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Position Squaring Ahead of US Data Helps the Dollar Recoup Some Recent Losses

Position Squaring Ahead of US Data Helps the Dollar Recoup Some Recent Losses

Overview: Position-squaring ahead of today's US personal consumption data and perhaps tomorrow's jobs report is giving the dollar a firmer profile against most G10 and emerging market currencies. The Scandis have been the hit hardest and are off 0.75%-0.85%. The euro and sterling about 0.35%-0.45% lower. The yen is the only G10 currency that is slightly firmer. The dollar-bloc is nursing small losses (0.10%-0.15%). Despite the firmer than expected preliminary August eurozone CPI, European 10-year yields are off 3-6 bp. The US 10-year Treasury yield is slightly below 4.10%, shaving about two basis points from yesterday's settlement. Two-year yields are down 4-9 bp in Europe, with the US two-year Treasury yield a little more than two basis points lower near 4.86%. Recall that the US two-year yield peaked on Monday around 5.10%. Softer yields but a firmer dollar is keeping gold activity subdued, and it is holding slightly below yesterday's high near $1949. 

Equities are trading mixed. Japan's stocks traded higher, as did Australia, but the other large bourses in the region fell. The Stoxx 600 in Europe is firmer and is recouping yesterday's minor loss (-0.15%) in full. The S&P 500 futures are flat, but the NASDAQ futures are a little softer. The large drop in US oil inventories reported yesterday and more speculation that Saudi Arabia may extend its extra unilateral cut through October are helping to extend oil's rally. October WTI is at a two-and-a-half week high, poking above $82. If sustained, it will be the sixth consecutive advance, the longest streak since January. It is up about 2.8% this week.

Asia Pacific

China's PMI was slightly better than expected, but not sufficiently to change assessments and China's CSI 300 fell in back-to-back sessions for the first time in two weeks. The recovery from the re-opening post zero-Covid has been a quickly faded. Many market participants want to give the world's second-largest economy last rites, as it were, blaming its ideology, which had generated more than an eight-fold increase in per capita GDP in a single generation and is largely, even if not solely responsible for reducing extreme global poverty in the past forty years. Development economists warn that with the urbanization of China, the focus for a further reduction in global poverty shifts to India, which does not have nearly as impressive of a track record. That means that the closing of the gap between the rich and poor globally will slow if not reverse. Still, the pace of deterioration of China's PMI appears to be slowing, with a small uptick in the manufacturing PMI (49.7 vs. 49.3) but a little slowing in the non-manufacturing PMI (51.0 vs. 51.5). The composite remained above 50 (51.3 vs 51.1), suggesting that some of talk about China in a recession (i.e., contracting) may be exaggerated. Separately, note that Nvidia reported that the US now requires it to seek prior permission to sell some advanced AI chips to to Middle East countries (it did not specify which) for fear that they are being sold to Chinese companies.

There were three data points to note from Japan. First, after falling by 0.6% in June, retail sales jumped 2.1% in July, nearly three times more than expected. Retail sales fell by an average of 0.1% in Q2 after averaging 1.1% in Q1. Recall, Japanese consumption contracted in Q2, despite the spring wage round that saw the largest increase in years, and 14% rally in stocks (which speaks to the wealth effect). Strength was seen in apparel and appliances. However, the upside surprise was matched by a downside surprise in the second data point. Industrial production plummeted 2.0% in July after rising by 2.4% in June. Manufacturing of machinery and electronic components were the weakest and offset the modest strength of the auto sector. Third, the Ministry of Finance reported last week's portfolio flows. Contrary to fears after the Yield-Curve Control policy was adjusted at the end of July, Japanese investors have been buyers of foreign bonds, not just last week, but over the four weeks since the decision was made. Over the four weeks, they have bought about JPY936 bln (~$6.5 bln). Japanese investors have been sellers of foreign equities and continued last week. For their part, foreign investors have been divesting of Japanese bonds and stocks. Over the four weeks, they have sold about JPY3.3 trillion (~$23 bln) of Japanese assets.

The dollar saw some limited follow-through selling yesterday after the dramatic key reversal on Tuesday. The session low was recorded after soft US data near JPY145.55. It recovered to around JPY146.30 in late dealings. It is in a narrow range of roughly JPY145.70 to JPY146.25 range today, with a slightly heavier bias. Options for nearly $1.5 bln expire at JPY146.50 today and $1.55 bln tomorrow at JPY146.40. The Australian dollar was bid to around $0.6520 amid the US dollar's broader sell-off yesterday, but drifted lower for most of the session, giving back a half-of-a-cent roughly. It tried again today to establish a foothold above $0.6500 and again has been rebuffed. Initial support is seen near yesterday's lows around $0.6450. Tomorrow there are nearly A$1.7 bln in expiring options in the $0.6520-5. The dollar continues to consolidate in a narrow range against the Chinese yuan. Today's low (~CNY7.2820) is the highest low in nearly two weeks. The high (~CNY7.2915) is the lowest high in a week. The dollar was fixed at CNY7.1811, slightly lower than yesterday (CNY7.1816). The average projection in Bloomberg's survey was CNY7.2776 (13 survey responses).


Inflation in the eurozone was firmer than expected, according to the preliminary estimate, bolstered by today's French report that showed a 1.1% rise in the month-over-month harmonized rate for a 5.7% year-over-year gain. The EMU aggregate reading showed the headline rate rose by 0.6% after falling by 0.1% in July. The year-over-year rate was unchanged at 5.3%, while the core rate slipped to 5.3% from 5.5%. The three-month annualized rate slowed to about 3.2% from 4.5% in the previous three months. The base effect indicates that there is likely to be substantial progress in September and October. In 2022, headline CPI rose by 1.2% and 1.5%, respectively. Making some conservative assumptions (0.4% a month increase in September and October), the year-over-year rate will fall below 3.5%. And that may be the best it gets for a few months. In November 2022 through January 2023, the monthly CPI fell, and this will make difficult to have much improvement in the 12-month rate. Separately, despite the stagnating economy, the unemployment rate in the eurozone remained for the fourth consecutive month (July) at the cyclical low of 6.4%. Last July, it was at 6.7%. At the end of 2019, the eurozone unemployment rate was 7.5%. 

The euro's recovery extended to $1.0945 yesterday, and the single currency settled above its 20-day moving average (~$1.0905) for the first time since late July. The $1.0960 area corresponds to the (38.2%) retracement of the sell-off since last month's high. There are options for about 880 mln euros at $1.0950 that expire today. The euro's recovery has coincided with a 25 bp narrowing of the US two-year premium over Germany. However, the euro has come back offered, in what appears to be some position squaring ahead of the US data. It is holding above yesterday's low (~$1.0855), and a break may be worth about a quarter-of-a-cent. Sterling also closed above its 20-day moving average (~$1.2700) for the first time this month. It reached nearly $1.2750 in the broad dollar sell-off after the soft data. After moving above $1.27, it held above it, but is also trading with a heavier bias today. Session lows, near $1.2675, was recorded in the European morning. Support is seen in the $1.2630-50 area. Tomorrow there are nearly GBP700 mln in options at $1.2800, the upper end of the previous trading range.


Although the weekly initial job claims are due, they ae overshadowed by tomorrow's BLS report and today's personal income and consumption report. For the second consecutive month, and the fourth month in the first seven, consumption is expected to outstrip income. The median forecast in Bloomberg's survey is for a 0.3% increase in personal income and a 0.7% rise in personal consumption. The rise in consumption speaks to the strong demand Fed Chair Powell referenced in last week's speech at Jackson Hole. 

Given the sensitivity to inflation, the PCE deflator is keenly followed. It is, after all, the measure of inflation that that the Fed targets. However, we argue that the CPI captures is essence, despite the different baskets and weightings. In H1, headline CPI rose at an annualized rate of about 3.4% and the PCE deflator rose at an annualized rate of roughly 3.2%. The core CPI rose at an annualized rate of 4.6% compared with the core PCE deflator's annualized increase in H1 of about 4.1%. The median forecast in Bloomberg's survey is for a 0.2% increase in both the headline and core PCE deflators, which would put the year-over-year increase at 3.3% and 4.2%, respectively, up from 3.0% and 4.1% in June. Going forward, consumption is expected to weaken over the remainder of the year as job growth slows, savings are drawn down, and student loan servicing resumes. In GDP terms, consumer spending rose 4.2% in Q1 and 1.7% Q2. It is seen slowing to 1.5% this quarter before settling in at around 0.5% for Q4 23 and Q1 24.

After last week's high (~CAD1.3640) held on Tuesday, the greenback reversed and fell to a low near CAD1.3515 yesterday. A break of the CAD1.3495-CAD1.3500 (two-week lows and the 20-day moving average) could signal a test on the CAD1.3450-60 area, which holds the (38.2%) retracement of this month's US dollar rally and the 200-day moving average. Canada's current account typically does not draw much interest, but the deficit looks set to have doubled in Q2 over Q3. If could point to a weaker Q2 GDP, which will be reported Friday. The US dollar may find initial resistance near CAD1.3565-75 today. Mexico's central bank boosted its GDP forecasts for this year (3.0% from 2.3%) and next (2.1% from 1.6%). Banxico acknowledged that exports to the US helps explain the resilience of the Mexican economy. The dollar softened against the peso but remained above Monday's low near MXN16.6945. It is in a narrow range today (~MXN16.7385-MXN16.7675). Resistance is seen near MXN16.80, and there are options for about $635 mln that expire today at MXN16.85. Looking further afield, not that there are options for $1.5 that expire next Tuesday at MXN16.70.

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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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