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.

Japan Retains Distinction of being the only G7 Country with Sub-50 PMI Composite

Tapering not a rate hike was the focus of discussions. Powell reiterated that price pressures would prove transitory and would ease after the re-opening disruptions settled down. The implied yield on the December 2022 Eurodollar futures fell for the second day, and the cumulative three basis point decline was the most in a month. The 10-year yield was capped near 1.50% and remains below there today.

The stronger than expected EMU preliminary PMI did not prevent European bond yields from slipping either. The dollar is softer against most major currencies, but the Japanese yen and Japan retain the distinction of being the only G7 country with a composite PMI below the 50 boom/bust level. Despite a strong preliminary PMI, the euro is struggling to extend yesterday’s recovery. The freely accessible and liquid emerging market currencies are also higher. The JP Morgan EM FX index is higher for a third day after dropping in the previous six sessions.

The Czech central bank is expected to hike 25 bp later today after Hungary hiked by 30 bp yesterday and announced the start of a new tightening cycle could see monthly adjustments. Asia Pacific equities were mixed. China, Hong Kong, Taiwan, and South Korea advanced, while Japan, Australia, and India slipped. Europe’s Dow Jones Stoxx 600 recovered yesterday after a soft start. It is trading a little heavier in the European morning.

US futures indices are slightly higher. Industrial commodities, including copper, iron ore, and steel rebar, are trading higher. August WTI is at a new high of around $73.50, helped a 7.2 mln barrel drawdown of US inventories, according to reports citing API. It confirmed it would put US inventories are a new 14-month low. Gold is consolidating in a narrow range of around $1780.

Asia Pacific

Japan’s preliminary PMI underscores the toll of the formal state of emergency and the slow vaccine rollout. The manufacturing PMI slipped to 51.5 from 53.0, while the contraction in the services slowed, signaled by the services PMI edging up to 47.2 from 46.5. The composite fell further from the 50 boom/bust level, easing to 47.8 from 48.8.

Australia’s flash PMI softened, but it remains at strong levels. The manufacturing PMI eased to 58.4 from 60.4, and the services PMI dropped to 56.0 from 58.0. This resulted in the composite slipping to 56.1 from 58.0. The strength of last week’s employment data and today’s report gives the central bank reason to adjust policies at the July 6 meeting. The focus is on its bond-buying and three-year yield target. The market does not see a rate hike until at least the middle of next year.

China had indicated that it was prepared to sell some industrial metals from its state inventories to relieve some pressure on prices. It appears the vague signal was more powerful than the actual announcement. Yesterday, it announced it would auction 20k metric tons of copper, 30k metric tons of zinc, and 50k metric tons of aluminum on July 5-6.

The dollar reached nearly JPY111.00, its best level since March 31. The disappointing Japanese preliminary PMI reinforces perceptions that the BOJ will lag behind the other major central banks in normalizing policy. Last year’s dollar highs were recorded near JPY112.25 in February and JPY111.70 in March. Initial support is now seen in the JPY110.60-JPY110.70 area. Note that there is a $1.15 bln option at JPY110.75 that expires tomorrow.

The Australian dollar is trading at four-day highs around $0.7570. It is trying to re-establish a foothold above the 200-day moving average (~$0.7560) and the (38.2%) of the losses suffered since the FOMC meeting, found near $0.7570. The next (50%) retracement is closer to $0.7600. The greenback rose to a two-month high against the Chinese yuan, a little above CNY6.49, before easing back to CNY6.48. We had seen potential toward CNY6.4950. The PBOC set the dollar’s reference rate that was again softer than the models expected (CNY6.4621 vs. CNY6.4634).

Europe

The flash EMU composite June PMI reached a 15-year high of 59.2. Not only was the May reading (57.1) surpassed, but so was the median forecast in Bloomberg’s survey (58.8). The manufacturing PMI held steady at 63.1 in the face of expectations for a modest softening, while the service PMI matched expectations by rising to 58.0 from 55.2.

Germany’s PMI accelerated while the French reading was mixed. Germany’s manufacturing PMI rose to 64.9 from 64.4. The median projection was for a pullback. The service sector surged as social restrictions eased (58.1 from 52.8). The composite jumped to 60.4 from 56.2. Fewer companies were reporting longer lead times and rising material costs. France’s results were somewhat less inspiring but still solid. The manufacturing PMI stands at 58.6 (from 59.4 in May), and the service PMI rose to 57.4 (from 56.6). The composite rose to 57.1 (from 57.0).

The UK, which has to delay its re-opening measures into the middle of next month, saw its preliminary PMI slip. The manufacturing PMI eased to 64.2 from 65.6, which is still a strong result and slightly better than expected. The services PMI slipped to 61.7 from 62.9. That is a bit less strong than expected. The composite also stands at 61.7, down from May’s 62.9 and below the median forecast in Bloomberg’s survey. Separately, the UK and EU appear to be edging toward an extension in the border checks in Northern Ireland that will avoid escalating the tensions.

While formally requesting an extension, the UK has threatened unilateral action. The EU wants to ensure it will not be one extension followed by another and another. Both sides have it in their interest to resolve the situation before a recriminating trade war is sparked.

The euro is holding above $1.1910 but has not risen above the high (almost $1.1955) seen in the US yesterday afternoon. There is an option at $1.1975 for about 465 mln euro that expires today. An option that expires tomorrow for 1.2 bln euros at $1.1925 is also notable. The $1.20 area houses the 200-day moving average and the (38.2%) retracement of this month’s decline. It represents an important hurdle. Sterling is approaching $1.40, where a GBP700 mln option expires today, and a GBP540 mln option expires tomorrow. The (38.2%) retracement of this month’s fall is near $1.3965, and the (50%) retracement is a little above $1.4015.

America

The US flash PMI is expected to soften a little, but the reading is expected to be strong. That said, looking at survey results, many economists expect the pace of US growth to peak around now. Some of the preliminary estimate details involving lead times and prices may be more important than the headline figures. Separately, the US reports the current account deficit for Q1. It may surpass the $200 bln-mark for the first time since 2007.

In Q4 19, it was a little below $105 bln. We have suggested that when coupled with the large budget deficit (already at 4.7% of GDP in 2019), the US typically has to offer higher interest rates or the dollar bears a greater burden in the adjustment process. Also, the market is interested in the different nuanced stances of Fed officials after last week’s FOMC meeting. Today, Bowman, Bostic, and Rosengren speak.

Canada’s April retail sales are expected to have fallen by nearly 5% after surging 3.6% in March and 5.8% in February. We would not read too much into the monthly volatility. The Canadian economy is recovering, and the key to the July 14 central bank meeting may be the July 9 employment report. Mexico also reports April retail sales. A small rise is expected after its retail sales rose by 3.6% in March (and 2.5% in February). The central bank meets tomorrow. Although it is widely expected to keep the overnight rate target at 4.0%, the rhetoric has become steadily less dovish. The market anticipates around 50 bp of tightening in H2.

The dollar peaked on Monday near CAD1.2485 before reversing lower. Follow-through selling has pushed it below CAD1.2300 today. The greenback bottomed (four-year low) near CAD1.20 on June 1. The CAD1.2300 area corresponds to a (38.2%) retracement. The halfway mark is around CAD1.2245 is the next target. Below there, initial potential extends toward CAD1.2200.

The greenback peaked against the Mexican peso at the end of last week near MXN20.75. It has fallen to a five-day low around MXN20.2630 today. The dollar may be capped in the MXN20.40-MXN20.42 area, which holds the 200-day moving average and the initial high from the FOMC meeting conclusion on June 16. The next target is near MXN20.17.

This article was written by Marc Chandler, MarctoMarket.

Turn Around Tuesday or Dollar Rally Resumes?

The Japanese yen and Canadian dollar are among the more resilient, and the Australian dollar and sterling among the heaviest. Emerging market currencies are mostly lower, except the South Korean won and Turkish lira. Even the Hungarian forint, where the central bank is widely expected to be the first EU country to lift rates today, is weaker. The US 10-year yield continues to recover from the drop to almost 1.35% early yesterday and appears capped near 1.50%.

European yields are mostly softer, while Australia and New Zealand saw a seven basis point jump in the yield of their 10-year benchmarks. Asia Pacific equities responded strongly to yesterday’s rally in the US, led by a 3%+ gain in Tokyo and 1.5% in Australia. Japan’s shares gained the most in around 12-month after yesterday’s first purchases by the BOJ in a couple of months. Hong Kong and Singapore failed to participate in the recovery after Monday’s slide.

Europe’s Dow Jones Stoxx 600 and US indices futures are trading lower. Commodities are sporting a weaker profile. Copper is paring yesterday’s gains. Iron ore fell 3.6% in Shanghai to bring this week’s loss to over 8%. Steel rebar has fallen by nearly 5% this week. Gold snapped a six-day drop yesterday with a 1% gain but stalled in front of $1800 and is trading heavier again today. August WTI initially extended yesterday’s 2.6% gain and reached $73.35, its highest level in nearly two years, before slipping back to around $72.50.

Asia Pacific

A leading adviser to the Japanese government called for a JPY1 trillion (~$9 bln) investment in semiconductor chip development this fiscal year and more in the coming years to revive the national industry. The US, China, EU, South Korea, and Taiwan are all trying to strengthen their capacity. It is becoming, as the Japanese adviser said, as important as food and energy security. A new advanced fabrication facility costs more than $10 bln, according to some estimates. The US has earmarked a little more than $50 bln, while Taiwan’s TSMC alone has announced plans to invest $100 bln over the next three years. South Korea’s Samsung and Hynix are talking around $150 bln investment over the next decade.

Since last week’s stronger than expected jobs data, several observers now expect the Reserve Bank of Australia to temper its emergency policy next month. Some attribute this to yesterday’s drop in Australian bank shares, the most in a year, but the logic is elusive, and the beginning of the normalization of monetary policy is understood to be supportive of financial institutions. Indeed financials recovered today, rising 2%.

The dollar is at a three-day high around JPY110.50 near midday in Europe after staging an impressive recovery after falling to almost JPY109.70 yesterday. Last week’s highs in the JPY110.70-JPY110.80 area are the immediate target. It might take a push higher in the US yields to get lift the greenback above the JPY111.00. Initial support is in the JPY110.20-JPY110.30 area. Note that the dollar has fallen only once against the yen in the last eight sessions. The Australian dollar remains confined to the pre-weekend range (~$0.7475-$0.7560). Some link the Aussie’s weakness to the drop in iron ore prices. Still, it is finding support just below $0.7500 in Europe. Initial resistance is seen near $0.7520 and then $0.7550.

The greenback edged higher against the Chinese yuan for the fourth consecutive session and the ninth day in the past 11. It is at its best level since early May (~CNY6.4745). The PBOC set the dollar’s fixing lower for the second consecutive session than the bank models in the Bloomberg survey anticipated (CNY6.4613 vs. CNY6.4626). Heavy bond issuance by local government and quarter-end demand tightened liquidity conditions in China and sent the overnight repo rate six basis points higher to 2.31%, bringing the cumulative increase to 44 bp over the past three sessions to its highest level in four months.

Europe

After striking the bilateral trade agreement with Australia earlier this month, the UK will formally apply to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership today. The UK had initially filed the request to join the bloc in February. The CPTPP covers about 15% of the world’s GDP. Reports suggest the UK is looking forward to opportunities to export autos, services, whiskey, and beef and lamb. In addition to Australia, the UK already has struck deals with seven of the bloc members.

Hungary is expected to become the first EU country to lift rates, followed by the Czech Republic tomorrow. Although expect a 30 bp hike to 90 bp, there is the risk of a larger move. The Deputy Governor spoke of “decisive action.” However, like many others, price pressures have risen before the economic strength has fully returned. Also, the central bank anticipates a stimulative budget next year ahead of elections. The one-week repo rate is at 75 bp.

It is adjusted once a week on Thursdays and may be brought into line with the base rate that will be hiked today. The central bank may also phase out other stimulus measures. It appears the market is expecting about two hikes. The Czech Republic is expected to hike its key repo rate by 25 bp tomorrow to 50 bp. The market also has almost 50 bp of tightening discounted for H2.

The eurozone’s preliminary June PMI will be released tomorrow. While manufacturing may stabilize at elevated levels, the service sector is expected to have accelerated as the vaccination program has intensified. The composite is expected to rise to around 58.8 from 57.1. The UK’s flash PMI is expected to moderate slightly as the contagion increased and forced a postponement to the economy-wide re-opening into the middle of next month. The risk may be on the downside of the median forecast in the Bloomberg survey for 62.5 from 62.9 in May.

The euro finished yesterday near its high of around $1.1920 but has come back offered today. Last Friday and yesterday, the euro found bids near $1.1850. We suspect it may not have to return there to catch a bid today. We are looking at the $1.1870 area for a possible base. Similarly, sterling, which mounted an impressive recovery yesterday from below $1.3790 to almost $1.3940 stalled, is testing the $1.3860 near midday in Europe. However, it too may find support near here, and a move back above $1.3900 would help stabilize the tone.

America

In prepared remarks for his appearance before the House Select Subcommittee on the Covid Crisis, Fed Chair Powell reiterates the view that once the supply imbalance is addressed, price pressures will ease. While Powell is unlikely to break new ground, his comments will help blunt the more hawkish comments of Bullard and Kaplan. Many think that the dot plots showed the fraying of the average inflation target regime, with 11 of the 18 Fed officials seeing two hikes in 2023 and seven anticipating a hike next year. Powell and the Fed’s leadership can be expected to push back and defend the approach.

The bipartisan effort to find a compromise on the infrastructure initiative may be drawing close. A key issue is how to pay for it, and President Biden has rejected the proposal to index the gasoline tax to inflation. Moreover, the compromise is for a $579 bln package, which pales in comparison with what Biden has proposed. One strategy that is being debated is to go do as much as the bipartisan effort will allow and then come back for the remainder using the reconciliation process.

However, that would require the full support of all the Democrats in the Senate, which does not look possible. Separately, there appears to be growing concern that the Senate’s minimum global corporate tax will not be ratified.

The US reports May existing home sales today. They are expected to have fallen for the fourth consecutive month. The overall level remains elevated, but the pace has slowed. Some link it to the lack of supply of new homes as construction is delayed. Tomorrow, the US reports new home sales (a small increase is expected following a nearly 6% decline in April) and the flash PMI (which is expected to soften from strong levels). In addition to Powell’s testimony, regional presidents Mester and Daly will speak today. Canada and Mexico’s economic calendars are light ahead of tomorrow’s April retail sales reports.

The US dollar reversed lower against the Canadian dollar yesterday after reaching almost CAD1.2490. It fell to about CAD1.2355 but stabilized today. So far, it has been confined to a roughly CAD1.2360-CAD1.2395 range. The CAD1.2400-CAD1.2425 offers nearby resistance. A convincing break of CAD1.2350 could spur a test on CAD1.2300. The greenback found support a little below MXN20.50 and appears to be carving out a new range. If the MXN20.40-MXN20.50 is the lower end of the new range, then the MXN20.70-MXN20.75 might be the upper end.

This article was written by Marc Chandler, MarctoMarket.

Fed Pushes on an Open Door, and the Dollar’s Recovery Goes into Overdrive

In this weekly technical note, we have been tracking the improving tone for the dollar prior to the FOMC meeting. The broad sideways movement seemed to have alleviated the extended condition that was a product of the dollar’s slide in April and May after rallying in Q1.

At the same time, we are mindful that interest rates and differentials are not supportive of the dollar. The 10-year rate differentials moved against the US in the past week, while the 2-year interest rate differential widened in the greenback’s favor by a few basis points. Perhaps, the most significant market adjustment is seen in the December 2022 Eurodollar futures contract. The implied yield rose almost 17 bp to 52.5 bp.

The market had priced in a hike by the end of next year, and now, post-FOMC is discounting about a 60% chance of a second hike. The Fed’s macro projections showed seven officials see a hike next year as appropriate, up from four in March. Recall that the implied yield of the December Eurodollar peaked in early April around 58 bp.

The dollar’s advance, except against the yen, was dramatic, and it has stretched the technical readings. The expiration of futures and options before the weekend, and the approaching quarter-end, maybe adding to the short dollar squeeze. Be attuned for reversal patterns or other signs that the greenback’s upside momentum is fading.

Dollar Index

While many observers attribute the stronger dollar to the Federal Reserve, last week was the fourth consecutive week that the Dollar Index advanced and the fifth week in the past six. This suggests, broadly speaking, that the upside correction to its slide from the end of March was well underway before the FOMC meeting. With the pre-weekend advance, the Dollar Index has surpassed the (61.8%) retracement (~91.95) of the erosion seen earlier in Q2.

It is now well beyond the upper Bollinger Band, set two standard deviations above the 20-day moving average, and is closer to a three-standard deviation move ( 92.35). The MACD is rising sharply, while the Slow Stochastic has entered overbought territory. The March high is still some distance off (~93.45), but it is what at least some bulls are targeting. Initial support is seen in the 91.50-91.60 area.

Euro

The single currency fell for the third consecutive week, and its 2%+ decline was the largest since April 2020. Ahead of the weekend, it approached three standard deviations from the 20-day moving average near $1.1840. The $1.1780 area may be the next target, but the $1.1700-area is technically more significant. It is where the euro bottomed at the end of March and corresponds to the (38.2%) retracement since March 2020, when the euro recorded a low near $1.0635. The MACD and Slow Stochastic are headed lower, with the latter over-extended. Initial resistance is around $1.1920.

Japanese Yen

The dollar rose slightly more than 0.7% against the Japanese yen in the past week. It was a back-to-back to gain for the first time since the end of March and the first week of April. The greenback stalled on June 17 near JPY110.80. The market looks like it wants to re-try the JPY111.00 area where it peaked at the end of March. Last year, the dollar made two highs against the yen. The first was in March, near JPY111.70. The high in February was near JPY112.25.

British Pound

The combination of the UK postponing the economy-wide re-opening well into July, a retail sales report that showed a decline as large as the advance economists expected, and the dollar’s broad recovery saw sterling’s losses accelerate. It had slipped by around 0.35% in the previous two weeks before getting clocked for more than 2% last week. It was the biggest loss since last September. The sharp move has pushed sterling a little more than three standard deviations below its 20-day moving average. The momentum indicators have entered overextended territory, but the weak close, near session lows warns that a low may not be in place. The next support area is seen in the $1.3670-$1.3720 band.

Canadian Dollar

The US dollar was stuck in a sideways range between CAD1.20 and CAD1.2125 and exploded higher, punching through CAD1.2460 ahead of the weekend. It also traded beyond three standard deviations above its 20-day moving average. Last week was the fourth consecutive weekly appreciation of the greenback after it fell for the seven prior weeks. The CAD1.2530 area is the next target. It corresponds with a (38.2%) retracement objective of the greenback’s decline since the end of last October. Above there, there is little to stand in the way of a move toward the CAD1.27 area, where the (50%) retracement and the 200-day moving average are found. The MACD and Slow Stochastic appear to be the most over-extended among the major currencies.

Australian Dollar

The Aussie peaked in Q2 in early May, a little shy of $0.7900. It has declined in five of the six weeks since the peak. The nearly 3% loss last week was the largest since last September. It pushed through the 200-day moving average (~$0.7555) like a hot knife through butter. Its losses also pushed it beyond three standard deviations from the 20-day moving average. A break of the $0.7500 area brings the next target around $0.7380 into view, the (61.8%) correction for the move that began before the vaccine was announced in early November. A bearish head and shoulders topping pattern is seen on the daily bar charts but is even clearer on the weeklies. It could project toward $0.7050, which corresponds to the (38.2%) retracement since last year’s low in March 2020, around $0.5500.

Mexican Peso

The dollar rose for the sixth consecutive session against the Mexican peso ahead of the weekend. It is the longest advance in four months. The dollar’s 4%+ gain was the largest weekly advance since last September. The greenback recorded a five-month low slightly below MXN19.60 on June 9 and has shot up to nearly MXN20.75 to briefly trade more than three standard deviations above the 20-day moving average. The momentum indicators show no sign of an imminent top.

The next objective is near MXN20.86. In addition to the powerful short-squeeze in the dollar, Mexico’s relative attractiveness has dimmed. Even without a super-majority, AMLO is pushing to tighten up PEMEX’s dominance. In contrast, Brazil is moving to privatize Elctrobras. Brazil has hiked the Selic rate three times by 75 bp each (to 4.25%) and is set to go again in August. Mexico’s target rate began the year twice the Selic target and now is 25 bp below it. The Brazilian real was the only currency to rise against the dollar last week. That said, dollar buying emerged below BRL5.00.

Chinese Yuan

The People’s Bank of China has taken a few steps up an escalation ladder to protest the yuan’s appreciation. It generated modest results of stabilizing the exchange rate, but the market (over) reaction to the Federal Reserve appeared to do more than the PBOC’s own measures were accomplishing. The yuan weakened for the third week and more than the previous two weeks combined (-0.85% vs. -0.50%).

The greenback finished at its best level in a little over a month, near CNY6.4530. The next interesting technical area is between CNY6.47 and CNY6.4950. The dollar gapped higher after the FOMC meeting, and that gap (~CNY6.4055-CNY6.4185) may offer psychological support. Chinese officials took action on three fronts recently: the currency, industrial commodities, and crypto. All three have moved in the desired direction, though the move against crypto was about access, not price.

This article was written by Marc Chandler, MarctoMarket.

Dollar Surges to Two-Month High on Fed Rate-Hike Projection

On Wednesday, Fed officials projected an accelerated timetable for rate increases, began talks on how to end emergency bond-buying, and said the COVID-19 pandemic was no longer a core constraint on U.S. commerce.

A majority of 11 Fed officials penciled in at least two quarter-point rate increases for 2023, adding they would keep policy supportive for now to encourage a labor market recovery.

The dollar index, which tracks the greenback against six major currencies, was up 0.53% at 91.892, its highest since mid April. On Wednesday, the dollar surged nearly 1%, its largest daily percentage gain since March 2020.

“Coming into the Fed meeting we felt there was a risk of a more hawkish outcome which could drive some USD strength if it came to happen,” said Chuck Tomes, associate portfolio manager at Manulife Asset Management in Boston.

“Because of that, we did put some protection on in case of that happening,” he said.

Still, Tomes said he sees the dollar rangebound to weaker over the longer term.

The Fed’s new projection prompted some, including Goldman Sachs and Deutsche Bank, to abandon calls to short the dollar.

“We continue to forecast broad U.S. Dollar weakness, driven by the currency’s high valuation and a broadening global economic recovery,” analysts at Goldman Sachs wrote in a note on Wednesday.

“However, more hawkish Fed expectations and the ongoing tapering debate look likely to be a headwind to Dollar shorts over the near term,” said the analysts, closing their recommendation to go long the euro against the dollar.

The Australian dollar – seen as a proxy for risk appetite – was down 0.72% at 0.75545, its lowest since April 1..

Australia also had upbeat data, with job creation beating expectations in May and unemployment diving to pre-pandemic lows.

The dollar was 0.77% higher against the Norwegian crown after Norway’s central bank kept its key interest rate unchanged as expected, but said an increase was likely in September and steepened its trajectory of subsequent rate rises as the economy recovers from the effects of COVID-19.

The stronger dollar sent sterling below $1.40 to a fresh 5-week low.

Elsewhere, bitcoin was trading at $37,769.48, little changed on the day.

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

(Reporting by Elizabeth Howcroft; editing by John Stonestreet, Robert Birsel, Raissa Kasolowsky and David Gregorio)

 

Analysis: As Fed Wakes Sleeping Dollar, Jolted Bears May Bolster Gains

The dollar was on track for its biggest two-day percentage increase against a basket of major currencies in 15 months on Thursday and stands at its highest level since mid-April, a day after the central bank shifted its first projected rate increase into 2023 in the face of surging inflation.

Betting against the dollar has been a popular trade for months, as the Fed’s insistence that it would maintain its ultra-dovish stance despite rising inflation drove the currency to a near 3-year low earlier this year.

The slightly hawkish shift in Wednesday’s statement appears to be changing that calculus: the prospect of a sooner-than-expected rise in U.S. rates boosts the dollar’s attractiveness to yield-seeking investors over currencies such as the euro and yen. Both Goldman Sachs and Deutsche Bank, for instance, after the Fed meeting recommended investors cut their bets on the euro rising against the buck.

“I think FX markets have finally awoken to the idea of earlier normalization from the Fed,” said Simon Harvey, senior FX market analyst at Monex Europe.

Large bets against the U.S. currency may accelerate the recent move if the threat of more gains pushes investors to reverse their bearish positions. Net bets against the dollar in futures markets stood at nearly $18 billion last week, a three-month high, according to data from the CFTC.

“In the coming weeks and months, the short-dollar thesis that has been so dominant and popular for much of the past year will be severely tested,” said Stephen Jen, portfolio manager at hedge fund Eurizon SLJ.

Momtchil Pojarliev, head of currencies at BNP Asset Management in New York, bought the dollar against the Japanese yen after the Fed meeting.

“The Fed has been patient, but we all know the Fed is going (to turn hawkish) at some point,” he said. “I didn’t think that it was going to be now.”

Because of the dollar’s central position in the global financial system, its fluctuations tend to ripple through a wide range of assets.

A stronger dollar tends to weigh on the balance sheets of U.S. multinationals, making it less favorable for them to change foreign earnings back into their home currency.

A rising greenback could also help tame a blistering rally in commodity prices that has helped boost inflation this year, as many raw materials are priced in dollars and become less affordable to foreign investors when the buck appreciates.

“With our view of rising rates, risky assets and equities will have difficulties,” said Kaspar Hense, a portfolio manager at Bluebay Asset Management, which oversees $60 billion. Hense went short the euro after Wednesday’s Fed meeting.

Some market participants, however, are maintaining their bearish views on the dollar, noting that the Fed’s easy money policies, which include the purchase of $120 billion a month in Treasuries, remain in effect. Other central banks are likely to follow the Fed’s lead in slowly normalizing monetary policy, potentially narrowing the gap in rates between the U.S. and other economies.

Goldman Sachs believes a global recovery will weaken the dollar over the longer term, while a report published by Societe Generale on Thursday showed a year-end price target of $1.27 for the euro, from $1.19 on Thursday.

“Clearly there has been technical, fundamental damage to the bearish dollar story, but I would like to see how the dust settles before determining if the dollar bear story is behind us,” said Paresh Upadhyaya, director of currency strategy and portfolio manager for Amundi Pioneer Asset Management.

“Now a lot of it is going to hinge on… what do other G10 and emerging market central banks do in response.”

Upadhyaya reduced his short dollar position heading into the Fed meeting but believes the currency will eventually head lower. Harvey, of Monex Europe, wants to see whether the next few weeks’ data will bolster the case for a stronger-than- expected recovery.

Others, however, think there could be room for more dollar gains.

Shorting the dollar “has been a popular trade for both discretionary and systematic managers,” said David Gorton, chief investment officer at hedge fund DG Partners. The “hawkish surprise from the Fed has perhaps exposed just how extended some of those short positions were.”

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

(Reporting by Saqib Iqbal Ahmed in New York and Saikat Chatterjee in London; Additional reporting by Maiya Keidan and Gertrude Chavez-Dreyfuss; Editing by Ira Iosebashvili and Dan Grebler)

 

Without Yield Support, the Dollar Wilts

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

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

Asia Pacific

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

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

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

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

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

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

Europe

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

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

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

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

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

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

America

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

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

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

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

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

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

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

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

This article was written by Marc Chandler, MarctoMarket.

China Raises Reserve Requirement for FX, Stemming the Yuan’s Rise

Japan, Australia, and Singapore, for notable exceptions. Europe’s Dow Jones Stoxx 600 took a seven-day advance into today’s action and is struggling to extend it. US futures have edged slightly higher. European bond yields have edged higher. The dollar is little changed against the major currencies. Outside of the Australian dollar, which is about 0.3% higher, around $0.7735, the other major currencies are +/- 0.15%. Emerging market currencies are mostly firmer, led by the Turkish lira, which was helped by a stronger than expected Q1 GDP (1.7% quarter-over-year and 7% year-over-year).

The JP Morgan Emerging Market Currency Index is extending its advance for the fourth consecutive session. Gold is holding above $1900, while oil is firm, and July WTI is extending last week’s 4.3% rally as it tries to solidify a foothold above $67 ahead of tomorrow’s OPEC+ meeting. Industrial commodities, such as copper, iron ore, and steel rebar have moved higher to build on the recovery seen at the end of last week.

Asia Pacific

China’s composite May CPI crept up to 54.2 from 53.8. It was the result of a slightly disappointing manufacturing reading that slipped from April’s 51.1 to 51.0. The non-manufacturing PMI, however, was stronger than expected, rising from 54.9 to 55.2. The recovery appears to be morphing into a steady pace expansion. Caixin PMI is next (manufacturing PMI tomorrow) with May trade figures and reserves possibly before the end of the week.

Japan has extended the formal emergency to June 20, with Opening Ceremonies for the Olympics scheduled for July 23. The emergency threatens to delay the economic recovery. April industrial output, retail sales, and housing starts were reported earlier today. Industrial production is aided by exports and rose 2.5%. While better than March’s 1.7%, it still fell shy of projections for a nearly 4% gain. Retail sales, however, sorely missed forecasts and illustrates, at least in part, the impact of the social restrictions on consumption.

The 4.5% month-over-month fall was more than twice the decline expected and was the biggest slump since last April. The broader measure of household spending is due out later this week. Housing starts were a bright spot. The 7.1% year-over-year advance bested expectations and was the first back-to-back gain in two years. Next up, the final manufacturing PMI reading. The preliminary report showed a slower pace of expansion (52.5 from 53.6).

The Reserve Bank of Australia meets first thing tomorrow. No change is expected, but the statement will be scrutinized for clues for what officials will decide next month when it reviews its asset purchases and three-year interest rate target. Shortly after the central bank meeting, Q1 21 GDP will be reported. A 1.1% quarterly advance is expected after a 3.1% expansion in Q4 20.

A series of comments by Chinese officials appeared to talk the yuan lower, emphasizing that the recent gains were unlikely to last due to speculation, potential Fed tightening, and or rate adjustments in the emerging markets. It was having a little impact until the PBOC announced a two percentage point increase in reserve requirements for foreign exchange positions. The new requirement starts June 15, and the reserve requirement will stand at 7%.

The PBOC’s reference rate for the dollar, set at CNY6.3682 (compared with expectations for CNY6.3656, the median in Bloomberg’s survey, also seemed to be a protest. The offshore yuan recovered on the announcement. The US dollar was rebuffed ahead of the weekend after a brief foray above JPY110 for the first time since early April. The greenback was sold in the European morning to around JPY109.65. Support is seen in the JPY109.40-JPY109.60 area. The Australian dollar is firm in the upper end of the pre-weekend range when it approached $0.7750. Recall that it had tested the month’s low (~$0.7675) and rebounded back above $0.7700, where it has remained today. The $0.7800 is the real nemesis for the Aussie bulls.

Europe

The eurozone’s May inflation is front and center. French data before the weekend showed a 0.4% rise for a 1.8% year-over-year gain. It was up from 1.6% in April. Italy reported a flat month-over-month rate today, which lifts the year-over-year rate to 1.3%, both slightly softer than expected. Spain’s 0.5% increase matched expectations and lift the year-over-year rate to 2.4% from 2.0%. German states have reported, and the domestic measures were mostly 2.5-2.6% higher year-over-year.

This warns of the possible upside risk to the national harmonized measure that rose 0.5% for a 2.1% year-over-year advance in April. The aggregate figure is out tomorrow. The risk is that the headline rises a little more than the 0.2% gain expected, which could see the year-over-year rate test 2%.

The fifth round of Europe-led talks to revised the 2015 pact that limits Iran’s nuclear developments began yesterday. This round of talks could be the last given the proximity of the June 18 Iranian elections. Separately, the possibility that a deal is struck and some Iranian oil can return to the market is part of the constellation of considerations for OPEC+ when it meets tomorrow to sort out its plans to boost output.

It is generally expected to maintain current output quotas, with a rise expected (~840k barrels a day) in July. Meanwhile, it appears that after four inconclusive elections in four years, Israel may be on the verge of a new government that will not include Netanyahu after one of the Prime Minister’s key allies defected to the coalition being forged by former Finance Minister Lapid. Of note, that coalition may rely on an Arab party to secure a majority. The Israeli central bank meets today and is widely expected to maintain the 10 bp base rate.

The euro fell to a two-week low below $1.2135 before the weekend and rebounded to poke above $1.22 before the end of the session. According to Bloomberg data, the euro has settled between $1.2192 and $1.2195 for the past three sessions. It is confined to around a fifth of a cent range today, hovering around 10 ticks on either side of those settlements. The pre-weekend high was $1.2205, and the euro has been stopped just in front of it so far today.

If it holds, it would be the fourth consecutive session of lower highs. Sterling also appears to be going nowhere quickly. It closed above $1.42 last Thursday for the first time in years, but there has been no follow-through buying. It met sellers today as it tried to push back above $1.4200. Initial support is seen around $1.4150, but better support is closer to $1.41.

America

The disappointing US April employment report underscores the importance of this week’s May estimate. Moreover, a strong upward revision to the April series would seem to be consistent with other data inputs. Auto sales on Wednesday may also be important. After the surge in April (18.5 mln vehicles as a seasonally-adjusted rate), the chip shortage may take a toll. The median forecast in Bloomberg’s survey is for a 17.5 mln pace.

Note that the chip shortage is seeing new car buyers opt for 2020 models and dealers buying cars with expiring leases as less than expected miles were driven last year, boosting the resale value. Fed president and governors have numerous speaking opportunities this week, and the general message has confirmed what the market already thought it knew, namely that a formal discussion on tapering is possible in the coming months.

As we have noted, many are talking about the Jackson Hole Fed conference at the end of August and/or the September FOMC meeting as likely venues. Despite the talk, the 10-year yield settled just below 1.60% before the weekend. Chair Powell speaks on Friday at a Bank of International Settlements function.

Canada reports Q1 GDP figures tomorrow (expected 6.8% at an annualized pace after 9.6% in Q4 20), but the jobs data at the end of the week is more important. Like the US, Canada’s April report disappointed. It lost 129.4k full-time positions and 207k jobs overall. However, while the US job creation is expected to have accelerated, the median forecast in Bloomberg’s survey anticipates another loss of jobs (~25k).

Mexico’s data highlights include worker remittances (which continue to exceed the trade surplus) and the PMI. However, the central bank’s inflation report on Wednesday is expected to solidify the cautious stance in light of the recent rise in price pressures. The market appears to be pricing in as much as 75 bp of tightening over the next year. In addition to April industrial production and May trade figures and PMI, Brazil reported Q1 GDP. It is expected to have grown by 0.8% after a 3.2% expansion in Q4 20. The year-over-year rate is expected to turn positive. Before the weekend, Fitch affirmed Brazil’s BB- rating and retained the negative outlook due to the risks that fiscal consolidation is not delivered.

The US dollar remains in its trough against the Canadian dollar. The CAD1.20 offers critical technical support, while the upside is blocked by the 20-day moving average (~CAD1.2115). The greenback briefly rose above the moving average last Thursday for the first time in a month, and those gains were quickly sold into, and the sideways churn continues.

The greenback was bid to two-week highs against the Mexican peso (~MXN20.0770) ahead of the weekend but also retreated to settle a little below MXN19.94. The MXN19.90 area offers initial support. The market may be reluctant to take the greenback above MXN20.00 in today’s thin activity. The dollar is testing support near BRL5.20. It has not traded below there since January. A break would target BRL5.0. The central bank meets on June 16 and already appears to have committed to the third 75 bp hike this year.

This article was written by Marc Chandler, MarctoMarket.

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

Dollar Correction at Hand or Just End-of-Month Adjustment?

As we have noted before, short-term trend changes are common around the end of months and the US employment report, typically the first Friday of the new month.

Our review of several dollar pairs’ technical condition suggests a good chance that the greenback’s recovery carries into early June activity even though its initial gains ahead of the weekend were quickly pared. Without stronger interest rate support, it is difficult to see a significant near-term recovery. Here we put more weight on the December 2022 Eurodollar futures for Fed expectations than the 10-year yield, where the 20- and 50-day moving averages of the implied rate have converged around a little above 1.60% compared with a peak of around 1.77% at the end of March. The Eurodollar futures appear to be discounting a rate hike at the end of next year.

Dollar Index

A small bottoming pattern appeared to have been carved out, but the Dollar Index was greeted by a wall of sellers after it popped above the 20-day moving average (~90.30) for the first time in a couple of weeks. If a correction has begun, the measuring objective of the bottoming formation and the (38.2%) retracement objective of the slide since the end of March (from almost 93.50) comes in near 91.00. Additional gains meet stronger resistance in the 91.50-91.70 area that holds the 200-day moving average and the next retracement objective (50%). The MACD and Slow Stochastic have turned up from over-extended territory.

Euro

The euro’s advance, which began from almost $1.1700 at the end of March, stalled in the $1.2245-$1.2265 band. ECB doves push against arguments in favor of reducing bond purchases. Month-end adjustments saw the euro retreat to around $1.2135 before the weekend before quickly snapping back to the $1.22 area. The first important technical test is seen at around $1.2050, the low from mid-May and the (38.2%) retracement objective of the rally from that March low.

A convincing break could spark a test on the $1.1975-$1.2000 area, where the (50%) retracement and 200-day moving averages are found. The MACD is turning down from the highs for the year. However, the Slow Stochastic did not confirm the new high in prices and is curled lower, leaving a bearish divergence in its wake.

Japanese Yen

The dollar pushed above JPY110 ahead of the weekend for the first time since April 6 but quickly sold off as the US 10-year yield fell back below 1.60% again. A bearish shooting star candlestick was formed. The JPY109.40-JPY109.60 offers initial support. The momentum indicators had turned higher for the dollar, and it did finish the week in the upper-end of the trading range since early April. Japan lags behind other high-income countries in its inoculation efforts and economic recovery, but US rates appear to be a more important driver of the exchange rate. A move above the pre-weekend high near JPY110.20 targets the JPY111 area.

British Pound

For the first time in three years, sterling closed above $1.42 after a BOE official talked about higher rates next year. However, it held below the multi-year high set in late February, just above $1.4235. The lack of follow-through sterling buying after the outside up day on May 27 is consistent with a consolidative/corrective phase.

Perhaps, also encouraging the profit-taking are concerns that the economy-wide re-opening planned for June 21 may be delayed as the contagion and hospitalizations are seeing renewed increases. Initial support is seen in around 1.4080-$1.4100. However, the momentum indicators are turning lower. Stronger support is seen near $1.40.

Canadian Dollar

The Canadian dollar snapped a seven-week advance last week with a small loss (less than 0.15%). Important chart support for the US dollar around CAD1.2000 held after repeated testing. Bottom pickers and profit-takers helped lift the greenback toward its 20-day moving average (~CAD1.2130) for the first time in a little over a month. Still, it held below the recent high (~CAD1.2145). Above there, the CAD1.2200 area offers resistance. The Slow Stochastic and MACD favor the greenback’s upside. For the past three sessions, higher lows have been recorded.

Australian Dollar

The Aussie’s price action appears to be among the most bearish of the currencies we review here. It reversed lower after failing to resurface above $0.7800 in the middle of last week (on the back of the RBNZ hawkish surprise) and finished the week a little above $0.7700 after retesting the lows for the month (~$0.7675).

A head and shoulders topping pattern appears to have been forged that projects toward $0.7500. That seems rather deep and requires the failure of the congestion support around $0.7600. The MACD and Slow Stochastic’s pullback is well advanced. The MACD peaked on May 11. The Slow Stochastic has been trending lower since April 21.

Mexican Peso

The US dollar saw two-week highs against the peso ahead of the weekend near MXN20.0770 and briefly frayed the downtrend line drawn off the month’s highs. However, the dollar reversed in North America and briefly traded below MXN19.90. The momentum indicators are mixed. The MACD has essentially moved sideways this entire month, while the Slow Stochastic turned higher a week ago.

The dollar appears range-bound. According to press reports, the campaigns for the June 6 legislative and local elections have been marred with the most violence in several years. AMLO’s party is expected to do well at the polls, but global investors might react less favorably due to the unfriendly investment environment.

Chinese Yuan

The dollar’s bounce in Europe and North America ahead of the weekend may halt the yuan’s advance after a seven-day advance. Chinese officials will welcome the price action after warning against a one-way market. Some talk about the CNY6.35 as the possible pain threshold, but in our experience, PBOC officials are more sophisticated than that.

The official discomfort with the rising yuan may have been checked by the broader dollar weakness, but when the greenback bounces, they may have a freer hand to encourage a softer yuan. Initially, the dollar may have potential to recover toward CNY6.40, but there is a small gap from May 24-25 that extends from about CBY6.4150 to CNY6.4180 that may attract prices.

This article was written by Marc Chandler, MarctoMarket.

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