Brazil To Begin CBDC Pilot in Second Half of 2022

Key Insights:

  • Brazil’s central bank chief says the CBDC pilot would begin in the second half of 2022.
  • The CBDC will be guaranteed by the Brazilian real, and banks can issue stablecoins upon deposits.
  • Brazil chose nine projects in March, including Aave, Visa, and Microsoft, to develop CBDC.

The Central Bank of Brazil chief said Monday that it would begin the CBDC pilot later this year.

The President of Banco Central do Brasil (BCB), Roberto Campos Neto, announced the move during an event presented by TradersClub (TC) and Arko Advice.

Neto said that Brazil would start piloting its central bank digital currency (CBDC) in the second half of 2022.

CBDC Pilot Roll Out Coming Soon

The central bank gave a hint in November 2021 that it would roll out the CBDC pilot this year. However, earlier reports say that the asset will not be ready for use until 2024.

According to Neto, the sovereign national digital currency would be pegged to the country’s official currency— the Brazilian real (BRL). He also confirmed that the CBDC dubbed “Digital Real” would have a fixed supply, similar to Bitcoin.

“This is a way of creating the digitalization of the currency without creating a rupture in the banks’ balance sheets. This project should have some kind of pilot in the second half of the year.”

Neto stressed that the bank has been exploring and studying the process of CBDC for a long time. He believes that crypto is more prominent as a form of “investment rather than payment” but could change with broader adoption and acceptance.

It is unknown whether the pilot project would make the CBDC available to the public or would restrict the asset to the central bank itself.

Brazil Picks up Pace in the Crypto Marathon

The central bank joined hands with nine partner projects to complete its CBDC goals. Announced in March, the selected partners include Aave, a DeFi lending platform, Visa of Brazil, ConsenSys, and Microsoft.

Brazil has been catching up pace in the crypto space by introducing various “pro-crypto” measures. CBDC development isn’t Brazil’s only crypto-related pursuit. The city of Rio has been at the forefront of the crypto adoption movement.

Rio de Janeiro announced that it would allow its citizens to pay their real-estate taxes in cryptocurrencies. Additionally, the city plans to expand its crypto-friendly measures to stimulate arts, culture, and tourism.

Rio Secretary of Finance and Planning Pedro Paulo stated last month,

“Going further, we will use these crypto assets to stimulate the arts, culture, and tourism, through NFTs, and create a sound and responsible governance policy to evaluate the realization of crypto investments.”

The city announced early this year that it would buy Bitcoin as a store of value for city reserves. The seaside city said it intends to invest 1% of the Treasury in Bitcoin, and the mayor of Rio, Eduardo Paes, has promised to launch its coin dubbed “Crypto Rio.”

Over 40% of Global Crypto Owners in 2021 Are Newcomers – Survey

Key Insights:

  • Close to half of the global crypto owners bought their first cryptos in 2021.
  • Inflation is driving crypto adoption in countries that saw currency devaluation.
  • Women make up a majority of the ‘crypto-curious’ audience.

Nearly half of all current crypto owners in the United States, Latin America, and the Asia Pacific have bought crypto for the first time in 2021, a new survey states.

2021: Crypto’s ‘Breakout Year’

Per a report released by Winklevoss-owned crypto platform Gemini, crypto newcomers poured in last year, making it a blockbuster year for virtual currency investments. Noah Perlman, COO at Gemini said,

“Crypto adoption reached a true tipping point last year, becoming an established economic driver and a valued investment across the globe.”

Of 30,000 people surveyed in 20 countries, Gemini found that inflation was a major driving factor for crypto adoption. Especially in Brazil, Mexico, and India, where the local currency saw devaluation against the USD.

For instance, the Brazilian Real was the most depreciated major currency in 2020, falling nearly 30% of its value. Indonesian Rupiah devalued 50% against the dollar between 2011 and 2020.

The survey found that these countries have led the world in crypto adoption, with more women investing in cryptos such as Bitcoin and Ethereum.

Women-Led Crypto Future?

According to the findings, nearly half of the respondents who said they were ‘crypto-curious’ were women. In developing countries, including Israel (51%), Indonesia (51%), and Nigeria, women led the way by representing more than 50% of crypto owners.

On the other hand, only a third of current crypto owners are women in developed nations, including the US (32%), Australia (27%), and Europe (33%).

Source: Gemini

“Latin America is a leader in crypto ownership among women compared to other regions, with 43% of crypto owners in the region identifying as women. The trend of high ownership among women in Latin America is expected to continue with the crypto-curious audience,” the readings noted.

Additionally, more women responders said they are crypto-curious, who currently do not hold any cryptos but are curious to acquire in the next year. The survey added that Irish people are the most crypto-curious globally, followed by Germany, Colombia, and the UK.

The majority of the ‘crypto-curious’ people in Ireland are women, an Irish daily stated. Gillian Lynch, Gemini’s Head of Ireland and Europe, said,

“This global survey reveals that Irish people have a strong appetite for crypto, which is expected given Ireland’s international reputation as a hub for financial services and emerging technologies.”

Rio De Janeiro To Begin Accepting Taxes in Bitcoin in 2023

Key Insights:

  • Starting 2023, citizens can pay real estate taxes in Bitcoin in Rio de Janeiro.
  • The city will also expand the use of crypto to stimulate arts, culture, and tourism.
  • Bitcoin’s reaction to this news enabled it to cross $47k.

The decision was announced during the Cryptoactivity Carioca event, during which the Secretaries of Finance and Planning and Economic Development, Innovation and Simplification, Pedro Paulo and Chicão Bulhões, also made proposals to develop a market for crypto in the city.

Rio Goes Crypto

Taking the first step in accepting the world of crypto, Rio de Janeiro became the first city in Brazil to allow its citizens to pay taxes in crypto. This will enable Rio to be at the forefront of the crypto adoption movement.

To facilitate the same, companies will be hired that specialize in cryptocurrency conversion. Through them, the taxes received in digital assets will be changed back into fiat (Brazillian Real), enabling the City Hall to receive 100% of the entire taxes.

Commenting on this move, mayor Eduardo Peas stated,

“Our effort here is to make it clear that in the city of Rio we have official initiatives that recognize this market. Now those who invest in cryptocurrency and live in the city of Rio will be able to spend this asset here paying official tax in the city of Rio. And we will move forward in this fast.”

While Rio is the first city in Brazil to do so, it is not the first city in the world. Last month, FXEmpire had reported on the announcement by the Governor of the state of Colorado declaring that the state would begin accepting cryptocurrency for the payment of taxes by this summer.

Following him, the State Senator of California also proposed a bill stating the state would accept payments in crypto for the provision of government services.

But Brazil intends on expanding the use of crypto beyond just taxes and payments. The city plans on integrating all aspects of crypto to further itself. Secretary Pedro Paulo stated,

“Going further, we will use these crypto assets to stimulate the arts, culture, and tourism, through NFTs, and create a sound and responsible governance policy to evaluate the realization of crypto investments.”

Safe to say that if implemented, the recent growth of the crypto market could allure people into using it. 

Bitcoin on the Charts

Speaking about the recent growth, today marked a great moment of relief for many crypto investors since Bitcoin finally retraced its movement to the January highs of $47k. Trading at $47,094, BTC recovered 99% of the losses faced since the beginning of this year due to the bearishness imbued by the market.

But, with the 50 and 100-day SMAs turned back into support and the price action inching closer to doing the same with the 200-day SMA, the king coin might be back at $50k soon.

Bitcoin crossed $47,000 today after 3 months

Oil Longs in Major Retreat as Volatility Jumps

This summary highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, March 8. A week where the war in Ukraine, and increased sanctions against Russia dictated most of the market swings. The prospect for lower growth and even higher inflation helped send the MSCI World stock index down by 4.5%, bond yields rose while the dollar hit multiple month highs against several major currencies.

Saxo Bank publishes weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

Commodities

The Bloomberg Commodity Spot index jumped a massive 11.2% during the reporting week, with gains being led by industrial metals, and not least energy where crude oil surged higher by 20% before suffering a major correction the day after the reporting week ended. Overall it was another week where surging volatility across most commodities saw money managers cut both long and short position, the net result being a small 2% reduction in the overall long across 24 major commodities to 2.17 million lots. Increasingly difficult market conditions helped trigger a 180k lots reduction across oil, fuel products and natural gas while net length was added to most other sectors led by grains and softs.

During 2021 the 30-day volatility on the BCOM Spot index traded within a 10.5% range between 9% and 19.5% but since the war started on February 24, it has surged higher, thereby forcing many hedge funds targeting a certain level of volatility to cut their exposure. Led by the energy and industrial metal sectors it jumped 3% to 22% during the reporting week before finishing at 28.5% on Friday.

As long the volatility remains stable, trend and momentum following hedge funds will normally buy into strength and sell into weakness. The mentioned volatility surge partly helps to explain the current dislocation in energy between reduced positioning and surging prices.

Energy

Despite rallying by around 20%, speculators cut their combined length in WTI and Brent crude oil by 100.3k lots to a three-month low at 435k lots, the largest one-week reduction since last July. Brent which jumped 22% during the week saw the biggest impact with the 38% to 158k lots being the biggest reduction made by money managers in a single week since ICE started publishing the data in 2011.

The slump took the net in Brent close to the December low at 154k lots low point when oil briefly traded below $70/b in response to the rapidly spreading omicron virus variant. The move was driven mostly by a pullback in outright longs of 63.5k lots, but also by the biggest addition in short bets (+33.6k lots) since 2016.

Long liquidation across all three fuel futures added to the story of speculators booking some profit after a one-week gains up to 42% had taken all three to record highs.

Metals

Gold surged to near the 2020 record high during the reporting and the fear of missing out of further gains saw funds raise their exposure in gold, silver and platinum through a combination of fresh buying and short positions being scaled back. As the table highlights, all three metals saw their net long jump to levels not seen in many months. Gold buyers added to 5% to 176k, a 20-month high, silver 15% to 49k, a two-year high and platinum by 72% to a one-year high at 26k.

Continued gold buying during the past five weeks had lifted the net long by 113k lots or 180% and after failing to hit a fresh record high above $2075 the temptation to book profit helped trigger the subsequent sharp correction which only paused on Friday when support was found at $1960, the 31.8% retracement of the February to March 290 dollar rally.

In HG Copper the return to a fresh record above $5/lb last Monday helped support a 36% increase in the net long to 42k lots, some 49k below the December 2020 peak and an additional 34k lots below the 2017 record at 125k lots. Highlighting a market where money managers remain unconvinced about copper’s short to medium term potentials, not least given continued uncertainty about the strenght of the Chinese economy.

Agriculture

Speculators finally managed to turn their CBOT wheat position around after 27k lots of net buying flipped the net to a long of just 20k lots. However, the hesitancy towards buying wheat at record levels and following a one-week surge of 30% was clear to see in the behavior, with the bulk of the net change being due to short covering and not fresh longs. KCB wheat meanwhile saw a small reduction of 2% after speculators cut short and long positions. Corn was also bought while the soybean complex was mixed.

Following weeks of sugar selling, buyers suddenly returned to lift the net long by 135% to 140k lots. During the week, the price jumped by 6% with surging fuel prices raising the prospect of more demand for plant-based fuels such as sugar towards ethanol production. Net selling of coffee extended to a third week with a weakening demand outlook, as shipments to Russia are cancelled, helping to offset continued worries about weather related declines in the Brazil output this season.

Forex

Russia’s unprovoked attack on a sovereign nation entered a second week, thereby supporting continued broad dollar strength. The Bloomberg Dollar Index reached a 20-month high reflecting haven demand and the market beginning to price in a relative faster pace of US rate hikes.

Speculators using IMM futures contracts to express their views on forex ended up, despite the mentioned strength, reducing bullish dollar bets for an eight consecutive week. Albeit at a slowing pace than recent weeks, the combined dollar long against ten IMM futures contracts was nevertheless reduced by 3% to $7.3 billion, the lowest since last August.

Looking beneath the bonnet we the find the relative small net change hiding increased selling of EUR, GBP and CAD being more than offset by short covering in CHF and JPY. The minor currencies saw demand for MXN and BRL while particularly challenging trading conditions saw continued reductions in both Ruble long and short positions.

What is the Commitments of Traders report?

The COT reports are issued by the U.S. Commodity Futures Trading Commission (CFTC) and the ICE Exchange Europe for Brent crude oil and gas oil. They are released every Friday after the U.S. close with data from the week ending the previous Tuesday. They break down the open interest in futures markets into different groups of users depending on the asset class.

Commodities: Producer/Merchant/Processor/User, Swap dealers, Managed Money and other

Financials: Dealer/Intermediary; Asset Manager/Institutional; Leveraged Funds and other

Forex: A broad breakdown between commercial and non-commercial (speculators)

The reasons why we focus primarily on the behavior of the highlighted groups are:

  • They are likely to have tight stops and no underlying exposure that is being hedged
  • This makes them most reactive to changes in fundamental or technical price developments
  • It provides views about major trends but also helps to decipher when a reversal is looming

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

Start trading now

This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Russia-centric Commodities in Focus Last Week

This summary highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, February 22. Once again a reporting week that ended a few days before a major risk event took place, this time Russia’s attack on Ukraine last Thursday which triggered major moves across most asset classes. During the week in question risk appetite was already being challenged with the MSCI World Index as well as the S&P 500 Index losing more than 3% while US treasury yields reversed lower with the 10-year tenor falling 10 basis points to 1.94%

Saxo Bank publishes weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

The dollar traded unchanged, with speculators continuing to reduce their net longs, before rallying in the days that followed while commodities saw strong gains led by grains, energy and precious metals.

Commodities

The Bloomberg Commodity Spot index rose 3.3% in the week to last Tuesday, thereby reaching a fresh record high. Gains were led by commodities and sectors most at risk of being impacted by supply disruptions from Russia and Ukraine. These were crude oil, gas, palladium and grains while gold and silver received a safe haven bid amid lower bond yields and stock market turmoil.

Speculators reacted to these developments by adding length to gold and silver as well as grains, while net selling of crude oil surprisingly extended into a fifth week. Overall the total exposure across 24 major commodity futures rose 4% to 2.2 million lots representing an $8.4 billion increased in the nominal exposure to $171 billion.

Energy

Large money manager accounts cut, perhaps somewhat surprisingly, their combined lenght in crude oil for a fifth week by 5.6k lots to 509k lots. A $1.7/b widening of the WTI/Brent spread to $4.8/b during the week, now at at $6.9/b, helped drive a diversion between the two with the Brent crude oil long rising by 13.4k lots while the WTI long was cut by 19k lots. Fuel products and natural gas all saw their net longs being reduced.

Metals

The gold long jumped 28% to 161k lots as the price returned to $1900, and following three weeks of buying the net long was lifted by 98k lot to the highest since November. Such an aggressive position adjustments within a relative short period of time always tend to create a certain amount of volatility with corrections often ending up being deeper than otherwise warrented, something that was on clear display last Thursday – after this reporting week – when the price after reaching a one-year high suddenly dropped close to 100 dollars.

Silver also saw a sizable amount of buying lifting the net long by 48% to a four-week high at 26k lots. In platinum, the net long received a 157% boost while palladium, despite rallying by more than 5% saw no interest in adding length with the net remaining neutral. A quiet week in copper meanwhile driving a 9% reduction in the net long to 33.4k lots.

Agriculture

The grains sector saw broad buying interest with the net long in across the six futures contracts rising 65k lots to a ten-month high at 717k. Buying was concentrated in corn, and not least wheat where the 8.5% price jump only helped trigger a halving of the net short to 18k lots, hence the panic buying last Thursday when the price in Paris reached a record high while Chicago wheat reached levels not seen since 2008.

The soybean long meanwhile reached a 14-month high at 180k lots, still some 58k lots below the October 2020 high. All four soft commodity contracts saw witnessed long liquidation led by cocoa while the sugar long continued to deflate dropping 8% to 53.8k lots, lowest since since June 2020. Coffee and cotton both seeing a relative small 4% reduction.

 

Forex

Before surging higher last Thursday, following Russia’s attack on a sovereign nation, speculators had cut bets on a rising dollar to a six-month low. After six weeks of non-stop selling the dollar long against ten IMM currency futures and the Dollar index dropped to $8.5 billion last Tuesday with the main driver being a 25% increase in the euro long to 59.3k lots or $8.4 billion equivalent. Additional short covering in JPY and AUD also helped more than offset selling of CHF, GBP, CAD and NZD.

Among the minor currencies the Russian Ruble long rose 21% to 19.5k lots or $0.6 bn equivalent, a 14-week high, just days before starting a collapse which so far has seen drop by close to 30%. Length was also added to BRL which reached a five-year high at 24.4k lots and MXN which at 16.8k lots reached a 14-month high.

What is the Commitments of Traders report?

The COT reports are issued by the U.S. Commodity Futures Trading Commission (CFTC) and the ICE Exchange Europe for Brent crude oil and gas oil. They are released every Friday after the U.S. close with data from the week ending the previous Tuesday. They break down the open interest in futures markets into different groups of users depending on the asset class.

Commodities: Producer/Merchant/Processor/User, Swap dealers, Managed Money and other

Financials: Dealer/Intermediary; Asset Manager/Institutional; Leveraged Funds and other

Forex: A broad breakdown between commercial and non-commercial (speculators)

The reasons why we focus primarily on the behavior of the highlighted groups are:

  • They are likely to have tight stops and no underlying exposure that is being hedged
  • This makes them most reactive to changes in fundamental or technical price developments
  • It provides views about major trends but also helps to decipher when a reversal is looming

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

Start trading now

This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Celo Launches Brazilian Real-Pegged Stablecoin cREAL

The situation of cryptocurrency in Brazil is significantly different from most others as the world of digital assets has been thriving in the country. Accordingly, the launch of a regional currency pegged stablecoin for multi-purpose use makes for a successful venture. 

cREAL Is Real

The Celo-based stablecoin is pegged to the Brazilian Real but it is not collateralized by the national currency. The cREAL is a decentralized, over-collateralized, algorithmic stablecoin that tracks the value of Real. The announcement from Celo stated:

“Brazil is now the first — and only — country with a Celo stablecoin that can seamlessly be traded, accepted as payment for groceries or even a car, and used to access DeFi apps and services without regional friction.”

Celo created the stablecoin after successfully launching cUSD and cEUR, stablecoins pegged to the Dollar and Euro respectively. And as is with the other two stablecoins cREAL will be based on Celo’s stability protocol Mento, which is in turn supported by digital assets such as Bitcoin and Ethereum in the reserve.

Celo confirmed that starting today the stablecoin will be available in Brazil-based cryptocurrency exchanges such as FlowBTC, NovaDAX as well as Ripio.

Furthermore, Celo asserted:

“A key benefit of cREAL is that it enables users to trade digital assets and transfer value faster, cheaper, and more easily using their smartphones. Transactions speeds average 5 seconds, with fees under one cent.”

If successfully implemented and adopted cREAL could play a huge role in the thriving crypto community of Brazil. The country currently has over 10 million cryptocurrency owners which represent over 4.88% of the population.

The Future of Crypto in Brazil

Owing to the significant volume of money that is transacted in cryptocurrency in the country has led the Brazilian Senate announced bills to regulate the digital assets in the country.

The Bills which are scheduled to be considered in February this year, particularly focus on services related to crypto-assets, transactions, and operations of cryptocurrency exchanges as well the use of crypto by legal entities. The bill will also detail the penalty for crimes related to the illicit use of cryptocurrencies.

Crude Oil Sees Fastest Buying Pace in Two Years

This summary highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, January 18. A reporting week that ended with a deepening selloff in stocks as bond yields continued to climb on speculation the Federal Reserve will have to boost interest sooner and by more than previously expected. Treasuries fell along the curve, pushing yields up to levels last seen before the pandemic shook the markets nearly two years ago. The dollar held steady while commodities continue to attract demand with tightness in energy, industrial metals and some soft commodities shielding the asset class from being caught up in the risk aversity seen elsewhere.

Saxo Bank publishes weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

Commodities

The Bloomberg Commodity Index rose 1.3% during the week, with strong gains in energy and softs, and to a lesser extent metals offsetting another week of losses across the grains sector. These developments helped drive 51k lots of net buying across 24 major commodity futures from large speculators, bringing the total net long to a two-month high at two lots. Buying was concentrated in WTI crude oil, gas oil, natural gas and cocoa with net selling mostly impacting the grains sector.

Energy

Speculators continued their rapid accumulation of length in crude oil futures and during the past four weeks, the net buying of WTI and Brent reached 155k lots, a rapid four-week accumulation of this magnitude was last seen in January 2020, just before the pandemic temporary sucked the life out of the market. The combined net long reached a ten-week high at 559k lots or 559 million barrels with WTI buying of 23.7 lots offsetting a small 2k lot reduction in Brent. Even though it was small, the reduction in Brent may signal fading belief in its short term ability to break above $90, a level that was almost reached during the week.

Metals

The gold net long was reduced for a third week, albeit at a slower pace. The 4% reduction to 84.5k was primarily driven by fresh short-selling from funds fading the rally towards $1830, a recent resistance level now turned support. Silver’s emerging relative strength which during the week saw the gold-silver ratio drop by 3.4% helped drive a 33% increase in the net long to 23.8k lots, a seven-week high. Copper’s one percent weakness did not deter traders, as they increased their net long to near a three month high at 28.2k lots. In platinum, the net short was reduced by 62% to just 1.3k lots.

Agriculture

Speculators reduced length in soybeans and corn while wheat was mixed with buying of Chicago and selling of Kansas. In softs, cocoa and coffee saw strong buying interest. Despite rallying by 3% the net long in sugar kept falling to reach a 19-month low., thereby making it a potential strong recovery candidate with surging fuel prices raising the prospect for increased bio-fuel production. Cotton’s 4.4% jump only attracted a small amount of additional buying from funds seeking to get involved in the commodity with the highest roll yield, currently around 20% on a one-year basis.

Forex

In forex, speculators responded to the latest stock market weakness by aggressively selling dollars. Against ten IMM currency futures and the Dollar Index the net dollar long was reduced by 30% to a four month low at $16.5 billion, and the most aggressive week of dollar selling since June 2020. All of the major IMM futures contracts with the exception of CHF got bought, led by EUR where 18.6 lots of buying tripled the net long to 24.6k lots. The Sterling short was removed following 29k lots of buying while the CAD position flipped to a net long of 7.5k lots after speculators bought a total of 14.9k lots.

What is the Commitments of Traders report?

The COT reports are issued by the U.S. Commodity Futures Trading Commission (CFTC) and the ICE Exchange Europe for Brent crude oil and gas oil. They are released every Friday after the U.S. close with data from the week ending the previous Tuesday. They break down the open interest in futures markets into different groups of users depending on the asset class.

Commodities: Producer/Merchant/Processor/User, Swap dealers, Managed Money and other

Financials: Dealer/Intermediary; Asset Manager/Institutional; Leveraged Funds and other

Forex: A broad breakdown between commercial and non-commercial (speculators)

The reasons why we focus primarily on the behavior of the highlighted groups are:

  • They are likely to have tight stops and no underlying exposure that is being hedged
  • This makes them most reactive to changes in fundamental or technical price developments
  • It provides views about major trends but also helps to decipher when a reversal is looming

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

Start trading now

This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

GOLD Analysis – Bearish Indicators in Place

Gold remained silent even after the FED’s multiple announcements on rate hikes. Gold price will be on the watch this week during the testimony of FED Chair Jerome Powell.

XAUUSD closed the first week of 2022 with a 1.76% loss compared to its closing price of December 2021 at $1830. Inflation hedge – Gold seems to have a weaker edge over the strengthening US Dollar. Investment volumes of Gold decreased in Q3 2021, whilst in Q3 2020 total Gold bound to Investment was 495t a year after that number decreased to 235t. Gold tied to the investment had a dominating demand in Q3 2020 and has been decreasing since then.

Despite an increased purchases of Gold by global Central Banks in 2021, many CBs parted with their precious metal purchases to withhold the deflation of their local currencies as the US Dollar was gaining momentum by the end of 2021. Thus, Turkey had to sell 35.1 tonnes in 2021 to hold Lira from being depreciated, in 2020 Turkish CB purchased 163.1 tonnes of Gold. Largest Gold purchases in 2021 according to the data from the World Gold Council were made by Brazil 62.3 tonnes, Hungary 63 tonnes, India 73.8 tonnes, Japan 80.8 tonnes, Thailand 90.2 tonnes.

Largest CB increase/decrease in Q3 2021 looks as follows.

Based on this data, it is obvious that these Central Banks are hedging against the hike of the US Dollar Index. Kazakhstan, Uzbekistan and Russia will be more vulnerable during recent days against the US Dollar due to developments in Kazakhstan and these states will probably use their Gold purchases to withhold their currencies from depreciation, following the Turkish CB.

Left to right first row – USD/INR, USD/KZT, USD/UZS

Left to right second row – USD/BRL, USD/RUB, USD/TRY

While rate hike news in late 2020 and mid 2021 were referred to as a bullish signal for gold and bearish for the US Dollar Index, since mid 2021 markets more rely on FED’s redemption of goals, promises and forecasts. Despite some forecasts being flickering, achieving one of the main goals is considered bullish for the US Dollar. Positive economic data during this weeks release and Mr. Powell’s positive outlook on the economic recovery of the United States will ignite the bullish momentum of the DXY.

Daily XAUUSD chart projects a triangle pattern, and signals the retest of the lower edge of the triangle, based on the pattern’s rule.

MACD and RSI also signal a bearish trend continuation of XAUUSD up until the end of this winter.

Moving averages on a daily XAUUSD chart also do not favor the Gold bulls. MA200 and MA50 both are above the closing price of XAUUSD. Remarkably, the 200-day moving average is above the 50-day MA. This formation in technical analysis is referred to as a “Death Cross’ and always is a bearish signal.

There still is a dynamic support which was able to withhold Gold from sliding below $1700, however the lack of impulse and a pressure from the USD could force XAUUSD to break this support and go down to $1724 and $1680 below that.

Commodity Currencies Explained (Part I)

Let’s start by defining what could be called a commodity currency (or commodity pair).

Generally, a commodity currency represents a currency from a country or geographical zone that produces specific commodities which will account for most of its exports.

Some examples of currencies which could be considered as commodity currencies are presented in the following table:

Currencies Top Material Exports
Argentine peso (ARS) Soybean meal ($8.81B), corn ($6.19B), delivery trucks ($3.83B), soybeans ($3.47B), soybean oil ($3.38B), bran ($292M), other vegetable residues and waste ($232M), and ground nut oil ($131M)
Australian dollar (AUD) Iron ore ($67.5B), coal briquettes ($51.5B), petroleum gas ($34.1B), gold ($25.4B), aluminium oxide ($5.6B), sheep and goat meat ($3.07B), and wool ($2.26B)
Brazilian real (BRL) Soybeans ($26.1B), crude petroleum ($24.3B), iron ore ($23B), corn ($7.39B), sulfate chemical wood pulp ($7.35B), poultry meat ($6.55B), frozen bovine meat ($5.67B) and raw sugar ($5.33B)
Canadian dollar (CAD) Crude petroleum ($67.8B), cars ($40.9B), gold ($14.6B), refined Petroleum ($12.3B), vehicle parts ($10.8B), sawn wood ($6.35B), raw aluminium ($5.45B), potassic fertilizers ($5.27B), rapeseed ($3.23B), and rapeseed oil ($2.6B)
Indian rupee (INR) Refined petroleum ($39.2B), diamonds ($22.5B), packaged medicaments ($15.8B), jewellery ($14.1B), cars ($7.15B), Rice ($6.9B), Crustaceans ($4.67B), and Non-Retail Pure Cotton Yarn ($2.86B)
Indonesian rupiah (IDR) Coal briquettes ($20.3B), palm oil ($15.3B), petroleum gas ($8.32B), cars ($4.52B), gold ($4.01B), lignite ($2.91B), stearic acid ($2.76B), uncoated paper ($2.37B), and coconut oil ($1.9B)
Malaysian ringgit (MYR) Integrated circuits ($63B), refined petroleum ($17.8B), petroleum gas ($11.5B), semiconductor devices ($9.65B), palm oil ($8.91B), rubber apparel ($4.37B), other vegetable oils ($1B), copper powder ($873M), asphalt mixtures ($417M), and platinum clad metals ($127M)
Mexican peso (MXN) Cars ($53.1B), computers ($32.4B), vehicle parts ($31.2B), delivery trucks ($26.9B), crude petroleum ($26.6B), tractors ($10.7B), beer ($5.07B), tropical fruits ($3.6B), and railway freight cars ($3.57B)
New Zealand dollar (NZD) Concentrated milk ($5.73B), sheep and goat meat ($2.62B), rough wood ($2.31B), butter ($2.29B), frozen bovine meat ($2.09B), casein ($613M), and honey ($237M)
Nigerian naira (NGN) Crude Petroleum ($46B), petroleum gas ($7.78B), scrap vessels ($2.26B), flexible metal tubing ($2.1B), and cocoa beans ($715M)
Peruvian nuevo sol (PEN) Copper ore ($12.2B), gold ($6.76B), refined petroleum ($2.21B), zinc ore ($1.65B), and refined copper ($1.62B), animal meal and pellets ($1.54B), lead ore ($1.01B), fish oil ($434M), and buckwheat ($139M)
Russian ruble (RUB) Crude petroleum ($123B), refined petroleum ($66.2B), petroleum gas ($26.3B), coal briquettes ($17.6B), wheat ($8.14B), semi-finished iron ($6.99B), coal tar oil ($4.49B), raw nickel ($4.03B), and nitrogenous fertilizers ($3.05B)
South African rand (ZAR) Gold ($16.8B), platinum ($9.62B), cars ($7.61B), iron ore ($6.73B), and coal briquettes ($5.05B), manganese ore ($3.16B), chromium ore ($1.92B), titanium ore ($583M), and niobium, tantalum, vanadium, and zirconium ore ($480M)
Swiss franc (CHF) Gold ($59B), packaged medicaments ($46.2B), blood, antisera, vaccines, toxins, and cultures ($32.9B), base metal watches ($13.6B), jewellery ($10.9B), precious metal watches ($7.32B), and hydrazine or hydroxylamine derivatives ($501M)
US dollar (USD) Refined petroleum ($84.9B), crude petroleum ($61.9B), cars ($56.9B), integrated circuits ($41.4B), vehicle parts ($41.2B), medical instruments ($29.5B), gas turbines ($28.1B), aircraft parts ($16.3B), and orthopedic appliances ($12.1B)
Vietnamese dong (VND) Broadcasting equipment ($42.3B), telephones ($18.2B), integrated circuits ($15.5B), textile footwear ($10.6B), and leather footwear ($6.43B), coconuts, Brazil nuts, and cashews ($3.16B), fuel wood ($2.05B), cement ($1.39B), metal-clad products ($1.37B), and cinnamon ($175M)
West African CFA franc (XOF) Gold ($11.66B), cocoa beans ($3.84B), refined petroleum ($2.64B), rubber ($1.08B), raw cotton ($1.04B), and crude petroleum ($941M), cocoa paste ($795M), other oily seeds ($407M), Phosphoric Acid ($346M), coconuts, Brazil nuts, and cashews ($280M), ground nuts ($192M), zinc ore ($173M), raw zinc ($155M), electricity ($141M), cocoa shells ($115M), calcium phosphates ($95.7M), radioactive chemicals ($59.6M), rough wood ($59.5M), raw copper ($49.4M), Petroleum Gas ($42.5M), non-fillet frozen fish ($356.1M), other vegetable residues ($25.4M), and aluminium ore ($3.17M)

Data: The Observatory of Economic Complexity (OEC)

(Bold: products which the country/economic area was the world’s biggest exporter in 2019)

For active trading purposes, the ones highlighted in yellow would be characterised as freely floating and more liquid currencies. Thus, they would also be more accessible and less costly (with lower fees) to trade.

For hedging purposes, the others would present some advantages to the commercialisation of their associated natural resources, even though they would rather be considered more exotic currencies.

Charts

Here is a representation of some key commodity currencies presented in the above table on a weekly timeframe against the US dollar (reference currency):

Graphical user interface, chart, applicationDescription automatically generated

Each chart was represented within 2-standard deviation Bollinger Bands based on a 20-period simple moving average (in orange), a 50-period simple moving average (blue curve), a 200-period simple moving average (the black curve) and in the pane below is a 14-period relative strength index (in blue) to which was applied a 9-period simple moving average (red curve).

All those charts are displayed over a 2-year historical period.

In the next article I’ll focus on highlighting some correlations which may exist between key natural resources and the currencies in which they are usually traded.

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Thank you.

For a look at all of today’s economic events, check out our economic calendar.

Sebastien Bischeri
Oil & Gas Trading Strategist

* * * * *

The information above represents analyses and opinions of Sebastien Bischeri, & Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. At the time of writing, we base our opinions and analyses on facts and data sourced from respective essays and their authors. Although formed on top of careful research and reputably accurate sources, Sebastien Bischeri and his associates cannot guarantee the reported data’s accuracy and thoroughness. The opinions published above neither recommend nor offer any securities transaction. Mr. Bischeri is not a Registered Securities Advisor. By reading Sebastien Bischeri’s reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Sebastien Bischeri, Sunshine Profits’ employees, affiliates as well as their family members may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

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.

Brazil Stocks and Currency Plunge, Rate Futures Rise on Fiscal Fears

Economy Minister Paulo Guedes said late on Wednesday the government may try to exempt 30 billion reais ($5.3 billion) of spending from its fiscal ceiling in order to boost welfare spending at President Jair Bolsonaro’s request.

With Bolsonaro’s popularity slipping and headlines focused on a Senate inquiry calling for criminal charges based on his handling of the pandemic, the president has pushed for more government spending ahead of next year’s election.

In public remarks on Thursday he promised some 750,000 truckers relief to offset rising diesel prices, without giving details. He repeated a vow to more than double payouts from Brazil’s main welfare program in a fiscally “responsible” way, although markets shrugged off his assurances.

Brazil’s benchmark stock index plunged around 4% in Thursday trading to its lowest levels since November. The real weakened 2%, testing levels near 5.7 to the U.S. dollar for the first time since April.

Interest rate futures showed bets on even more aggressive rate increases by the central bank to contain inflation already running in double digits over the past 12 months.

JPMorgan analysts shifted their call for upcoming monetary policy meetings, forecasting the central bank will hike rates by 125 basis points next week and again in December instead of its prior outlook for continued 100-basis-point increases.

The proposal to exempt additional welfare spending from the spending cap “is already jeopardizing the credibility of the fiscal sustainability,” they wrote, adding that policymakers may turn even more aggressive with a 150-basis-point hike next week.

The JPMorgan analysts warned of fresh stimulus “backfiring” by forcing the central bank to tighten financial conditions, threatening a forecast for the economy to grow 0.9% next year.

For a look at all of today’s economic events, check out our economic calendar.

($1 = 5.6870 reais)

(Reporting by Jose de Castro; Writing by Brad Haynes; Editing by Chizu Nomiyama)

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.

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.

Brazil Cenbank Minutes Raise Possibility of 100 bps Hike at Next Meeting

By Jamie McGeever

The minutes of the June 15-16 meeting, where the bank’s rate-setting committee known as Copom raised rates to 4.25%, showed policymakers believe a full normalization of policy is now appropriate, shifting up a gear from a more cautious “partial” approach in recent meetings.

With inflationary pressures “more intense than expected”, a faster pace of policy tightening at the next meeting may be required, the minutes said. This would lift the Selic closer to the “neutral” level of interest, when the economy runs at full employment and potential growth without fueling inflation.

“In our view, the minutes go a step further (in relation to the statement) in giving Copom the flexibility to increase the rate of interest rate hikes, and/or go beyond neutral,” said Caio Megale, economist at XP Investimentos.

The 75-basis point increase in the central bank’s benchmark Selic rate last week was the third consecutive hike of that magnitude, as Copom seeks to prevent current inflation from lifting 2022 expectations beyond target.

The central bank’s 2022 inflation target is 3.50%. Copom last week said its baseline scenario currently points to 12-month inflation of 3.50% by the end of next year, but many economists reckon inflation next year will be closer to 4.00%.

Annual inflation is currently running at more than 8%. Copom’s own estimates point to it ending this year 5.8%, well above its goal of 3.75% and even the 5.25% upper limit of its target range.

“The Committee evaluated a quicker reduction of monetary stimulus already on this meeting,” the minutes read.

“The Committee decided that the best strategy would be to maintain the current pace of stimulus reduction but highlighting the possibility of a quicker adjustment in the next meeting.”

Economists reckon the neutral rate of interest would be a Selic of around 6.00%-6.50%. If inflationary pressures do not cool, Copom may be forced to go beyond 6.50%.

The minutes show Copom maintained “transparency” in its communications that more flexibility to adjust policy at a potentially faster rate was required, and that a return to the neutral rate “has become appropriate”.

Despite the recent exchange rate appreciation that has seen the dollar fall to around 5.00 reais, short-term inflation pressures remain strong, the minutes said.

(Reporting by Jamie McGeever; Editing by Andrew Heavens and Raissa Kasolowsky)

Without Yield Support, the Dollar Wilts

The JP Morgan Emerging Market Currency Index is edging higher for the fourth consecutive session. The lower yields are not doing equities much good today. Outside of China, the large equity markets in the region fell, and the MSCI Asia Pacific Index is posting back-to-back losses. The three-day rally in Europe’s Dow Jones Stoxx 600 is at risk as most sectors, but health care and real estate, are losing ground. Financials are the largest drag.

US future indices are a little changed to slightly firmer. Oil and other industrial commodities are firmer, and the CRB Index closed yesterday at new six-year highs. Gold is unable to benefit from the weaker dollar and lower interest rates. The upside momentum that had carried it briefly above $1900 fizzled.

Asia Pacific

China reported a smaller than expected rise in last month’s consumer prices but a larger rise in producer prices. Falling food prices helped temper the rise in consumer prices to 1.3% rather than 1.6% that the median in Bloomberg’s survey projected. The decline in pork prices helped keep food prices in check, while non-food prices rose by 0.9%. Producer price inflation accelerated to 9.0% from 6.8%. The median forecast was 8.5%. Oil, metals, and chemicals were the drivers. Beijing is trying to finesse lower producer prices by cracking down on unauthorized activity, but it does not appear sufficient.

Reports suggest it is considering some sort of cap on thermal coal prices before peak summer demand. One proposal would cap the price to the miners, while another proposal was to limit the price at the port. Still, the discussion shows that Chinese officials are still reluctant to allow supply/demand to adjust prices. If thermal coal prices or other commodities are not allowed to move freely, is Beijing really prepared to allow the yuan to be convertible as some are suggesting could take place with the introduction of a digital yuan?

The Reserve Bank of Australia did not adjust policy last week, but comments today suggest it may join the queue of central banks adjusting their stance as the inoculations are gradually allowing some return to normalcy. Former RBA member Edwards said that the RBA would likely scale back its QE next month, which others, including ourselves, had suggested was possible.

The RBA’s Assistant Governor Kent admitted he has been surprised by the strength of the rebound and is optimistic about growth fueling wage increases and inflation. Currently, the RBA targets the April 2024 bond at 10 bp. It is to decide next month whether to switch it to the November 2024 maturity. Targeting the 3-year yield at the cash rate is a way to underscore the lack of intent to raise rates in the interim.

The dollar is trapped in almost a 20-pip range against the yen today in the upper end of this week’s range. It has not been above JPY109.65 so far this week nor below about JPY109.20. There are about $1.2 bln in options in the JPY109.00-JPY109.10 area that roll-off today. The benchmark three-month implied volatility reached almost 5.53% yesterday, its lowest level since February 2020. The Australian dollar is steady, trading inside yesterday’s range, which was inside Monday’s range (~$0.7725-$0.7765). Like the dollar-yen, the Aussie is also in a 20-tick range so far today.

The Chinese yuan rose today, recouping the losses seen in the past two sessions. The dollar reached CNY6.4120 at the end of last week but has consistently recorded lower highs and lower lows this week. The PBOC’s reference rate for the dollar was set at CNY6.3956, spot on expectations. It is beginning to look as if official intent is more about breaking the one-way market that had appeared to develop and stabilize the yuan rather than reverse it. Whether defending a set line, which some have suggested at CNY6.35 or not, still has to be seen.

Europe

The ink G7 finance minister agreement on the minimum corporate tax is hardly even dry, and the first exception is being sought. The UK (and apparently the EU) want to exclude financial services from the new global tax regime. Separately, the US and the EU will have a rapprochement that will resolve the two outstanding disputes: The goal is to resolve the Boeing/Airbus subsidy issue by July 11 and end the steel and aluminum tariffs imposed by the Trump administration on national security grounds by the end of the year. The US has protested but will not escalate the sanctions for the Nord Stream 2 pipeline, and the tax reform would see European countries drop their digital tax initiatives.

Meanwhile, Europe is gradually taking a harder line against China. The EU Parliament is not proceeding with the ratification of the EU-China trade agreement struck at the end of last year. Italy, which was the only G7 country to sign on to the Belt Road Initiative, has blocked Chinese acquisitions under Prime Minister Draghi. Europe has endorsed the US call for new efforts to find the origins of Covid-19, even though the origins are unnecessary to combat virus and protocols to tighten security as labs during such work are necessary regardless of the precise origin.

Germany reported a 15.5 bln euro trade surplus in April, down from 20.2 bln in March. Exports growth slowed to 0.3% after a 1.3% gain previously. Imports fell by 1.7%, more than expected after the March series was revised to show a 7.1% gain (initially 6.5%). The smaller trade surplus translates into a smaller current account surplus (21.3 bln euros vs. 30.0 bln in March).

Unlike what we saw yesterday with the Japanese trade and current account figures, the German current account is driven by the trade balance. In Japan, the current account surplus is driven by foreign earnings, interest, royalties, and licensing fees, not trade in goods and services.

The euro is firm, but it too is trading inside yesterday’s range, which is inside Monday’s range (~$1.2145-$1.2200). There is an option for about 1.14 bln euros at $1.22 that expires today. The market is also circumspect ahead of tomorrow’s ECB meeting, for which a consensus has emerged that it will not return its bond-buying to that which prevailed before March.

We caution that knowing the ECB’s bond-buying plans does not help trade the euro or European rates, both of which have risen since the ECB accelerated its buying. Sterling, too is range-bound with last Friday’s range (~$1.4085-$1.4200). The general consolidative tone looks set to continue.

America

The Bank of Canada meeting is the highlight of the North American session today. At its last meeting in April, it announced it would slow its bond purchases and brought forward the closing of the output gap into H2 22. Since then, Canada has reported back-to-back job losses. The Canadian dollar has appreciated by almost 3.4% since that April meeting. It is the strongest of the major currencies. A decision on whether to proceed with tapering is expected at next month’s meeting, not today.

Yesterday, Canada reported an unexpected trade surplus for April. Exports and imports fell, with motor vehicle trade disrupted by the line shutdowns due to the shortage of semiconductors. Canada’s energy trade balance was in surplus by about C$6.8 bln, while the non-energy balance was in deficit by about C$6.2 bln. Canada had a C$6.4 bln surplus with the US and a C$2.2 bln deficit with China.

The US reports wholesale inventory data today ahead of tomorrow’s May CPI. The focus, however, is shifting to next week’s FOMC meeting. Yesterday, the US sold $58 bln 3-year notes. Although the high yield slipped fractionally, the bid cover ticked up, as did indirect bids. Today, the Treasury sells $38 bln 10-year notes and tomorrow $24 bln 30-year bonds.

Tomorrow’s four and eight-week bill auctions may draw more attention than usual as the earlier bill auctions showed a little uptick as the market anticipates that the Fed may have to tweak the interest it pays on reserves or the zero rate on the reverse repos (demand reached a new record of almost $500 bln yesterday). Separately, the US Senate passed (68-22) the bill to boost US competitiveness, which has some elements that were in the infrastructure bill. The bill now gets taken up by the House.

Mexico reports May CPI figures today. The year-over-year pace is expected to pull back from the 6.08% pace seen in April but not sufficiently to change anything. Moreover, the core rate is expected to quicken a little. Through April, Mexico’s core rate has risen by almost 5% at an annualized rate. The market appears to lean toward a rate hike by the end of the year and as much as four hikes by the middle of 2022. Brazil reports its IPCA inflation today as well.

The year-over-year pace is expected to have accelerated to nearly 8% from about 6.75% in April. The central bank has already indicated it will raise rates next week by 75 bp, the third such move of the year. It would lift the Selic rate above Mexico’s cash target rate after having begun the year at half of it.

A little position squaring yesterday lifted the US dollar to almost CAD1.2120, but it has come back offered today and traded CAD1.2085 in the European morning. This week’s low so far is about CAD1.2055. Key technical support is seen at CAD1.20, while CAD1.2145 marks the upper end of the recent range.

The Mexican peso is rising for the fourth consecutive session, the longest rally in two months. The greenback finished last week near MXN19.96 and is testing MXN19.62 now, its lowest level in five months. The next area of chart support is seen near MXN19.50. The US dollar is also on its 2021 lows against the Brazilian real. It has not been below BRL5.0 since last June.

This article was written by Marc Chandler, MarctoMarket.

Brazil’s 2021, 2022 Interest Rate Outlooks Shoot Higher after Cenbank Move: Survey

The central bank’s benchmark Selic rate is now expected to end this year at 5.50% and end next year at 6.00%, according to the average forecast of over 100 economists in the bank’s weekly ‘FOCUS’ survey.

The central bank’s rate-setting committee known as ‘Copom’ last week hiked the Selic rate by 75 basis points to 2.75%, the first increase in six years. It was more than economists had expected, and the biggest rise since 2010.

The new ‘FOCUS’ survey forecasts for this year and next are 100 basis points higher than they were only four weeks ago, but do not signal an increase in the terminal interest rate. That remains 6.00%, the average 2023 forecast economists have held for around five months.

The average 2021 inflation forecast rose for an 11th week in a row, to 4.7% from 4.6%, the survey showed, further above the central bank’s official goal of 3.75% with a margin of error of 1.5 percentage point on either side.

Annual consumer inflation is currently running at 5.2% and expected to rise to around 7% in the middle of this year before easing back.

A persistently weak exchange rate, strong global commodity prices and growing concerns over the government’s fiscal position are all pushing inflation expectations higher.

(Reporting by Jamie McGeever; Editing by Chizu Nomiyama)

Even When She Speaks Softly, She’s Yellen

After posting the first back-to-back decline this year, the MSCI Asia Pacific Index bounced back today, led by a 2.7% gain in Hong Kong (20-month high) and a 2.6% rise in South Korea’s Kospi. The Nikkei and Taiwan’s Stock Exchange rose by more than 1%. Europe’s Dow Jones Stoxx 600 eked out a small gain yesterday and is a little higher today. The S&P 500 fell in the last two sessions for a loss of a little more than 1% and is trading about 0.6% better now.

The US 10-year is firm at 1.11%, while European bonds are little changed, and the periphery is doing better than the core. Of note, France’s 50-year bond sale was greeted with a record reception. The dollar is lower against all the major currencies, but the yen. Most emerging market currencies are firmer as well. We see the dollar’s pullback as part of the larger correction that began almost two weeks ago.. Gold recovered smartly from yesterday’s test on $1800 to return to the 200-day moving average (~$1845). February WTI reversed lower ahead of the long holiday weekend and made a marginal new low today (~$51.75) before recovering nearly a dollar.

Asia Pacific

According to the recent government data, China’s rare earth exports fell by more than a quarter to what Reuters estimates are the lowest in five years. China attributed it to weaker global demand, but there is something else going on. Yesterday, China indicated that a new mechanism will be created to decide, coordinate, and regulate the rare earth supply chain (including mining, processes, and exporting).

Rather than exporting rare earths, China’s industrial policy aims to export products containing rare earths. Move up the value-added chain. The big push now apparently is for batteries for electric vehicles. The PRC has become a net importer of rare earths that it processes. Its imports often come from mines it owns outright or has an important stake. For example, the Democratic Republic of Congo is responsible for 60% of the world’s cobalt.

There are 12 mines, and reports suggest China has a stake in each, and more than 85% of the cobalt exports are headed to China. In 2018, China provided around 80% of US rare earths, and at least one mine in the US sends the material to China to be processed.

For the past several sessions, the dollar has forged a base in the JPY103.50-JPY103.60 area and is probing the JPY104.00 level. The high from January 14 was about JPY104.20, and there is an option for roughly $360 mln at JPY104.35 that expires later today, just shy of last week’s high near JPY104.40. The Australian dollar closed below its 20-day moving average yesterday (~$0.7100) for the first time in a little more than two months.

It rebounded earlier today to $0.7725. The session high may not be in place, and we suspect there is potential toward $0.7740. The dollar’s reference rate was set at CNY6.4883, practically spot-on median expectations in the Bloomberg survey of bank models. The dollar’s four-day advance was snapped today. It has risen from almost CNY6.45 and stalled in front of CNY6.50. Faced with an increase in interbank borrowing costs for the ninth consecutive session, the PBOC injected CNY75 bln in seven-day cash via repo agreements.

It is the first injection after draining for the past six sessions, and it was the largest supply of funds this month. Some liquidity appears to be going into equities, and Chinese traders reportedly bought a record $3.4 bln of HK shares today.

Europe

Despite Germany’s social restrictions, which may be tightened and extended, business sentiment held in better than feared. The ZEW survey assessment of current conditions did not deteriorate as economists expected, though it did not really improve, either. The -66.4 reading compares with -66.5 in December. However, the expectations component rose to 61.8 from 55.0. This is the highest since September and more than anticipated.

The UK Prime Minister, who holds the rotating G7 presidency, has invited South Korea, India, and Australia to the summit in June. Moreover, reports suggest Johnson intends on getting them involved right away, which seems aggressive. It appears to be causing some consternation among other members. Germany, Japan, France, and Italy are opposed.

Italy’s Prime Minister Conte survived the vote of confidence in the Chamber of Deputies yesterday, and today’s challenge is in the Senate. The government support is thinner. However, the ability to secure a majority is somewhat easier given that Renzi’s party will abstain, though it will still be close. A defeat could see Italian bonds sell-off, but Conte will seek to broaden the coalition in the existing parliament before elections are required. This could include independents or members of center-right parties.

Two central bank intervention announcements last week caught our attention. First, Sweden’s Riksbank announced a three-year plan to purchase SEK5 bln a month. The purpose is to fund reserve purchases in SEK and pay down the SEK178 bln fx loans from the National Debt Office, which is thought to be about 70% in US dollars.

The krona was trending lower this year against both the dollar and euro, which follows the krona’s appreciation in the last few months of 2020. The impact is minor in terms of average daily turnover, estimated to be around SEK300-SEK320 bln almost equally divided between euros and dollars.

Second, the Israeli shekel soared in recent months and reached levels not seen since Q1 1996. The Bank of Israel intervened and bought $21 bln in all of 2020, with almost $4.5 bln in December alone, and still the shekel appreciated by 7.5% and nearly 3%, respectively. Businesses and investors were crying for relief. The central bank announced it would buy $30 bln this year, which triggered a powerful short-covering rally that carried the dollar from nearly ILS3.11 to almost ILS3.29 by the end of last week.

Dollar sellers emerged yesterday. It is steadier today, but in wider ranges than typically seen before. Its preannounced intervention war chest may ultimately prove insufficient to prevent shekel appreciation. The $30 bln is roughly twice its current account surplus, but foreign direct investment inflows are nearly the same size as the current account surplus. And yet, net portfolio inflows should be expected, but most importantly, how Israeli offshore investment is managed can be impactful.

Profit-taking on foreign investments or hedging the currency risk, even on a small fraction of the roughly $470 bln of foreign stocks and bonds owned by Israelis, can be a significant force rivaling the current account and direct investment-related flows.

The euro was sold a little below $1.2060 yesterday, its lowest level since December 1st. It reached $1.2130 in the European morning, and the $1.2140 area is the halfway point of last week’s decline. The bounce has left the euro’s intraday momentum indicator stretched.

We expect North American dealers will take advantage of the upticks for a better selling opportunity. Also, note there are around 4.1 bln euros of $1.2190-$1.2200 options that roll-off today. Sterling recovered a little more than a cent from yesterday’s lows (~$1.3520) to today’s high. It faces resistance near $1.3635. Tomorrow the UK reports December CPI figures, and a small uptick is expected.

America

The Senate holds the confirmation hearing for Yellen. She was the first woman to head the Federal Reserve, and she will be the first woman to lead the US Treasury, and the first person to have held both posts. It is a reflection of our age. Like the current Federal Reserve, the former Chair can be expected to recognize the need for fiscal support, while at the same time acknowledging that deficits will decline on the other side of the emergency.

The stock of debt is elevated, but it not extreme in relative or absolute terms. Despite higher debt in 2020, the servicing costs appear to have fallen. Moreover, as the economy grows faster than the level of interest rates, debt will decline as a percentage of GDP. Her remarks on the dollar will be scrutinized. To demonstrate the Biden Administration’s multilateral thrust, at this juncture, it is sufficient for Yellen to acknowledge the G7/G20 position that exchange rates are best set by the market.

At the end of last year, the US Treasury cited Switzerland and Vietnam as currency manipulators. She may be asked about those, and of course, the yuan. The new US Treasury model had the yuan a few percentage points undervalued. However, it is interesting to note that when adjusted for GDP per capita, The Economist Big Mac index of purchasing power parity has the yuan slightly (~2.5%) overvalued.

The economic calendars for North America are light today. The Treasury’s International Capital (TIC) for November will be reported today at the end of equity trading. Capital flows were volatile at the onset of the pandemic, but long-term inflows averaged $23.56 bln in the first ten months of 2020 compared with an average of $27.21 bln in the same period in 2019 and $54.32 bln in the Jan-Oct period in 2018.

The week’s highlight includes the January Philadelphia Fed survey Thursday and weekly jobless claims, as well as Friday’s preliminary PMI. Canada reports the December CPI tomorrow, shortly before the outcome of the Bank of Canada meeting is announced. Although the consensus is for a standpat outcome, a “mini-cut” cannot be ruled out given the official rhetoric. The current overnight target rate is 25 bp. The main feature for Mexico is the December unemployment figures on Thursday. Brazil’s central bank meets tomorrow, and the is little chance of a change in the 2% Selic rate.

Last Thursday, the US dollar recorded its lowest level against the Canadian dollar since April 2018 (~CAD1.2625). Between the modest greenback strength seen yesterday and expectations that Biden cancels the XL pipeline, the US dollar tested CAD1.28. It has come back offered today and is testing the CAD1.2720 area in the European morning.

It can fall a bit further in the North American session, but we look for support in the CAD1.2690 area to hold. That said, a break could signal a move toward CAD1.2640. The greenback held below MXN20.00 yesterday and reversed lower, closing a little under MXN19.69. It has taken out yesterday’s low (~MXN19.66) but struggles to maintain the downside momentum. A move above MXN19.75 would suggest a return to MXN20.00 is likely.

The dollar fell from BRL5.5160 last week, its highest level since mid-Movember, to BRL5.20. The low from earlier this month was around BRL5.12, and there is scope for a re-test.

This article was written by Marc Chandler, MarctoMarket.

For a look at all of today’s economic events, check out our economic calendar.

Yuan Slumps as US-Chinese Tensions Rise

India was an outlier, suffering a 2.4% loss, and Taiwan’s semiconductor sector was hit, and the Taiex fell 0.6%. European markets are off to a strong start with a 2% gain in the Dow Jones Stoxx 600 to cut last week’s loss in half. The benchmark is approaching a two-week downtrend line near 399. US shares are higher, and this could lift the S&P 500 to test the key 2945-2955 area.

The US 10-year yield is little changed near 64 bp, but European bonds are lit with peripheral yields off 4-8 basis points. The dollar is mixed. The dollar-bloc currencies and Scandis are firm, while the European complex and yen are heavier. Risk appetites are also evident among emerging market currencies, where the South African rand, Mexican peso, Turkish lira, and Hungarian forint are higher.

The JP Morgan Emerging Market Currency Index is in a sawtooth pattern of alternating gains and losses for more than a week. It fell before the weekend and is higher now. The Russian rouble has been helped by the continued recovery in oil prices, where the July WTI traded above $31. Gold racing higher after pushing to new multi-year highs at the end of last week. The yellow metal is extending is advance for a fifth session and tested the $1765 area in Europe.

Asia Pacific

Japan reported its GDP contracted by 0.9% in Q1 or 3.4% at an annualized rate. It was a little better than expected though the Q4 19 loss was revised slightly to show a 1.9% quarterly contraction (earthquake and sales tax increase). This quarter understood to be considerably worse with expectations of a quarterly decrease of around 5.0-5.5%. Separately, even if not totally unrelated, the latest Asahi poll shows support for Prime Minister Abe is off about eight percentage points to 33%, the lowest in two years. The two big knocks include the handling of the virus and efforts to secure the power to appoint senior prosecutors.

At the same time that the US was announced a tighter ban on the sales of chips to Huawei, China took steps to dramatically increase its output of 14-nanometer wafers. Taiwan Semiconductor Manufacturing Corporation (TSMC) plans to build a wafer fabrication plant in Arizona needs to also be understood in this context too. The US prohibited without a license the sales of chips to Huawei if designed or made by US-produced technology and hardware. That would apply to TSMC, whose biggest customer is Huawei.

The US export controls were circumvented by servicing Huawei out of foreign fabrication facilities. The new actions seek to close the loophole, and it seems that China had been preparing for this be stockpiling in semiconductor chips.

The dollar is confined to less than a third of a yen range above JPY107.00 and is within the pre-weekend range. So far, it is the first session in four that the dollar held above JPY107.00, though this could be challenged in the North American session today. On the top side, a $2.2 bln option at JPY107.50 expires today. After settling on its lows before the weekend, the Australian dollar bounced back to test the $0.6455 area. Resistance is around the pre-weekend high near $0.6475.

The option for roughly A$635 mln at $0.6495 that expires today looks safe. A closed blow $0.6440 would likely signal that the corrective forces remain in control. Given the heightened tension between the US and China and the greenback’s strength seen late last week, today’s PBOC fix was closely watched. The dollar’s reference rate was set at CNY7.1030, which was a bit stronger than the bank models suggested. The dollar reached its highest level since it peaked on April 2 near CNY7.1280. The highest close was on March 25 near CNY7.1150 and is under threat today.

Europe

Bank of England Governor Bailey reportedly denied that zero interest rates were under consideration last week. And the BOE’s chief economist Haldane seemed to suggest that negative interest rates were among the unconventional measures that were being considered. We suspect that the contradictory signals are more apparent than real.

With the base rate at 10 bp, unconventional policy options are being discussed. Haldane was making this more academic point. Bailey was signaling the policy thrust, which is to say that expanding its asset purchase program holds more promise. The UK 2-year yield, which fell below zero last week, is now near minus five basis points.

The economic data highlight of the week is the preliminary PMI reports. The aggregate composite is expected to rise from the record low of 13.6 in April to 27.0 in May, according to the median forecast in the Bloomberg survey, as both the manufacturing and service sectors are forecast to improve. Ahead of the report, the European Commission is slated to announce its policy recommendations for a recovery package for next month’s meetings.

The euro is trading heavily but within the pre-weekend range. It has found a bid at $1.08, where a nearly 530 mln option will expire today. On the topside, the pre-weekend high was near $1.0850, and the 20-day moving average is just below there, likely keeping the $1.0875, expiring option for about 565 mln euros out of play. Sterling gapped lower (below $1.21) on the back of the talk of negative rates, but recovered to $1.2125 in the European morning.

It is struggling to maintain the downside momentum that has seen it fall for five consecutive sessions coming into today. Note that the lower Bollinger Band is found near $1.2115 today. The Turkish lira‘s short-squeeze is extending for its eighth consecutive session. News that Clearstream and Euroclear will not settle lira trades appears to have encouraged further buying back of previously sold lira positions. The US dollar found support near TRY6.81, as domestic demand (for debt servicing?) emerged.

America

The US calendar is light today. The highlight of the week includes the Philadelphia Fed survey (the Empire State manufacturing survey rose to -48.5 from -78.2) and the preliminary PMI (which is also expected to improve). April housing starts, and existing home sales will also be reported, and no fewer than eight Fed officials speak, including Powell (and Treasury Secretary Mnuchin) before the Senate Banking Committee tomorrow. Canada reports April CPI and retail sales figures this week. Mexico’s data highlight is the April retail sales report.

Conventional wisdom sees the negative yields in the US fed funds futures and concludes that investors are betting that the Fed cuts the target rate again. Some suggest that investors may be trying to push the Fed hand, deliver it a fait accompli, force it to cut, perhaps against its wishes. It is hard to argue against this. It seems to intuitively true.

Yet, the markets are not only about betting and taking on risk, but they are also for hedgers and people trying to layoff risk. The negative yields can be explained, even if no one thought the Fed would adopt negative rates. Imagine businesses that need to protect themselves against the chance.

They buy “insurance” from the seller, who then goes to the market to layoff the risk. Financial intermediaries may also choose to hedge the risk of sub-zero rates. Negative rates in the US appear to be more about swapping from floating to fixed rates and the related hedging then actually reflecting expectations of negative Fed policy rates.

Brazil is being punished. The currency and equity market are among the hardest hit, losing a third of their value. It is not simply a function of macroeconomics. Policy matters. The self-inflicted political crisis adds to the challenge posed by the crippling pandemic. President Bolsonaro has lost the confidence of investors who had been prepared to like him after several tumultuous years. The loss of the second health minister in a month during a pandemic that appears to give Brazil the fourth most cases in the world.

The US dollar is consolidating within the pre-weekend range against the Canadian dollar (~CAD1.4020-CAD1.4120). A six-week downtrend line is found today near CAD1.4160. With stronger risk appetites today, initial support near CAD1.4060 would be pressured in North America. The greenback is also consolidating against the Mexican peso with a heavier bias. Lows from the end of last week around found near MXN23.75. Below there, support is seen around MXN23.50, which also corresponds to the lower Bollinger Band. The dollar posted a key downside reversal on May 14 against the Brazilian real. Still, the follow-through dollar selling ahead of the weekend was reversed in late turnover, and the greenback finished on session highs (~BRL5.8560). The dollar’s record high was set near BRL5.9715.

This article was written by Marc Chandler, MarctoMarket.