend as sterling dropped around 0.8%, the most in October to slightly through $1.3670. The pre-weekend loss met the (38.2%) retracement objective of the month-long rally.

The next retracement objective (50%) is closer to $1.3625. The momentum indicators are just turning lower. The risk is a return to the year’s low near $1.34. The budget announcement seemed to reinforce speculation that the Bank of England will hike rates next week. Although Governor Bailey says ongoing QE will not prevent it from hiking rates, we suspect it will also adjust its bond-buying as two dissenters, including a deputy governor, wanted last month.

Canadian Dollar

The Bank of Canada ended its QE and seemed to signal an earlier rate hike in the middle of last week. The more hawkish posture knocked the greenback from the top is its range, a bit above CAD1.2430 to almost CAD1.2300, the lower end of the range. It chopped within it over the next two sessions.

It flirted with CAD1.24 but finished closer to CAD1.2385. A move above CAD1.2430, where the 20-day moving average is found, would be an early sign that the US dollar’s decline since September 20 began near CAD1.29 will correct higher. The first target would be the CAD1.2490-CAD1.2520 area, which holds the 200-day moving average and the (38.2%) retracement of the leg down. The momentum indicators have turned higher, suggesting a stronger greenback.

Australian Dollar

The Australian dollar posted an outside up day on October 28, and it rose to its best level since early July. To be sure, this was not a breakout. The Aussie stopped short of the 200-day moving average, near $0.7560, and there was no follow-through buying ahead of the weekend.

The momentum indicators are stretched but are not quite turning. A break of the $0.7480 area would be the first sign of the pullback that we anticipate. The first (38.2%) retracement objective of the month-long rally is near $0.7410, which is around where the 20-day moving average is found. Below there, the next target would be closer to $0.7360.

Mexican Peso

The dollar gained a little more than 1% against the peso before the weekend, the largest gain in the month and half of the week’s advance. News that Mexico’s economy unexpectedly contracted in Q2 (-0.2% quarter-over-quarter) contributed to the selling pressure on the peso.

The greenback’s surge carried it slightly beyond the (61.8%) retracement objective of the decline from above MXN20.90 on October 12 to about MXN20.12 on October 22 and 26. That retracement target is around MXN20.6040. Despite the intrasession penetration, the dollar finished below it.

The next area of resistance is by MXN20.80. The momentum indicators have turned higher for the dollar. Ironically, if the peso’s weakness extends and persists, partly in reaction to the weakening economy, the inflationary impulse makes a 50 bp hike when Banxico meets on November 11 more likely. The first two hikes in the cycle were for 25 bp.

Chinese Yuan

The yuan fell a minor 0.33% against the dollar last week, the first five-week loss. The greenback closed above CNY6.40 for the first time since October 18. It had looked like the dollar was settling into a range of around CNY6.38-CNY6.40. If we are right about the scope for broader dollar gains, the greenback could rise back into the CNY6.4100-CNY6.4250.

The yuan’s weakness comes as the inclusion of Chinese bonds by the FTSE Russell flagship index becomes effective. On the one hand, China’s premium over US 10-year yields has fallen from 220 bp at the end of last year to 126 bp in late October and finished the month around 144 bp. On the other hand, of the major bond markets, China is the only one where yields fell this year (~16 bp).

This article was written by Marc Chandler, MarctoMarket.

Are the Technicals Anticipating a Soft US GDP Report? Could it be a “Sell the Rumor buy the Fact?”

Indeed, the greenback fell against all the major currencies, even the Japanese yen, against which it had reached new four-year highs (~JPY114.70) before pulling back. On the other hand, the Antipodean currencies and the Norwegian krone continued to lead the move against the US dollar. The Aussie rose to new three-month highs, while the Kiwi, Nokkie, and Canadian dollar saw four-month highs.

Emerging market currencies were more mixed than the majors. At the end of the week, Russia’s larger than expected 75 bp rate hike helped lift the rouble, the best emerging market currency, last week. It reached a 15-month high ahead of the weekend. The Chinese yuan reached its best level in five months last week.

On the other hand, the Turkish lira and Brazilian real came under intense selling pressure. Turkey’s central bank showed little concern about the lira’s exchange rate when it delivered a larger-than-expected 200 bp cut in the one-week repo rate. At 16%, it stands below the headline and core inflation rates (19.58% and 16.98%, respectively in September. The lira lost 3.7% last week and fell to a record low.

The lira dropped by 25% in 2020 and is off another 22.6% this year. Political and economic turmoil in Brazil gave Turkey a run for its money. The Brazilian real fell 3.3% last week, which almost doubled its depreciation this year to 8.00%. President Bolsonaro has lost the confidence of investors and local businesses. Brazil may report that inflation stabilized (above 10%) in October, ahead of the central bank meeting, which is widely expected to lift the Selic rate 100 bp to 7.25%. It would be the third such move this year after beginning the cycle with three 75 bp increases.

Dollar Index

The high for the year was set on October 12, near 94.55. It pulled back to around 93.50 early last week before consolidating. It met the (38.2%) retracement objective of the leg up that began in early September and came in about 93.55. The next important chart area is the 93.00-93.25. The momentum indicators are still headed lower, but prices have stabilized. A close back above 94.00 would suggest that minor correction is over.

The Dollar Index settled at the end of last month slightly below 94.25. If it does not recapture this by the end of next week, it will post the first monthly loss since July. The dollar’s losses may reflect some position adjustment ahead of a soft GDP report. However, the market could be vulnerable to a “sell the rumor buy the fact” as the market quickly turns its attention to the November 3 FOMC meeting and the start of tapering.

Euro

Although the single currency held above $1.16 since testing the $1.1570 area on October 18, the upside was limited to the $1.1670 area approached on October 19. Indeed, it has been confined to Tuesday’s range (~$1.1610-$1.1670) and traded in about a third of a cent range ahead of the weekend. The momentum indicators are pointing higher. Yet, the market lacks energy even though the five-day moving average cross above the 20-day moving average for the first time since mid-September.

The US 2-year premium over Germany rose for the sixth consecutive week and around 110 bp, it is the most since March 2020. It was closer to 200 bp before the pandemic. The ECB meets next week, but important decisions are not expected until the December meeting. The EMU reports Q3 GDP, and it is expected to have grown around 2% quarter-over-quarter. Lastly, rising energy prices and a weaker euro suggest that the preliminary October CPI risk is on the upside.

Japanese Yen

After rising to a four-year high around JPY114.70, the dollar appears to have entered a consolidation phase. It pulled back to about JPY113.40 ahead of the weekend. The weak close sets up a test on the JPY113.25 support area and then JPY112.75. We note that US yields remain firm, but the dollar-yen rate has become a bit less sensitive to it (the correlation has softened). The dollar’s four-week ascent against the yen ended last week with a roughly 0.65% pullback, which tested the trendline off drawn from the lows before last month’s FOMC meeting.

We have suggested that at least initially, the JPY114.50-JPY115.00 may mark the upper end of a new range for the dollar. If that holds, the market may have to fish for the lower end of the range, and perhaps it may be encouraged by a rally in US Treasuries either ahead of or in response to the Q3 GDP estimate, for which the Atlanta Fed’s tracker sees at 0.5% annualized.

British Pound

Sterling was practically flat last week despite the seventh consecutive weekly increase in the implied yield of the December 2021 short-sterling interest rate futures contract. The implied yield rose 10 bp to about 46 bp. In early September, before the surge in rates began, it was at 0.11%. Even at the end of the week, BOE officials (chief economist Pill) were still goading the market by saying a hike in November was “fairly balanced.”

Sterling’s rally, which began the month near $1.34, stalled around $1.3835 last week (fraying the upper Bollinger Band), just in front of the 200-day moving average (~$1.3850). This area also corresponds to the (50%) retracement of the sell-off since the May high ($1.4200). Momentum indicators are getting stretched but have not begun leveling off. Support is seen in the $1.3675-$1.3700 area.

Canadian Dollar

The Canadian dollar rose for the fifth consecutive week, albeit barely, and reached levels not seen since June. The market is aggressive in pricing in a hike several months before the Bank of Canada anticipated the output gap to be closed. The implied yield of the March 2022 BA futures rose 11.5 bp, marginally exceeding the increase of the previous two weeks. At 0.795%, it is 23 bp on top of the December 2021 contract yield.

The Bank of Canada meets next week and may subtly push against speculation of an early hike. After falling slightly below CAD1.2290, the US dollar reversed higher but again encountered selling pressure near CAD1.2385. Both the MACD and Slow Stochastic appear to have leveled off in oversold territory. However, it probably requires a move above CAD1.2400-CAD1.2425 to suggest a corrective phase as opposed to consolidation.

Australian Dollar

The Aussie rose 0.6% last week, its third weekly advance. The move extended its gains to 3.3% this month. It settled last month around $0.7225. It is not just against the US dollar; speculative participants have driven the Aussie up on the crosses, including the yen and euro. The $0.7500 area corresponds to the (50%) retracement objective of the slide from early May that began by $0.7900 and bottomed in late August close to $0.7100.

The next (61.8%) retracement is found just shy of $0.7600, but before that, the 200-day moving average (~$0.7565) must be overcome. The momentum indicators are stretched, and the Slow Stochastic has already begun curling over. The Aussie finished last week below its five-day moving average for the first time this month. Initial support is seen around $0.7450, and a break signals a move to $0.7400. If that goes, there is room for another cent pullback.

Mexican Peso

The peso extended the previous week’s gains that had halted a four-week slide. Indeed, the peso’s nearly 0.75% gain last week put it near the best performers in the emerging market universe. Anticipation of more aggressive rate hikes, even before the bi-weekly CPI, reported before the weekend, accelerated more than forecast. The peso may have also benefited from a rebalancing of portfolios away from Brazil, where neither the political nor economic environment is favorable. The sell-off in bonds, stocks, and currency gives the sense that foreign investors are joining domestic investors in abandoning President Bolsonaro.

The Brazilian real managed to fall nearly as much as the Turkish lira (~3.3% vs. 3.6%). Before the weekend, the US dollar recorded a new low for the month (MXN20.1250) ahead of support seen near MXN20.10. A break sets up for a test on more important support around MXN20.00. The MACD and Slow Stochastic reflect the strong downside momentum. The latter has begun entering oversold territory. Mexico reports September trade, employment, and Q3 GDP next week. Growth is expected to have shifted lower to around 0.5% from 1.1% and 1.5% in Q1 and Q2, respectively.

China

If we begin by acknowledging that the yuan is closely managed and observe that it has risen four consecutive weeks to levels not seen since June, it seems reasonable to conclude that officials desired some yuan strength. And that strength should be kept in perspective. It is a little less than 1% this month. Still, the 0.8% gain last week was more than the cumulative gains of the previous three weeks and was the biggest advance since the last week of May when the dollar’s three-year low (~CNY6.3570). The dollar finished last week near CNY6.3835.

Some speculate that Beijing’s efforts to secure energy supplies and dampen commodity prices are consistent with a stronger currency. However, the volatility of commodities overwhelms the exchange rate volatility that PBOC officials tolerate. Also, the exchange rate is a blunt instrument, creating unintended consequences. Some demand for the yuan may have stemmed from the dollar bond issuance last week (four tranches for $4 bln). The momentum studies on the offshore yuan are stretched.

This article was written by Marc Chandler, MarctoMarket.

Greenback’s Gains Pared Mostly, but Extended Against the Yen

The yen was the weakest of the major currencies, falling almost 1.75%, its worst week since March 2020. The JP Morgan Emerging Market Currency Index initially declined to a new low for the year before recovering to snap a five-week slide and gain nearly 0.45%.

Despite the six basis point gain ahead of the weekend, perhaps helped by a stronger-than-expected September retail sales report, the 10-year note yield of 1.57% was off about four basis points on the week. The short end of the coupon curve was firmer as the curve flattened. The 2-year yield rose six basis points to 40 bp, the highest since last March. The yield has fallen only in one session so far this month.

As we have noted (here), the market is particularly aggressive in pricing in Fed tightening next year. With the average effective rate holding at eight basis points, the August 2022 Fed funds futures contract implies a yield of 23 bp, which is equivalent to a 60% chance of a hike at the late July FOMC meeting. The Federal Reserve says it will finish the tapering around the middle of next year.

Dollar Index

Since last month’s FOMC meeting, the Dollar Index rallied from slightly below 93.00 to a little above 94.55. It has since pulled back to test the midpoint of that rally (~93.77). It consolidated ahead of the weekend with an inside day. The MACD is has rolled over, and the Slow Stochastic did not confirm the high and has turned down. The next retracement objective (61.8%) is closer to 93.60, which is also about where the (38.2%) retracement of last month’s rally is found. Despite the pullback and the fraying of the 20-day moving average (~93.85), the Dollar Index has not closed below the moving average since mid-September. Given its firm close before the weeks, it seems more like consolidation right now than a trend reversal.

Euro

Last Wednesday and Thursday, the euro posted its first back-to-back gain since early September. It rose to almost $1.1625 on Thursday, stopping just shy of its 20-day moving average and the month’s high of $1.1640. The $1.1640 area also marks the (50%) retracement of the euro’s losses since the FOMC meeting concluded on September 22. Although the MACD and Slow Stochastic have turned up, the price action is not inspiring, though it managed to finish the week above $1.16, even if barely, for only the second time this month.

The euro recorded a new low for the year on October 12, near $1.1525. The $1.1490 is roughly the (38.2%) retracement of the euro’s rally since the March 20202 low around $1.0635. The US 2-year premium over Germany moved above 100 bp last week for the first time since the pandemic struck. It has risen by about 10 bp since the FOMC meeting.

Japanese Yen

The greenback gained against the yen in six of the last seven sessions. It rose from about JPY111.45 to JPY114.45 during this run and reached a new three-year high. Indeed, its four-week rally matches the longest advance since April-May 2018. Rising US yields (last week more about the short-end than long-end) is the key catalyst. More participants are talking about new opportunities for the carry trade, but momentum players appear to have also jumped aboard.

We identified the JPY114.50-JPY115.00 area as the possible top of a new range. The MACD continued to trend higher and is approaching the high for the year set in March and April. The Slow Stochastic appears to be poised to turn lower earlier next week after re-entering over-bought territory. Initial support now is seen in the JPY113.00-JPY113.25 area.

British Pound

Sterling had a good week, gaining 1% against the dollar to reach its best level in a month (~$1.3775). It is up 2% this month, helped by an aggressive backing up of short-term UK rates. Specifically, the implied yield of the December 2021 short-sterling futures contract rose 8.5 bp last week, its sixth weekly advance, during which time the rate has surged 24 bp as the market prices in a hike before the end of the year.

There are two meetings left (November 4 and December 16). The momentum indicators are trending higher, and the five-day moving average crossed above the 20-day for the first time since mid-September. The pre-weekend gains toward almost $1.3775 kissed the upper Bollinger Band. Look for sterling to run into resistance in the $1.3800-$1.3850 area, which holds the (50%) retracement of its decline from the June1 high when it last traded above $1.42, the 200-day moving average, and the trendline connecting the May and September highs. Initial support now is likely in the $1.3650-$1.3670 area.

Canadian Dollar

The US dollar fell for the fourth consecutive week against the Canadian dollar. Since last month’s FOMC meeting, the Canadian dollar has been the strongest major currency, appreciating by around 3.25% to its best level in three months. At the end of last week, the US dollar approached the measuring objective of the head and shoulders pattern we have been tracking that projects to about CAD1.2300. The greenback exceeded the (61.8%) retracement objective of its rally since the multi-year low was set on June 1 near CAD1.2000, which came a little above CAD1.2365.

After dipping below CAD1.2340 before being squeezed back to CAD1.2400. The MACD is at its lowest level in a few months but does not appear poised to turn higher. On the other hand, the Slow Stochastic has flatlined in oversold territory. Initial resistance is seen in the CAD1.2430 area. Since the Bank of Canada meeting on September 10, the June 2022 BA futures contract has sold off, and the implied yield has risen by about 28 bp. It consolidated in the second half of last week. The swaps market is pricing in about 75 bp of tightening over the next year.

Australian Dollar

The Australian dollar rallied almost 1.5% last week and finished above $0.7400 for the first time in over a month, corresponding to the (38.2%) retracement of the decline from the May high of almost $0.7900. It traded above its upper Bollinger Band every day last week and closed above it (~$0.7415) for the second consecutive session ahead of the weekend. Booming commodity prices are widely seen as a supportive factor, but they did not appear to do the Aussie much good in the June-August period.

The economic re-opening helps explain why the market can look past poor data, like the September employment report. The Aussie has fallen in only three sessions so far this month and is looking stretched. The MACD is overbought and is at its highest level in five months. The Slow Stochastic is also overbought and could turn lower next week. Initial support below $0.7400 is around $0.7375-$0.7380. On the upside, last month’s high was closer to $0.7480.

Mexican Peso

The greenback’s four-week rally against the peso ended with a bang. It fell almost 1.7% last week, the largest weekly loss since June. The dollar made a marginal new seven-month high a little above MXN20.90 on October 12, reversed lower, and fell to MXN20.32 ahead of the weekend, a new low for the month. Two factors helped the peso recover. First, the tone from most Banxico officials and the minutes seemed to play up the chances that the central bank may lift rates by more than the previous quarter-point moves. Second, risk appetites were strong, helping lift equities.

The MSCI Emerging Market Equity Index rose the second consecutive week after falling in the previous four weeks. The momentum indicators are heading lower for the dollar. With the pre-weekend decline, the greenback has given up a little more than half of the gains since the mid-September low (~MXN19.85). That retracement was found a little below MXN20.38. The next retracement (61.8%) is around MXN20.25.

Chinese Yuan

On October 14, the PBOC set the yuan’s exchange rate against the dollar lower than the models (Bloomberg survey) suggested. The gap was big enough to suggest that perhaps officials were signaling that they did not want to see continued yuan appreciation. The market seemed to shrug it off and took the yuan to a marginally new four-month high before the weekend. Some observers draw a connection between foreign flows returning to the Chinese equity market and the yuan’s strength. PBOC’s claim that the risks posed by Evergrande are “controllable” and unlikely to spread is precisely what other central banks said as the housing market bubble popped in 2007-2008.

Investors seem mistrustful and have taken other high-yielding Chinese bonds (mainly in the property development sector to around 20%). Given the slowing of the economy and the low consumer inflation, we suspect officials do not want the yuan to strengthen much from here, but to impose their will, it may have to escalate its efforts. Initial support for the dollar may be in the CNY6.4200-CNY6.4250 range, with CNY6.45 the likely nearby cap.

This article was written by Marc Chandler, MarctoMarket.

Two Major Surprises Today

The dollar has been sold against nearly all the currencies today. Among the majors, the Antipodeans and Swedish krona lead the move. The euro rose briefly through $1.1830 in the European morning, its best level in a little more than three weeks. The JP Morgan Emerging Market Currency Index is rising for the seventh time in eight sessions.

The risk-on mode to finish the month is evident in equities as well. Following the new record highs in the US, the MSCI Asia Pacific Index climbed for the sixth session in the past seven and has taken out the two-and-a-half-month downtrend. Europe’s Dow Jones Stoxx 600 is rising for its third consecutive session, while US futures indices are extending their recent gains. Debt markets are quiet. The US 10-year is hovering around 1.28%, while European yields are 1-3 bp firmer, following the higher than expected August CPI.

The UK Gilts are a notable exception, and the yield is nearly two basis points lower at 0.66%, perhaps helped by sterling, which is at a new two-week high. Gold found support near the 200-day moving average (~$1809) and is trading inside yesterday’s range when it peaked around $1823. Oil prices are surrendering yesterday’s late gains. OPEC+ meets tomorrow. Output is scheduled to rise by 400k barrels per day, but there are concerns about the strength of demand in the face of the spread of Covid. October WTI finished last month near $73.25. It is now near $68.40 after last week’s 10.6% rally.

China’s iron ore contract snapped a six-day advance today, slumped almost 2.5%. Copper is up slightly for the third consecutive session and the seventh in the past eight. The CRB Index rose yesterday for the fifth time in the last six sessions and set a new high for August. It is within striking distance of the six-year high set at the end of July.

Asia Pacific

The risk-on move today is surprising given the poor Chinese PMI. The manufacturing PMI slipped a little more than expected to 50.1 from 50.4, but the real shocker was the non-manufacturing PMI. It slumped to 47.5 from 53.3. The median forecast in Bloomberg’s survey anticipated a pullback to 52.0 from 53.3. This drove the composite to 48.9, its first reading below the 50 boom/bust level since February 2020. The composite peaked in May at 54.2 and has fallen in each of the following three months. Recall that the PBOC cut reserve requirements in July. Today’s dismal reading is likely to fan expectations for further accommodation.

On the other hand, Japan’s data was generally better than expected. Industrial output fell 1.5% in July. That may not sound so good, but it followed a 6.5% jump in June and was better than the 2.5% drop of the median forecast in Bloomberg’s survey. In addition, the unemployment rate unexpectedly slipped to 2.8% from 2.9%, and the job-to-applicant ratio rose to 1.15 from 1.13. defying forecasts for a decline. Lastly, housing starts also rose more than expected. However, with a formal Covid emergency covering more than 70% of the population, the recovery is not expected to gain much traction until Q4.

The virus could be knocking Australia into a contraction. The Q2 current account surplus was a little smaller than expected but was offset to some extent by the upward revision to Q1. To the extent that Australia’s current account is driven by trade flows, we are concerned that the rise in prices has concealed a decline in volumes. Separately, Australian building approvals slumped in July by 8.6%, more than expected, and follows a 5.5% decline in June (initially reported a -6.7%). The final August PMI due later this week is expected to confirm the 43.5 preliminary composite reading, though the risk is on the downside.

The dollar remains confirmed to a narrow range below JPY110.00, and it is holding above yesterday’s JPY109.70 low, where a nearly $400 mln option is set to expire later today. Recall that the dollar settled last month slightly above JPY109.70 too. After consolidating its pre-weekend gain yesterday, the Australian dollar was pushed higher to $0.7340 today to test the two-week high. Initial support is seen around $0.7320. Some buying may have been related to the A$588 mln option at $0.7300 expiring today.

The next area of chart resistance is seen in the $0.7370-$0.7380 area. Despite the disappointing data, the dollar eased toward the lower end of its recent range against the Chinese yuan. It found support in front of CNY6.4570. The yuan, like the yen, is nearly flat on the month. The dollar ended July near CNY6.4615. The PBOC set the dollar’s reference rate at CNY6.4679, tight to expectations of CNY6.4680.

Europe

Today’s upside surprises by French and Italian inflation readings helped lift the aggregate CPI to 3.0% from 2.2% in July. The median forecast in Bloomberg’s survey was for a rise to 2.7%. The core measure also rose more than expected to stand at 1.6%, up from 0.7% in July. The month-over-month increase of 0.4% was twice what had been expected. Recall that Germany’s CPI actually slipped to 3.4% from 3.5% when reported yesterday, while Spain surprised with a 3.3% year-over-year rate instead of 2.9%. Italy’s August CPI was “supposed” to fall by 0.2% but instead rose by 0.3%, and the year-over-year rate surged to 2.6% from 1.0%. French inflation rose 0. 7% this month to lift the year-over-year rate to 2.4% from 1.5%.

However, the French surprise was even more pronounced in the July consumption report. The median forecast in Bloomberg’s survey called for a 0.2% increase in consumer spending. Instead, it crashed by 2.2%. Consider that French consumer spending fell by an average of 0.1% a month in the first six months of the year. The only kind thing to be said is that it has become a volatile number under covid. Germany had a pleasant surprise. Its unemployment rate fell this month to 5.5% from 5.6% in July (that was initially reported at 5.7%). The unemployment queue fell by 53k, more than the 40k decline forecast. Note that Germany lost about 650k jobs in Q2 20 and has since gained back about 400k.

The euro posted an outside up day before the weekend, and follow-through yesterday was limited to about $1.1810. Additional buying today lifted it through $1.1830, its best level since August 6. It is rising for the seventh session in the past eight. An expiring option at $1.1875 for almost 720 mln euros seems too far to be relevant today, but tomorrow there is a nearly 650 mln option at $1.1825 that will be cut. The $1.1850-area may be sufficient to cap it today.

Sterling edged up to $1.3800, a two-week high. Soft consumer credit and mortgage lending figures may have encouraged the pullback in Europe to the $1.3760 area. The 200-day moving average is found near $1.3810. Meanwhile, the euro is approaching the GBP0.8600 cap that has held this month.

America

Pending July, home sales and the Dallas Fed’s manufacturing survey were consistent with the recent string of US reports that have been weaker than expected. As the second month of the quarter winds down, look at Q3 GDP forecasts. The Fed’s GDP nowcasts have softened. The NY Fed has Q3 GDP tracking 3.8%, while the Atlanta Fed’s model puts it at 5.1%, with the St. Louis Fed at 4.9%. This makes the median forecast in Bloomberg’s survey of 6.9% seem high. But it is not just that the Fed’s models are updated more frequently.

The last four contributions to the Bloomberg survey averaged 7.7%. However, it was flatted by one forecast that is the highest in the survey, for 11.2%. The others at 6.5%-6.6% were still above the Fed’s trackers.

Today’s US data features house prices (FHFA and CoreLogic). House prices are still rising. The Conference Board’s August confidence report will also be released. The market expects a softer report, but the risk is on the downside after the University of Michigan’s survey showed a sharp drop (10-year lows). Tomorrow, the ADP reports its private-sector job estimate. The Bloomberg survey median is for 625k after a 330k increase in July. Canada reports June monthly GDP. A sharp recovery is expected after a 0.3% contraction in May.

Growth in Q2 is seen at 2.5% annualized. Mexico’s central bank releases its inflation report. While price pressures are still on the upside, the two hikes (July and August) may see Banxico pause in September. Brazil sees June unemployment (14.4% vs. 14.6%) and its July budget. Of note, reports suggest that Brazil has surpassed the US in the proportion of adults with a single vaccine. Lastly, Chile’s central bank is expected to hike its overnight target rate by 50 bp to 1.25%. It lifted the key rate by 25 bp in July and signaled the start of a sequence.

The US dollar is trading at ten-day lows against the Canadian dollar. It has entered an area that may prove sticky ahead of today’s options expiry. There are options for $1.2 bln at CAD1.2560. The low in Europe has been CAD1.2570. There is another option that may be being absorbed for $645 mln at CAD1.2575. The greenback is fraying the uptrend drawn off the July 30 low and comes in today near CAD1.2585. Initial resistance is now pegged in the CAD1.2600-CAD1.2620 area.

The US dollar is seeing more follow-through selling against the Mexican peso after posting an outside down day at the end of last week. Dollar selling yesterday was limited to MXN20.11 and the 200-day moving average. Selling today has pushed the greenback to roughly MXN20.0650, an eight-day low. The next area of support is around MXN20.00.

This article was written by Marc Chandler, MarctoMarket.

Market Awaits Fresh Incentives

Perhaps the FDA’s approval removes another reason for vaccine hesitancy in the US, while China has reportedly brought its flare-up under control. US S&P 500 and NASDAQ set new record highs, and Asia Pacific markets moved higher, though there was profit-taking in Hong Kong on Chinese tech names. It was the third consecutive advance of the MSCI Asia Pacific Index.

European shares are edging higher, and US futures are posting minor gains. The US 10-year continues to push against the 1.30% area, while European yields are mostly 2-3 bp higher. The greenback is narrowly mixed through the European morning, with a small upside bias. The majors are +/- 0.15%. Emerging market currencies are also mixed, but the JP Morgan EM FX index is rising for the fourth session after trending lower in the previous four sessions. Gold has backed off from the 200-day moving average ($1810) it approached yesterday. Support is seen near $1775. October WTI is consolidating its big two-day advance (~8.5%), while iron ore and copper are extending their recoveries.

Asia Pacific

China’s regulatory crackdown spooked foreign investors. The SEC has modified the disclosures needed for Chinese IPOs in part because of Beijing’s recent actions. Consider the performance of the NASDAQ Golden Dragon Index, which is compromised of companies whose shares are traded in the US while conducting a majority of their business in China. It set a record high in mid-February, a few months after Beijing stopped the Ant IPO. It was halved in the following six months and recorded its lowest level since June 2020 on August 19.

The index has fallen for eight consecutive weeks coming into this week and 11 of the past 12 weeks. The Golden Dragon Index rose by 8% yesterday. It was the third successive gain. The fear of missing out may be greater than the fear of Beijing’s moves. US SEC Chair Gensler renewed his warning that unless Chinese companies listed in the US allow inspections of their financial audits, their shares could be delisted from the NYSE and NASDAQ starting in 2024.

South Korea’s central bank meets tomorrow. It is a close call, and news yesterday of rising household credit favors a hike. The issue is really one of timing, and a slight majority in the Bloomberg survey see the next meeting (October 12) as more likely. Governor Lee had suggested last month that a hike as early as this week was possible and opined that policy would still be easy if the central bank were to deliver 1-2 hikes. The reason we thought the October timeframe would be more likely is primarily due to the virus. Seoul is under lockdown that has been extended into next month. The government’s goal is to have 70% fully vaccinated by the end of next month.

The dollar remains in a tight range against the Japanese yen. It is trapped in a JPY109.40-JPY110.25 band for the fifth session, though it has not been above JPY110 since Monday. There is a $585 mln option at JPY109.90 that will be cut today. The greenback has been stopped just short of it in Asia yesterday and again today. The Australian dollar fell every session last week, and its 3.2% drop was the largest since last September. It bounced 1.75% over the past two sessions and is consolidating in a little more than a 10-tick range on either side of $0.7250.

News that China’s second busiest port has re-opened after a two-week covid-related shutdown is a welcome development. After closing above the upper end of its recent range (~CNY6.50) before the weekend, the dollar slipped back to around CNY6.47 yesterday but has steadied today. It is inside yesterday’s range, unable to resurface above CNY6.48. The PBOC set the dollar’s reference rate a bit firmer than the models expected (CNY6.4728 vs. CNY6.4715). The central bank was generous in its seven-day repo operation, providing a net injection of CNY40 bln, the largest in six months.

Europe

The German August IFO survey disappointed. The current assessment improved, but the drop in expectations warns that many fear this is the best it gets and that the German economy is near a peak. At 97.5, the expectations component was the lowest since February. The current assessment (101.4 vs. 100.4) is the highest since May 2019. It leaves the overall assessment of the business climate at 99.4, a three-month low. Separately, we note that the controversial Nord Stream 2 pipeline lost a case in a German court earlier today.

It was unable to secure a waiver from EU rules that require the pipeline to be certified as an independent transmission or system operator. This appears to require that Gazprom surrender control and command functions. It is part of what could be a long, drawn-out process, and the pipeline has already sought the necessary certification. Gas prices initially jumped on the news as some fear a delay in operations.

At yesterday’s G7 meeting, Europe tried in vain to convince the US to extend the August 31 deadline. The Taliban also rejected the idea of an extension. However, given that it will take a couple of days to complete the withdrawal of US troops, there are only a few more days to finish the civilian evacuations. Press reports cite a UK diplomatic memo noting that President Biden assured the G7 in June that he would maintain enough of a security presence in Afghanistan to ensure their operations in Kabul could continue following the main US withdrawal. However, Biden has requested a contingency plan from the Defense and State Departments for a delay.

The Scottish National Party concluded a powersharing agreement with the Greens at the end of last week. In exchange for two ministerial posts, the Greens will support the government on confidence votes and budget issues related to their common program. The SNP was a seat shy of a majority in the May elections, and the support of the Greens put the government on more stable footing. The Greens also favor Scottish independence.

SNP leader and First Minister of Scotland Sturgeon is pushing hard for a referendum in the current term of parliament (five years) and ideally in the middle of 2023. The SNP holds a party conference next month, which may launch a more formal campaign. The UK government is cool toward a second referendum (1st lost in 2014), and many legal experts think 10 Downing Street could block it. Still, a non-binding test of the people’s preferences could give the power of a referendum as the non-binding EU referendum did for the UK in 2016. Of course, Scottish independence would require, among other things, either its own currency or a formal agreement to use sterling.

The euro’s three-day bounce is stalling. The single currency is trading within yesterday’s roughly $1.1725 to $1.1765 range. The key to the upside is the $1.18-area. It has not closed above it since August 5. Ahead of Fed Chair Powell’s speech at Jackson Hole at the end of the week, the market may be reluctant to push it. On the other hand, significant options at $1.17 expire for the next three days. Today’s options for a little more than one billion euros are the smallest.

Tomorrow, options for 1.4 bln euros will be cut, and on Friday, there are options for 1.5 bln euros at $1.17. Sterling is also inside yesterday’s range (~$1.3695-$1.3750). Recall sterling settled last week near $1.3625. A convincing move above $1.3740 could see the range extended to $1.3775-$1.3800. The euro has recovered from its lowest level against sterling (August10, ~GBP0.8450) and reached almost GBP0.8600 at the start of the week. It has since pulled back to about GBP0.8545 yesterday and is also recording an inside session.

America

The US’s recent 30-year bond sale did not see strong demand. Indirect bidders, often foreign central banks and multilateral lenders, came out for the 10-year auction on August 11 and yesterday’s two-year sale. Indirect bidders took a record of slightly more than 77% of the 10-year and 60.5% of yesterday’s $60 bln two-year note sale, the most in more than a decade. The high-yield of the two-year was a smidgeon above 24 bp, a two basis point increase from last month’s auction and but just inside the 0-25 bp Fed Funds target.

Following the strong bid-cover (2.65x vs.2.47x in July), the yield slipped a couple of basis points. Some observers suggest that the reduced T-bills have encouraged foreign central banks to move further out on the curve. While that may explain the demand for the two-year, it is not really a compelling narrative for the 10-year demand. China’s reserves rose by nearly $22 bln in July, and this did not seem to be bolstered by valuation as in July, as the other reserve currencies, like the euro, sterling, and yen, rose against the dollar.

We were skeptical when some economists shrugged off the terrible miss on last week’s retail sales report (-1.1% vs. median of -0.3% on the headline and -1.0% on the core vs. median forecast of -0.2%), claiming it reflected a shift toward services away from goods. Alongside the Richmond Fed’s manufacturing survey was a service revenue index. It fell from 19 in July to 15 in August.

Other services data point to slower growth, Friday, ahead of Chair Powell’s speech at Jackson Hole, July personal consumption expenditures will be reported. It is more comprehensive than retail sales. After rising 1% in June, the July increase is expected to moderate to around 0.4%. That was the average monthly increase in 2019. In 2018, it averaged a monthly gain of 0.3%.

The US reports its preliminary estimate of July durable goods orders today. Boeing reported it received 31 orders in July, the least since April, and follows a surge of 219 orders in June. The company made 28 deliveries in last month after 45 in June. This is partly why the durable goods orders tend to be volatile. Orders excluding transportation are expected to have matched June’s 0.5% increase, but the risk appears to be on the downside.

Canada’s economic calendar is light until next week. Mexico provides a final read on Q2 GDP. Quarter-over-quarter growth was estimated at 1.5%, and it might be revised slightly higher. Brazil IPCA August inflation is reported today, and another rise is expected. The year-over-year pace of 8.59% in July is likely topping 9% this month. The central bank meets next on September 22 and is widely expected to hike the Selic rate by 100 bp.

The US dollar peaked before last weekend near CAD1.2950. It posted a bearish shooting star candlestick and set a low yesterday, as stocks and oil rallied, near CAD1.2580, around the 20-day moving average and roughly where this month’s uptrend line is found. Below there, the 200-day moving average is near CAD1.2550. On the upside, resistance is seen by CAD1.2650.

The greenback traded between MXN20.1460 and MXN20.4565 before last weekend and remains in that range for the third session. This week, the dollar has been recording higher lows and lower highs, but it has not traded below MXN20.00 since last Wednesday. The dollar recorded a key reversal against the Brazilian real ahead of last weekend by making a new three-month high (~BRL5.4740) before reversing and falling through the previous session’s low. It settled near session-lows yesterday (~BRL5.2460). The next target is near BRL5.2070.

This article was written by Marc Chandler, MarctoMarket.

Fed Lifts Dollar

Follow-through buying pushed the euro and the Australian and New Zealand dollars to new lows for the year. The Swiss franc and Japanese yen are more resilient. Emerging market currencies are under pressure, led by South Africa, Turkey, and Poland.

The JP Morgan Emerging Market Currency Index is lower for the fourth consecutive session and about 1% this week. Equity markets are tumbling. The S&P 500 lost 1% yesterday and is off over another percent today. Asia Pacific equities fell hard, led by Hong Kong, South Korea, and Taiwan. Of note, New Zealand bucked the trend and rose almost 1.9%. Europe’s Dow Jones Stoxx 600 is off almost 2% today, its biggest loss in a month, but the weekly slide could be the largest since February.

The US 10-year yield is near 1.23%, down three basis points. European core bond yields are softer, while the peripheral yields are a little firmer. After a soft employment report, Australia’s 10-year benchmark yield fell about six basis points to dip below 1.08%, a new six-month low. Gold is recovering from follow-through selling that had pushed it to a $1774.5 low and is back near $1788.

Oil prices slid yesterday, with the September WTI contract falling to a three-month low below $65, and it is off another 3.3% today around $63.25, after falling to almost $62.8. It is the sixth consecutive losing session for crude, during which time it is off around 10%. US oil inventories fell more than expected, and the level is the lowest since January 2020.

However, while the decline in stocks should be supportive of prices, news that gasoline inventories rose for the first time in a month warned that demand may be flagging, which dovetails with other reports suggesting a decline in auto traffic and air travel here in August. Copper, iron ore, steel are lower as well.

Asia Pacific

Australia’s jobs data was poor even though it showed a net gain of 2.2k jobs and the unemployment rate falling to 4.6% from 4.9%. The survey period was July 4-17. The impact of the lockdowns in Sydney and Melbourne is likely to impact the August and potentially the September reports. The decline in the unemployment rate to its lowest level since December 2008 mostly reflects the decline in the participation rate (66.0% vs. 66.2%). Also, even though employment rose (part-time +6.4k and full-time -4.2k), hours worked fell by 0.2%. Meanwhile, Australia reported a new record of daily cases of covid.

While China appears to continue pursuing “wolf diplomacy” in its own neighborhood, its domestic crackdown is broadening. Ironically, like many western leaders, Xi appears to be concerned about the concentration of wealth. The emerging slogan is “common prosperity.” There are references to reasonable adjustments of excessive incomes. This could result in some capital flight, but it may be difficult to isolate it from the broader strength of the US dollar and the efforts to discourage investment in China by the US from both Beijing’s actions and official discouragement by the US.

Xi’s relation to Deng Xiaoping is a subject of much debate, as Deng was responsible for the punishment of Xi’s father. Yet, at least in some important ways, Xi seems committed to arresting the excess created by Deng’s economic reforms while seemingly ending the political reforms (including alternating with the Youth League for ambitious people without blood ties to the revolutionary generation). Inequality followed from the economic reforms. According to some academic figures, the top 10% of China’s population accounted for 41% of the national income in 2015 from 27% in 1978.

Xi apparently plans to curb “excessive” incomes and encourage the wealthy to give back more to society (philanthropy?). Beijing has begun pursuing stronger anti-trust action and judging from the team that Biden has put together, US efforts may become more robust. The US and China are also wrestling with the power of internet companies, their ability to influence their customers, and the use of data. Yet how both countries are navigating the challenges is a study in contrast.

The dollar initially rose to nearly JPY110.25, a new high for the week, before reversing lower and is challenging yesterday’s low below JPY109.50 in the European morning. A break would signal a test on JPY109.00 and possibly the low set earlier this month near JPY108.70. The Australian dollar was sold below $0.7300 on Tuesday and has been pushed through $0.7200 today. It made new lows in the European morning near $0.7140. While there may be some chart support near $0.7100, the $0.7050 area corresponds to the (38.2%) retracement of the rally since March 2020.

The potential head and shoulders topping pattern objective is nearer $0.7000, corresponding to the low from last September-November. The greenback rose less than 0.2% against the Chinese yuan and nicked the 200-day moving average (~CNY6.4960) for the first time since July 2020. With a brief exception, the dollar has been between CNY6.45-CNY6.50 since mid-June.

The yuan’s softness against the dollar should not distract from its strength against the CFETS trade basket, where it is near a five-year high. SWIFT reported that the yuan’s use on its network fell to 2.19% in July, a three-month low, from 2.46% in June. The PBOC set the dollar’s reference rate at CNY6.4853, tight against expectations for a CNY6.4855 fix.

Europe

As widely anticipated, Norway’s Norges Bank did not raise rates but clearly signaled a rate hike is likely in the coming weeks, which means next month’s meeting. Since the lockdown was lifted, economic activity has rebounded. Tomorrow, Norway reports GDP figures. After contracting each month in Q1, it returned to growth in Q2. Indeed, the expansion of the monthly GDP in April and May offset in full the Q1 contraction.

May’s 1.8% monthly GDP gain is expected to be followed by a 1.3% growth in June. That would put Q2 GDP around 1.6% for the quarter. The Norges Bank expects to hike rates once a quarter for the next several quarters.

The fall of Afghanistan may force the EU to find a new compromise with Turkey as a bulwark against a flood of refugees, though Turkey already hosts the most refugees in the world. The UK has offered to take 20k fleeing Afghans. Of course, Germany and France want countries en route to Europe to provide shelter.

Turkey agreed to provide space for hundreds of thousands of refugees from Syria for a little more than 5 bln euros in 2016 but seems less willing to do so again. Turkey is building a 150-mile wall along its border with Iran to prevent the Afghans from crossing. The refugee problem can become a new powerful political dynamic in Turkey and in the EU.

The euro flirted with $1.17 yesterday but convincingly broke it in Asia earlier today, falling to almost $1.1665 before stabilizing in the European morning. It has though been unable, so far, to resurface above $1.17, where there are 2.5 bln euros of options expiring today and another 755 mln tomorrow. There may be support near $1.1650, but the $1.1600 area is the next critical area.

Sterling finished last week near $1.3865 and traded down to almost $1.3665 earlier today. It is the lowest level in nearly a month. Last month’s low was near $1.3570, and the year’s low set on January 11 was almost $1.3450. Initial resistance now is seen in the $1.3700-$1.3720 area.

America

The FOMC minutes confirmed what the market had already suspected. Most but not all Fed officials see that tapering this year would likely be appropriate. It lends credence to our argument that the burden has shifted from needing more data to providing no significant downside surprise. Looking at the September 2022 fed funds futures contract, a hike is nearly fully discounted. For this to be the case, the Fed will have to finish its tapering around the middle of next year.

That would seem to imply a slowing of about $17 bln a month. Officials may want to frontload it a bit to allow a gradual stop. While some officials prefer tapering the MBS more aggressively, that does not seem to be widely supported.

If the Conservative Party’s O’Toole is going to seriously challenge Trudeau, he will need a stronger issue than inflation. Yesterday, Canada reported that CPI was 3.7% above year-ago levels, matching the highest level since 2003. The core measures are lower than the headline but are still elevated. O’Toole blamed the inflation on Trudeau’s fiscal accommodation and offered to waive the sales tax in December if the Conservatives win.

However, Bank of Canada Governor Macklem attributed the price pressures to the unique circumstances of the public health crisis. The central bank expects price pressures to moderate next year to 2.4% from 3.0% this year. Through July, CPI has averaged 2.6% year-over-year.

The US reports weekly jobless claims, the August Philadelphia Fed survey, and July Leading Economic Indicators. However, the FOMC minutes and anticipation of next week’s speech by Powell at Jackson Hole suck the interest away from these high-frequency data points. Canada, Mexico, and Brazil have light economic diaries today. Canada will report June retail sales tomorrow, and a strong rebound is expected after May’s 2.1% drop.

Falling oil prices and a continued retreat in equities have sent the Canadian dollar sharply lower. The US dollar jumped to nearly CAD1.2775 today, its fourth consecutive daily advance. It settled near CAD1.2515 at the end of last week. The greenback set a six-month high in July, slightly above CAD1.28. The next target is near CAD1.2850, which corresponds to the (61.8%) retracement of the US dollar’s decline since last November’s election.

Still, the intraday move seems exaggerated, and a pullback toward CAD1.2700, where a $570 mln option expires tomorrow, would not be surprising. The US dollar jumped through MXN20.20 to approach last month’s high (MXN20.25) amid the heightened risk-off mood. It too looks stretched on an intraday basis. Initial support may be seen near MXN20.10. The greenback has not closed above the 200-day moving average (~MXN20.1150) since June. The Brazilian real was crushed yesterday, falling nearly 1.8%, for its third consecutive losing session. A move above BRL5.40 could signal a move toward BRL5.50.

This article was written by Marc Chandler, MarctoMarket.

Monday Blues: Delta, Kabul, Disappointing Chinese Data

Note that South Korea’s markets were closed, and the Kospi will have a seven-day losing streak in tow when it reopens tomorrow. Taiwan’s Taiex fell for the eighth consecutive session today. Europe’s Dow Jones Stoxx 600 is snapping a 10-day advance, while US futures indices are sporting small losses. US bonds rallied after the shockingly poor consumer confidence reported before the weekend, and this helped ease Asia Pacific yields.

European yields have firmed after a soft start, while the US 10-year yield that peaked near 1.38% last week is nearly flat, around 1.27% today near midday in Europe. The dollar is the fulcrum today, with the growth/risk-sensitive dollar bloc currencies and Scandis trading heavily and the funding/safe-haven currencies (Swiss franc and Japanese yen) firmer. Emerging market currencies are mixed, leaving the JP Morgan Emerging Market Currency Index slightly higher before Latam opens. Gold edged a little higher initially to almost $1783.

Although it has not sustained its early momentum, it looks like it has not given up on a retest of the $1800 area. Oil has slipped lower, but September WTI bounced off the $66.80 in Europe to test $68. Key support is at $65. Copper gained 1% last week but has given it all back plus more today with a 1.6% loss through the European morning.

Asia Pacific

An unexpected pick-up in consumption helped lift the Japanese economy by 0.3% in Q2. Consumption was expected to have been flat but instead rose by 0.8%. As a result, the Q1 decline was revised to -1.0% from -1.5%. Strength, as expected, came from business spending. It rose by 1.7% on the quarter, better than expected, though the Q1 contraction was widened to -1.3% from -1.2%. Inventory liquidation shaved 0.2% off Q2 GDP, a bit more than expected after it contributed 0.4 % to Q1 GDP. Although exports rose, imports rose faster, and the net export function shaved 0.3% off GDP, more than the 0.2% compression in Q1.

Separately, revision to June industrial output figures (6.5%, month-over-month rather than 6.2% initially reported) suggests some momentum as the quarter ended. Lastly, we note that the GDP deflator was -0.7% after -0.2% in Q1. It is the largest drop since Q1 13.

With the Olympics over, Japan’s Prime Minister Suga’s attention turns to politics as if it ever left. His term as the head of the LDP ends next month. For all practical purposes, Japan remains a one-party state, with the LDP dominating. There are other parties, but rarely have they acquired power. Suga is not very popular. A poll by Asashi last week showed his support may have fallen below 30%, the perceived threshold of winning the next election. Yet, the LDP rules favor the status quo and require any challenger to Suga to get the backing of 20 other members.

The LDP leadership is trying to discourage other potential candidates. Yesterday, Suga avoided the controversial Yasukuni Shrine (but did send a religious offering) and marked the end of WWII with a somber address. He followed the new precedent of his predecessor Abe in not apologizing for its aggression. Japanese prime ministers issued apologies for a couple of decades, but still not to the satisfaction of South Korea and China.

We have noted that Japan has recently seemingly elevated its commitment to defend Taiwan should it be attacked by China. Besides providing the latest excuse for the aerial harassment of Taiwan, given Beijing’s modus operandi, some “punishment” of Japan seems likely.

China’s July data disappointed, and the resurging virus warns of further weakness this month, which has seen a large port shut and regulatory pressures weighing on steel output. Retail sales, industrial production, investment in both fixed assets and property slowed.

The “surveyed jobless rate” unexpectedly rose to 5.1% from 5.0%. Speculation of additional easing by the PBOC was already running high last week, and today’s data will encourage it more. Meanwhile, there is much interest in China’s National People’s Congress session. It is expected to force the anti-sanctions law on Hong Kong. The enforcement could further the angst of foreign companies, especially banks, operating in HK.

The dollar has been sold to nine-day lows near JPY109.30. The greenback has been streaky lately. Today is the fourth consecutive loss, which ended a five-day advance. Initial support is in the JPY109.00-JPY109.20 area, but the month’s low was set near JPY108.70. The Australian dollar is weaker but within the $0.7300-$0.7400 range that, with few exceptions, has dominated for the past month.

There is an option for A$970 mln that expires tomorrow at $0.7330. The Chinese yuan strengthened slightly but remained in a narrow range. Within this narrow range, the dollar has not strengthened in a week. The dollar has traded mostly between CNY6.45 and CNY6.50 since mid-June. For the sixth session, it was confined to a tighter CNY6.4735-CNY6.4890 range. The PBOC set the dollar’s reference rate at CNY6.4717, a bit stronger than recently seen relative to expectations (CNY6.4695).

Europe

The weekly Insapol out over the weekend shows the German Social Democrats are finding some traction ahead of the late-September election. For the first time in a year, support has edged above the Greens. Support rose for the SPD by a couple of percentage points to 20, while the Greens were unchanged at 18%. On the other hand, the CDU/CSU slipped one percentage point to 25%, its lowest in three months. These poll results, as fluid as weekly polls may be, and the fact that the SPD’s Scholz is more popular than the CDU’s Laschet, suggest the possibility just emerging on the event horizon of a SPD-Green-FDP coalition.

Swiss overnight deposits rose by more than one billion francs for the second consecutive week. This suggests that the Swiss National Bank’s hand may have been behind the trough carved out by the euro near CHF1.0720. It recovered to CHF1.0840 ahead of the weekend before reversing lower and posting an outside down day. Follow-through selling today brought the cross briefly back below CHF1.0760 before stabilizing.

With deeply negative yields, there is not much for the SNB to do but intervene to block currency appreciation that is not based on Swiss fundamentals. Moreover, there are insufficient domestic bonds to buy (QE), leading it to buy foreign assets, especially US shares.

The euro recovered smartly ahead of the weekend. On the back of the drop in US consumer confidence, the euro, which had found support earlier in the week just above $1.17, rallied to $1.1805 and settled just below. Today, it found sellers in the $1.1800 area and has been sold to $1.1780.

There is an option for almost 500 mln euros at $1.1750 that expires today. A break of $1.1740 would re-target the $1.1700-key support area. Sterling recovered from a two-week low before the weekend but stalled near $1.3880. That area continues to block the upside. Immediate support is seen near $1.3835, and of its signals, a return to the 200-day moving average near $1.3780.

America

The US Treasury sold $126 bln of coupons last week. The supply was easily absorbed. In fact, on some metrics, like the low amount left in the hands of primary dealers, set records. A big concession may have helped. The yield had backed up nearly 25 bp in the five sessions before the auction. There may have been some immediate buyers remorse as yields headed higher the following day.

The market took its breath near 1.38%, and the dreadful consumer University of Michigan’s consumer confidence survey (lowest in a decade) helped make the action participants happy as the 10-year yield plunged over eight basis points (to almost 1.27%), the most in three weeks. Investors will be watching the bill auctions for signs of disturbances spurred by the debt ceiling considerations. The 20-year bond auction ($27 bln) has been more challenging this year, and it may be struggling to find/create a natural constituency. The premium is not as plump, and market conditions may be thinner.

In a well-tipped and anticipated move, Canada’s Prime Minister Trudeau called for a snap federal election, two years ahead of schedule, on September 20. In the 2019 election, he lost his parliamentary majority garnered in 2015. Trudeau hopes to re-gain his majority on the coattails of a successful inoculation campaign, strong fiscal and monetary from both the US and Canada-led recovery, and an opposition that is struggling Nor is Trudeau giving the opposition much time.

The 36-day campaign is the shortest permitted by law. To secure the majority, Trudeau’s Liberals need to pick up a net of 13 seats. The polls suggest it is close. Recall that in 2019, the Liberals lost every contest in Alberta and Saskatchewan in protest of Trudeau’s climate policies.

The US reports the August NY Fed manufacturing survey. It popped up from 17.4 in June to 43.0 in July, a record high. It is not expected to have sustained that momentum, and a pullback toward 28.5 is expected. Although it is typically not a market-mover, traders may be more sensitive after the University of Michigan consumer confidence report. The Treasury International Capital (TIC) report is due after the market’s close. Given the low level of intervention and the dated nature of the report (two-month lag), it tends to be discussed by analysts but rarely market moving.

The week’s highlights include July retail sales tomorrow and industrial production figures Wednesday. Fed Chair Powell hosts a town hall discussion with teachers tomorrow and the FOMC minutes for last month’s meeting are due on Wednesday. While the focus in Canada is on the election, it reports exiting homes sales today, July CPI on Wednesday, and retail sales Friday.

The US dollar is trading at four-day highs against the v near CAD1.2550. The 200-day moving average is just shy of CAD1.2565. It closed above the 200-day moving average a couple times last month, and although it has been frayed on an intraday basis this month, it has not closed above it. Above it, resistance is seen in the CAD1.2600-CAD1.2615 band. Recall that last week, the Mexican peso had been bought before Banxico hiked rates and sold off on the fact.

Follow-through selling ahead of the weekend stalled with the poor US confidence report and sent the peso to new highs for the week. The greenback is consolidating today within the pre-weekend range. In the European morning, the dollar found support near MXN19.88. Initial resistance is seen in the MXN19.92-MXN19.94 area. Meanwhile, the risk-off sentiment and domestic political issues may weigh on the Brazilian real, which has depreciated for the past four weeks and six of the past seven weeks. The dollar faces resistance in the BRL5.30 area and then the 200-day moving average around BRL5.3380.

This article was written by Marc Chandler, MarctoMarket.

Gold’s Flash Crash and Limited Follow-Through Greenback Gains

The dollar is broadly mostly firmer against the major and emerging market currencies. The JP Morgan Emerging Market Currency Index is lower for the fifth consecutive session, while the euro was sold to its lowest level in five months before stabilizing. Bonds in the Asia Pacific region sold off in the wake of the jump in US yields after the jobs report, but benchmark yields are 1-2 bp lower in Europe, and the US 10-year yield is a little softer near 1.28%.

Japan’s markets were closed for a national holiday, while China and Hong Kong led the advancers in a mixed session that saw Australia, South Korea, and Taiwan shares fall. Europe’s Dow Jones Stoxx 600 is posting small gains for the sixth consecutive session. US equity futures are posting small losses. Crude oil tumbled last week and has continued to fall today.

WTI for September fell nearly 7.7% last week, its biggest decline since last October. Near midday in London, it is off another 3.6% today to approach key support near $65.00. Copper fell by 3% last week, its biggest drop in nearly two months. It is off by another 1.4% today.

Asia Pacific

China reported trade figures over the weekend and July inflation prints earlier today. The data does not give a clean read on the economy as the virus and extreme weather conditions distort the activity. Both imports and exports slowed, and the trade surplus rose to $56.5 bln from $51.5 bln in June. The PRC imported 25 aircraft last month, which also inflated the import figures. The distinction between value and volume may be of increased importance.

The value of iron ore, oil, and steel imports, for example, rose, but it concealed a decline in volume. Recall that the PMI showed that orders for manufactured goods exports fell for the third month in July. Part of the decline in textiles exports, including protective masks and medical equipment, may be traced to the base effect and last year’s surge. The politically sensitive trade with the US saw a 13.4% year-over-year rise in exports and a 25.6% rise in imports.

China’s CPI rose by 1% year-over-year last month, down from 1.1% in June. Prices rose by 0.3% on the month, the first increase since February. Food prices are off 3.7% year-over-year, while non-food prices have risen by 2.1%. Excluding food and energy, China’s consumer prices rose 1.3%. The average pace in H1 21 was 0.4%. Producer prices accelerated to a 9% year-over-year pace from 8.8% in June.

Mining prices rose 38.7% (35.1% in June), though raw material price increase eased to 17.9%, year-over-year, a three-month low. On balance, given the recent cut in reserve requirements, Chinese officials are more concerned with signs that growth is faltering than consumer price pressures.

The seven-week and counting lockdown of Sydney, coupled with one of the lowest vaccination rates among high-income countries, is taking its toll on public support for the Morrison government. The latest polls show that the prime minister’s support has slipped below 50% from 85% last April. Labor leads the ruling coalition by six percentage points (53%-47%). National elections must be held by next May.

With Tokyo’s markets closed, the dollar has been confined to almost a quarter of a yen range above JPY110.10. An option at JPY110.50 for about $530 mln rolls off today. Helped by higher US yields, the dollar rose in the last three sessions. The Australian dollar extended its losses seen in the wake of the US employment data to briefly dip below $0.7330 in early Asia.

It looks poised to retest the $0.7360 cap. The greenback slipped slightly against the Chinese yuan after rising 0.33% ahead of the weekend, the most in nearly two weeks. Ir remains in the CNY6.45-CNY6.50 range that has largely prevailed since the latter part of June. The PBOC set the dollar’s reference rate at CNY6.4840, a little softer than the CNY6.4856 anticipated.

Europe

Germany reported a larger than expected June trade surplus. Exports rose 1.3% on the month, four times more than economists in Bloomberg’s polls anticipated. Imports rose by 0.6% compared with the median expectation for a 0.4% increase. As a result, the surplus rose to 16.3 bln euros, while the median forecast was for a 13.5 bln surplus. Germany’s trade surplus drives the current account surplus, which rose to 22.5 bln euros from 13.1 bln. The current account surplus averaged 20.5 bln euros a month in H1 21. This compares with an average of 16.6 bln euros in H1 20 and 19.6 bln in H1 19.

Press reports are playing up the growing rift between UK Prime Minister Johnson and the Chancellor of the Exchequer Sunak. Johnson’s approval ratings have sunk to a new low, with nearly half of the public disapproving of the prime minister. Over the weekend, a leaked letter revealed that Johnson was considering demoting Sunak.

Johnson and Sunak are at odds over public spending, taxes, and travel restrictions. Sunak enjoys greater support among the Conservative Party members than Johnson. Separately, after a sharp backing up after the hawkish BOE meeting, the short-end of the UK curve has stabilized today, and the March and June short-sterling futures are unchanged.

The euro briefly traded below last month’s low ($1.1752) to its lowest level since the end of March. It has stabilized in the European morning, at little changed levels. However, it has been unable to muster much in the way of upticks, and sentiment is poor.

There is a billion-euro option expiring at $1.1750 today. Nearby resistance is seen near $1.1780, with $1.18 being too far away to be practical today and where an option for almost 1.5 bln euros that rolls off today is struck. Sterling fell to an eight-day low near $1.3850. It has more than stabilized in the European morning. It has turned higher on the session. Resistance is seen in the $1.3920-$1.3935 area today.

America

The second consecutive increase of more than 900k US jobs solidifies expectations for a tapering announcement next month, with some strong hint expected at Jackson Hole later this month. The JOLTS report today should confirm that the demand for labor is recovering faster than supply. The highlight of the week is Wednesday’s CPI report that could see the year-over-year measures ease for the first time since last October.

Several Fed officials speak this week, including Bostic and Barkin this week. Meanwhile, the infrastructure bill was stymied in the Senate over the weekend. It will be taken up again today. Remember, the House will not debate and vote on it until next month.

Canada reported a healthy jobs report before the weekend too. Even though overall job growth missed expectations, the 94k increase was is proportionately equivalent to nearly a million jobs in the US. The unemployment rate fell to 7.5% from 7.8%, and the participation rate was steady at 65.2%. Full-time positions were filled for the first time in four months. The data was sufficiently strong to keep the chins wagging about the likelihood that Prime Minister Trudeau calls for an election in the coming weeks. Trudeau would most likely run against the Conservative leader O’Toole who appears not to have developed an economic platform.

Mexico reported July CPI figures today. The year-over-year pace is expected to ease slightly to 5.78% from 5.88% in June. Industrial output figures for June are due mid-week, and a flat report is expected. The highlight of the week is the central bank meeting on Thursday.

With inflation continuing to run well above the target, Banxico appears poised to hike the overnight rate by another 25 bp to 4.50%. Recall that it hiked rates in June, reversing February’s cut. Brazil’s central bank delivered a 100 bp hike last week and signaled another hike of the same magnitude next month. It takes some of the sting from tomorrow’s IPCA inflation measure that is expected to rise to almost 9% from 8.35% in June.

The US dollar briefly took out the pre-weekend high barely to rise to almost CAD1.2585, but it is poised to begin the North American session near its lows below CAD1.2540. It frayed the 200-day moving average (~CAD1.2575) as it has several times over the last couple of weeks but has not closed above it since July 20. Support is seen in the CAD1.2475-CAD1.2500 area.

Similarly, the greenback traded above last week’s high against the Mexican peso to poke above MXN20.0950 but has come back offered and will begin the North American session near its lows just below MXN20.02. A break of initial support seen in the MXN19.97-MXN19.98 could spur a test on the MXN19.90 area, with a more solid shelf near MXN19.80.

This article was written by Marc Chandler, MarctoMarket.

Chinese Officials Calm Markets

Led by a 3% recovery in the Hang Seng, the large equity markets in the Asia Pacific region advanced after the MSCI benchmark recorded the lows for the year yesterday. Europe’s Dow Jones Stoxx 600 is posting modest gains that were sufficient to lift the benchmark to new record highs. US equity futures are firm. US and European 10-year yields are little changed. The US is firm around 1.26%. European yields are also 1-2 bp higher. The biggest reaction in the capital markets is the setback in the dollar, which is softer against nearly all currencies through the European morning.

Among the majors, the New Zealand and Canadian dollars and the Norwegian krone are the strongest. The yen and Swiss franc are the laggards. Among emerging market currencies, the South African rand and Hungarian forint are the strongest. The JP Morgan Emerging Market Currency Index extended yesterday’s gains and is poised for its best two days this month.

Meanwhile, the decline in real yields and a weaker dollar appear to be helping lift gold above its 200-day moving average near $1821. Falling oil inventories in the US are helping lift crude prices. The September WTI contract is up by more than 1% for the second day as prices push above $73 a barrel. After falling on Tuesday, the CRB rose yesterday, its sixth gain in the past seven sessions.

Asia Pacific

Chinese officials moved to calm markets. They did so by the regulators meeting with banks and trying to isolate the crackdown on private education while signaling that IPOs in the US are not banned. State funds may have been deployed to support equities. The PBOC provided additional liquidity. The CNY30 bln (~$4.6 bln) via seven-day repo was the largest such operation this month. Even if Chinese officials succeed in stabilizing the market, the damage to sentiment and confidence among foreign investors will take some time to heal.

First, outside of some general narrative, it is not clear Beijing’s end game. Second, what appears to be capriciousness and clumsiness did not just begin in recent days but is part of a sequence of events that goes back to the intended Ant IPO last year. Third, the opaqueness and activist state approach does not attract foreign investment. Fourth, these recent events show why integrating China into the world’s capital markets is a gradual process that is not simply moving in one direction. The main challenge is not technology, which means that a digital yuan may not be the game-changer that some have suggested.

After buying a record among Japanese bonds in the week through July 16 (JPY2.57 trillion), foreign investors pared their holdings last week by JPY223 bln. The most interesting development last week with Japanese portfolio flows was the continued divestment of foreign bonds. Japanese investors sold JPY1.09 trillion of foreign bonds. It was the fourth liquidation in the past five weeks. Indeed, the average weekly sales over this run have been JPY544 bln, the most in a five-week period since March as the fiscal year was drawing to a close.

The dollar is hovering near this week’s lows against the yen set on Tuesday near JPY109.60. There is little support below there until last week’s low closer to JPY109. There is an option for about $380 mln at JPY109.30 that expires today. On the upside, the greenback has not been able to poke above JPY110.00 today. The Australian dollar is bid, and it is straddling the $0.7400 are near midday in Europe. It has not closed above $0.7400 since July 15.

It appears to be absorbing offers that may be related to the A$1.1 bln in options expiring today between $0.7385 and $0.7400. The $0.7425 area holds the 20-day moving average, and the Aussie has not closed above it since mid-June. The dollar had broken out of the recent range against the Chinese yuan and reached its best level in three months on Tuesday (~CNY6.5125). It has since surrendered the gains and move back to the lower end of the previous trading range (~CNY6.45). It is on track for its biggest two-day drop against the yuan in six months. The dollar’s reference rate was set at CNY6.4942, nearly spot-on the median projection (CNY6.4944) in the Bloomberg survey.

Europe

Germany reported a larger than expected decline in unemployment and what appears to be an upside surprise on inflation. The unemployment queues fell by an impressive 91k in July after a 39k decline in June. It was the largest drop since late 2006. The median forecast called for a 29k decline. The unemployment rate fell to 5.7% from 5.9%. It was at 5% before the pandemic struck.

The German states have reported their CPI figures, and the national figures will be out shortly. The states reported a monthly rise of 0.8%-1.0%, which poses an upside risk to the median forecast expected a 0.6% rise in the national calculation, which would lift the year-over-year rate to 3.2% from 2.3%. The EU harmonized measure was expected to rise by 0.4% for a 2.9% year-over-year pace (up from 2.1% in June).

Spain, the other large EMU country reporting unemployment and inflation figures today. The Q2 unemployment rate eased even if not as much as expected, falling to 15.26% from nearly 16% in Q1. The EU harmonized inflation measure fell 1.2% on the month, which due to the base effect saw the year-over-year rate rose to 2.9% from 2.5%.

Tomorrow is a big day of releases for the eurozone. It reports the June unemployment rate (seen steady at 7.9%, though the risk is on the downside), CPI (seen at 2% but the risk is on the upside), and the first estimate for Q2 GDP ( a 1.5% quarterly gain, which would be the first expansion in three quarters and only the second quarterly expansion since Q3 19 (it was stagnant in Q4 19).

The euro is extending its rally for the fourth consecutive session. It has forged a base around the $1.1750-$1.1760 area and tested it at the start of the week. Today it is pushing against $1.1880, a three-week high. It closed above the 20-day moving average yesterday for the first time since June 7, and the five-day moving average is crossing above the 20-day moving average for the first time since then as well. It has not traded above $1.19 this month, and there is an 800 mln euro option struck there that expires today. Sterling is also advancing for the fourth consecutive session.

It settled last week slightly below $1.3750 and reached $1.3970 today, its highest level since June 23. Recall that sterling peaking on June 1 is near $1.4250. It is moving above the (50%) retracement level (~$1.3910) today, and the next retracement (61.8%) is just shy of $1.40.

America

There are two main takeaways from yesterday’s FOMC statement and press conference. First, the Fed is still on track to make a formal tapering announcement in a couple of months. The actual tapering could begin before year-end, depending on the economy. Powell seemed relatively calm about the prospects that the new Delta variant will cause a major economic disruption. The Jackson Hole-September FOMC meeting timeframe still seems reasonable, especially if the upcoming employment data is as strong as anticipated, and there are several forecasts for non-farm payrolls to rise by a million when announced at the end of next week. Second, the Fed continues to argue that elevated price pressure is temporary.

Powell has argued that a relatively small basket of goods in the CPI basket accounts for the prices. We have noted that only about a third of the components are rising faster than 2%. Powell pointed to cars (new, used, and rental), airfare, and hospitality as significant contributors. The Fed Chair continued to push back against linking house price increases to its MBS purchases and seemed to suggest early tapering off those purchases did not have wide support. The minutes will shed light on this debate.

More than a month after President Biden said a deal was struck, the Senate appears to be on the verge of approving a bipartisan physical infrastructure bill. It will be around $550 bln in new spending, and almost another $500 bln is anticipated in federal money for highways that are part of the regular cycle. It will be partly paid for by reallocated unspent covid relief funds and tapping the Strategic Oil Reserves and a few other more gimmicky measures like counting revenue for future growth and boosting the reporting for crypto trades to capture more tax revenues.

The US reports its preliminary estimate for Q2 GDP. The median forecast in Bloomberg’s survey calls for an 8.5% annualized pace after 6.4% in Q1. Personal consumption is expected to have risen by double digits for the second consecutive quarter. The GDP deflator is projected to rise to 5.4% from 4.3%. We suspect the US economic growth is peaking, and the slowing will be gradual, but by H2 22, the sub-3% pace will return. Separately, the US reported weekly jobless claims. They unexpectedly rose by 50k in the previous week, which was the second increase in three weeks and the first back above the 400k-mark since mid-June. Unperturbed, economists in the Bloomberg survey are looking for 385k claims last week.

The US dollar is breaking down against the Canadian dollar. It is convincingly falling through the 20-day moving average (~CAD1.2525) for the first time since mid-June. The greenback is trading near two and a half week lows against the Canadian dollar to test CAD1.2450. Recall it peaked near CAD1.28 on July 19. The next target is near CAD1.24, the halfway mark of the US dollar’s recovery from the five-year low set on June 1 near CAD1.20.

The Mexican peso shrugged off Moody’s downgrade of Pemex deeper below investment grade (Ba3 and retained a negative outlook). Of the main rating agencies, only S&P sees Pemex as an investment-grade risk. The dollar has approached MXN19.85 to take out last week’s low. The next area of support is seen near MXN19.80. It should be capped in front of MXN19.97.

This article was written by Marc Chandler, MarctoMarket.

Fed Day

The China-inspired losses saw the MSCI Asia Pacific Index fall to new lows for the year today, though Hong Kong’s Hang Seng posted a 1.3% gain. Europe’s Dow Jones Stoxx 600 is posting the first gain of the week, led by information technology, real estate, and consumer discretionary. Despite strong bank earnings, financials are matching the market, not outperforming it. US futures are oscillating around little changed levels.

The US 10-year benchmark yield is firm at 1.25%, while European yields are mostly slightly softer but sufficient to take German, French, Dutch, and Greek yields to new 3-4 month lows. The Antipodean currencies and yen are the heaviest against the US dollar, with the Canadian dollar the only major currency gaining on the greenback through the European morning. Emerging market currencies are mixed, leaving the JP Morgan EM FX index little changed.

The Chinese yuan gained for the first time in five sessions. API estimated a 4.7 mln barrel drop in US oil stocks and a large (6.2 mln barrel) drawdown in gasoline inventories, which, if confirmed, would be the largest since March. September WTI is around 1% higher today. Gold continues to move broadly sideways and is straddling the $1800-level today.

Iron ore and steel rebar futures fell in Shanghai, while copper is recovering from yesterday’s decline, which snapped a five-day advance. September lumber dropped 6.7% yesterday to bring this week’s decline to about 8.3% after jumping 18% last week on Canada’s wildfires. The CRB Index fell 0.6% yesterday to end is five-day, 6.8% advance.

Asia Pacific

Investors are continuing to try to make sense of Beijing’s aggressive moves that appear to be a broad offensive that can only result in a slowing if not reversing of past efforts to integrate into global capital markets. The ultimate goal is not clear. Beijing had appeared to be willing to use the capital inflows to ease restrictions on capital outflows. Some even speculated that this would gradually allow the yuan to be convertible.

Although we disagreed, many observers see that introducing the digital yuan as early as next year’s Olympics would challenge the US dollar’s role. The recent actions appear to deal a blow to such speculation. Lastly, there is some thought that the PBOC could ease policy again (following the recent cut in reserve requirements) to lend support to the stock market, if needed.

Australia’s Q2 CPI came in slightly above forecasts with a 0.8% rise after 0.6% in Q1. The year-over-year pace jumped to 3.8% from 1.1%. The underlying measures were as expected, with a 1.6% year rise (from 1.1%) for the trimmed mean and a 1.7% (from 1.3%) weighted median. Still, the data is unlikely to stand in the way of the RBA announcing increased bond purchases at next week’s meeting (August 3). The lockdown in Sydney and social restrictions elsewhere are threatening the economy.

Keep an eye on Japanese weekly portfolio flows that are released first thing tomorrow in Tokyo. In the previous week, ending July 9, foreigners appear to have bought a recorded amount of Japanese bonds (JPY2.57 trillion or ~$23.3 bln). To put the figure in perspective, the previous four-week average was around JPY546 bln. For their part, Japanese investors have sold foreign bonds for the past three weeks, and the average weekly sale of JPY804 bln is the most since early March. On the other hand, equity portfolio flows have been minor.

The dollar is consolidating in about a quarter of a yen below JPY110.00 so far today. The greenback has been recovering since dipping briefly below JPY109.60 near midday in NY yesterday. A move above JPY110.00 could see JPY110.20, but the subdued session will likely continue until the FOMC statement. The Australian dollar is stagnant. It remains within the range set on Monday (`$0.7330-$0.7390). There is an option for A$710 mln at $0.7390 that expires today and another for about A$515 mln at $0.7400 that expires tomorrow.

The dollar spiked to CNY6.5125 yesterday, its highest level in three months, and broke out of the CNY6.45-CNY6.50 month-old range. However, it was pushed back into the range today as the yuan rose for the first time in five sessions. The PBOC set the dollar’s reference rate at CNY6.4929, slightly lower than the median expectation picked up in Bloomberg’s forecast (CNY6.4935).

Europe

The UK and the EU are still at odds over the Northern Ireland Protocol. However, the EC moved to de-escalate the situation. Rather than push forward with its threat of imminent legal action as the end of the month should mark a new phase of enforcement, it appears to have granted a grace period of the summer to find an amicable solution.

Germany’s August GfK consumer confidence survey was unexpectedly weak. Rather than rising to 1.0 as economists projected, it remained at -0.3. The disastrous floods seem to be the main culprit. Tomorrow, Germany reports July CPI figures and employment data. The EU harmonized measure of CPI is expected to rise to 2.9% from 2.1% in June. Unemployment may have ticked down to 5.8% from 5.9%. It was at 5.0% steadily in H2 19.

The week’s highlight for the eurozone comes on Friday with the aggregate CPI (there seems to be upside risks to the 2.0% median forecast in Bloomberg’s survey) and the first look at Q2 GDP.

In the UK, Nationwide reported its house price index fell 0.5% in July. It is the first decline since March and the largest fall since last June. The year-over-year rate moderated to 10.5% from 13.4% in June. A tax break is winding down. On July 1, the stamp-duty threshold on new purchases was halved to GBP250k, adding GBP12.5k to the average home bought in London. Starting October 1, the threshold will return to GBP125k.

The euro is trading quietly in the upper end of yesterday’s range that saw it reach $1.1840, its highest level since mid-July. It has held above $1.18 so far today, and if sustained, will be the first session since July 12 that it has not traded with a $1.17-handle. There is a billion-euro option at $1.18 that expires today and another at $1.1820, and a third at $1.1850.

Tomorrow, there is a 1.36 bln euro option struck at $1.1850 that will also expire. It suggests that the area will likely be sticky. Sterling is firm but holding below $1.39 that it approached yesterday. An option for almost GBP400 mln is struck at $1.3925 that expires today. Tomorrow there is an option for almost GBP410 mln at $1.3900 that also will be cut. Initial support is seen near $1.3860 and then $1.3820.

America

Following Monday’s unexpected decline in June’s new home sales (-6.6%) and a downward revision to the May series (-7.8% rather than -5.9%), the US reported weaker than expected June durable goods orders, mitigated in part by the upward revisions to the May data. Separately, house price increases accelerated in May.

Today’s reports of the advance goods trade balance and retail and wholesale inventories will give economists the last opportunity to adjust the Q2 GDP forecasts ahead of tomorrow’s report. The median forecast in Bloomberg’s survey sees 8.5% annualized growth in Q2 after a 6.4% pace in Q1. The price deflator is expected to accelerate to 5.4% from 4.3%.

The outcome of the FOMC meeting is center stage today. No change in policy is expected, though some members seem to want to adjust the asset purchases immediately with special attention to the mortgage-backed securities. This seems unlikely. However, Powell is unlikely to push against expectations that an announcement could be made at the next FOMC meeting in September.

By pledging to give the market a clear advance warning, it would seem to need to say something relatively soon to keep its options open for an adjustment in the pace and possibly the composition of its purchase by the end of the year. Powell could deter dissents by striking a compromise by replacing the agency bonds purchases with more Treasuries, but this too seems unlikely. The FOMC statement is unlikely to deviate much from the last one, and the Fed is unlikely to see the rising Delta covid cases as substantially impacting its economic outlook.

Canada reports June CPI figures. The year-over-year rate is expected to ease (3.2% from 3.6%) for the first time this year. Canada has three core measures, two of which may have also softened (median and trim iterations). At the end of the week, Canada will report May’s monthly GDP. It is expected to have matched April’s 0.3% contraction, but the data seems dated.

Mexico’s June trade surplus was much smaller than expected ($762 mln vs. median Bloomberg survey forecast for $2 bln). Partly, it appears that domestic demand is improving, and this will likely be seen in the Q2 GDP report due at the end of the week. The median forecast anticipated a 1.8% expansion in the quarter after a 0.8% pace in Q1.

The US dollar is encountering selling pressure near CAD1.26 for the fifth consecutive session. Key support is seen near CAD1.2525, though there is an option for almost $390 mln at CAD1.2550 that expires today. Momentum indicators like the MACD and Slow Stochastic are trending lower, and the greenback’s recovery from the multi-year low set on June 1 near CAD1.20 looks over or nearly so.

The US dollar is trading near seven-day lows against the Mexican peso (~MXN19.9330). Chart support is seen in the MXN19.80-MXN19.82 band. Nearby resistance is pegged near MXN20.03.

This article was written by Marc Chandler, MarctoMarket.

China Sends Ripples Across the Markets

Hong Kong shares are bearing the brunt. The Hang Seng has fallen by 10% in the three sessions, including today. The Shanghai Composite is off nearly 5.5% in the same period. A few of the other larger markets in the region, including Japan, South Korea, and Australia, posted small gains. Moody’s affirmation of a stable credit outlook helped lift Philippines’ stocks by 2.4%, the most in a couple of months and recouped most of Monday’s slide.

Europe’s Dow Jones Stoxx 600 is off around 0.5%, led by financials and energy. US futures are trading with a heavier bias. Benchmark bond yields are lower. The 10-year Treasury yield is hovering near 1.25%, off more than three basis points. European yields are 1-2 bp lower. The dollar is bid. The yen continues to be resilient. Emerging market currencies are retreating as an expression of the risk-off mood. The JP Morgan Emerging Market Currency Index is off 02%.

Industrial metals have been knocked back by reports suggesting China is considering new export tariffs on steel. Oil is sidelined, and the September WTI contract is little changed, around $72 a barrel. Gold is not drawing much of a bid. A stronger dollar may offset the lower yields as a consideration. If the yellow metal does not recover, it may close below $1800 for the first time in three weeks.

Asia Pacific

Beijing is fighting a two-front battle. Domestically, the new drive that began last year with the Ant IPO and crackdown on Alibaba has broadened. Stronger regulatory efforts, anti-trust, and IPOs in foreign markets, and now private education companies are killing the proverbial goose that lays the golden egg by underscoring international investors’ concerns about investing in China.

The capital inflows were to create conditions under which Beijing could ease capital outflow restrictions. The other front of the battle is in foreign policy. Yesterday’s high-level meetings with the US appeared to have failed to break new ground. While reports suggest that there is still scope for Biden and Xi to meet in October, with the March and July contentious meetings, the chances of an agreement seem remote.

Reports today suggest China is considering a 10-25% tariff on steel exports starting in Q3 to rein in the sector. This is separate from its regulatory initiatives. This seems more in the containing commodity prices and rationalizing the steel sector. It appeared to have an immediate effect of sending iron ore and steel rebar prices lower. However, nickel, which is needed in the new batteries, proved resilient and is at new multi-year highs. Separately, China reported industrial profits moderated to 20% year-over-year from more than 36% in May.

South Korea reported slightly softer than expected growth in Q2. GDP rose by 0.7% on the quarter after a 1.7% pace in Q1. This is broadly consistent with what had been perceived as a maturing of the Asia economic recovery. The government was quick to reaffirm its expectation for 4% growth this year, indicating that today’s report will have no impact on monetary policy. The central bank meets in late August. The market has fully discounted a 25 hike in the next three months. Separately, South Korea and North Korea agreed to re-establish formal relations, including the hotline.

A record number of covid cases in Tokyo has not offset the flow into the yen today. For the first time in four sessions, the dollar slipped below JPY110.00. Initial support is seen in the JPY109.80 area, but recall last week’s low was slightly above JPY109.00. It appears that the same considerations that weigh on US Treasury yields boost the demand for the yen. Covid cases in Sydney are still rising, and the risk-off is pushing the Australian dollar lower.

It has meet resistance in the last three sessions in front of $0.7400, and expiring options are set at $0.7380 today and $0.7390 tomorrow. On the downside, yesterday’s low near $0.7330 is holding, and a break could see a test last week’s lows (~$0.7290-$0.7300). The nearly 0.25% rise in the dollar against the Chinese yuan is the largest in almost a week and a half.

The greenback spiked to CNY6.5125 earlier, which is the highest level since April. The 200-day moving average is found by CNY6.5170. The greenback has not traded above this moving average since last July. The PBOC set the dollar’s reference rate at CNY6.4734, a bit softer than the median projection in Bloomberg’s survey for CNY6.4741.

Europe

Interest in the eurozone’s money supply figures has waned, perhaps as a result of the ECB’s asset purchases and negative interest loans. June M3 rose 8.3% year-over-year, largely in line with estimates. However, it is the underlying lending figures that draw more interest. Loans to households rose 4% after a 3.9% pace in May, while loans to companies rose 1.9%, matching the previous month’s rise. The economic highlights of the week still lie ahead. At the end of the week, the preliminary July CPI and Q2 GDP will be reported.

We see upside risk to the Bloomberg median forecast for 2.0% CPI. The median forecast calls for a 1.5% increase in the GDP quarter-over-quarter.

Hungary hiked its key rate by 30 bp in June to 0.90%. It is expected to follow up with another 20 bp hike today. The overnight deposit rate has stood at minus 5 bp since March 2019, when it was lifted from -15 bp, where it had been since August 2017. Inflation runs above 5%, the highest in nine years, and the core measure is at 16-year highs. As a result, Hungary may lift the deposit rate out of negative territory today to 10 bp.

The euro is trading inside yesterday’s range (~$1.1765-$1.1815). The 20-day moving average is slightly below $1.1820, and the euro has not traded above it since June 11 and has not closed above it since June 7. Although a base has been carved out in the $1.1750-$1.1760 area, the single currency has not been able to distance itself from it.

A break target the year’s low set at the end of March near $1.1700. Reports of falling covid cases in the UK may have helped spur sterling’s gains yesterday to a six-day high near $1.3835. Recall last week’s low was close to $1.3570. However, the recovery stalled, and sterling is consolidating today, straddling the $1.38 level. A break of the $1.3765 area could signal a move into a support band in the $1.3700-$1.3730 area.

America

The US 10-year TIP yield is at a record low today, near minus 1.14%, which seems incredible given that the US is expected to report Q2 GDP around 8.5% at an annualized clip and a deflator of almost 5.5%. The decline in the real yield yesterday was cited as a key force behind the greenback’s heavier today. Meanwhile, states that have had low vaccination rates are seeing strong spikes in the virus. The latest figures show about 60% of the 18+ cohort have been fully vaccinated, and 69% have been given one of two shots.

That means a little more than 49% of the population is fully vaccinated, which has been fairly stable. Ironically, even as the US secures more vaccines, a sizeable minority does not want it. Meanwhile, efforts to reach a bipartisan deal on infrastructure are still being stymied.

The US reports June durable goods orders today. The headline (~2.1%) will be lifted by aircraft, without which a modest gain (~0.8%) is expected. Shipments of non-defense and non-aircraft goods may have slowed to 0.8% from 1.1%. However, more attention may be on house price reports today. The FHFA reports its monthly house price index. It has been rising by more than 1% a month since last June without exception.

In April, it rose the fastest over this period, posted a 1.8% month-over-month increase. S&P CoreLogic Case Shiller index of house prices in the largest 20-cities and nationwide are expected to have accelerated in May. This comes as the FOMC’s two-day meeting begins, and several officials share our concerns about the optics, if not the impact of the central bank continuing to buy mortgage-backed securities. The Conference Board’s July consumer confidence measure is expected to soften from elevated levels. Lastly, note that Alphabet, Apple, Microsoft, among others, report earnings today.

Canada reports June CPI figures tomorrow, and the year-over-year rate may decline (3.2% from 3.6%) for the first time this year. Mexico reports June’s trade balance. A $2 bln surplus is expected, which would be the largest for Q2. Last year, the monthly trade surplus averaged $2.8 bln a month, up from $446 mln in 2019 and a $1.1 bln deficit in 2018. In the first five months of 2021, the average monthly surplus has fallen to $66.5 mln. Separately, we note that the dispute over measuring domestic content for autos and auto parts under the USMCA has not been resolved.

The US dollar is firm against the Canadian dollar but within the recent range (~CAD1.2525-CAD1.2610). There is an option for $550 mln at CAD1.26 that expires today. The 20-day moving average is near CAD1.2515, and the greenback has not traded below it since mid-June. On the upside, the 200-day moving average is around CAD1.2610. A move above it would target the CAD1.2680 area initially. The greenback is also confined to yesterday’s range against the Mexican peso (`MXN19.99-MXN20.1650). The risk-off mood warns of the risk of a stronger US dollar. Last week’s high was near MXN20.25.

This article was written by Marc Chandler, MarctoMarket.

Greenback Starts Big Week Softer

Last week’s weakness in the MSCI Asia Pacific Index seemed to be partly driven by Beijing’s crackdown on some tech companies and private sector education companies. The benchmark fell by 1.9% last week and continued to be sold today, led by Hong Kong’s 4%+ drop and Shanghai’s 2.3% decline.

Only Japan of the large bourses posted modest gains after coming back from a two week holiday. However, the Dow Jones Stoxx 600 in Europe rallied 1.5% last week, but its four-day advance is meeting profit-taking today, and it is nursing a 0.35% decline near midday in Europe. US futures are also heavy. Benchmark 10-year yields are heavy. The US Treasury yield is off almost three basis points at 1.25%, ahead of this week’s auctions of $183 ln in coupons and a $28 bln two-year floating-rate notes. It had been down to 1.22% earlier in the session.

The US 10-year real yield has fallen to a new record low of almost -1.13%. European yields began off a couple of basis points softer, with most benchmarks falling to fresh 3-5 month lows but have recovered to see minor increases. Rallies in China and South Korean bonds pushed their 10-year benchmarks to new three-month lows too. The dollar is mostly softer against the major currencies, having seen its earlier gains pared or even reversed.

The Australian dollar and Norweigan krone are the laggards. Several emerging market currencies, including the South African rand and Mexican peso, have recovered from earlier losses. The JP Morgan Emerging Market Currency Index is off for the third consecutive session and has a four-week downtrend in tow. Gold is firm but meeting resistance in the $1810-$1812. Last week, it peaked near $1825. Oil prices appear to be being dragged lower by demand concerns and are snapping a four-day advance.

However, September WTI has trimmed its earlier losses, and near $71.70 is off about 0.5%. Copper is rising for a fifth session. The CRB Index gained 1.9% last week, its seventh advance in the past nine weeks.

Asia Pacific

China expressed outrage at a map used by CNBC of China did not include Taiwan. Some observers note that if a map of the US did not contain Alaska and Hawaii, there would be no protest, but a critical difference is that China’s territorial integrity is questioned. Other observers complained that some areas, like Tibet, were included as part of China. Meanwhile, China’s attempt to be more integrated into global finance, attract foreign capital, which would give it scope to ease restrictions on capital outflows, will likely be dealt a blow by the crackdown on online educational companies.

Some of these companies attracted investment flows from hedge funds, pension funds in some provinces in Canada, and some states pension in the US. Lastly, a massive typhoon hit eastern China, and on top of last week’s floods. This will likely have some negative economic impacts, and China’s Politburo that meets this week may address it. Still, given the recent cut in reserve requirements, an easier policy bias had already emerged.

Japan’s preliminary July PMI shows that Q3 is off to a poor start. The manufacturing PMI slipped to 52.2 from 52.4. It is the lowest in five months. Output and new orders fell to six-month lows. The services PMI fell deeper into contraction mode. The 46.4 reading, down from 48.0, is a new five-month low, but note that the services PMI has not been above the 50 boom/bust level since January 2020. Last July it stood at 45.4. The pandemic was frequently cited as the main culprit. About 23% of Japan’s population is fully vaccinated, which is a little less than half of the level in many large European countries and the US and Canada.

Falling US yields and the risk-off sentiment is dragging the dollar lows against the yen. Initial support is seen near JPY110.00, and an expiring option for $350 mln at JPY109.80 may attract interest. Recall that before the weekend, the dollar settled on the week’s highs just shy of JPY110.60. The Australian dollar’s key upside reversal in the middle of last week off the year’s low (~$0.7290) faltered near $0.7400 in the last two sessions and was sold to nearly $0.7330 today.

There is an option for about A$455 mln at $0.7335 that will be cut today. The dollar edged higher against the Chinese yuan for the third consecutive session. It begins this week with an eight-week advance that goes back to the first week in June. The PBOC set the dollar’s reference rate at CNY6.4763, a little lower than the models in Bloomberg’s survey projected of CNY6.4768.

Europe

The July German IFO survey disappointed but remains at elevated levels. The expectations component deteriorated for the first time in three months, falling to 101.2 from 103.7, the highest level since 2010. The current assessment ticked up to 100.4 from 99.7. Although it missed expectations, it was still the strongest since mid-2019. The overall business climate reading stands at 100.8, down from 101.7 in June. It is the first decline since January.

Last week, the UK announced it would station two naval ships in Asia as part of the attempt to preserve free navigation and check China’s aggressiveness. Today, reports suggest it is looking at ways to remove China’s state-owned nuclear energy company (China General Nuclear Corp) from future projects in the UK. This could put at risk the GBP20 bln power station (in a joint effort with France’s Electicite de France) and the planned development in Essex.

CGN also has a 33% stake in the Hinkley Point facility being constructed in Somerset and is among the UK’s largest construction projects. Recall that the UK will permanently shut five of its eight nuclear plants by 2024.

At the end of last week, the ECB confirmed that the cap on dividends and buybacks for banks will be allowed to expire at the end of September. However, it still urged banks under supervision to be cautious. The UK had made similar moves earlier this month. A little more than a third of the banks in the Euro Stoxx 600 Index report earnings this week. Note that eurozone banks typically pay dividends only once a year. Bank shares are off about 0.6% today.

The euro is firm. It appears to be forging a shelf in the $1.1750-$1.1760 area for the sixth session. It is knocking around $1.1800. Last week’s high, set on July 19, was about $1.1825. There is an expiring option for a little more than 620 mln euros at $1.1830 today. Sterling is firm and has risen a little above last week’s high of $1.3790. A move above $1.3820 would lift the tone. Support is seen around $1.3735.

America

This is a big week in the US with the FOMC meeting and the first look at Q2 GDP on tap. However, there are other important events as well. First, there will likely be a test vote in the Senate on the bipartisan infrastructure initiative. Our concern is that even if the Senate strikes a compromise, the House may prove more difficult. Some want immigration to be included, and others may reject the funding compromise that could be reached in the Senate. Second, Treasury Secretary Yellen acknowledged that the statutory debt limit is back on August 1 and that the various maneuvers can buy for a couple of months.

Recall that in 2011, over a similar dispute, S&P downgraded the US. Among the first places to look for investors to respond may be in the T-bill auctions, though it is not exactly clear when Treasury runs out of room. Third, large tech companies, including Apple, Alphabet, Facebook, Microsoft, Qualcomm, and Amazon, report earnings this week. So do Telsa, Ford, Exxon, Chevron.

The US begins the week with June new homes sales, which are expected to bounce back after falling for two months. The limited supply seems to be the major culprit. The July Dallas Fed manufacturing survey is due, and it is expected to have edged higher. It, too, has slipped lower for the previous two months. Canada has a light economic diary until the middle of the week, when the June CPI will be reported. The year-over-year rate (3.6% in May) could soften for time this year, largely as a result of the base effect.

Two of the three core measures are also expected to have eased. At the end of the week, Canada reports May GDP, which is likely to have contracted for the second month. That said, Canada appears to be emerging from the soft patch. Mexico also has a busy week. Today’s unemployment data is followed by the trade balance tomorrow and Q2 GDP at the end of the week. According to the median forecast in Bloomberg’s survey, the economy is expected to have expanded by 1.8% on the quarter, after a 0.8% expansion in Q1.

The US dollar peaked against the Canadian dollar last Monday near CAD1.28. It was sold to around CAD1.2530 before consolidating ahead of the weekend. A break of CAD1.25 would strengthen the conviction that a high is in place. It corresponds to both the 20-day moving average, which the greenback has not closed below since early June, and the (38.2%) retracement objective of the uptrend since then.

A convincing break could signal a test on the CAD 1.24 area. The US dollar flirted with the 200-day moving average against the Mexican peso last week (~MXN20.21) but failed to close above it and tested MXN20.00 before the weekend. It is little changed on the day in Europe, having already tested the MXN20.1650 area. A break of MXN19.97 could spur a decline toward MXN19.82.

This article was written by Marc Chandler, MarctoMarket.

Stretched Dollar Remains Firm

Sterling fell to new six-month lows while the euro recorded its lowest level since late March, and the Australian dollar fell to new lows for the year. Led by a 2% fall in the South African rand, with the bulk of the sell-off coming after the central bank kept policy rates unchanged, which is now lower on the year, most emerging market currencies weakened. The Russian rouble was the strongest in that space, though the lion’s share of the gains came before the central bank hiked its key rate by 100 bp to 6.5% ahead of the weekend.

The dollar had seemed to track short-term US interest rates until recently, and its strength has come in the face of softer rates. The implied yield of the December 2022 Eurodollar futures contract finished the week near 42 bp, down 13 bp over the past few weeks. The 10-year yield fell to about 1.125% before recovering to trade closer to 1.30% at the end of last week.

The dollar and interest rates are behaving as one would expect in a risk-off environment. The contagious Delta variant appears to be dampening activity economic activity in Australia, Japan, and parts of Europe. Several US states are recording multi-month highs in cases, and weekly initial jobless claims unexpectedly rose to their highest level in two months (in the week through July 16).

Floods in Germany, Belgium, and China could also impact economic activity and prices. Droughts in North America may boost food prices and boost natural gas prices as an alternative for a decline in hydroelectric output. A freeze in Brazil sent coffee prices sharply higher, while wildfires in Canada saw lumber prices rise dramatically (almost 22% over the past three sessions) after trending lower in recent weeks.

On the other hand, equities are harder to fit into the risk-off narrative. Most of the large Asia Pacific equity market fell, but Europe’s Dow Jones Stoxx 600 rallied and will take a four-day advance into next week. The benchmark is within striking distance of the record high it set earlier this month. The S&P 500 and NASDAQ advanced and have only fallen in two of the past eight weeks. They are both poised to set fresh recorded highs.

Dollar Index

The Dollar Index recorded a key reversal in the middle of last week. After rising to its best level in three months (~93.20), it reversed lower and settled below the previous day’s low. Follow-through selling the next day took it to 92.50 and the 20-day moving average. It recovered by stalled near 93.00 before the weekend. Neither the MACD nor the Slow Stochastic confirmed the new high, but the underlying tone remains constructive and buying on dips seems stronger than the selling pressure into rallies. Moreover, the five and 20-day moving averages cross-over has caught the major moves this year since February, and the five-day average is still above the 20-day.

The year’s high was set in late March near 93.45. A break above there could target the high from early last November near 94.30, and the 94.50 area corresponds to the (38.2%) retracement of the drop since the panic-driven high in March 2020 near 103.00.

Euro

The downside momentum of the euro seemed to pause in recent days ahead of $1.1750. However, the bounces have been brief and shallow. The momentum indicators have not confirmed the recent lows. The risk is for a test on the year’s low set in late March near $1.1700, and a break of it could signal a return to the low set near $1.16 on the night of the US election last November.

The ECB’s lower for longer forward guidance could attract funds into the asset markets, but the euro itself is unloved, and speculators in the futures market are still scaling out of a net long position. A move above $1.1830, where the 20-day average is found, would lift the tone. The euro has not closed above the 20-day moving average since early June.

Japanese Yen

The dollar began last week testing JPY109.00, its lowest level since late May as the US 10-year note yield slumped below 1.20%. By the end of the week, the yield was back near 1.30%, and the greenback was around JPY110.60. It settled above its 20-day moving average (~JPY110.40) for the first time in a couple of weeks. The MACD and Slow Stochastic have turned up from oversold territory. Overcoming chart resistance near JPY110.65 could see a push above JPY111.00. The year’s high was set earlier this month near JPY111.65.

British Pound

Sterling fell to five-month lows near $1.3570 on July 20, just shy of the (50%) retracement of the rally from last November, found near $1.3550. In the second half of the week, a recovery attempt stalled near $1.3785 in front of the 20-day moving average (~$1.38). This area presents an important technical hurdle, which overcoming would lift the tone. The momentum indicators look constructive as they try to turn higher. A move below $1.3680 warns of a return to the lows.

Canadian Dollar

The greenback reached 5.5-month highs against the Canadian dollar at the start of last week, near CAD1.28. It pulled back to the CAD1.2525 area before buyers re-emerged, and it consolidated mostly below CAD1.26. The MACD has turned down, as has the Slow Stochastic, without confirming the high. Still, a push back above the CAD1.2650 area could warn of another run at the highs. The 20-day moving average is near CAD1.25, and the US dollar has not closed below it since early June. Doing so now would likely confirm that a top is in place.

Australian Dollar

The elevated covid cases in Sydney and the weakest composite PMI (preliminary reading) since May 2020 (45.2) illustrate headwinds for the Australian economy. The minutes from last month’s RBA meeting showed that officials have a flexible stance toward bond purchases. It is likely to use that flexibility at its August 3 meeting to boost its bond purchases. Ahead of that, investors expect a jump in Australia’s Q2 CPI, with the headline rising above 3.5% year-over-year from 1.1% in Q1.

The underlying measures will likely firm toward 1.5%-1.6% from 1.1%-1.13%. The Aussie posted a key reversal in the middle of the week by falling to new lows for the year (~$0.7290) and then recovered to finish above the previous day’s high. Sellers were lurking in front of $0.7400 and drove it back to $0.7350 ahead of the weekend. The pre-weekend price action was poor, and the close was near session lows. The next important support area is near $0.7300.

Mexican Peso

Although the dollar set four-day lows ahead of the weekend, it still managed to close high (0.5%) on the week for the third consecutive week. The JP Morgan Emerging Market Currency Index fell for the fourth consecutive week and the sixth weekly fall in the past seven weeks. The greenback peaked against the peso in the middle of the week, slightly above the 200-moving average (~MXN20.21). Initial support now is seen near MXN19.95 and a stronger shelf in the MXN19.80-MXN19.83 area.

The Slow Stochastic is trending higher and is approaching overbought territory. The MACD has flatlined near the trough. In the slightly bigger picture, the dollar has mostly been confined to a range set on June 24 (~MXN19.7150-MXN20.2150).

Chinese Yuan

The US dollar posted a minor gain of about 0.15% against the yuan ahead of the weekend to secure another weekly advance. The advance covers the last eight weeks without fail. While that is statistically true and no doubt has not been lost on official and private observers, it is also true that the greenback has been mostly in a CNY6.45-CNY6.50 range. Rather than see a depreciation of the yuan, it has gone essentially nowhere.

The dollar has not traded above the high set in late June near CNY6.4910 this month, though it was approached a couple of times. It is also true that the yuan’s 0.7% gain against the dollar this year make it one of the strongest emerging market currency so far this year and stronger than all the major currencies but the Canadian dollar (~1%). Moreover, by focusing on the eight-week decline of the yuan against the dollar, one misses the fact that the yuan is at five-year highs on a trade-weighted basis (CFETS).

This article was written by Marc Chandler, MarctoMarket.

Lower for Longer

While the existing vaccines seem to have lost some of their ability to prevent the illness, they remain a power prophylactic against hospitalization and death. Nevertheless, new social restrictions have been introduced in some high-income countries, even those like Israel, that have been fairly successful in vaccinating a large part of their population.

The virus is once again raising the prospects of slowing the economic recovery that was unevenly unfolding. The preliminary July PMI for Australia, UK, France, and the US disappointed. Expectations for the trajectory of monetary policy are being impacted. Consider that the implied yield of the December 2022 Eurodollar futures fell to 40 bp in the middle of last week from 55 bp on July 1.

A similar futures contract in the UK, the December 2022 short-sterling implied yield fell from 58 bp in mid-July to almost 40 bp on “Freedom Day” as the UK dropped all social restrictions and mask requirements. The implied yield of the December 2022 Bank Acceptances in Canada fell 20 basis points from July 14 to nearly 105 bp ahead of the weekend. In Australia, the December 2022 bill futures contract’s implied yield fell a little over 60 bp on July 6 to 36 bp last week.

The December 2022 Euribor futures contract has been considerably steadier as it is widely accepted that the European Central Bank will not lift rates until after 2023. The implied yield has been confined to a -42 bp to – 50 bp trading range since the end of April. The yield finished last week at -49 bp, falling about five basis points since the ECB meeting. The ECB’s new forward guidance signaled that bond purchases and low rates will prevail until the staff forecasts that the 2% target can be sustained. In June, the staff forecasts projected 2023 CPI at 1.4%.

The signal of lower for longer helped drive European bond yields to new 3-4 month lows. The French 10-year bond yield had been offering a positive yield since the second half of April but recently moved back below zero. One has to pay Greece 50 bp to lend to it for two years, which is a little more than one would pay to Italy for the same maturity.

Greece takes about 15 bp a year from those lending to it for five years, while Italy’s five-year yield has dipped below zero for the first time since early April. The amount of negative-yielding bonds in the world has increased to almost $16 trillion from below $13 trillion in late June, and that does not include Japan’s 10-year bond, where the benchmark yield is less than a basis point.

The ECB’s dovishness likely minimizes the impact of the preliminary July CPI figures. In July 2020, the eurozone saw consumer prices fall by 0.4% on the month and again in August. This speaks to a likely acceleration of the year-over-year pace from 1.9% in June. Also, note that since at least 2000, prices gained less in July than in June (and consistently rose more in August than July).

The monthly increase in June was 0.3%. The Bloomberg survey shows economists anticipate sharp month-over-month declines in Italian and Spanish prices. French CPI is also expected to have fallen slightly in July. German inflation may have ticked up. These considerations suggest the year-over-year rate may have edged above 2%.

The eurozone will provide its first estimate of Q1 GDP at the same time as the CPI figures on July 30. Recall that in Q4 19, before the pandemic struck, the eurozone economy was stagnant. Last year contracted in H1 before recovering in Q3. However, unlike the US experience, the eurozone economy contracted against in Q4 20 and Q1 21. Despite the spread of the Delta mutation and the floods in parts of Europe, including Germany, the recovery now appears to be on more solid footing, and the EU Recovery Funds are at hand. The regional economy likely expanded around 1.4%-1.5% in Q2 and is poised to accelerate further here in Q3.

The highly contagious, though less lethal mutation (if vaccinated), has pushed investors to reconsider the recovery theme that had two drivers last November, the US election and the vaccine announcement. Of course, this does not mean that it is the only development in the market, but it seems to be a relatively new and powerful one. The US dollar rallied as the pandemic first struck, partly as a safe haven as US Treasuries were bought and partly as a function of the unwinding of dollar-funded purchases of risk assets (e.g., emerging markets).

When things began to stabilize at the end of last March 2020, and the NBER now dates the end of the US recession as April 2020, the dollar trended lower and accelerated into the end of the year and began to recover in early January. From the end of March through December last year, the Antipodeans and Scandis led the move against the greenback and appreciated roughly 20%-25% against the US dollar. These currencies are often perceived to be levered to world growth and are often more volatile than the other majors. Over the past three months, they have been the weakest, losing 3.0-6.50%.

The opposite is also true in the sense that the Swiss franc and Japanese yen, other currencies often used for funding, hence the appearance of safe-haven appeal, were the worst performers against the dollar in the last nine months of 2020 (rising about 8.25% and 4.5% respectively). However, over the past three months, they have been among the most resilient in the face of the dollar’s surge. The Swiss franc is off less than three-quarters of a percent, while the yen is off by about 2.4%.

A challenge for investors and policymakers is the evolution of the virus that renders some of the high-frequency data rather dated and arguably less impactful outside of the headline risk posed. The Federal Reserve has succeeded in securing for itself much room to maneuver and is not tied to a particular time series, like the monthly jobs report or data point. The FOMC statement is likely to hardly change from the previous one.

Discussions about the pace and composition of the Fed’s bond-buying will continue. Still, Fed Chair Powell was speaking for the central bank when he told Congress recently that the bar to adjust the purchases (substantial further progress toward the Fed’s targets) has not been met.

The Jackson Hole symposium at the end of August has long been seen as the first realistic window of opportunity for the Fed to signal its intention to slow, possibly alter the composition of its bond purchase, and shape it more formally at the September FOMC meeting. Ahead of Jackson Hole, there is one more jobs report, and the early call is for around a 750k increase.

Reporters may try to draw Powell out but are unlikely to have much more success than the US Senators and Representatives. There is ongoing interest in the size of the reverse repo facility, for which the Fed now pays five basis points at an annualized rate, the same as a six-month bill. In addition, Powell pushed back against suggestions by some officials that the central bank’s MBS purchases are lifting house prices beyond the access of many American families. Will reporters press him on this or the buying of inflation-protected securities that arguably distort the price discovery process and the break-even metric?

Stable coins’ regulatory framework may be questioned. Recall that just before Biden took office, the Comptroller of the Currency allowed federally chartered banks to used distributed ledgers (blockchain) and conduct business with stable coins. There is a push to treat stable coins as securities for regulatory purposes. While the ECB recently announced it was going forward with a research and design phase of its development of a digital euro, the Federal Reserve’s report is expected in September. Powell said what many officials seem to believe that the introduction of a digital dollar would likely dry up demand for stable coins and crypto.

The day after the FOMC meeting concludes, the US reports its first estimate of Q2 GDP. The median forecast in Blomberg’s survey has crept up in recent days to 8.5% at an annualized pace, up from 6.4% in Q1. The NY Fed’s GDPNow model puts growth at 3.2%, while the Atlanta Fed’s model is closer to the market at 7.6%, while the St. Loius Fed Nowcast stands at 9%.

Even before this surge in the virus in the US, where about half of the adult population is fully vaccinated, we suggested there was a reasonable chance that Q2 marks the peak in growth. Fiscal policy will increasingly be a drag, pent-up consumer demand will be satiated. Monetary policy is near a peak. Perhaps the recent increase in the rate paid on deposits at the Fed and on the reverse repo facility and the recent sales of corporate bonds bought in 2020 mark the end of the easing cycle. We have also underscored the restrictive impact of doubling the oil price since the end of last October.

While there does not appear to be an iron law, it would not be surprising to see price pressures peak with a bit of a lag. This dovetails with the timeframe suggested by both Powell and Yellen. Some recent industry data suggests that the US used car market (accounting for around a third of the recent monthly increases in CPI) is normalizing in terms of inventory, and prices have softened in the wholesale markets.

We note that input prices and prices paid components Markit PMI have fallen in June, and the preliminary report suggests a further decline is taking place this month. Airfare and the price of hotel accommodations, and food out of the house, appear to be a one-off adjustment rather than persistent increases.

The US will report June personal income and consumption figures ahead of the weekend, but the data will already be embedded in the GDP estimate. On the other hand, the PCE deflator, which the Fed targets rather than the CPI, may draw attention. It is expected to post a sharp 0.7% increase on the month for around a 4.2% year-over-year. It rose by 0.4% in May and a 3.9% year-over-year rate. The core rate, which the Fed does not target but makes references from time to time, is expected to accelerate to 3.7% from 3.4%.

Lastly, the infrastructure debate in the US Senate looks to come to a head in the days ahead. It could, in turn, shape the political climate until next year’s midterm elections. The latest wrinkle is that what might serve as the basis of a compromise in the Senate may be rejected by a number of Democrats in the House. The failure to find a bipartisan solution for even the physical infrastructure components will not defeat the Biden administration but force it to rely on the reconciliation mechanism, which is confined to fiscal policy.

It would likely hamper the administration on non-budgetary fiscal issues. The debt ceiling looms. The Congressional Budget Office sees the Treasury running out of room to maneuver in October or November. Biden’s spearheading of a 15% minimum corporate tax rate might not need their approval, but the approval of 60 Senators may be needed for the other component of the global tax reform, the agreement to link the sales and taxes for the largest companies.

This article was written by Marc Chandler, MarctoMarket.

Delta Variant Saps Risk Taking Appetites, Sending the Greenback Higher even as Rates Fall

Equities are under pressure. Nearly all the markets in the Asia Pacific region and Europe are lower. The MSCI Asia Pacific is paring last week’s 1.4% advance, while the Dow Jones Stoxx 600 in Europe is off for the fourth consecutive session at six-week lows. Only the consumer staples and health care sectors are posting small gains. The S&P 500 futures are off nearly 0.5%.

The Dow futures are off more, while the NASDAQ futures are down a little less. Bonds are bid, and the US 10-year yield is around three basis points lows near 1.26%. Core European benchmark yields are softer, and most are trading at new three-month lows today. Peripheral bonds have come under pressure as the European morning progressed. The dollar rides high, with the Scandis and dollar-bloc currencies off leading the move with losses of mostly 0.3%-0.7%, with the Canadian dollar being tagged for more than 1%.

The yen is the notable exception, and it is posting modest gains. Emerging market currencies are all lower, led by the Czech koruna and South Korean won. Gold, which had been flirting with $1835 a couple of sessions ago, is testing the $1800 area. The OPEC+ agreement is pushing oil lower. September WTI is trading below $70. The next technical target is seen in the $66.80-$68.60 area. Copper is off for the fifth session in the past six.

Asia Pacific

OPEC+ struck a deal yesterday that had been rumored last week. The output will increase by 400k barrels a day next month. Gradually, the 5.8 mln barrels a day that have been shuttered will come back to the market. The key to the deal was the baseline of not just the protesting UAE, but others will be adjusted higher. The UAE’s baseline from where cuts will be measured was boosted to 3.5 mln barrels a day from 3.17 mln, and not quite what it had initially sought (3.8 mln).

Saudi Arabia and Russia saw their baselines increase by 500k barrels to11.5 mln. September WTI fell 3% last week, the most in three months. It was the second weekly decline after a nine-of-ten-week advance (~21%). While the political compromise resolves the immediate crisis, there are fissures with the bloc and, for many, the baseline may be than a little embellished.

The surge of the Delta virus and reports of a “Delta plus” mutation gaining ground is emerging as a powerful economic and political factor. The Reserve Bank of Australia meets on August 3, and there are already forecasts that it will take back its recent decision to taper (from A$5 bln a week to A$4 bln). The governing coalition is slipping in the polls, and the opposition Labour is now six percentage points ahead. According to Newspoll, satisfaction with the vaccine rollout has fallen to 40% from 53% in April.

Meanwhile, two polls show support for the Japanese cabinet is continuing to decline, and the pre-Olympic build-up is marred with new covid cases among athletes. The Kyodo poll showed support for the cabinet falling more than eight percentage points to 35.9%. A Mainichi Shimbun poll had the support rating falling four points to 30.

The dollar is trading near session lows against the Japanese yen in the European morning but has not taken out last week’s lows near JPY109.70. Below there is this month’s low, slightly above JPY109.50, which stands in the way of a move toward JPY109. The Australian dollar finished last week at new lows for the year, and follow-through selling has pushed it beyond the (61.8%) retracement target of the rally since the end of last October (~$0.7380).

The next important support area is not until closer to the $0.7230-$0.7250 area. The US dollar firmed for the second consecutive session against the Chinese yuan. It is at a six-day high near CNY6.4850. The greenback has been trading in the CNY6.45-CNY6.50 range for the past several weeks. The PBOC’s dollar reference range was the tightest to expectations (CNY6.4700 vs. CNY6.4705) for several sessions.

Europe

A bit of a caricature of”Freedom Day” in the UK has materialized. The health minister Javid, who recently returned to the government, acknowledged he tested positive for covid. Prime Minister Johnson and the Chancellor of the Exchequer have also been ordered into quarantine due to their contact with Javid. “Freedom Day” drops the mandatory mask-wearing and social distancing requirements.

Ironically, Israel, one of the most vaccinated countries, has reimposed some restrictions (e.g., mask-wearing indoors) dubbed “soft suppression” to avoid a fourth national lockdown due to the contagion of the new variant. Separately, there seems to be a dispute in the UK government over a potential GBP10 bln healthcare tax that the Prime Minister and Health Minister Javid are pushing for, but meeting resistance from the Chancellor of the Exchequer Sunak. In Germany, the polls have yet to show the impact of the flooding. The national election is in just over two months. CDU/CSU candidate Laschet’s attempt at jest seemed to go over like a lead balloon. The Green’s maybe in the best position to gain.

The economic highlight of the week is the ECB meeting followed the preliminary PMI. The central bank needs to bring its forward guidance into line with its redefined symmetrical inflation target of 2%. The adjustment is expected to begin preparing the groundwork that lifts the bar to an exit from the extraordinary monetary policy. In fact, it seems likely that what was once regarded as extraordinary–bond purchases, long-term loans at negative rates, and a negative deposit rate–will be part of the standard operating procedure even after the Pandemic Emergency Purchase Program is completed next year.

As we have noted, the ECB has not hiked rates since 2011, and even then, the move was seen as a mistake, and Draghi unwound the two hikes in his first two meetings as ECB President. The Bloomberg survey found a median expectation for the manufacturing PMI to ease a bit, while the service PMI is expected to quicken. The net result is a marginal new high in the composite PMI.

The euro’s 0.6% loss from last week is being extended today, and the single currency looks to be heading toward the low for the year set at the end of March near $1.1700. There may be some chart support around $1.1740. A move above $1.1820 would help stabilize the tone. We note that the latest Commitment of Traders shows that as of July 13, the net long speculative euro position is the smallest since last March at around 59.7k contracts, down from 165k contracts in early January. The fifth loss in six sessions has brought sterling to nearly $1.37, where the 200-day moving average is found. Sterling had not traded below this moving average since last September, when it was closer to $1.27.

The sell-off is pushing sterling through the lower Bollinger Band (~$1.3715). There is some old congestion around $1.3670 that may offer some near-term support. However, the next important chart area is not until closer to $1.3550. The net long speculative sterling position in the futures market fell by nearly 2/3 in the CFTC reporting week through July 13. At below 8k contracts, it is the smallest since early January.

America

A simmering dispute over the terms of the new North American free-trade agreement broke into the open last week. Ironically for many observers, in some important respects, the Biden administration is taking a tougher line on trade than Trump. This applies not only to China, where sanctions have been extended, and as we learned last week, there are no plans for regular high-level meetings on economic matters, as there were under Bush and Obama.

Mexico and Canada argue that the Biden administration is backtracking from the understanding struck with Trump officials about the technical rules for cars and parts shipped across the regional borders. As a result, they are threatening to launch a formal complaint under the terms of the treaty. If the case goes against them, it will be harder for Mexico and Canada to meet the thresholds. Yet rather than necessarily move production capacity to the US, as the US administration and the United Auto Workers seem to assume, producers in Mexico and Canada could forfeit the advantage and pay the WTO tariff schedule of 2.5% on passenger vehicles (and a much stepper 25% on light trucks).

The US economic calendar is dominated by housing markets reports (starts and sales) and the preliminary PMI at the end of the week. In addition to bills, the government auctions 20-year bonds and 10-year TIPS. Fed officials enter the quiet period ahead of July 27-28 FOMC meeting. The highlight for Canada is the May retail sales report on Friday, which is expected to be soft. Mexico also reports May retail sales at the end of the week, but before that, it will report the biweekly CPI measure.

Banxico meets on August 12, and the market appears to have about a 50% chance of a 25 bp hike discounted. Brazil reports July inflation figures, and another rise is expected (8.50% vs. 8.13%), which underscores expectations for another 75 bp when the central bank meets on August 4.

The US dollar has soared against the Canadian dollar, jumping through the 200-day moving average (!CAD1.2625) to reach CAD1.2780, its highest level since early February. The weakness in equities and oil are sources of pressure. The next important chart point is not until closer to CAD1.2850, the (61.8%) retracement objective of the US dollar slump since the end of last October. The greenback is now well beyond the upper Bollinger Band (~CAD1.2680).

The CAD1.28-area corresponds to three standard deviations from the 20-day moving average. The net long speculative position in the futures market was chopped by nearly 15k contracts in the week through last Tuesday, the most since last March. It stands near 26.4k, the smallest since early May. The US dollar is firm against the Mexican peso, but it remains below last week’s high (~MXN20.0820). The greenback continues to trade within last Tuesday’s range (~MXN19.8150-MXN20.8020). Speculators in the futures market have been net short the peso since the end of April.

This article was written by Marc Chandler, MarctoMarket.

Rates and Currencies Act like They are From Different Planets

The 10-year yield slipped four basis points on the week to 1.32%. The yield has risen in three of the past 15 weeks. It is tough to argue that it is a fluke. While it is holding above the 200-day moving average (~1.25%), the 30-year yield has spent the last two sessions below its 200-day moving average (~1.975). The implied yield of the December Eurodollar futures fell five basis points last week and is off near 15 bp over the past five weeks.

The dollar rose against all the major currencies but the Japanese yen, which eked out a negligible gain. The combination of economic data and central bank statement (and an end to asset purchases) spurred the market to price in an RBNZ rate hike as early as next month (August 17). Still, the Kiwi finished slightly lower on the week. Still, it joined the yen and Swiss franc, whose central banks are widely expected to be among the laggards in adjusting monetary policy, to be the only currencies that have risen here in July against the US dollar.

Perversely, the other two high-income countries in the front of the queue to adjust policy, Norway and Canada, have the poorest performing currencies this month (~-2.80% and -1.70%, respectively).

Dollar Index

The Dollar Index rose by about 0.6% last week. Still, it is up less than 0.30% in July after rising 2.9% in June. In recent days, it has held below the three-month high set on July 7, near 92.85. The MACD is slowly declining, while the Slow Stochastic has pulled back from overbought territory but is threatening to cross higher. The year’s high was set at the end of March near 93.45. A break of that March high would have bullish implications and it least signal at test on the 94.40-94.50 area. On the other hand, a move below 91.55 would suggest a high may be in place.

Euro

The euro fell to new three-month lows last week, slightly above $1.1770. The single currency has spent the last three sessions within the range set on July 13 (~$1.1770-$1.1875). Immediate resistance is seen in the $1.1840-$1.1850 area. Ahead of the ECB meeting on July 22, the risk is on the downside as the market prepares for a dovish forward guidance adjustment in light of its new symmetrical 2% inflation target. The MACD has not confirmed last week’s lows. The Slow Stochastic edged out of oversold territory but has moved sideways in the second half of last week. A convincing low does not appear to place, and the next important support area is seen closer to $1.17.

Japanese Yen

After matching a five-day high on July 14 (~JPY110.70), the dollar reversed lower, arguably with the drag of falling yields, and finished below the previous session’s low. The outside down day saw follow-through dollar selling the following day, but good bids were seen around JPY109.70. The greenback recovered a bit ahead of the week, as yields edged higher and settled slightly above JPY110.05.

Although the MACD and Slow Stochastic appear to be poised to turn higher, they haven’t yet. The correlation between US 10-year yield and oil prices over the past 30-day is near the highest since March 2019 (~0.52, rolling 30-day correlation of differences). A move above JPY110.85 could see the dollar rested the month and year high around JPY111.65. Below the JPY109.50 area, support is seen ahead of JPY109.00.

British Pound

Strong inflation and consumption figures spurred hawkish rhetoric from a couple of BOE officials and firmer short-term UK rates, but sterling still fell around 0.95% against the US dollar and lost about 0.35% against the euro. Indeed it posted a weekly close below $1.38 for the first time since April. Sterling closed poorly, and although it held above the recent lows in the $1.3730-$1.3740 area, it looks weak.

The cap near $1.39 looks stronger than support, and the 200-day moving average may beckon (~$1.3695). The Slow Stochastic has cycled to the middle of the range without a strong recovery in prices, and it looks to be poised to level out. The MACD moved gently off its lows but could turn down again.

Canadian Dollar

What a miserable two-week stretch for the Canadian dollar. It has fallen in eight of the ten sessions and has fallen by 2% over this run. The data has been firm, and the Bank of Canada did take another step toward slowing its bond purchases. The greenback covered the week’s range in two days. There were buyers for it on the pullback after the Bank of Canada’s announcement near CAD1.2425, and the following day it was flirting with the upper Bollinger Band (~CAD1.2610) and the 200-day moving average around (~CAD1.2625).

Above there, the CAD1.2700 marks the halfway point of the US dollar’s sell-off since last November’s election, but there appears to be little chart resistance ahead of the CAD1.2740-CAD1.2750 area. The MACD is stretched but continues to move higher. The Slow Stochastic has flatlined below last month’s high.

Australian Dollar

With a little more than a quarter of the population having received a single vaccine and a longer and tighter lockdown in parts of the country, the economic prospects have dimmed. They offer a stark contrast with New Zealand. The Australian dollar was sold to new lows for the year ahead of the weekend, as it slipped below $0.7400. We have recognized the risk of a move to $0.7380, which would complete the retracement (61.8%) of the rally since the US election last year. Below there may not be much support for another half of a cent. The MACD has is nearly a horizontal line in the trough, while the Slow Stochastic is moving sideways a little above the low set earlier this month.

Mexican Peso

The US dollar set the week’s range on July 13 (~MXN19.8150-MXN20.0820). It finished the week near the lower end of the range, but this represented only a small loss for the greenback (<0.15%). Still, it is the third decline in the past four weeks. The JP Morgan Emerging Market currency index eked out a minor gain last week (0.1%) to end a two-week decline. Although the peso is the only LATAM currency to rise so far here in July (0.4%), it was a poor performer last week in the region.

The Brazilian real came back into favor rising 2.8%, the Peruvian sol rose 1.6%, and the Colombian peso rose slightly more than 0.6%. The Chilean peso lost the most in the region (~1.25%) despite the central bank hiking rates and suggesting it may be the first of several. The momentum indicators are mixed. Broad sideways trading seems like the most likely near-term scenario. The MXN19.75 area offers support below MXN19.80.

Chinese Yuan

The yuan was virtually unchanged against the dollar last week, finishing slightly below CNY6.48. It leaves it off by about 0.33% here in July and up by nearly 0.75% year-to-date. Three-month implied volatility settled June a little above 5%. It began last week above 5% and finished at its lowest level since March 2020 (~3.93%).

The lower end of the near-term dollar range appears around CNY6.45, but it looks poised to test the upper-end that comes in around CNY6.49. The greenback has not traded above CNY6.50 for about three months. Although the firmness of June economic data shows the quarter ending on an upbeat, the PBOC does not appear to be in a hurry to ease policy further. The 10-year onshore yield fell to fell to 2.92% on July 13, its lowest in a year.

The low currency volatility and the non-correlation of the bond market to other major bond markets attract foreign asset managers. Year-to-date, the US 10-year yield has risen 40 bp, the German Bund by 22 bp, the British Gilt 43 bp, and the Chinese bond yield is off almost 20 bp.

This article was written by Marc Chandler, MarctoMarket.

The Dollar Reverses Lower: Is this the Real Thing?

The dollar’s rally into early July left the technical indicators stretched, and we note that near-term trend reversals recently have occurred around the end of the month or US jobs report.

Despite the first employment report that beat expectations in three months, US interest rates softened. In fact, the implied yield of the December 2022 Eurodollar futures contract fell four basis points. The contract traced out what appears to be a key reversal by making new lows before rallying and closing above the previous high (in price). The two-year note yield, which doubled in June, slipped lower for the fifth session in the past six. The 10-year yield fell every day last week for a cumulative decline of 10 to approach 1.40%, the lower end of where it has traded over the past four months.

The new week begins off slowly with the US holiday on Monday. Given that the individual forecasts of Federal Reserve officials were not discussed at last month’s FOMC meeting, and Chair Powell played them down, it ought not to be surprising if the minutes were not as hawkish as the dots. Still, while some “buy the rumor sell the fact” type of trading of the dollar was seen after the employment data, the market will want to see follow-through before becoming convinced that the month-long dollar rally is over.

Dollar Index

The Dollar Index rose to a new high since early April ahead of the jobs report, reaching almost 92.75. It sold off and closed near its lows, around 91.20. A potential key reversal was traced out. A break of 92.00 favors a near-term top being in place, and a move below 91.50 would be convincing. The momentum indicators are over-extended but are still pointing higher. As scar tissue shows, even with technical indicators seeming near extremes, prices can continue to rise, but the reversal pattern and weak close is the ideal set-up to mark the end of the month-long rally.

Euro

The common currency bounced off the push below $1.1810 after the employment data but did not take out the previous session’s high (~$1.1885). It snapped a four-day slide. A move above $1.19 would help stabilize the tone. The late June high near $1.1975 needs to be overcome to boost confidence that a meaningful low is in place. The momentum indicators are oversold territory, but if $1.1800 is given, there is little on the charts before $1.1700, which corresponds to the March low and the (38.2%) retracement of the rally since the pandemic low in March 2020 (~$1.0635).

Japanese Yen

The US dollar posted a bullish outside up day in the middle of last week, trading on both sides of the previous session’s range and closing above its high to move back above JPY111.00. However, ahead of the weekend, it posted a bearish outside down day. It made a marginal new high for the year, a tad above JPY111.65, where the upper Bollinger Band was found. The high from March 2020 was slightly higher at JPY111.70. The high from last year was set in February by JPY112.25. The MACD does not appear stretched, but the Slow Stochastic is more so. Both look poised to turn lower. The yen is often a range-trading currency, and the lower end of the range may be represented by the trendline off the Q2 lows, which is near JPY110.00 now.

British Pound

Sterling fell to its lowest level since mid-April (~$1.3735) before the US jobs data. It recovered to almost $1.3850 to record a key upside reversal. It has fallen in four of the past five weeks, and as a consequence, the momentum indicators are stretched. The MACD is poised to turn higher next week. Next week, follow-through cable buying could turn the Slow Stochastic, which has not confirmed the drop to the lowest level since mid-April. The $1.3870-$1.3900 offers the next hurdle. For its part, the euro has been struggling to sustain a foothold above GBP0.8500 and now looks set to pull back and return to the lower end of its range, closer to GBP0.8500.

Canadian Dollar

The Canadian dollar was the most impressive of the majors at the end of last week. After making a marginal new high near CAD1.2450, before the US jobs report, the greenback reversed lower, taking out the previous three sessions’ lows to record key reversal. Indeed, it surpassed the (61.8%) retracement objective of the bounce since the June 23 low near CAD1.2250. The nearly 1% US dollar decline (to about CAD1.2310) ahead of the weekend was the largest in a year. Initial support will likely be found in the CAD1.2300. A break of it could signal a move back toward CAD1.2200. The MACD has curling over, but the Slow Stochastic is, well, slower.

Australian Dollar

The Aussie recovered smartly after falling to a new low for the year (~0.7445) ahead of the weekend and rallied smartly through the high of the previous two sessions to rise to almost $0.7535. It, too, posted a key upside reversal. It also snapped a four-day drop, which followed a five-day rally the previous week. The MACD is headed lower though it is already at the lowest level since April 2020. The Slow Stochastic is headed lower, but follow-through gains next week could see it turn higher, which would leave a bullish divergence in its wake, has not confirmed the new low in price. The $0.7550-$0.7575 band offers nearby resistance and houses the 200-day moving average. However, it may require a move above $0.7600 to boost confidence that a durable low is in place.

Mexican Peso

The dollar peaked against the peso the day before the US employment report around MXN20.08, nearly reaching the (38.2%) retracement of the unexpected Banxico rate hike-induced slide (MXN20.1040). The pre-weekend sell-off saw it briefly trade below MXN19.75 to record a new low for the week. The momentum indicators are not particularly helpful now, but the dollar is likely to remain under pressure. Initial support is likely around MXN19.70 and then the five-month low set on June 9 by MXN19.60. The market has 50 bp of tightening priced into Q3.

Chinese Yuan

The yuan has been recently moving in line with emerging market currencies against the dollar. Consider last week, the yuan fell by about 0.25% and declined by around 1.3% in the month of June. The JP Morgan Emerging Markets Currency Index lost 0.5% last week and 1.2% in June. Still, the dollar rose for the fifth consecutive week against the yuan. Yet, last week’s high near CNY6.4850 was below the previous week’s high (~CNY6.4910)), and the greenback’s pullback after the employment data suggests a stronger yuan to start the new week. Initially, the dollar could ease toward CNY6.45 and maybe CNY6.43 in the coming days.

This article was written by Marc Chandler, MarctoMarket.

Dollar’s Upside Correction Stalls after 3-4 Weeks of Gains

The combination of a seemingly more hawkish Federal Reserve and position squaring around the expiration of futures and options had pushed the greenback dramatically higher and stretched the technical conditions. It had traded three standard deviations away from its 20-day moving average, for example, against several major currencies.

The dollar’s pullback should not be surprising, though several large banks appeared to throw in the towel on their bearish narratives. Nevertheless, our underlying concern remains intact that given the large trade and budget deficits, the US must offer higher interest rates or accept a weaker dollar, and more likely, a combination of both. Moreover, we recognize that the US economy may be reaching its peak pace of expansion here in Q2 and that price pressures should also begin easing.

At the press conference after the FOMC meeting, Chair Powell cited two concrete examples of prices. The first was lumber, which he noted, rallied sharply but had begun coming off. The price of lumber has nearly been halved since peaking in early May. The second example was used vehicle prices. They rose by 10% in April and more than 7% in May and accounted for around a third of the jump in CPI. Early industry reports suggest the wholesale market may have peaked, and retail should follow with a lag.

Dollar Index

After rallying to 92.40 in the aftermath of the FOMC meeting, the Dollar Index fell to almost 91.50, where the 200-day moving average intersects, in the middle of last week. The subsequent upticks stalled in front of 92.00. It finished the week near its lows. Additional near-term losses are likely. There is scope to test the 91.00-91.15 area. The Slow Stochastic has rolled over from overbought territory, and the MACD looks poised to do the same in the coming sessions. A break of the 90.60 area would deliver a blow to the apparently newfound bullish sentiment.

Euro

The euro rose in four of last week’s five sessions for a net gain of about 1%. Although it closed near the week’s highs, the market shied away from testing the $1.2000 area, where the 200-day moving average and (38.2%) of June’s decline is found. A move above there would likely signal a move into the $1.2050-$1.2100 band. The euro settled around $1.2125 on the day before the FOMC meeting concluded (June 16). The momentum indicators are turning up. A soft preliminary EMU June CPI figure followed by a firm US jobs report (estimates appear to be gravitating around 700k increase in nonfarm payrolls) may off a macro challenge to the constructive technical outlook for the single currency.

Japanese Yen

The dollar made a new high for the year against the yen, slightly above JPY111.10. However, it failed to settle above JPY111.00 and spent the entire pre-weekend session below it. Over the past 30 and 60 days, the correlation between the exchange rate and the US 10-year yield is stronger than the correlation with the 2-year yield. The US 10-year Treasury yield is struggling to rise much above 1.50%. Some observers still attribute the lowly yield to the Fed’s purchases but recall that the yield poked above 1.77% at the end of Q1. Since late April, the dollar has been trending higher, and that trend line begins next week near JPY109.75.

British Pound

Although all the major currencies but the yen rose against the dollar last week, sterling was an underperformer, rising a still-impressive 0.75%. In doing so, sterling snapped a three-week 2.7% decline. After finding support slightly below $1.38 at the start of the week, it ran into sellers around $1.40 in the middle of her week and subsequently drifted back to $1.3900.

The Bank of England may have sounded dovish, but the implied yield of the June 2022 short-sterling futures contract (three-month time deposit, like Eurodollar futures) eased by two basis points (~32.5 bp), still above the month’s low (26 bp). This suggests the market is still pricing in a hike over the next year. The Slow Stochastic has turned higher, but the MACD is lagging. A move above $1.4020 could spur a test on the $1.4100-$1.4150 area. On the other hand, a break of $1.3870 signals that the bears have the upper hand.

Canadian Dollar

The US dollar extended its recovery after failing to take out CAD1.20 at the start of the month, reaching almost CAD1.2490 at the start of it the week. It reversed lower and fell to about CAD1.2250 in the middle of the week before consolidating. It still looks vulnerable. A break of the CAD1.2250 area, which corresponds to the (50%) retracement of the June gains, signals a move toward CAD1.2200, the next retracement (61.8%), and the 20-day moving average. The MACD and Slow Stochastic have turned down from overbought levels that followed the four-week 3.2% greenback recovery.

Australian Dollar

The Australian dollar made new highs for the week ahead of the weekend, above $0.7600. The Aussie approached the (50%) retracement objective of the sell-off that began with the key reversal on June 11, when the high for the month was set (~$0.7775), selling off and settling below the previous session’s low. The momentum indicators are turning up, and further gains are likely ahead. A move through $0.7625 could see $0.7660-$0.7700.

A move now below the 200-day moving average (~$0.7560) would be disappointing. The central bank meets on July 14 and will likely adjust policy. The most likely scenario is to cease targeting the three-year yield at its cash target level. It may also reduce the size of its next round of QE.

Mexican Peso

The dollar soared nearly four percent against the Mexican peso in the week of the FOMC meeting. The greenback stalled at the start of the past week and was offered even before Mexico’s central bank surprised the world by raising rates. The dollar slumped by 1.7% on the day Banxico moved the most since last September. In fact, the greenback fell every session last week for the first time since April. The market is pricing in further aggressive tightening, encouraged by the bi-weekly CPI poked above 6%. The momentum indicators are pointing lower.

The five-month dollar low set earlier this month was a little below MXN19.60, and the low for the year was set in January near MXN20.55. A four-year trendline comes in near MXN19.04 at the end of next week, rising by about 0.01 pesos a week. We note that the momentum indicators are have also turned up for the JP Morgan Emerging Market Currency Index. The index bounced smartly off the 200-day moving average last week. It also rose in every session last week.

Chinese Yuan

The adjustment that the PBOC signaled in early June by lifting the reserve requirement for foreign currency forwards appears to have run its course. The dollar poked briefly above CNY6.49. We had anticipated a move into the CNY6.47-CNY6.4950 area. However, the way the PBOC is setting the dollar’s reference rate seemed to suggest that officials were content with the pullback in the yuan. The dollar slipped fell for three consecutive sessions against the yuan, and the loss before the weekend of slightly less than 0.25%, was the longest losing streak and the largest loss of the month.

If the CNY6.50 area is the upper end of a possible new range for the dollar, where is the lower end? That still has to be determined, but we suspect it may be around CNY6.4200. Although the yuan is a closely managed currency, it is notable that the Slow Stochastic and MACD are poised to turn lower for the dollar.

This article was written by Marc Chandler, MarctoMarket.