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Still No Follow-Through Dollar Buying After Last Week’s Surge

Still No Follow-Through Dollar Buying After Last Week's Surge

Overview: The dollar was threatening to break higher at the end of last week, and the euro and sterling closed below key supports. However, so far this week, the greenback is consolidating and has not seen follow-through buying. The key data this week, US consumption and jobs, and the eurozone's CPI still lay ahead. The Antipodeans and Norwegian krone enjoy a firmer today. A 0.8% contraction in Sweden's Q2 GDP was not as deep as had been feared, but enough to keep the Swedish krona on the defensive. The G10 currencies are mostly trading in narrow ranges. Emerging market currencies are mixed. The South African rand and Hungarian forint lead the advancers. There is some speculation that Hungary may cut its base rate today.

Stocks in the Asia Pacific extended yesterday's rally, led by Hong Kong and China. Europe's Stoxx 600 is up about 0.5% after gaining 0.9% yesterday. US index futures are narrowly mixed. Bond yields are mostly lower. Benchmark 10-years yields are 2-4 bp lower in Europe, with the exception of UK Gilts, where the yield is slightly firmer after yesterday's holiday. The 10-year US Treasury yield is off one basis point to about 4.19%. The two-year yield has slipped slightly below 5.0%. Note that yesterday, the sold $222 bln in bills and notes and comes back for another $96 bln today (bills and notes). Softer yields help support gold prices. Recall that the yellow metal bottomed last week near $1885 and reached $1926 yesterday. It is firm now near yesterday's highs. October WTI bottomed last week near $77.60 and reached almost $80.90 yesterday. It is holding just below there so far today, testing the 20-day moving average (~$80.75). Talk that OPEC+ may extend production cuts, ostensibly in reaction to anticipated weaker demand from China seems to be neutralizing what appears to be increased Iranian supply.

Asia Pacific

At the Jackson Hole symposium last week, Bank of Japan Ueda justified the current monetary stance, saying that the central bank's assessment of the underlying rate of inflation is below 2%. Japan's five- and 10-year breakeven rates (the difference between the yield of the conventional and inflation-linked securities is below 120 bp. Meanwhile, Japan's July jobs data was disappointing. The unemployment rate, reported earlier today, jumped to 2.7% from 2.5%. rising further from the cyclical low of 2.4% seen in January. Note that at the end of 2019 it was at 2.2%. The number of employed people fell by 100k and the unemployed rose by 110k. Hiring slowed in retail and business services. The job-to-applicant ratio slipped to 1.29 from 1.30. This is the low since last July. Lastly, we note the weak demand for Japan's two-year note that was sold today. To be sure, it was well over-subscribed but lowest since 2010 (3.20 vs 3.95 last). The average yield was a little more than one basis point. 

Many are arguing China's problems stem from its Communist ideology. This seems too simplistic. After all, under Mao, there was an extensive social safety net, dubbed "Mao's iron rice bowl". This is to say that Xi's shunning of efforts to bolster consumption is not derived from Marxist-Leninist precepts but Xi's own idiosyncratic thought, which as we have noted shared with some political right views the US and Europe that sees welfare spurring laziness. There is a genre of literature claiming the Chinese system was terminal before the pandemic, but it seems policy choices since Covid have exacerbated the challenges. Meanwhile, Chinese officials argue the US is in decline, and point to the serial financial crises, illustrating its instability. The conventional wisdom in both countries seems to be that the other is in some kind of systemic decline. Moreover, there is nothing that the various bilateral talks or even a Biden-Xi meeting on the sidelines of next month's G20 meeting can address. Yet, it seems that such an assessment risk misjudging the other's reaction function and may violate a basic precept of under-estimating an adversary. 

The dollar rose to a marginal new high for the year against the shortly after European markets closed yesterday, reaching nearly JPY146.75 but has remained below it today. Indeed, the greenback is consolidating in a narrow range so far today (~JPY146.30-JPY146.55). Options for slightly more than $1 bln at JPY147 expire today. The market is probing for the official pain threshold and are pressing gingerly, with an eye on the 10-year JGB yield. The Australian dollar held above $0.6400 yesterday. While it was unable to surpass the pre-weekend high near $0.6440, it did so today, rising to about $0.6455. However, it was greeted with new selling that knocked it back to $0.6435. Still, the intraday momentum indicators are constructive suggesting another attempt at the highs is likely. Nearby resistance is seen in the $0.6465-75 area. The greenback remains firm against the Chinese yuan but is consolidating below CNY7.30. Of course, Chinese officials could do more if they wanted, as they have plenty of reserves and policy tools. Yet, the focus seems misplaced. The yuan is weak but not extremely so. Rather, according to the OECD's model of purchasing power parity, it is the yen (and euro) that are historically undervalued by more than 50%. Surely, they too could do more if desired. The PBOC fixed the dollar at CNY7.1851 today. The average estimate in Bloomberg's survey was for CNY7.2764 (range of projections was CNY7.1860-CNY7.2918). Press reports suggest the large banks are considering another cut in deposit rate as soon as later this week.


The highlight of the week is Thursday's preliminary EMU August CPI. The median forecast in Bloomberg's survey is for a 0.4% month-over-month increase, which is consistent with the year-over-year rate slipping to 5.1% from 5.3%. The core rate is expected to ease to 5.3% from 5.5%. Still, the ECB is looking at the same thing many market participants are and that is outsized 1.2% rise last September and the 1.5% gain in October 2022. As these drop out of the 12-month comparison, inflation is likely to fall sharply on a year-over-year basis. Today's high frequency data included consumer confidence surveys in Germany and France. Germany softened and France was unchanged. Also, Spain reported slightly better July retail sales. They accelerated to 7.7% year-over-year from 6.9%.

The market has all but given up on the idea that the Bank of England could hike rates by 50 bp next month. There is around a 6% chance discounted by the swaps market but before the BOE meets on September 21, the employment/wage data (September 12) and CPI (September 20). The UK still enjoys a premium on 10-year rates. It peaked a little above 70 bp in June, which was the largest since 2009. The premium has been trending lower and briefly traded below 20 bp last week, the smallest since early May. It is now near 25 bp. 

The euro settled above $1.08 and back above the 200-day moving average that is a little above $1.0805. The high recorded as the Fed's Powell spoke at Jackson Hole was slightly higher than $1.0840 and it held below it today. The euro looks set to challenge $1.08 again in North America. Yesterday's low was slightly below $1.0790 and the pre-weekend low as about $1.0765. Sterling, too, managed to close above key support ($1.26), which it closed below at the end of last week. It rose to about $1.2635 today, stalling in front of the pre-weekend high (~$1.2655). Overcoming resistance in the $1.2650-75 area may be the key to a better technical tone.


Fed Chair Powell talked a bit about house prices and rents in his Jackson Hole speech. He seemed to recognize the recent data points to recovery of prices and rents. S&P CoreLogic Case Shiller 20-city price index has risen every month this year after falling eight months in 2022. The FHFA house price index has not fallen since last August. In the first five months of the year, the FHFA index has risen at an annualized pace of about 7%. In the last five months of 2022, the FHFA index was flat. 

This week, US labor market is in focus with nonfarm payrolls at the end of the week. The median forecast in Bloomberg's survey is for 170k increase, having crept up a little with the newest forecasts. Today's see the JOLTS report and job openings are expected to have continued to trend lower. Job openings have fallen every month this year but April. Job openings at the end of last year was about 11.23 mln. In June, openings fallen to 9.58 mln, the lowest since April 2022. The 1.65 mln decline in the first half dovetails well with the BLS nonfarm payroll gain in H1 of 1.62 mln.

Mexico's trade balance deteriorated in July. The $881 mln deficit was the largest in three months but considerably smaller than the $1.8 bln median forecast in Bloomberg's survey. There are some strong seasonal patterns in Mexico's trade figures. In all but two years in the past 20, the trade balance weakens in July. Imports and exports fell. Today's data includes the IGAE indicator of economic activity. It is sometimes used as a proxy for month's GDP. It is expected to rise by 0.5% in June after a 0.03 decline in May. The IGEA will be overshadowed by the final read of Q2 GDP. Revisions point to the possibility that the 0.9% quarter-over-quarter gain is tweaked higher.

The US dollar was mired in a roughly CAD1.3570-CAD1.3610 yesterday, holding inside the pre-weekend range. The high set at the end of last week was near CAD1.3640. On the downside, a break of CAD1.3560 is needed to denote anything important technically, and there are options for nearly $1.2 bln that expire there tomorrow. The dollar dipped below MXN16.70 yesterday but turned better bid in the North American afternoon and settled at new session highs scored late near MXN16.7920. A small hammer candlestick may have been formed. Follow-through dollar buying today has so far been limited to MXN16.8020. Nearby resistance is seen in the MXN16.87-90 area. It probably takes a move above MXN17.00 to shake out some of the new peso longs. 

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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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