by Marc Chandler
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Overview: Encouraged by the continued stream of US data, which suggests that the world's largest economy is accelerating, the US 10-year yield is approaching last year's 4.33% high, and the dollar's run has lifted it to new highs for the year against the Japanese yen, Chinese yuan, and the Australian and New Zealand dollars. Even a rate hike by Norway did not stop the dollar from rising against the krone. The greenback is firmer against most of the major currencies but has steadied in the European morning against the yen, Swiss franc, and Canadian dollar. Disappointing employment data from Australia has kept the pressure on the Aussie, which spiked lower $0.6365 before buying emerged. The dollar gapped higher against the Chinese yuan, the sixth day of gains, and is holding above CNY7.30. The market is unpersuaded by the aggressive fixings by the PBOC. Gold is consolidating its recent losses that pushed the yellow metal below $1900.
Most of the large bourses in the Asia Pacific region fell, but China and Taiwan were the chief exceptions. Europe's Stoxx 600 is lower for the third consecutive session, and without a strong recovery, it will post its third straight weekly loss, the longest of the year. US index futures are slightly firmer. Meanwhile, the bond market sell-off continues. The 10-year JGB yield edged up to nearly 0.64%, its recent high. European yields are most 3-5 bp higher and the US 10-year Treasury yield is near 4.29%, up almost four basis points. Lastly, September WTI has steadying after falling by about 4.5% over the past three sessions. US commercial oil inventory fell by 6 mln barrels, to the lowest level since January as refiners processed the most since January 2020 and exports remain strong. US weekly output is at a post-pandemic high of about 12.7 mln barrels a day.
Asia Pacific
According to the OECD's model of purchasing power parity, the yen is more than 49% undervalued. On a trade-weighted measure, it is off almost 29% since the pandemic struck to reach its lowest level in more than a quarter-of-a-century. A couple of days ago, Japan reported that net export contributed 1.8 percentage points to Japanese Q2 growth, which leaving aside the Covid distortions, was the most since 2009, another crisis-distorted year. Yet today's merchandise trade report showed the balance fell back into deficit last month. Exports fell (-0.3%) on a year-over-year basis for the first time since February 2021. Imports fell (-13.5%) for the fourth consecutive month on a year-over-year basis and the 15.2% is the biggest decline since September 2020. Separately, many thought that after the BOJ's adjustment of the 10-year yield cap at the end of last month, Japanese investors would sell foreign bonds and repatriate funds. Yet, Japanese investors have been buying after last December's adjustment. The MOF weekly portfolio flow data showed that Japanese investors sold JPY334 bln of foreign bonds (~$2.3 bln) after the previous week's buying was revised to JPY1.12 trillion (from JPY438 bln).
Australia's July disappointing employment report did not change expectations that the central bank will stand pat when it meets on September 5, but it did drive the Australian dollar to new lows for the year. Australia lost 24.2k full-time jobs in July after gaining 38k in June. The unemployment rate rose to 3.7% from 3.5%. The median forecast in Bloomberg's survey was for a rise to 3.6%. Counting part-time, Australia lost 14.6k jobs. Economists had expected an increase of 15k. The participation rate also slipped lower (66.7% vs. 66.8%).
The US dollar rose to about JPY146.40 in the North American afternoon yesterday. It rose above the level that the BOJ is believed to have intervened in September 2022. In Asia today, the dollar extended the gains slightly to about JPY146.55, before coming off. Initial support now is seen around JPY146.00. There was some congestion last November in the JPY148.40-85, but the high last October was almost JPY152.00. Many observers are on "intervention watch" but the rhetoric still has not escalated to the point that would suggest intervention was imminent. The dollar's rise also seems somewhat more orderly than last September and October, when the greenback often traded above its upper Bollinger Band. Benchmark three-month implied volatility averaged (20 day) was above 11% last September and October. It is now below 10%. In terms of one-direction moves, last October the dollar went on a 12-day run that ended with the BOJ's intervention on October 21. The dollar has risen for the last eight consecutive sessions. The Australian dollar is falling for its eighth straight session today, with a cumulative loss of about 2.60%. The employment data does not change anything. The break of %0.6400 could spur another cent decline, though the trendline connecting the pandemic low (~$0.5510) and last year's low (~$0.6170) comes in near $0.6375. The Aussie took it out, falling to $0.6365, but is testing $0.6400 in late European morning turnover. The dollar gapped higher on Monday against the Chinese yuan and has not looked back. It gapped higher today, above the perceived cap at CNY7.30 and reached nearly CNY7.3175. Given the greenback's broad strength and the economic and financial divergence with the US, further gains are likely. Acknowledging the purposeful opaqueness of Chinese actions, we think Chinese officials are moderating the pace of the yuan's decline more than trying to reverse it. Last year's dollar high was set almost two weeks after the dollar peaked against the yen. The high was recorded on November 1 near CNY7.3275. The PBOC set the dollar's reference rate at CNY7.2076 and the average expectation in Bloomberg's survey was CNY7.2994. The gap between the two has trended higher as the dollar appreciated.
Europe
The eurozone recorded its second monthly trade surplus since September 2021. The June surplus of 412.5 bln was more than three times greater than expected. This enabled it to record an average monthly surplus of 1.6 bln euros in Q2 after a deficit of 175 bln euros a month in Q1. It is the first quarterly surplus since Q3 21. The broader measure of trade, the current account, will be reported next week (August 22). It has recovered more than the trade balance. The current account was in deficit from April through October last year before swinging back into surplus. In the first five months of the year, the eurozone recorded an average monthly current account surplus of 10 bln euros. In the Jan-May 2022 period, it recorded an average monthly deficit of 2.5 bln euros. Before the pandemic, the eurozone's current account surplus was 2.2% of GDP. Last year the deficit was 0.7% of GDP, the first deficit since 2011 and the largest since 2008. The ECB projects that the surplus will be 1.1% of GDP this year, rising to 1.5% next year.
Today is a bit a reprieve for the UK, which has reported key employment and inflation reports already this week. Tomorrow, the UK sees July retail sales. The bulk of June's increase will be unwound. The median forecast in Bloomberg's survey calls for a 0.6% decline (volume terms) after a 0.7% increase in June. That would put the year-over-year rate at -2.1% (from -1.0%) and snaps a three-month improvement. At the end of last week, the swaps market was not fully confident that the BOE would hike rates at the September 21 meeting. After the jobs and inflation data, the market not only has a 25 bp hike discounted but a 25% chance of a 50 bp move,
The euro is extending its losing streak into the fifth consecutive session today and reached almost $1.0860, its lowest level for the fourth consecutive session yesterday and reached its lowest level since July 6. Yesterday, it settled below $1.09 for the first time in a month. Last month's low was set near $1.0835, and the (61.8%) retracement of the rally from the year's low set in mid-March (~$1.0515) is around $1.0805. The 200-day moving average is closer to $1.0785, and the trendline connecting the March and May lows is found by $1.0755. Sterling was the only G10 currency to hold its own against the surging greenback yesterday and this may be a function of the swing in BOE expectations after the string of recent data. It has come back a little softer and it is in a narrow range (~$1.2705-$1.2745). Sterling is going nowhere quickly against the US dollar. Nearby support is seen around $1.2675-85. Norway's central bank, Norges Bank, delivered the expected 25 bp hike (to 4%) and signaled another hike next month to finish the cycle. However, the hike has not helped the krone much. It is lower for the sixth consecutive session against the dollar and euro.
America
The string of stronger than expected US data continued with yesterday's July housing starts 3.9% increase and 1.0% rise in industrial output. The June data were revised lower, but the upside surprise in July sufficient to offset it. The gain in industrial output and manufacturing (0.5%) snapped a two-month decline. The FOMC minutes read more hawkish than expected and the expectations for the year-end Fed funds rate edged higher to about 34%, which still seems low given that strength of the recent data. The Atlanta Fed's GDP tracked moved up to 5.8% yesterday. Given the margin of error at this stage of the quarter, is seems to be stronger than Q2's 2.4% pace and well above the median forecast in Bloomberg's survey of 0.7%.
Today attention turns to weekly jobless claims, which rose to a five-week high in the week through August 4 (248k). The four-week moving average of 231k is nearly 10% below the high seen in June (almost 257k). The Philadelphia Fed's August business outlook is expected to improve marginally. Then there is the index of Leading Economic Indicators, which are all but ignored by the market. The index has been declining without fail since the start of Q2 22 and the pace of decline over the past six months (-8.1%), faster than point last year, has in the past only been seen in recessions.
Canada reports June portfolio flows. In the first five months of the year, StatsCan has reported a net inflow of about C$15 bln. In the Jan-May 2022 period, Canada drew nearly C$100 bln of net portfolio flows. Canada's S&P/Toronto Stock Exchange Composite Index rose nearly 3% in June and the 10-year government bond yield rose by about eight basis points to 3.26%.
The US dollar traded well above CAD1.35 yesterday for the first time in two months. The "stars" are aligned against it. The US dollar rose broadly, risk appetites were squeezed, oil prices tumbled, and US rates rose. The gains were extended to almost CAD1.3555 today. The CAD1.3570 is the next technical target, though the upper Bollinger Band is slightly higher (CAD1.3585). Above there, CAD1.3600 attracts before the April-May highs, closer to CAD1.3650-60. The greenback is edging higher against the Mexican peso. It reached nearly MXN17.2080 today, its best level since August 8 when it reached about MXN17.2845. The peso's recent softness seems more a function of the broader risk climate than a specific Mexican development. Once that diminishes, we suspect the demand for the peso will resurface. Initial dollar support today may be seen in the MXN17.10-12 area.
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