Previous post Next post

The Greenback Starts H2 on a Firm Note

The Greenback Starts H2 on a Firm Note

Overview: The dollar is recovering from the month-end losses seen at the end of last week. Only the New Zealand dollar among the G10 currencies is holding its own. Japanese reports indicate that Tokyo is in contact with the US Treasury about intervention, which is injecting a note of caution as the greenback holds below JPY145.00. Chinese officials also appear to be stepping up their efforts to stabilize the yuan. Among emerging market currencies, central European currencies are among the worst performers today. The South Korean won, and Thai baht lead the advancers. Similarly, gold which traded higher at the end of last week to reach almost $1923 before the weekend, is trading lower today, and found support near $1910. August WTI is extending the recovery from the middle of last week's low near $67 and is above $71.50, its best level in about eight sessions.

Global equity markets have begun the second half on firm footing. Japanese, Chinese, Hong Kong, South Korea, and Taiwan rallied more than 1%. The MSCI Asia Pacific Index gained more than 3% last month. Europe's Stoxx 600 is extending its advance for a fifth consecutive session. It gained 2.25% last month. US index futures are firmer. The S&P 500 and NASDAQ gained around 6.5% in June. Benchmark 10-year yields are little changed so far today. The US 10-year Treasury yield is near 3.85%. There seems to be little market impact from the unrest in France.

Asia Pacific

China's Caixin manufacturing PMI slipped from 50.9 to 50.5, a bit better than expected. It averaged 50.3 in H1, the same as the average of the "official" PMI. The services and composite Caixin reading will be released tomorrow. China's composite PMI has averaged 54.3 in the Jan-June period. Through May, the Caixin composite has averaged 53.8. Beijing is using a combination of verbal intervention (PBOC pledge to stabilize the yuan) and the daily fix to moderate the pace of the yuan's decline. Meanwhile, Pan Gongsheng, a deputy governor of the PBOC and former head of SAFE (State Administration of Foreign Exchange) was named as the PBOC's communist party head. This is understood to be part of the transition from PBOC Governor Yi Gang who retired from his party post due to the mandatory retirement age. Pan, a PhD economist, is seen likely to become the new governor of the central bank. 

Japan's Q2 Tankan survey picked up a slight improvement in sentiment and outlook. It was the first improvement for large manufacturers since Q3 21. Plans for capex rose to 13.4% from 3.2% in Q1. The inflation expectations were notable. The one-year expectation eased to 2.6% from 2.8%. The three-year expectation slipped to 2.2% from 2.3%, while the five-year was unchanged at 2.1%. Also, Japan's businesses have a favorable outlook for the yen, seeing the dollar average JPY132.43 and the euro JPY140.11 during the current fiscal year. So far, the dollar has averaged almost JPY137.55 and the euro has averaged JPY142.,55. Separately, the final manufacturing PMI confirmed the preliminary estimate of 49.8 in June from 50.6 in May. It has averaged 49.3 in H1 23 after averaging 50.5 in H2 22. The services and composite PMI will be reported Wednesday. The composite has averaged 52.4 in the first half and 50.2 in H2 22. The highlight of the week will be the May labor earnings and household spending figures due Friday. 

Australia's final manufacturing June manufacturing PMI stands at 48.2. The preliminary reading was 48.6 after 48.4. It has not been above 50 since February and has averaged 49.0 in the first half. The final services and composite PMI will be reported Wednesday. Separately, CoreLogic reported median urban house prices rose for the fourth consecutive month after falling from May 22 through February 23. Home loan values appear are stabilizing and building approvals surged 20.6% in May, blowing away expectations. The RBA meets tomorrow. The futures market has around a 17% chance of a hike discounted, down from about 28% before the weekend. It is nearly fully priced in by the end of Q3. The RBA hiked by a quarter-point in May and June after pausing in April. The overnight cash rate target is 4.10% and the swaps market see the peak near 4.50% by the end of the year.

The dollar is firm against the yen but is holding below JPY145 that was briefly breached before the weekend. The market is somewhat cautious ahead of the tomorrow's US holiday and amid Nikkei reports that the US Treasury is discussing the Japanese officials the advantages and disadvantages of intervention. The Australian dollar forged a base near $0.6600 last week and recovered to around $0.6670 at the end of the week. It made a marginal new high today near $0.6675. Nearby resistance is seen near the $0.6690-$0.6700 area. Initial support is seen at $0.6640 and then $0.6620. The dollar is consolidating against the Chinese yuan. It fell to a three-day low near CNY7.2250 before rebounded to CNY7.2550. The PBOC set the dollar's reference rate lower than expected (CNY7.2157 vs CNY7.2467). There were reports that Chinese banks, including state-owned banks were dollar sellers near the reference rate.


The eurozone's final manufacturing PMI stands at 43.4 from the 43.6 flash reading and 44.8 in May. It averaged 46.4 in the first half and spent H2 22 below the 50 boom/bust level as well, averaging 48.2. Germany's stands at 40.6 rather than the 41.0 flash estimate, a three-year low. The slump in German manufacturing, however, has not prevented the trade surplus from recovering smartly. The May trade surplus will be reported tomorrow. It has averaged 16.1 bln a month in the Jan-Apr period, more than twice as high as the surplus in the same year ago period. We already know that Germany's non-EU exports slipped about 2.3% year-over-year, with exports to the US off 7.1% year-over-year ad exports to China 4.3% lower than a year ago. From a small base, exports to Turkey, Mexico, and India are up 16%-18% year-over-year. Exports to Russia were off by nearly 37% from a year ago to 700 mln euros. Factory orders (Thursday) are expected to have risen for the first time in three months.

France has been hit with a wave of violent social unrest and it has been sufficient for President Macron to cancel the scheduled trip to Germany today. The French economy expanded by 0.2% in Q1 23 after stagnating in Q4 22. The median forecast in Bloomberg's survey expects the economy to have expanded by 0.2% in Q2 and again in Q3. The final manufacturing PMI stands at 46.0 compared with the preliminary estimate of 45.5. It averaged 47.1 in H1 23 after averaging 48.8 in H2 22. In addition to the final services and composite PMI on Wednesday, France will also report May industrial and manufacturing production. While industrial output may have risen, manufacturing is seen softer. Separately, Italy's manufacturing PMI fell to 43.8 in June from 45.9. It was below 50 throughout H2 22 but rebounded in Q1 back above the boom/bust level. However, the deteriorate in Q2 has been dramatic the drying up of the pipeline (new orders) warns of further weakness. Similarly, Spain's manufacturing PMI fell for the third consecutive month in June to stand at 48.0. Spain reports May industrial output figures on Wednesday around the same time as the services and composite PMI. After falling a sharp 1.8% in April, Spanish industrial production is seen rising by 0.2%.

The UK's final June manufacturing PMI stands at 46.5, a bit better than that the 46.2 preliminary estimate. It is fourth consecutive decline, and it has not been above 50 since last July. It averaged 47.6 in H1 23, the same as in H2 22. Last June, it stood at 52.8. The final services and composite PMI will be reported Wednesday. The Bank of England does not meet until August 3, but the swaps market is pricing in about an 85% chance of a 50 bp hike.

The euro is consolidating within the pre-weekend range with a softer bias. It reached slightly above $1.0930 last Friday but has not been above $1.0920 today. It is the fourth session of lower highs. On the downside, the euro fell to $1.0835 before the weekend and today's low is about $1.0870. A close below the 20-day moving average (~$1.0865) would be the first since June 9. Similarly, sterling is also not seeing any follow-through buying after trading higher before the weekend, on what appears to have been quarter-end adjustments. It is about a half-a-cent range above $1.2660. The five-day moving average looks poised to slip below the 20-day moving average for the first time in nearly a month, illustrating the loss of momentum. Support was found slightly below $1.2600 last week.


Although participation will be light today ahead of tomorrow US holiday and Canadian markets are closed today, the economic calendar is busy. The final manufacturing PMI may not draw much attention but May construction spending (median forecast in Bloomberg's survey is for a 0.5% after a 1.2% increase in April) and the ISM may attract more notice. Also, through the session the automakers will report June sales. A modest increase from the 15.05 mln unit pace (SAAR) is expected. In June 2022, US recorded 13.0 mln vehicle sales. The average pace this year through May has been 15.28 mln, more than 10% above the average for the same period in 2022. The US Treasury will sell $173 bln in bills today and more Thursday. Use of the Fed's reverse repo facility fell by a little more $200 bln in June. US Treasury has sold $340 bln of bills since the debt ceiling agreement was struck on June 2. That means that other accounts have absorbed the rest of the T-bill supply, which is understood as a drain on deposits and ultimately a tightening of financial conditions. 

Canada's manufacturing PMI tomorrow. It stood at 49.0 in May. On Thursday, it reports May's trade figures, but the highlight of the week is the employment data on Friday. The median forecast in Bloomberg's survey sees a 20k increase in jobs after a 17.3 loss in May. The unemployment rate may tick up to 5.3% from 5.2%, while hourly wages for permanent employees slows. The Bank of Canada meets next week (July 12), and swaps market has it as about a 50/50 proposition.

Mexico's June manufacturing PMI is on tap today. It stood at 50.5 in May, which is what it has averaged this year. In the first five months last year, it averaged 48.6. Mexico will also report the June IMEF survey results as well. Meanwhile, worker remittances remain strong. Through April, they have averaged $4.74 bln a month. In the Jan-Apr 2022 period, the average was $4.30 bln. The median forecast in Bloomberg's survey is for $5.43 bln. Worker remittances are an important part of Mexico's constructive external balance story that has helped underpin the peso. Still, the highlight for the week is Friday's CPI report. The takeaway for the second half of June and the entire month is that price pressure continues to moderate, and barring a reversal, could see Banxico cut rates in Q4. Chile will also report June CPI figures on Friday. It peaked last August at 14.1%. It has fallen consistently since, but for last November. It is expected to have slipped below 8% last month, and the central bank is expected to begin an easing cycle here in Q3.

Canada's markets are closed today. It is trading softly within the pre-weekend range (~CAD1.3205-CAD1.3285). Corrective forces are still playing out after the greenback fell from CAD1.3650 on May 31 to nearly CAD1.3115 on June 27. It has not closed above the 20-day moving average in a month but could today. It is around CAD1.3260, and it would set up for a crossing of the five- and 20-day moving averages in the coming days. The initial target is the CAD1.3300-20 area and potential back toward CAD1.3380-CAD1.3400. Meanwhile, the dollar is continuing to trade in narrow ranges in the trough its forged after setting the multi-year low in mid-June around MXN17.0250. Given the carry, one is still paid to be long the peso even without spot gains. The recent range has been MXN17.0450-MXN17.2650. The 20-day moving average, which the greenback has not closed above since May 25, is near MXN17.1845 today.


Full story here Are you the author?
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.
Previous post See more for 4.) Marc to Market Next post
Tags: ,,,,,,,,,,,

Permanent link to this article:

Leave a Reply

Your email address will not be published.

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

This site uses Akismet to reduce spam. Learn how your comment data is processed.