Dollar Index Climbs After U.S. Retail Sales Show Surprise Rebound

The dollar index, which measures the U.S. currency against six others, added to gains following the report and was last up 0.5% at 92.866. It hit its highest level since Aug. 27.

Retail sales rose 0.7% last month, boosted in part by back-to-school shopping and child tax credit payments, while data for July was revised down.

A separate report showed U.S. initial claims for state unemployment benefits increased 20,000 to a seasonally adjusted 332,000 for the week ended Sept. 11. Economists had forecast 330,000 applications for the latest week.

“If you look at the retail sales number, it’s quite constructive even with the revisions, so we are seeing the dollar benefit from that, particularly against the funding currencies like the euro, Swiss and the yen,” said Bipan Rai, North American head of FX strategy for CIBC Capital Markets in Toronto.

The news could bolster investor expectations for next week’s Federal Reserve policy meeting and how soon the U.S central bank will start to taper stimulus.

“It feels like whatever lingering concerns there were with the underlying economy … that was kind of washed away a little bit. So as we move towards the Fed next week, the evidence backs up the idea that we’re going to get a taper signal from the Fed at the meeting,” he said.

On Tuesday, the dollar index fell to a one-week low of 92.321 after a softer-than-expected inflation report. Its low for the month was 91.941, on Sept. 3, when payrolls data disappointed.

Investors are looking for clarity on the outlook for both tapering and interest rates at the Fed’s two-day policy meeting that ends next Wednesday.

Tapering typically lifts the dollar as it suggests the Fed is one step closer to tighter monetary policy.

It also means the central bank will be buying fewer debt assets, in effect reducing the amount of dollars in circulation, which in turn lifts the currency’s value.

The dollar also gained 0.3% to 109.70 yen , after sliding to a six-week low of 109.110 in the previous session.

The euro was 0.4% lower at $1.1766.

The Swiss franc also fell against the dollar and was last at 0.9263 franc per dollar.

Elsewhere, the Australian dollar was down 0.5% at $0.7296.

Earlier, data showed the country’s jobless rate unexpectedly fell to 4.5%, but the statistics bureau said the change reflected a drop in the participation rate rather than a strengthening of the labor market.

In cryptocurrencies, moves in bitcoin were relatively subdued. It was last down 0.9% at $47,711. Ether changed hands at $3,589, down 0.7%.

AMC Entertainment Holdings Inc boss Adam Aron said in a tweet this week that the theater chain would accept ether, bitcoin cash and litecoin alongside bitcoin for ticket purchases.

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

(Reporting by Caroline Valetkevitch; Additional reporting by Ritvik Carvalho in London and Kevin Buckland in Tokyo; Editing by Alexander Smith, Mark Potter and Jonathan Oatis)

 

Two Major Surprises Today

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

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

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

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

Asia Pacific

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

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

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

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

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

Europe

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

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

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

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

America

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

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

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

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

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

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

This article was written by Marc Chandler, MarctoMarket.

Market Awaits Fresh Incentives

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

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

Asia Pacific

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

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

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

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

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

Europe

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

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

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

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

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

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

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

America

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

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

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

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

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

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

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

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

This article was written by Marc Chandler, MarctoMarket.

U.S. Dollar Climbs to 9-Month Peak on Fed Taper View, Delta Virus

The dollar index, which measures its performance against six currencies, hit 93.434, its highest since early November last year. It was last up 0.2% at 93.273.

“The U.S. dollar is broadly stronger today against the non-haven currencies with a strong risk-off tone in markets that are roiled by the spread by the Delta variant,” Shaun Osborne, chief FX strategist at Scotiabank in Toronto, wrote in a research note.

“Preparations for the beginning of the Fed’s tapering cycle may also not be helping,” he added.

The minutes of the Fed’s July meeting showed officials largely expect to reduce their monthly bond buying later this year, but consensus on other key issues appeared elusive, including the timing of the start of the taper and whether inflation, joblessness or the coronavirus pose a bigger risk to economic recovery.

The Fed minutes, along with sustained worries about the spread of the coronavirus, pushed Wall Street stock indexes lower. European markets were down as well on Thursday, while safe-haven U.S. Treasuries gained, with benchmark 10-year yields nearly 3 basis points lower at 1.246%.

The dollar hardly reacted to data showing weekly unemployment claims showed the number of people on state jobless rolls dropped in early August to levels last seen in mid-March 2020.

The euro fell as low as $1.1665 against the dollar for the first time since Nov. 4 and was last down 0.1% at $1.1699, while sterling fell 0.7% to $1.3679.

The reduction in debt purchases is also widely considered positive for the dollar as it is expected to raise U.S. government bond yields, making it more attractive for investors to hold dollar-denominated assets.

That said, Commerzbank analyst Antje Praefcke noted that the minutes provided little insight compared to what regional Fed chairs have recently said.

“The market will presumably only receive more detailed news in September when the Fed publishes its new projections and dot plots,” she said.

“Until then, it makes more sense to keep an eye on the current developments of the pandemic and economic data,” Praefcke added.

With pandemic fears in focus and oil prices falling, commodity-exposed currencies fell sharply on Thursday.

The Norwegian crown extended its fall against the euro even as the country’s central bank kept interest rates on hold and reiterated plans to hike them in September.

It fell more than 1% to the lowest since July against the euro at 10.5405 crowns and dropped similarly against the U.S. dollar.

The Australian and New Zealand dollars each fell more than 1% to their lowest levels since November 2020 at US$0.7144 and US$0.6810, respectively.

The Kiwi dollar extended its losses, when New Zealand entered a new lockdown, delaying its central bank from becoming the first in the G10 from raising rates during the pandemic.

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

(Reporting by Gertrude Chavez-Dreyfuss in New York and Yoruk Bahceli in Amsterdam; Additional reporting by Kevin Buckland in TOKYO; Editing by Gareth Jones, Tomasz Janowski and Sonya Hepinstall)

 

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.

Despite Fed comments, USD/MXN maintains its 20 cents range before NFP data

The US dollar fell against the Mexican peso on Thursday as investors awaited the US employment report scheduled for release on Friday. Before, the dollar’s bulls welcomed comments from two Federal Reserve members. However, the movement was contained.

The USD/MXN performed its second negative day in a row on Thursday after testing the 20.0000 area on Tuesday and Wednesday. In this way, the pair respected its 20 cent range between 19.8000 and 20.0000.

Daly and Clarida signal tapering measures

San Francisco Federal Reserve president Mary Daly and Federal Reserve vice president Richard Clarida both predicted that the Federal Reserve would be able to cut bond purchasing programs later this year or early in 2022 and to increase interest rates by 2023.

“I’m looking for continued progress in the labor market, continued putting COVID behind us, rising vaccination rates, the things that are so fundamental to us saying that the economy has achieved that metric of substantial further progress,” Daly said in a Wednesday interview. “Right now my modal outlook is that we will achieve that metric later this year or early next.”

According to Daly, tempering some economic activity would not derail the recovery in the United States.

Also on Wednesday, Clarida said the Fed would reach its targets by the end of 2021 and would begin raising rates in 2023.

“Given this outlook and so long as inflation expectations remain well anchored at the 2% longer-run goal … commencing policy normalization in 2023 would, under these conditions, be entirely consistent with our new flexible average inflation targeting framework,” Clarida said in a virtual interview.

USD/MXN waits for developments

usdmxn chart daily

In that framework, the USD/MXN is trading inside a 20 cents range between 19.8000 and 20.0000. Following the comments from Federal Reserve officials, the unit rose to test the 20.0000 area, but after the dust settled, it started to consolidate levels again.

The USD/MXN is currently trading at 19.9000, which is down by 0.08 percent today. Investors are now waiting and seeing what the nonfarm payroll data will reveal on Friday.

For day traders and short-term strategies, long opportunities are seen at the 19.8000 support, while the 20.0000 area is seen as a selling area.

There are two resistance levels to the upside: the 200-day moving average at 20.1500 and the 21 July high of 20.2500. Supports are located at 19.8000, 19.7000, and 19.6000.

USD/MXN Extends Decline Due to a Dollar Post-Fed Hangover and Tests 19.80 Support

The US dollar is declining against the Mexican Peso for the eighth day in a row as investors digest the effects of the Federal Reserve’s relaxed stance towards cutting stimulus and fighting inflation.

The USD/MXN traded lower on Monday. The pair tested the 19.80 level as a continuation of the July 29 break of the dynamic uptrend support line from June 9. The dollar is currently trading at 19.8075 against the Mexican peso, down 0.38 percent.

Investors are still digesting the Federal Reserve‘s monetary policy decision made last week. According to the American central bank, the United States economy is doing well, but the progress is not significant enough to justify a tapering in the near future.

The dollar index extended its decline after the Federal Reserve’s announcement, and it is now trading around 91.98, down 0.11 percent on Monday. Previously, DXY traded at 91.78 on July 30, its lowest level in over a month.

Wells Fargo analysts predict that no taper announcement will be made before the end of December.

“We look for the FOMC to make a formal announcement regarding the tapering of its asset purchases at the December 14-15 meeting, and we expect that the Fed will begin the process of winding down its purchases early next year,” the bank said in a recent note. “But before that formal announcement is made, we expect that Fed officials will hint that tapering will be forthcoming.”

USD/MXN below the 200-day moving average

USDMXN daily chart

In nearly two weeks, the USD/MXN lost around 2 percent of value from July 21 high at 20.25 to August 2 provisional low at 19.80. The pair achieved some technical milestones in the route, building up a bearish case that could lead the unit to 2021 lows at 19.50.

After the Fed, the bearish sentiment in the USD/MXN has just grown up. Now, the pair looks ready to tackle down the 19.80 area and extend declines to 19.70-75. Below there, 2021 lows wait at 19.55.

All eyes are now focused on the current week’s employment report. If the number is below expectations, the dollar will fall, giving the Mexican peso more room to gain.

The Inadvertent Debt/Inflation Trap – Is It Time To Face The Music?

What happens to a global economy after 10+ years of global central bank efforts to support a recovery attempt after a massive credit/debt collapse originates from a prior credit/debt housing bubble?  What happens to global economies when they become addicted to easy money policies and central bank activities that support greater and greater risk-taking? What is the end result of these actions after more than 10+ years of excess and central bank support for the markets?

Let’s play this out a bit to think about how the current market environment may be similar to what happened in the mid/late 1990s and see if we can come to any real conclusions. Remember, we are using our research and technical analysis skills to play a “what if” scenario in this research article.  Our current trading systems have not warned us of any major Bearish price trends of price collapses that may take place. Our systems are still trading the US markets based on current market trends.  This research is completely speculative in the sense that we are trying to identify “what if” scenarios based on events in the recent past.

One thing that our research team has been discussing over the past 8+ months, since shortly after the US elections in November 2020, is the idea that the new US President/US Federal Reserve may engage in policies that are initially perceived as supportive of the global markets in a post-COVID world – yet may engage in very dangerous end results.  An example of this is the continued stimulus efforts for a world that has somewhat moved beyond the initial COVID shock and has transitioned into a new form of economic activity.  Another example would be the US Federal continuing to act in a manner to support the US equities market while Inflation and consumer activity have recently shown extreme pricing/buying activities.

One idea that my research team suggested is this activity may be similar to President Ronald Reagan’s Star-Wars project in how Reagan was able to prompt a spending excess between the US and Russia which eventually broke the Russian economy.  The process between that event and what is happening right now are strangely similar.

The Strange Outcome Of Global Central Bank Policies – The US Is The Clear Winner

The US and many foreign central banks have pushed the envelope of easy money policies over the past 8+ years by continuing to run programs to support a stronger economic outcome.  The focus has been on creating an inflationary target to start a more traditional shift away from the ongoing easy money policies.  Inadvertently, these global central banks may have created and supported one of the biggest asset shifts/bubbles in the past 50+ years.

The COVID-19 virus event may have actually pushed the US Federal Reserve and foreign global central banks into an inadvertent process of creating a massive inflation trap at a time when the global economy and corporate world was banking on much more mild inflationary trends.  The reflation trade that came after June 2020 is likely to have pushed assets, commodities, credit & debt cycles beyond any conceivable scope of reason, while putting unimaginable pressure on foreign central banks in Asia, South America, Africa, and most of the emerging markets.

The incredible rally in commodities, asset values (homes, stocks, US equities, and others) prompted capital to shift towards the strongest and most capable outcomes on the planet.  This created a liquidity trap in many foreign markets where traders moved assets into US equities, Cryptos, US ETFs, and other assets while shunning less dynamic and secure global assets.

https://www.thetechnicaltraders.com/wp-content/uploads/2021/07/2021-07-16_WorldMarketCap-1.jpg

(Source: https://data.worldbank.org/indicator/CM.MKT.LCAP.CD)

What has transpired over the past 10+ years is that the US equities markets have risen to levels above the 2007~08 peak levels. US equities have also continued to skyrocket higher as foreign investors seek to move assets into US Dollar-based equities and ETFs, and away from stagnant, under-performing local equities and assets.  Currently, the US stock market total capitalization makes up nearly $48T of the total global market capitalization. The next closest foreign market exchange is China, which makes up nearly $12T in total capitalization.

https://www.thetechnicaltraders.com/wp-content/uploads/2021/07/2021-07-16_GlobalStockMarketCap-2.jpg

(Source: https://www.advratings.com/companies/the-largest-stock-exchanges)

When one takes into consideration the massive expansion of state, corporate, consumer, and global credit/debt that has taken place over the past 10+ years in China (and the risks associated with servicing that debt as well as increased commodities/asset costs which have taken place over the past 24+ months) one starts to consider if China may suddenly turn into Russia of the late 1990s.

At that time, the inflation rate in Russia reached over 120% and took place after a number of key economic events set up an almost perfect storm. The aftermath of this event continued to create moderate global market crisis events.

  • 1973 & 1979 Energy/Oil Crisis
  • 1982 US Interest Rate Peak/Recession
  • 1983 Israel Bank/Stock Crisis
  • 1987 Black Monday
  • 1991 India Economic Crisis
  • 1994 Mexican Peso Crisis
  • 1998 Russian Financial Crisis

Although the names and dates of these events are much different than what is set up today, imagine the 1973/79 oil/energy crisis was the peak in oil prices in 2018.  Imagine the 1982 peak in US interest rates was the peak in interest reached in 2018.  Imagine the Israel Bank/Stock Crisis and the 1987 Black Monday was the 2020 COVID crisis.  Imaging the 1991 India Economic Crisis, and 1994 Mexican Peso Crisis were the post-COVID economic and current crisis events that have taken place over the past 14+months throughout the world.

Now, imagine that China is the new 1998 Russian Financial Crisis taking place.  One of the biggest and strongest economies in the world is now at risk of entering a severe inflationary period where excess credit/debt of the past few decades may be washed away – just like what happened in Russia.

https://www.thetechnicaltraders.com/wp-content/uploads/2021/07/russia_inflation_rate2.jpg

(Source: https://www.timetoast.com/timelines/financial-crisis-1900s-2017)

Lastly, remember what came about after these events took place and how isolated the world was from the Russian economic collapse in the late 1990s. The world is not so isolated any longer.  If China initiates a credit/debt crisis event, there is a very strong likelihood that the global markets will react to this event moderately violently.

The Hang Seng Index May Foretell A Collapse In The Making

The typical process of the unwinding of this excess credit/debt/liability usually takes place in a common process.  First, individuals, corporations, and state-run agencies load up on cheap debt while inflation and costs are relatively consistent.  Then, as the economy heats up, inflation, commodity prices, and equipment/material costs begin to skyrocket – eating into operational profits for these entities. Meanwhile, the need to service the debt/credit persists.  As fractures in the system become evident (usually starting with isolated debt defaults by some large entities), investors start pricing greater risks into the credit/debt markets – further complicating the issues for these entities that are burdened with excess debt and diminishing profit margins.

Looking at the Russian Inflation Rate chart, above, any type of major inflationary increase will usually push these entities over the edge in terms of sustainability.  Once the cost of refinancing the debt and ongoing profit margins have been squeezed beyond limits, the crisis escalates to a point of implosion.

https://www.thetechnicaltraders.com/wp-content/uploads/2021/07/HSI_W_F.png

Given the rise in Real Estate, Commodities, Oil/Energy costs, and other factors, we believe this event may be unfolding right before us in current market trends.  China may be the focus of what Russia was in the late 1990s with extensive credit/debt issues, massive imports of raw materials, commodities, and food, and extensive global foreign debt/credit issues related to the Belt Road project.  If a global event were to unfold, which we are only speculating MAY happen at this point, China and Asia would become the focal point for this process.

More than ever, right now, traders need to move away from risk functions and start using common sense.  There will still be endless opportunities for profits from these extended price rotations, but the volatility and leverage factors will increase risk levels for traders that are not prepared or don’t have solid strategies.  Don’t let yourself get caught in these next cycle phases unprepared.

Want to know how our BAN strategy is identifying and ranking various sectors and ETFs for the best possible opportunities for future profits? Please take a minute to learn about my BAN Trader Pro newsletter service and how it can help you identify and trade better sector setups.  My team and I have built this strategy to help us identify the strongest and best trade setups in any market sector.  Every day, we deliver these setups to our subscribers along with the BAN Trader Pro system trades.  You owe it to yourself to see how simple it is to trade 30% to 40% of the time to generate incredible results.

As something entirely new, check out my new initiative URLYstart to learn more about the youth entrepreneurship program I am developing. This is an online program of gamified entrepreneurship designed to introduce and inspire kids to start their own businesses. Click-by-click, each student will be guided from their initial idea, through the startup process all the way to their first sale and beyond. Along the way, our students will learn life lessons such as communication, perseverance, goal setting, teamwork, and more. My team and I are passionate about this project and want to reach as many kids as possible!

Have a great day!

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

Chris Vermeulen
Chief Market Strategist
www.TheTechnicalTraders.com

 

Fed Day

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

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

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

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

Asia Pacific

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

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

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

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

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

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

Europe

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

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

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

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

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

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

America

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

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

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

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

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

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

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

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

This article was written by Marc Chandler, MarctoMarket.

USD/MXN tests its 200-day moving average ahead of the FOMC decision

The US dollar is extending its decline from the 20.0000 area against the Mexican peso on Wednesday, as investors are waiting for news from the Federal Reserve later in the day.

On Wednesday, the Federal Reserve is expected to maintain its interest rates at 0.25 percent. However, all eyes are focused on the statement and post-decision press conference hosted by the Fed’s chairman Jerome Powell.

The experts are looking for clues on how the economy in the US is doing, as well as the effects of high inflation rates on interest rates. Additionally, they will be watching tapering plans.

Any lack of tapering talk or actions regarding inflation will push the dollar down.

TD Securities analysts anticipate that Powell will say the recovery is keeping its momentum and even expect more success.

“Powell will likely acknowledge that the Committee has begun discussions about tapering plans, but that reaching the standard of “substantial further progress” remains a ‘ways off’.” The bank added that the “market priced for a cautiously optimistic outlook, but could bear flatten on a hawkish message.”

In the same line, economists at UOB expect “the Fed to keep its current policy stance unchanged in the July FOMC and the Jackson Hole Symposium (26 August) could see the first hint of taper, and we expect the first taper to be done in December 2021.”

USD/MXN remains under bearish pressure

USDMXN daily chart

Due to this scenario, the USD/MXN closed Tuesday its fifth consecutive day with a decline, and while the pair is trading sideways on Wednesday, the Fed’s message would push the dollar lower, giving the Mexican peso more room to move.

The USD/MXN currency pair lost 1.30 percent since reaching a peak of 20.1122 on July 21. It has now tested its 200-day moving average, which is now at 19.9770. If the pair manages to break below that level, it will face support at 19.90, where a dynamic uptrend support coming from June 9 lies.

Next supports are identified at 19.80, July 13 low, and the 19.74 level, which is July 2 minimum. Then, the 2021 lows area at 19.55 would be exposed.

A close above the 20.00 area would provide bulls with reasons to believe there is any upside potential. However, fundamental and technical factors continue to point south.

China Sends Ripples Across the Markets

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

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

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

Asia Pacific

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

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

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

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

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

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

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

Europe

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

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

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

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

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

America

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

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

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

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

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

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

This article was written by Marc Chandler, MarctoMarket.

Greenback Starts Big Week Softer

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

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

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

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

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

Asia Pacific

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

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

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

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

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

Europe

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

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

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

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

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

America

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

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

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

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

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

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

This article was written by Marc Chandler, MarctoMarket.

Stretched Dollar Remains Firm

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

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

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

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

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

Dollar Index

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

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

Euro

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

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

Japanese Yen

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

British Pound

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

Canadian Dollar

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

Australian Dollar

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

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

Mexican Peso

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

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

Chinese Yuan

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

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

This article was written by Marc Chandler, MarctoMarket.

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.

Dollar Falls From Three-Month High as Traders Unwind Risk

The greenback was weaker against the euro, the Japanese yen and the Swiss franc, which are generally low-interest rate, stable markets that traders short, using the proceeds to buy riskier assets, said Marvin Loh, senior global markets strategist at State Street.

But with bond yields rising and equity markets tanking, riskier positions in currency markets were sold off, benefiting the euro, as well as the yen and the franc, which are also considered safe-haven currencies.

“When you have this kind of unwind going on, you’ve got strength in those currencies,” said Loh.

The euro held on to earlier gains after the European Central Bank set a new inflation target and claimed a role in fighting climate change after a strategy review, with the single currency last up 0.39% against the dollar, at 1.18365.

The dollar was 0.71% weaker against the yen at 109.825, with the yen having earlier touched 109.535, its strongest since June 11, while the Swiss franc touched 0.9134 versus the greenback, its firmest since June 17.

The dollar index, which measures the greenback against six rivals, was down 0.297% at 92.493 from Wednesday, when it reached 92.844 for the first time since April 5.

The global spread of COVID variants has added to fears that there could be some disappointment in terms of economic growth in the coming months, said Mazen Issa, senior FX strategist at TD Securities.

“While we are cautious in interpreting price action at a time of the year when liquidity is not as plentiful, we think markets are contemplating a potential growth scare as the Delta variant spreads and infections rise,” he said.

Riskier currencies, like the Australian and New Zealand dollars, tumbled, with the Aussie down 0.78% at $0.7426, touching its weakest level since mid-December, and the Kiwi dropping 1.08% to $0.6943.

Data on Thursday showed the number of Americans filing new claims for unemployment benefits rose unexpectedly last week, an indication that the labor market recovery from the COVID-19 pandemic continues to be choppy.

“It’s an indication that if these numbers continue not to be anything stellar, or that we’re not moving towards full employment, that leaves the Fed room to just take it easy and not necessarily think about a tapering timeline,” Juan Perez, senior currency trader at Tempus Inc, said of the data.

Minutes of the U.S. Federal Reserve’s June policy meeting released on Wednesday showed that while the economic recovery “was generally seen as not having yet been met,” Fed officials agreed they should be poised to act if inflation or other risks materialized.

A Reuters poll expects the Fed to announce a strategy in August or September for tapering its asset purchases. While most predict the first cut to its bond-buying program will begin early next year, about a third of respondents forecast it will happen in the final quarter of this year.

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

(Reporting by John McCrank; additional reporting by Saikat Chatterjee; Editing by Kirsten Donovan, Lisa Shumaker and Sonya Hepinstall)

USD/MXN Price Analysis: Peso Gains One Over Greenback

The Mexican Peso took a breather today, with the USD/MXN pair dropping below 20.000 for the first time in days. The drop in oil prices and defensive market tone saw the US Dollar record losses against its North American currency counterpart for the first time in days.

USD/MXN Could Slip Lower

The Peso was able to get one over the US Dollar for the first time in days. Mexico’s central bank, Banxico, started increasing borrowing costs last month as it loos to contain the rising inflationary pressures. The decision to raise rates and the hawkish shift by the apex bank took Wall Street by surprise, leading several investors to price the start of a tightening cycle. The apex bank is expected to adopt three more rate hikes before the end of the year.

The monetary policy divergence between the US apex bank and Banxico has worked in the Peso’s favor today. However, the volatility might need to remain low for the search-for-yield trade to be at its optimum now that the summer is approaching.

The USD/MXN pair could experience further weakness over the coming hours as investors turn their attention to the June inflation data that would be released tomorrow. The analysts are expecting the heading CPI to ease slightly to 5.87% y/y from 5.89% y/y in May. However, if the CPI doesn’t cool or accelerate further, traders could expect a rate hike in September, and that could fuel further weakness for the USD/MXN pair.

USD/MXN chart. Source: FXEMPIRE

Large Oil Correction Could Put USD Back On Top

The investor sentiment is fragile at the moment. Combine it with a large correction in oil price, and the Mexican Peso or crude-linked currencies would struggle to perform excellently against the US Dollar.

However, if the situation should resolve itself over the next few years, then the MXN could continue to benefit, and the USD/MXN could slip below 19.000. Currently, USD/MXN has stalled around its 200-day simple moving average, close to the 20.00/ 20.20 mark. If the sellers are able to push the price lower in the next trading sessions, then USD/MXN could head towards the 19.80 region. Failure to defend this support level could bring into focus the 2021 low near 19.55, followed by the 19.00 psychological level.

U.S. Dollar Little Changed Following Fed Minutes

Fed officials last month felt substantial further progress on the economic recovery “was generally seen as not having yet been met,” but agreed they must be ready to act if inflation or other risks materialize, according to the minutes of the central bank’s June policy meeting.

The greenback eased a bit following the release of the minutes, then reversed course and edged higher.

“Today’s minutes only serve to confirm that the Fed is going to be reducing asset purchases some time this year most likely,” said Kathy Lien, managing director of BK Asset Management.

The dollar index, which measures the greenback against a basket of peer currencies, was up 0.135% at 92.664, consolidating near its recent 3-month high, even as U.S. bond yields fell to their lowest levels since February.

Pressure from the lower bond yields, along with some recent soft economic reports, likely contributed to the greenback’s lackluster reaction to the Fed minutes, Lien said.

But the U.S. economy is emerging from the COVID-19 pandemic in better shape than Europe and Japan, which bodes well for the greenback, she added.

“Bottom line is, there wasn’t a big reaction, but I don’t think it stands in the way of an extension of the gains in the dollar,” she said.

One of the main drivers of foreign exchange in the second half of the year will be the divergence of central banks that begin winding down monetary stimulus, based on solid economic fundamentals, and those that do not, said Win Thin, global head of currency strategy at Brown Brothers Harriman.

The U.S. dollar index is currently trading more than 3% above where it was in February when U.S. yields were last this low, he said.

“Which brings us back to anticipated U.S. economic performance and eventual withdrawal of stimulus by the Fed,” he said.

The euro touched a three-month low against the dollar on Wednesday after German data raised doubts about the strength of the economic recovery.

The European single currency changed hands at $1.18035, having earlier touched a three-month low of $1.17815. Against the yen, it fell to 130.535 yen, edging near its two-month low of 130.05 set on June 21.

Investor sentiment in Germany, the euro zone’s biggest economy, fell sharply in July, though it remained at a very high level, the ZEW economic research institute reported.

Other risk-sensitive currencies took a hit after oil prices plunged as OPEC producers cancelled a meeting when major players were unable to come to an agreement to increase supply.

The Australian dollar dipped 0.14% to $0.7484, stabilizing after a bounce on Tuesday when the Reserve Bank of Australia took a first step towards stimulus tapering.

The RBA announced a third round of its quantitative easing program, albeit at a smaller size than the previous two rounds, while retaining the April 2024 bond for its three-year yield target of 0.1%.

The Japanese yen traded little changed at 110.590 yen per dollar, still holding on to gains from its 15-month low of 111.64 touched last week.

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

(Reporting by John McCrank; additional reporing by Ritvik Carvalho in London; Editing by Alexander Smith, Hugh Lawson, Andrea Ricci and Cynthia Osterman)

 

The Dollar Reverses Lower: Is this the Real Thing?

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

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

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

Dollar Index

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

Euro

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

Japanese Yen

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

British Pound

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

Canadian Dollar

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

Australian Dollar

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

Mexican Peso

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

Chinese Yuan

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

This article was written by Marc Chandler, MarctoMarket.

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

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

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

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

Dollar Index

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

Euro

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

Japanese Yen

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

British Pound

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

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

Canadian Dollar

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

Australian Dollar

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

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

Mexican Peso

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

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

Chinese Yuan

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

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

This article was written by Marc Chandler, MarctoMarket.