Dollar Consolidates as Stocks Melt snbchf.com

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Marc Chandler
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Overview: The sharp losses in global equities are dominating today's market developments. Yesterday's 2.1% loss of the S&P 500 and 3.25% drop in the Nasdaq were the largest since carry-trade unwind climaxed on August 5. They have fallen more today and are poised to gap lower at the opening. Asia Pacific shares tumbled, led by Taiwan's 4.5% tumble and the Nikkei's 4.25% loss. It delivered Indian stocks its first loss in nearly three weeks. Europe's Stoxx 600 is off 1.1%, its third day of losses and the most since August 5. The equity drop is giving bonds a haven bid, and benchmark 10-year yields are 2-3 bp lower in Europe. The 10-year Treasury yield is softer, a little below 3.82%. The lowest closing yield this year was slightly below 3.79% on August 5. Gold is heavy and looks as if sales may be to meet margin calls. The yellow metal which peaked last week near $2530 reached $2472 today. The 20-day moving average is around $2490, and it has not closed below it since August 7. With Libyan supply set to return and OPEC+ to allow increased output starting next month, while demand is seen weaker, October WTI plunged to almost $69 a barrel today. Recall that before the weekend, it had approached $77. October WTI recovered in Europe to re-enter yesterday's range but looks to struggle in front of $71.

For its part, the dollar is mixed today. The Canadian dollar and Scandis are still trading with heavier bias, while the others have steadied. The Japanese yen is the strongest, up about 0.2%. The Bank of Canada is widely expected to cut rates today and signal further cuts are likely. Most emerging market currencies have firmer, but the Turkish lira, Mexican peso, and Taiwanese dollar are nursing small losses.

Asia Pacific

Japanese markets do not seem sensitive to the PMI and the final August services and composite PMI were no exception to the general rule. Last week, the Japanese government upgraded its assessment of the economy for the first time in 15 months, and yesterday, BOJ Governor Ueda reaffirmed his commitment to raising rates further, barring a new economic surprise. The final composite PMI comes in a 52.9, down from the 53.0 flash reading but still the highest since May 2023. Australia's final services and composite PMI were a little better than the initial estimates. The composite stands at 51.7, a three-month high, up from the 51.4 flash estimate. Australia reported Q2 GDP expanded by 0.2%, as expected, after growth in Q1 was revised to 0.2% from 0.1%. Australia also reported July household spending. The 0.8% rise offset the 0.5% decline in June, and the year-over-year rate stands at 2.9%, up from 2 .2%. China's Caixin services and composite PMI elicited little market reaction. Its readings were stronger than the "official" version, but the market is terribly suspicious of Chinese data, and is convinced additional stimulative measures are needed if the ~5% growth target is to be met.

The dollar traded on both sides of Monday's range against the Japanese yen on Tuesday but settled within the range, imparting a more neutral tone. Recall that after falling to about JPY143.45 on August 26, the greenback recovered. It rose slightly above JPY147.15 on Monday and made a marginal new high yesterday before reversing lower to nearly JPY145.15 in early North American turnover. Soft US data and a sharp decline in stocks gave the US Treasury market a boost, which also helped sustain the yen's bid. The dollar ground lower through the Asia Pacific session and recorded a low near JPY144.75. It found a bid in early European turnover. Nearby resistance is seen around JPY145.50. A break of JPY144.75 could spur a test on trendline support found today near JPY144.00. The Australian dollar found support slightly below $0.6710 yesterday but was sold to almost $0.6685 early in the local session today. It recovered to a new session high in early European turnover to almost $0.6720. Resistance may be in the $0.6730-40 area. A break of the $0.6680 could signal losses toward $0.6640 initially, and then the $0.6580-$0.6600 area. The New Zealand dollar is also breaking down. It was the best performing G10 currency last month with a 5% gain against the US dollar and 1.6% gain against the Australian dollar. It is the worst performer here at the start of September. It frayed support near $0.6170 today and the next technical target is around $0.6125-35 next, and possible $0.6100. Resistance is now around $0.6200. The US dollar continued to recover from the low set at the end of last week (~CNH7.0710), which had not been seen since June 2023. It reached CNH7.1310 yesterday, and with the help of a stronger yen, fell back to around CNH7.1060 today. Resistance is seen in the CNH7.14-CNH7.15 area. The PBOC set the dollar's reference rate at CNY7.1148 (CNY7.1112 yesterday).

Europe

What new information to be gleaned from the final eurozone services and composite PMI comes from Italy and Spain, which do not have preliminary estimates. The takeaway is that they are doing better than Germany and France. Italy's manufacturing PMI improved for the third consecutive month in August and has risen in seven of the last nine months, though it has not been above the 50 boom/bust level since March 2023. On the other hand, the services PMI slipped in August (51.4 vs. 51.7) for the fifth consecutive month but has not been below 50 this year. The composite rose for the first time since the end of Q1 (50.8 vs. 50.3). Turning to Spain, its manufacturing PMI fell for a third month in August to 50.5. It has not been lower since January. The service PMI rose for the first time in three months in August but at 54.6, it is slightly below this year's average (~55.2). The composite edged up to 53.5 (53.4 in July) and was at 50.4 at the end of last year. In addition to next week's ECB meeting, which is widely expected announce the second cut in the cycle (and update economic forecasts), attention is gradually turning to next year's budget. France needs a new prime minister and government to do so. Pressure is mounting on French President Macron. The UK's final service and composite PMI underscore that momentum seen in H1 when it was the fastest growing the G7 is carrying into Q3. The services PMI was revised to 53.7 from the preliminary estimate of 53.3 and 52.5 in July. The composite PMI stands at 53.8, a four-month high. (53.4 initially, and 52.8 in July). The Autumn budget, Labour's first, will be delivered at the end of October and both Prime Minister Starmer and Chancellor of the Exchequer Reeves warn that the unexpected GBP27 bln hole left by the previous government will likely require a tax increase. There is much talk of a capital gains tax increase.

The euro peaked slightly above $1.12 on August 26 and reached $1.1025 yesterday. It settled yesterday below the 20-day moving average (~$1.1055) for the first time since August 1. It is consolidating inside yesterday's range so far today. Support below yesterday's lows is in the $1.0990-$1.1000 area, but given the state of the momentum indicators, and with the five-day moving average slipping below the 20-day moving average for the first time in a month, the downside risk may extend toward $1.0940. Resistance may be encountered near $1.1075. Sterling peaked near $1.3265 on August 27. It approached $1.31 before the weekend. It eased below it yesterday, but it is holding today. The momentum indicators have turned lower, and we suspect the downside correction is still in its early stages. Nearby resistance is seen around $1.3150. Options for almost GBP670 mln at $1.3075 expire tomorrow. A break of $1.3080 would suggest a test on the $1.2965-$1.3000 area.

America

Today's US data are a likely minor distraction from Friday's national employment report. And there is little new in today's reports. The preliminary goods trade balance foretells a widening of the US July trade deficit. US retailers and wholesalers appear to be frontloading holiday shipments in fear of supply chain disruptions and inventories are rising. A jump in the volatile factory orders time series can be anticipated after the 9.9% Boeing-order induced jump in durable goods orders. The JOLTS report on job openings appears to have lost its sting, and in any event, it has been trending lower for more than two years. Still, it remains a little elevated compared with levels that prevailed before the pandemic. August auto sales will trickle in over the course of the session. Although they will impact retail sales and consumption forecasts, the market impact is often minimal. Still, auto sales are expected to have slowed to around a 15.4 mln seasonally-adjust annual rate down from 15.82 mln in July. Through July, US auto sales have averaged slightly less than 15.6 mln compared with 15.4 mln in the first seven months of 2023. The Fed's Beige Book will be released late in the session, but with high conviction that the Fed will cut 25 bp on September 18, the impact may be minor. Meanwhile, the Bank of Canada will most likely announce its third rate cut of the year shortly after reporting July merchandise trade balance. In the first half, Canada recorded a C$1.45 bln goods deficit, which is down from C$4.14 bln in the H1 23. Canada runs a current account deficit of less than 1% of GDP. The Bank of Canada nearly universally expected to cut rates today, (to 4.25%), and the swaps market is fully discounting quarter-point cuts at the next three meetings (through the Jan 29, 2025, meeting). Another 50 bp of cuts is discounted between March and July next year to bring the target rate to ~3%.

The US dollar strengthened against the Canadian dollar yesterday for the fifth consecutive session. After bottoming last week near CAD1.3440, its lowest level since March, the greenback recovered to a little above CAD1.3560 yesterday. The greenback has not been below CAD1.3530 today and it is pressing against yesterday's high. Tuesday's advance of almost 0.40% was the most in a month. We have been looking for the recovery to extend toward CAD1.3600, but that may be too conservative. The risk may extend toward CAD1.3635 and possibly CAD1.3700. The US dollar reached a new high against the Mexican peso yesterday since the August 5 peak (~MXN20.2180). It was turned back from slightly below MXN19.9850 and settled lower on the day (~MXN19.80). It is firm near MXN19.84 in late European morning turnover. Among the Latam currencies, the greenback finished lower only against the peso. The momentum indicators are getting stretched but do not prevent a retest of the last month's high. The Chilean peso was the regional laggard, dropping 1.15%, arguably weighed down by the 2.8% drop in copper, its fourth consecutive daily drop (off 5% in the run) ahead of the central bank rate cut. The central bank has been cutting rates since July 2023 when the policy rate had been at 11.25% for nine months. Yesterday's 25 bp cut brings the policy rate to 5.50%. The central bank signaled more cuts are likely and the swaps market looks for another 125 bp of cuts over the next year.

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About 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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