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PBOC Sends Signal in Lower Dollar Fix, while the Canadian Dollar makes a 9-Month High

PBOC Sends Signal in Lower Dollar Fix, while the Canadian Dollar makes a 9-Month High

Overview: Hawkish comments by ECB President Lagarde at the central bank symposium in Sintra and the PBOC's weaker dollar fix have weighed on the greenback today. It is lower against most of the G10 currencies, but the Japanese yen and Norwegian krone. It also slipped to a new nine-month low against the Canadian dollar. Emerging market currencies are also mostly firmer, with the notable exceptions of the Russian rouble and beleaguered Turkish lira. There is still little clarification of the recent events in Russia. 

Asia Pacific equities were mixed. Japan, Taiwan, and South Korean markets eased, but China, Hong Kong, and most of the other large markets in the regions advanced. Europe's Stoxx 600 and Germany's Dax are extending their retreat for the seventh consecutive session, while US equity futures are posting modest gains. Benchmark 10-year yields are a little more than a basis point higher in Europe and the US, which puts the US Treasury yield around 3.74%. Gold is trading quietly in the $1920-$1930 range. August WTI is has traded on both sides of yesterday's range and is near $68.40 after being turned back from an attempt above $70 earlier in the session. A close below yesterday's $68.70 low would be a negative technical development and would suggest the risk of a move back to this month's lows around $67.

Asia Pacific

Despite numerous initiatives to support real estate market in China, stresses are still percolating. Two more developers failed to meet their dollar obligations over the weekend. Many investors appear to be chomping at the bit for more economic support. Central China Real Estate, the 33rd largest builder (by contract sales) was unable to make a dollar-interest-rate payment before the weekend. It announced it would suspend payments on all offshore debt. Leading Holdings Group is not in the top 100 Chinese builders. It was unable to pay in full a $119.4 mln owed at the end of last week. Several other Chinese builders met interest rate payments at the end of the 30-day grace period, or shortly after, according to reports last week.

Japanese investors continued to return to the global bond market after repatriating funds last year, according to the weekly Finance Ministry portfolio flow report. They sold roughly JPY21.74 trillion of foreign bonds in 2022 or about $165.5 bln at the average exchange rate last year (~JPY131.40). Through June 16, they have bought about JPY13.22 trillion or around $98.2 trillion at the average exchange rate this year (~JPY134.60). Foreign investors were small net sellers of Japanese equities last year (~JPY890 bln) but have returned in a big way so far this year, snapping up nearly JPY6.3 trillion, the most in a decade for a 24-week period. 

There a several G10 inflation reports this week. Canada's is later today, and Australia's is the first thing tomorrow. Australia's newly minted monthly calculation peaked last December at 8.4% and fell to 6.2% in March before bouncing back to 6.8% in April. The median forecast in Bloomberg's survey has it falling to 6.1% in May, which would match last May's reading. The market has also been given up on a rate hike by the Reserve Bank of Australia next week (July 4). The futures market sees the probability near 22% down from around 50% a little more than a week ago. The odds of an August move have been downgraded from 100% to less than 80% now.

The dollar is firm against the Japanese yen, but it has thus far held below last Friday's high for the year slightly above JPY143.85. There are $1.2 bln of options at JPY144 that expire Thursday, and a move above there could spur dollar buying. On the downside, watch the JPY143.20 area, for initial support. The Australian dollar's advance was stymied today near $0.6720, where the five- and 20-day moving averages converge. It set the high in the middle of the Asia Pacific session and had been pushed back to about $0.6680 in the European morning. The intraday momentum indicators became oversold the Aussie entered the congestion area established over the past couple of sessions. Only a break of the $0.6650-$0.6750 would be significant. The dollar's fix was at CNY7.2098, well below the median in the Bloomberg survey. The PBOC sent a clear signal in today's reference rate. for CNY7.2209. It was the second day; the dollar's reference rate was lower than expected. The dollar fell to CNY7.2065, holding above yesterday's low (~CNY7.2025) before stabilizing. Against the offshore yuan, the dollar initially rose to a new high for the year near CNH7.25 before pulling back to CNH7.21.


On the heels of the disappointing flash June PMI last week and softer IFO survey from Germany yesterday, Italy reported weaker sentiment surveys today. Italy's confidence measures have held up better. Consumer confidence rose to a new high for the year of 108.6 from 105.1. It is the best since February 2022. Business confidence softened to 100.30 from 101.2, the lowest since February 2021. October. Economic sentiment eased for the second consecutive month (108.3 vs. 108.6). Meanwhile, the Italy's premium over Germany for two-year borrowing is about 62 bp, which is slightly less than half of last September's peak (132 bp). For perspective, the current setting is near the 200-day moving average. Italy's 10-year premium began the year above 200 bp. It fell to the lowest level since April 2022 near the middle of June around 155 bp and is now near 163 bp. A key takeaway is despite the slowing of the ECB's demand and some anxiety over the right-wing Italian government, market tensions appear at a low ebb.

Sweden's Riksbank meets on June 29. The market looks for a 25 bp hike to 3.75%. Like we saw with the Norway's Norges Bank, the risk is for a 50 bp move. Inflation is still elevated. In May it stood at 9.7%. It peaked at the end of last year at 12.3%. The underlying rate, which the Riksbank targets, is based on fixed rate mortgages. The year-over-year stood at 6.7% in May. It peaked at 10.2% last December. After some volatility to start of the year, the monthly changes have stabilized, and at an annualized rate it has risen at less than 1% in the first five months of the year. The Riksbank hiked by 50 bp in February and against in April. Last year, it began the tightening cycle in April with a 25 bp hike but then ratcheted up to 50 bp in June, a 100 bp hike in September and a 75 bp move in November. The swaps market looks for a terminal rate between 4.00% and 4.25% by the end of the year. The Swedish krona is off about 3% against the dollar this year and almost 5% against the euro. 

The euro is firm but is still trading within the range set last Friday (~$1.0845-$1.0960) when the flash PMI disappointed. The $1.0950 area is roughly the (61.8%) retracement of the losses from the last week's high (~$1.1010) to the low after the PMI. A move above there would see a return to the $1.10 area. Support is seen ahead of $1.09 today. Sterling pushed above yesterday's high to reached almost $1.2760, a three-day high, but quickly retreated into the $1.2715-20 area in the European morning. Nearby support is seen around $1.2690-$1.2700. There are options for about GBP715 mln that expire today at $1.2665.


The US has a busy economic calendar today and after the flurry of releases, the Atlanta Fed will update its GDP tracker, which as of June 20, was at 1.9%. The preliminary May durable goods orders may be flattered by a jump in Boeing orders that were double April's (69 vs.34). Its deliveries also doubled in May (50 vs. 26). Excluding defense and aircraft, the median forecast in Bloomberg's survey is for a 0.2% gain in durable goods orders after a 1.3% rise in April. House prices are also on tap. FHFA's April measure will be report and it has not fallen since August. At an annualized rate it rose by about 5.6% in Q1 23 after a flat Q4 22. S&P CoreLogic's measure is also due. It 20-city index rose in March for the first time since last June. At an annualized rate, it rose at less than 0.5% in Q1 23, the first quarterly gain since Q2 22. May new homes sales will also be reported. After rising by 4.0% in March and 4.1% in April, economists expected a modest pullback of about 1.2% in May. Recent housing activity (starts and existing home sales) have been reported better than expected. The Conference Board's consumer sentiment survey is due. The preliminary University of Michigan survey was stronger than expected and the market looks for improvement in the Conference Board's measure. The Richmond Fed's manufacturing and business conditions indices, alongside the Dallas Fed's service activity survey for June are due but not typically market movers. 

Canada kicks off this week's inflation reports. Last May, Canada's CPI short up by 1.4%. This will drop out of the 12-month comparison. It will likely be replaced with a 0.4% increase, and the base effect means that year-over-year rate can fall toward 3.4% (from 4.4%.). If so, this would be the slowest pace since June 2021. For the Bank of Canada, the problem is that the underlying measures have seen little or no improvement this year from the same period a year ago. The economy has proven stronger than expected. At the end of the week, Canada reports April GDP, and it is expected to rise by 0.2% after stagnating in March. The market was surprised by the Bank of Canada rate hike earlier this month and is loath to be surprised again. The swaps market has around a 60% chance of a hike discounted. A quarter point hike at the July 12 meeting would bring the target rate to 5.0%. The terminal rate is seen between 5.00% and 5.25%. The Canadian dollar has appreciated by about 3.20% this month, making it the second-best performer in the G10 after the Norwegian krone (~3.5%). Year-to-date, the Canadian dollar has risen by about 3%, making it the third best, behind sterling (~5.25%) and the Swiss franc (~3.35%).

The US dollar fell to a new low for the year against the Canadian dollar today, slightly below CAD1.3120. It snapped back in the European morning to around CAD1.3150. Follow-through buying could see the greenback test yesterday's North American high closer to CAD1.3175. A upside surprise with Canada's CPI today may be seen as positive for the Canadian dollar on interest rate expectations. Stronger than expected Mexican survey data yesterday was unable to push the peso out of its sideways range trading seen over the past week or so. Mexico reports May trade figures today, but it is not typically a market mover. The broad consolidation looks set to continue between MXN17.00 and MXN17.25.


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Marc Chandler
He has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.
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