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BRICS to Expand a Little, USD Steadies after Yesterday’s Retreat, Attention Turns to Jackson Hole

BRICS to Expand a Little, USD Steadies after Yesterday's Retreat, Attention Turns to Jackson Hole

Overview: Strong Nvidia's earnings after the US markets closed yesterday helped lift Asia Pacific markets today. All the large bourses were higher but India. Hong Kong, South Korea, and Taiwan indices rose more than 1%. Europe's Stoxx 600 is higher for the fourth consecutive session and US index futures are higher, led by the NASDAQ. European benchmark bond yields have extended yesterday's PMI-induced decline and are mostly 1-2 bp lower. The 10-year Gilt yield is off nearly 6 bp after falling more than17 bp yesterday. The yield is off a little more than 25 bp this week. The 10-year Treasury yield is flat near 4.19%. In addition to $150 bln in bills (four- and eight-week bills), the US Treasury will sell $8 bln 30-year TIPS, where demand is suspect.

The BRICS have invited Saudi Arabia, UAE, Iran, Ethiopia, and Argentina to join as of the new year has been overshadowed by the plane crash that had been carrying the Wagner leader Prigozhin It does not appear that new initiatives about a dollar alternative for saving or trade have been launched. Promises to boost local currencies bilateral trade have been made for at least a decade with marginal results at best. Yesterday's dollar losses are being trimmed and the greenback is firmer against all the G10 currencies, with the Scandis and Antipodeans the heaviest. Emerging market currencies are more mixed. Many Asia Pacific currencies are firmer, while the Chinese yuan is little changed. Central European currencies are mostly softer. With rising inflation, Turkey is seen hiking the one-week repo rate to around 20% (from 17.50%) imminently. Gold is firm after rising $18 yesterday. It is higher for the fourth consecutive session. Oil has steadied after falling by nearly 1% yesterday. October WTI is trying to snap a three-day decline.  

Asia Pacific

Japanese investors sold a small amount of foreign bonds for the second consecutive week. In the past two weeks through August 18, they sold a cumulative JPY597 bln (~$4 bln) after having bought almost twice as much in the first week after the Yield Curve Control was adjusted at the end of July. Since the BOJ first doubled the 10-year cap at the end of last year, the weekly MOF data shows Japanese investors have bought nearly JPY13.4 trillion (~$98 bln) of foreign bonds. This offers a prima facia case that Japanese investors are not the source of the selling pressure that has lifted yields this year. Last week, Japanese investors bought (~JPY185.6 bln) of foreign equities, ending a seven-week sell-off. For their part, foreign investors bought JPY1.13 trillion of Japanese bonds, the most since April. On the other hand, they sold JPY741 bln of Japanese equities, the most since March. 

If there is a desire among developing countries to accelerate the use of local currencies, one of the India's leading entrepreneurs (Anil Agarwal) said that Beijing must reduce its trade imbalance with other developing nations. India's trade deficit with China was around $85 bln but the other Brazil, South Africa, and Russia, had trade surpluses with China. There is nothing outside the BRICS that prevent the use of their currencies for bilateral trade. Yet, earlier this year, Russia indicated it had too many Indian rupee and did not want to be paid for its oil in rupee by India. They reportedly settled on the UAE dirham, which is pegged to the dollar (like a stable coin in the crypto world). As is well known, the Chinese yuan is not fully convertible (it does not trade 24-hours a day and the exchange rate are closely managed). The BRICS bank, the New Development Bank has been in operation for around seven years. Its officials have acknowledged that it is dollar dependent. The CFO, Leslie Maasdorp told Bloomberg that "The bank's capital is in US dollars. Our reporting currency is US dollars. So, the US dollar is hot coded in the DNA of the bank." Of the $30 bln in loans the NDB has made less than $6 bln has been in local currency. If the share of local currency borrowing rises to 30% in the next few years, which is an explicit goal, it is still not a game-changer, and is in line with the proportion at the World Bank. 

The drop in US rates helped the yen extend its recovery, rising to an eight-day high after disappointing US flash PMI. The dollar fell through the neckline of a possible double top pattern we have been monitoring around JPY145.00, but there has been no follow-through dollar selling today and the greenback rebounded to around JPY145.45 by late morning turnover in Europe, despite the flattish US yields and softer JGB rates. Nearby resistance is seen around JPY145.70. The Australian dollar snapped an eight-day losing streak last Friday with the smallest of gains (2/100 of a cent). It has risen in the first three sessions this week, and this is enough to get the oversold daily momentum indicators to curl up. However, it stalled in front of the next important technical area near $0.6490 and has returned to around $0.6445. Support is seen near $0.6425. The broad US dollar sell-off and drop in US rates may have done more to help steady the yuan than the most of Beijing's efforts. The dollar is remains within the range set on Tuesday (~CNY7.2675-CNY7.2975). The PBOC fixed the dollar at CNY7.1886 today compared with the average estimate in Bloomberg's survey of CNY7.2812 (range of projections CNY7.2689-CNY7.2883). That puts the top of the 2% band near CNY7.3325. The PBOC still appears to be engineering a squeeze in the offshore market.


Often, even if not always, the euro-dollar's exchange rate seems to be sensitive to changes in short-term interest rate differentials, for which we use the two-year government obligations as proxy. The US premium rose above 200 bp yesterday before the disappointing US flash PMI. It is a new high for the year. When the euro bottomed near $0.9535 at the end of last September, the US two-year premium was a little above 250 bp. It peaked around 265 bp a bit more than a month after the exchange rate bottomed. More recently, the euro's high for the year was recorded on July 18 near $1.1275. The US premium had narrowed to a two-month low slightly less than 150 bp on July 13. The differential, which was still a little wider yesterday, even if off its intrasession high, needs to pull back to boost the chances that the euro holds $1.08. Yet, today, it has risen to new highs around 205 bp.

The euro held slightly above $1.08 yesterday and rose to $1.0870. This simply retraced half of the losses from Tuesday's high ($1.0930) to Wednesday's low (~$1.0805). The $1.0880 area corresponds to the next retracement (61.8%) and the euro has stopped just in front of it today. It is in about a quarter-cent band above $1.0850 today. We suspect consolidation is likely ahead of the Fed Chair Powell's speech at Jackson Hole Friday around 10:00 am ET. Sterling recovered after the US PMI nearly everything it lost on the UK's disappointing PMI. It held important technical support near $1.2600 and bounced to about $1.2730 before running out of gas. It closed firmly above $1.2700, but it no follow-through buying has seen in slip back toward $1.2665. The price action in the past two sessions has covered the dominant two-cent range ($1.2600-$1.2800). Neither bulls nor bears can be happy.


While the US flash August PMI disappointed, July new home sales surprised on the upside, rising to the best level in over a year. In addition, the preliminary estimate of the benchmark revisions to nonfarm payrolls was smaller than expected at 306k (expectations were for 400k-500k). There were 358k fewer private sector jobs and 52k more government jobs. The significance should not be exaggerated. It amounts to around a 0.2% change in the level of March 2023 employment of 155.5 mln. Nor does it change the underlying picture of a resilient labor market that is gradually slowing. Weekly jobless claims and continuing claims have risen since the July employment surveys were conducted, suggesting the risk of a soft employment report next Friday. The early call is for a 160k increase in nonfarm payrolls, which would be the least since the end of 2020, and would lower the three-month moving average to 177k, which is slightly more than half of the three-month average in January (334k). July durable goods orders are also on tap tomorrow. A slowing of Boeing orders and delivers will make for a soft read, but even when defense and aircraft orders are excluded durable goods orders in July may be flat or nearly so. 

The Jackson Hole symposium kicks off tonight. Powell's speech tomorrow is of key interest, of course, and between today and tomorrow four other Fed officials speak. The futures market is discounting about a 10% chance of a Fed hike next month and less than a 50% chance of a hike in November. It is difficult to see the pendulum of market sentiment become more dovish. So even though the market often hears Powell more dovish (than the FOMC statement, for example), there does not seem much room this time. The theme of the conference is "Structural Shifts in the Global Economy." Many think that "de-globalization" is among the factors putting the world in a high inflation environment. The Fed's Summary of Economic Projections showed after hiking rates twice in the H2 23, the median forecast by Fed officials was that as many as four cuts would be appropriate next year (even though the median forecast did not see the PCE deflator falling below 2% until after 2025). Even if the Atlanta Fed's GDP tracker is exaggerating by half Q3 growth (its 5.8% projection will be revised today) it still points to another quarter of growth above the non-inflationary pace seen by the Fed (1.8%). Powell may explain the need to have rates at restrictive levels for some time, but will it resonate? The market as nearly three cuts fully priced in by the end of Q3 24, with about an 80% chance the first cut is next May. 

The US dollar reversed lower against the Canadian dollar after briefly poking above CAD1.36. The disappointing US PMI more than offset the unexpectedly large decline in Canada's June retail sales, excluding auto (-0.8% vs. median forecast in Bloomberg's survey for a 0.3% gain). A potentially bearish shooting star candlestick was created. US dollar selling today has been limited to about CAD1.3510, and it has rebounded to about CAD1.3550. Nearby resistance is seen around CAD1.3560. A break of the CAD1.3475-CAD1.3500 area could signal the start of a deeper correction. Although a weaker US economy may weigh on Mexico's, the market's initial response is to bid the peso, with 11.25% overnight rates, higher. The US dollar fell to MXN16.7850. Recall it settled last week near MXN17.0560 and has not closed below MXN17.00 since August 1 until Tuesday. The multiyear low was set in late July around MXN16.6260. The greenback has steadied and has ticked up a little above MXN16.84 ahead of the CPI figures for the first half of August. Some may be initially confused if the biweekly rate accelerates while the year-over-year rate falls (both headline and core). It might not matter much as monetary policy is solidly on hold at the next central bank meeting on September 28. Meanwhile, the greenback has been testing BRL5.00 at the end of last week and earlier this week. Amid the broader dollar pullback yesterday, the dollar fell to BRL4.8465, nearly a two-week low. The 1.6% slide in the greenback was the largest loss in four months. Given the firmer dollar tone today, it could recover toward BRL4.90-BRL4.92.

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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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