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Calm Before the Storm: Greenback Confined to Narrow Ranges

Calm Before the Storm:  Greenback Confined to Narrow Ranges

Overview:  With many central bank meetings in the days ahead, the dollar has begun the new week on a quietly and mostly in tight ranges, helped by a holiday in Tokyo. G10 currencies, outside of the Scandis are slightly firmer in European turnover. Emerging market currencies are narrowly mixed, but of note the 0.25% decline makes the Chinese yuan the weakest. The Mexican peso is extending its recovery into the seventh consecutive session.

While mainland Chinese stocks recovered from early weakness, the large bourses in the region fell. Europe's Stoxx 600 is off a little more than 0.5%, snapping a two-day advance, while US index futures are trading with a firmer bias after the pre-weekend tumble. The UAW strike at continues. Benchmark 10-year yields are mostly 1-2 bp higher in Europe, though Gilt yields are up a little more. The US 10-year yield has edged up to about 4.35%, while the two-year yield is near 5.05%. Last week's high was slightly above 5.07%. November WTI is extended last week's gains to approach $91 a barrel. Since the end of June, it has only declined in two weeks (rising in nine, including the past three). In the last two sessions, gold recovered from almost $1901 to $1930.50. It is consolidating today (~$1922.65-$1930.65). 

Asia Pacific

The PBOC cut required reserves by 25 bp last week (freeing up ~CNY500 bln or almost $70 bln) on top of injected more funds (CNY591 bln CNY401 bln in August) through the one-year Medium-Term Lending Facility. This followed on the heels of the surge in aggregate lending last month (CNY3.12 trillion vs. CNY535 bln in July). Some of the high-frequency August data such as retail sales, industrial production was stronger than expected and showed improvement sequentially on a year-over-year basis. The surveyed joblessness also eased slightly. Still, problems in the property market remain evident. House prices fell for the third consecutive month. Investment in property is being reduced at an accelerated pace (-8.8% vs-8.5% year-to-date, year-over-year), Residential property sales fell for the first time this year (-1.5% year-to-date, year-over-year). 

This week the focus is on the prime lending rates, but it would be unusual to see them cut without the one-year Medium-Term Lending Facility rate cut. However, recall that last month's MLF cut was not fully passed through to the prime rates. The reduction in required reserves and the strong increase in lending does not mean that officials are giving the market a greenlight to sell yuan. In fact, some reports suggest that officials have made it clear that they want banks to reduce their proprietary foreign exchange trading. A liquidity squeeze in the offshore market was engineered last week that makes it more expensive sell the yuan. Although the yuan stabilized last week, Chinese equities did not. The CSI 300 brought a four-day losing streak into today's activity. It has fallen in 10 of the past 12 sessions. Meanwhile, observers anxiously waiting for Beijing's response to the EU's announcement of a probe of China's domestic EV subsidies. BYD (Berkshire Hathaway has a little less than a 10% stake) and other Chinese brands account for less than 3% of the overall EU auto market).

Japan's economy would have contracted in Q2 if not for the net exports and tourism (which economists understand to be an export of hospitality services that must be picked up rather than shipped). However, Q3 seem to be off to a somewhat better start. Industrial output fell by a revised 1.8% in July (initially -2.0%), but the tertiary industries activity rose by 0.9%, three-times more than median forecast in Bloomberg's survey. After some recent bond auctions saw lukewarm reception, last week's five- and 20-year bond sales were better received. The 20-year sale saw the highest bid-cover ratio since May 2020 (3.94). The five-year bond auction also saw solid demand (4.41 bid-cover), with a smaller tail (difference between average and cut-off price) than the previous auction. The focus this week is on the BOJ meeting at the end of the week. Before then, the August trade balance is due, as is the national CPI. The trade balance often deteriorates in August, and this is expected to be the case this year. The national CPI is largely anticipated from the Tokyo figures, which have already been released. The headline and core rates are likely to slip but the measure that excludes fresh food and energy may be sticky at cyclical highs.

The dollar rose to new highs for the year against the Japanese yen before the weekend, slightly shy of JPY148. The market may have been emboldened, knowing that today is a holiday in Tokyo, making intervention less likely. Still, a narrow range has confined the buck today (~JPY147.55-JPY147.90). The rise in US rates, with the 10-year Treasury yield posting its second-highest close of the year, provided the cover. The greenback has not closed below its 20-day moving average against the yen since late July. It is found near JPY146.70 now. The Australian dollar set a nine-day high before the weekend near $0.6475 but settled poor, slightly above $0.6430. The low (~$0.6425) was recorded late in the session, seeming to underscore the market's reaction of the higher levels. It has held today, and the Aussie to trade to almost $0.6450. A break of $0.6400 may signal the end of the upside correction that began earlier this month and re-target the lows near $0.6355. The double top from June and July (near $0.6900) has a measuring objective around $0.6300. Note that Bullock replaces Lowe at the helm of the RBA today. On the back of the better-than-expected Chinese data, and apparent official discouragement of bank prop trading fx, the dollar fell to a two-week low near CNY7.2465. However, the inability of the news to help Chinese equities and the yen's fall to new lows for the year, seemed to drag the yuan back down. The greenback finished slightly below CNY7.2760 and reached about CNY7.2940. The PBOC continues to set the dollar's reference rate below the previous day's and lower than the Bloomberg survey. Today's fix was at CNY7.1736 (CNY7.1786 on Friday) compared to the average projection in Bloomberg's survey for CNY7.2715. The top of the 2% band is about CNY7.3171. 


It is a relatively quiet week for eurozone data an event. The market continues to work through the implication of last week's hike, and the subsequent decline in the euro. The swaps market sees about a 20% chance of a hike at next month's meeting, the odds rise about 33% of a hike before the end of the year. We suggested the euro was vulnerable regardless of what the ECB did. If it hiked, we anticipated the market to interpret is as a dovish hike because it would likely be seen as the last. Some observers have claimed that the euro sold-off because the market thought it was a policy mistake. That is possible but seems a rather contrived narrative. After all, we had argued that even if the ECB did not hike, the euro was likely to be sold. Also, it was just as much a strong dollar story as it was about the weak euro. Outside of the dollar-bloc and yen, the euro was the strongest of G10 currencies last week. It gained, for example, around 0.25% against sterling, even though the Bank of England is most likely to lift rates this week too. Separately, note that the EU ended is ban on Ukraine grains to protect local farmers. Poland, which holds parliamentary elections next month, Hungary and Slovakia announced that they would extend the ban.

The UK reports August CPI on Wednesday, ahead of the outcome of Thursday's BOE meeting. Headline inflation is expected to tick up to 7.1% year-over-year last month from 6.8% in July, spurred by a 0.7% increase month-over-year. It will be the first increase since February. In the three months through July, the annualized increase of CPI was about 1.6%. The swaps market is pricing in about a 70% chance of a hike on Thursday. The perceived probability has been falling steadily since late August, when a small chance of a 50 bp hike was being discounted. 

The euro has a nine-week slide in tow, its longest decline since the birth of the single currency. Using a synthetic euro (mathematic calculation) show the longest consecutive loss before that was a 12-week decline in 1996. The euro traded marginally through the May low (~$1.0635). It has held above the (38.2%) retracement of the euro's rally from the low seen a year ago (September 28, ~$0.9535), found near $1.0610. The lower Bollinger Band (two standard deviations below the 20-day moving average) is about $1.0615. The low for the year was set in January around $1.0485. So far today, the single currency is in an unusually narrow range between roughly $1.0655 and almost $1.0680. Sterling held above its May low (~$1.2310), but it settled poorly, below $1.24 for the first time since then. It was the second consecutive close below the 200-day moving average (~$1.2435). Sterling met new sales as it tried to recover above $1.2400 in Asia and fell to a new low near $1.2370 before finding a bid in early European turnover. The lower Bollinger Band is near $1.2345. The market is trying to re-establish a foothold above $1.2400 ahead of tomorrow's UK CPI seems likely. That said, note that there are options at $1.23 for around GBP900 mln expire tomorrow.


Higher energy prices lifted the US CPI, PPI, and retail sales (reported on a nominal basis). While higher energy may be inflationary in the first instance, it is headwind to economic activity, and has been often understood as such by the Federal Reserve. Leaving aside the deep recession associated with the pandemic and shutdowns, most of the American business cycles in the past 50 years ended with a sharp rise in oil prices. The IEA estimate there is a 1.2 mln barrels per day shortage, which could more than double in Q4. Ahead of the conclusion of the FOMC meeting on Wednesday, where the focus in more on what the Fed says, including the new Summary of Economic Projections (dot plot) than what it does (the market understands there to be little chance of a hike), the US reports July TIC data and August housing starts and permits. When looking at the TIC data, many observers focus on US Treasuries, but it appears that some official accounts switch from Treasuries to Agencies and earn a slightly better yield. Also, when looking at the change of holdings, often change in valuation is not considered. Housing starts are seen easing August after rising nearly 4% in July. The UAW strike, the resumption of student loan servicing, and a possible partial government shutdown in October are seen slowing the economy at the start of Q4. Last week (as of September 14), the Atlanta Fed's GDP tracker was reduced to a still strong 4.9% for Q3, down from 5.6%. 

Canada reports August housing starts today. They are expected to have slowed slightly. August CPI is due tomorrow. Both the headline and care likely crept up. At the end of the week, July retail sales will be reported. An improvement is likely after a 0.1% increase in June (-0.8% excluding autos). The record from the recent central bank meeting is also due (September 20). The swaps market has a little better than a 50% chance of a hike before the end of the year. Mexico reports July retail sales on Thursday, and it is unlikely to come close to repeating the heady 2.3% month-over-month increase seen in June. CPI for the first half of September is due at the end of the week and the continued moderation is price pressures is anticipated. Lastly, Brazil's central bank is seen delivering its second 50-bp cut in the new easing cycle Wednesday. 

Since mid-August, the dollar has found support at CAD1.3490-CAD1.3500. The area was tested again at the end of last week and it held, with the greenback finishing the week near CAD1.3525. It is testing the area again today. On September 7, it approached CAD1.37, and the move lower since has seen the five-day moving average cross below the 20-day for the first time since the end of July. The other momentum indicators have turned lower and did so without confirming the high earlier this month. A break of CAD1.3465, where the 200-day moving average is found and the (38.2%) retracement objective of the greenback's rally since mid-July would lend credence to ideas that a high is in place. In the face of the US dollar's broad gains, the Mexican peso stands out. It begins this week after strengthening for the past six sessions. Following the of the central bank winding down the hedging facility, the dollar jumped to nearly MXN17.7080, its highest level since May. However, this seemed to be more a question of positioning that a change in what we continue to see as a constructive macro backdrop. The dollar fell to almost MXN17.05 before the weekend and traded down to almost MXN17.03 today. The (61.8%) retracement level (~MXN17.09) was overshot and the dollar closed below the 20-day moving average (~MXN17.0985) for the first time since late August. The momentum indicators are trending lower. We look for a return to the MXN16.60-70 area. 

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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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