by Marc Chandler
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Overview: The US dollar is mixed but is mostly consolidating. The Australian dollar is a notable exception. The lack of new fiscal initiatives from China weighed on the Aussie, which is off for the fourth consecutive session. The other dollar-bloc currencies have also seen the recent losses extended. On the other hand, the Japanese yen and euro enjoy a firmer bias. After a dreadful drop in factory order, German industrial production surprised to the upside (2.9% vs. median forecast of a 0.8% gain in Bloomberg's survey). China imposed levy on European brandy and initiated an investigation into European autos in retaliation for last Friday's decision to increase tariffs on China-made EV for improper subsidies.
Mainland Chinese stocks jumped as the local markets re-opened. The CSI 300 rose nearly 6%. However, profit-taking on mainland shares that trade in Hong Kong fell by a little more than 10%. Most of the large bourses in the region but India. Europe's Stoxx 600 is off about 0.85%, giving back in full the gains from the past two sessions. US index futures are 0.2%-0.4% higher. Global bonds are mixed. China's 10-year bond yield jumped five basis points (to ~2.18%), while European benchmark yields are slightly firmer. The 10-year US Treasury is slightly softer, threatening to snap a four-day advance. Gold slipped to a new low for October, slightly below $2629. It has recovered and is little changed on the day near $2940. The lack of new fiscal measures from China has weighed on oil prices, though the war in the Middle East has not subsided. November WTI initially extended its gains to nearly $78.50, almost a three-month high, but reversed lower to test the $75.20 area. The intraday momentum indicators are stretched, and it looks poised to recover in North America today.
Asia Pacific
Chinese markets re-opened after the week-long holiday. The index of mainland shares that trade in Hong Kong rallied 30% during the Golden Week holiday. A couple of reports looking at the Chinese ADRs suggest the new buying came in rather than short covering following Beijing's announcement of various support measures. A press briefing, announced Sunday, which included the Chair of the National Development and Reform Commission, stopped shy of the new fiscal initiatives some anticipated, and the index of mainland shares that trade in HK tumbled nearly 10.2% today. In Japan, labor cash earnings slowed (3% year-over-year from 3.4% in July). Adjusted for inflation, earnings fell back below zero after positive readings in June and July (for the first time since Q1 22). Household spending fell in August and the -1.9% decline on a year-over-year basis is the most since January. Rengo, the labor union association, will decide its basic stance later this month for next year's spring round of wage negotiations. Separately, Japanese's August current account surplus widened, while the trade deficit narrowed to about JPY378 bln. In August 2023, it was -JPY755.2 bln. The Reserve Bank of Australia released its minutes from last month's meeting when it stood pat and dropped the reference to a discussion about a rate hike. First thing tomorrow, the Reserve Bank of New Zealand is expected to deliver a 50 bp rate cut that will bring the cash target rate to 4.75%. Since the start of September, the New Zealand dollar had been the worst performing G10 currency, depreciating by about 1.85%.
Despite the rise in US rates, the dollar traded heavily against the yen yesterday. The greenback initially rose in the Asia Pacific session to start the new week to slightly more than JPY149.10 but trended lower and fell below JPY148 in the North American morning. The losses were extended to JPY147.35 today set in early European turnover. Nearby support is seen around JPY147.00-JPY147.15. Australian dollar continues to fall. It spent little time above $0.6800 yesterday and approached $0.6740. The losses have been extended to $0.6715 today in the local session but has not been able to rise through yesterday's low. It peaked at the end of September near $0.6940. The daily momentum indicators are falling, suggesting the risk of a $0.6600-$0.6620. The offshore yuan seemed more sensitive to the yen's gains that the rise in US Treasury yields. The dollar was sold from about CNH7.10 to around CNH7.0580 yesterday and CNH7.0465 today. The PBOC set the dollar's reference rate at CNY7.0709 (CNY7.0074 on September 30, before the holiday).
Europe
German factory orders fell by almost three-times more than expected in August (-5.8%) but that did not stand in the way of a striking rebound in August industrial output (2.9%). The aggregate report for the eurozone will be reported next week (October 15). French industrial output jumped 1.4% in August (expected 0.3%) while the July series was revised to 0.2% (from -0.5% initially). Spain's industrial production slipped by 0.1%, as expected. Italy will report its figures on Thursday. A small 0.2% increase is expected after a 0.9% decline in July. Meanwhile, the slowing of Swedish September CPI (1.6% vs. 1.9%) and a softer underlying rate (1.1% vs. 1.2%) keeps the market on the fence about the possibility of a 50 bp cut at the Riksbank's next meeting (November 7). The central bank will see another inflation report before it meets again. The Riksbank has delivered three quarter-point rate cuts since beginning the easing cycle in May.
The euro did not see any follow-through losses after the US-jobs inspired tumble and despite the slump in German factory orders. The US two-year premium over Germany edged a little higher after widening by nearly 24 bp last week and 12 bp the week before. It is back to late July levels. Still, it is snapping a six-day widening today. The euro held support in the $1.0945-50 area, which holds the mid-August low and the (61.8%) retracement of the euro's rally from the early August low (~$1.0780). It has approached the $1.10 area in the European morning. A push above $1.1050 lift the technical tone. There was a marginal extension of sterling's recent losses. It traded $1.3060 for the first time since September 12. It held today. Corrective pressures saw it recover toward $1.31. Initial resistance will likely be encountered in the $1.3125-35 area. The Labour government cannot get out of its own way, with petty scandals, intrigue, and the ousting of Prime Minister Starmer's chief of staff over the weekend. Chancellor Reeves Autumn Budget on October 30 is fraught with risk. Tax increases that are being debated include imposing that value-added tax on private tuition, resetting the tax for non-domiciled foreigners, a closing a loophole on carried interest.
America
The US advanced estimate of August trade warned of a narrowing of the deficit to $94.3 bln from $102.8 bln. Today, the US reports the overall trade balance. The deficit is expected to narrow in line with the advanced report. Still, the growth differentials and over-valued dollar on most metrics, has seen the trade balance deteriorate this year. Consider that the deficit averaged $75.7 bln in the three months through July compared with a $65.1 bln average in the same period last year. Through July, the US recorded a trade deficit of $505 bln compared with about $470 bln in the first seven months of 2023. That said, the trade report does not elicit the dramatic response by the market as it once did. The advanced report helps minimize surprises. Forecasts appear to have gotten better. More participants have arguably come around to recognizing that capital flows are more important than trade flows in driving financial asset prices. Canada reports its August goods trade too. Through July, Canada's goods trade deficit has narrowed to C$1.4 bln from almost C$5 bln in the year ago period.
The greenback rose for the fourth consecutive session against the Canadian dollar and settled above CAD1.36 for the first time since September 10. The greenback reached CAD1.3640 in North America yesterday and drew nearer CAD1.3650, where options for a little more than $1 bln at CAD1.3650 that expire tomorrow. A move above CAD1.3650, which is also last month's high could spur a move into the CAD1.3680-CAD1.3700 area. Yesterday, the greenback extended its losses for a sixth session against the Mexican peso. It reached nearly MXN19.43 in the North American morning. The greenback retreated but found support near MXN19.20. The dollar's downtrend is being challenged today. The greenback is trading above MXN19.30 in Europe. Resistance is seen near MXN19.50. President Sheinbaum sent a package of secondary laws to Congress to implement that judicial overhaul. The Senate will begin the process next week and each of the three branches of government will have a five-person committee to review the candidates for judges. Those committees will begin work at the end of the month, and gender parity will be considered. The first election will take place June 1, 2025.
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