by Marc Chandler
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Overview: An eerie calm hangs over the foreign exchange market on this the anniversary of the end of the Bretton Woods agreement 53 years ago today. Narrow ranges are dominating. Strong Australian jobs data and a cautious Norwegian central bank have underpinned their respective currencies today. A firm Q2 UK GDP appears to have given sterling a boost. The euro and the Swiss franc are struggling, while the yen is recording its narrowest range in several weeks. Emerging market currencies are mixed, with the Chinese yuan trading heavier following uninspiring data.
Equities are mostly higher. The MSCI Asia Pacific Index rose for its fifth consecutive session, though Hong Kong and Taiwan were exceptions today. Europe's Stoxx 600 is edging higher for the third consecutive session, and US index futures are trading a little firmer ahead of the retail sales and industrial production due before the opening local session. Bonds are under modest pressure and benchmark 10-year yields are firmer in Europe, with the 10-year Gilt yields up three basis points (~3.85%) to lead the move. The 10-year US Treasury yield is slightly higher near 3.84%. After posting a bearish outside down day yesterday, gold has come back firmer. It is mostly in a $2446-$2460 range today. September WTI extended its pullback yesterday after peaking Monday-Tuesday above $80, it fell through $77 yesterday. No follow-through selling has been seen today and it is consolidating below $77.60.
Asia Pacific
The Japanese economy rebounded more than expected in Q2 after contracting in Q1. The 0.8% quarter-over-quarter expansion was better than the 0.6% median forecast in Bloomberg's survey and translates to a 3.1% annualized pace (2.3% expected). It follows the 0.6% fall in Q1 output. Of note, consumption expanded for the first time in five quarters. Capex also contributed to growth. It had contracted in three of the past four quarters. Exports and imports improved but still shaved a little from GDP. Inventories were pared and this subtracted about 0.1% from GDP after contributing 0.3% in Q1. The deflator moderated to 3.0% (2.6% expected) year-over year from 3.4%. For its part, Australia reported it grew 60.5k full-time positions in July, bringing the three-month average to almost 50k, the most since October 2022. The unemployment rate edged up to 4.2% from 4.1% and this seemed to reflect the rise in the participation rate to a new record (67.1% from 66.9%). Still, the report does not appear to have changed view about the trajectory of RBA policy. The futures market prices in one cut at the end of the year. China reported its July real sector data and house prices. China's data is full of inconsistencies and many observers pick and choose which data they take at face value and which they dismiss. Still, the takeaway is that more support is likely to be necessary if China's 5% GDP target is to be met. Growth in industrial output slowed to 5.1% from 5.3% year-over-year, while retail sales were stronger than expected rising 2.7% after a 2.0% year-over-year rise in June. Unexpectedly, fixed investment slowed (year-to-date, year-over-year) to 3.6% from 3.9%. Surveyed unemployment rose to 5.2% from 5.0%. The property market remains a drag, despite the various initiatives announced. Beijing has been unable to force banks to lend to developers, but many observers want us to believe that the banks are always doing the government's bidding in the foreign exchange and bond market.
The dollar bottomed on August 5 near JPY141.70 and spent the past five sessions mostly in a JPY144.50-JPY148.00 range. It is in a narrow JPY147.00-JPY147.60 range today in quiet turnover. It has not managed to meet the minimum retracement of the last leg down that began the day before the BOJ and FOMC meet on July 31, which is found near JPY148.45. The momentum indicators are trending higher. Even with the lack of much of a recovery, the dollar's oversold condition after falling about 12.5% in a little less than four-weeks is being alleviated. The Australian dollar set a three-week high near $0.6645 yesterday before turning lower and settling on session lows, slightly below $0.6600. It recorded a three-day low earlier today around $.6570 before rebounding with the strong jobs report. It is approaching $0.6630 in the European morning. A move above $0.6650 could signal a move toward $0.6700. The US dollar recovered from a marginal new seven-day low against the offshore yuan near CNH7.1300 and settled slightly above CNY7.14. Follow-through dollar buying today has lifted the greenback around CNH7.1620 today. The dollar is slightly stronger against the offshore yuan than the onshore yuan. The PBOC set the dollar's reference rate at CNY7.1399 (CNY7.1415 on Wednesday). Lastly, note that the Philippines central bank delivered a quarter point cut as widely expected.
Europe
The UK's data-packed week continued today with the GDP figures. The economy expanded by 0.6% in Q2 from 0.7% in Q1. And that followed contraction in Q3 23 and Q4 23. Consumption slowed (0.2% vs. 0.4%), while government spending increased sequentially (1.4% vs. flat). Business investment and net exports were drags. However, in June, the economy stagnated. It had grown by 0.4% in May after a flat performance in April. Industrial output jumped 0.8% in June, led by a 1.1% surge in manufacturing output. Construction unexpectedly rose, while services output slipped by 0.1% in June after growing 0.3% in May). The trade balance narrowed in nominal terms to GBP5.3 bln from a revised GBP5.8 bln in May. (initially GBP4.9 bln). The trade shortfall was about GBP2.4 bln in June 2023. The median projection among economists polled by Bloomberg is for the UK growth to slow to about 0.3% quarter-over-quarter for the next several quarters. After the series of high-frequency data this week (tomorrow June retail sales), the swaps market is little changed, showing a 40% chance of a cut in September and 49 bp before the end of the year. At the end of last week, the swaps market was pricing almost a 45% chance of a cut next month and about 45 bp of cuts before year-end. Lastly, as expected Norway's Norges Bank left its deposit rate steady at 4.5%. The swaps markets show high confidence of a cut before the end of the year (~88%).
The euro reached nearly $1.1045 yesterday, its best level since early January. It could not sustain the upside momentum. It pulled back to around $1.1010. According to Bloomberg data, it was the first close above $1.10 since January 1. It is in an extremely narrow range today mostly between $1.1005 and $1.1015. There are 1.4 bln euros in options expiring at $1.10 today and almost 1.7 bln euros that expire tomorrow. The rally from Tuesday's low (~$1.0915) to Wednesday's high was a bit too fast, and that is what the break of the upper Bollinger Band signaled. Nearby support is the $1.0965-80 area. Sterling consolidated yesterday after surging by slightly more than 0.70% on Tuesday. It stalled after meeting the (50%) retracement of its drop from the July 17 high (~$1.3045) found near $1.2855. It held $1.2820 and is near $1.2860 in late European morning turnover. The price action looks constructive, and the next technical target is near $1.2900.
America
The US July CPI was benign. Headline inflation slipped below 3.0% for the first time since April 2021. The core rate stands at 3.2%, which is also the lowest since April 2021. It was close enough to expectations that the impact was marginal at best. A September Fed cut continues to be a forgone conclusion and the market continues to shave the odds of a 50 bp move. At the start of last week amid the heightened market turmoil, a 50 bp cut was fully discounted. Now, pricing of the Fed funds futures is consistent with about a 45% chance of a 50 bp cut, which still seems exaggerated, pending the next jobs report on September 6. Outside of import/export price indices due today, attention turns back to the real sector, and here is where there will likely be more evidence that the economy is slowing. Auto sales bounced back in July after the computer-glitch induced weakness in June. But excluding auto, retail sales may have eked out a 0.1% gain. The core measure, which excludes autos, gasoline, building materials, and food services, is expected to have also slowed to 0.1% (from 0.9% in June). Industrial production may have contracted by 0.3% after it rose by 0.6% in June. It would be the first decline since March. Manufacturing output likely fell as well. Note that through July, the Bureau of Labor Statistics reported a net loss of US manufacturing jobs this year. Weekly jobless claims are due and for the past seven weeks have been alternating between gains and losses. Last week's report covered the week through August 2, and it showed a decline of 17k. Still, the four-week moving average rose to almost 241k, the highest since last August and likely rose again last week.
The US dollar traded below CAD1.37 yesterday for the first time since July 18 but recovered to close higher on the day. The upticks were capped near CAD1.3725 today and it looks set to challenge yesterday's low near CAD1.3690. The US dollar is retreating from the year's high set on August 5 at max risk-off near CAD1.3950, and the pullback does not look finished. The greenback unwound its recent gains against the Mexican peso and returned to this week's low near MXN18.75. The 20-day moving average is there as well. Momentum indicators are trending lower and the charts suggest potential into the MXN18.40-50 area. Domestic political considerations in September, with the sitting of the new legislature, may dampen enthusiasm for the peso as August winds down.
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