by Marc Chandler
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Overview: The next couple of weeks in the capital markets are likely to be tumultuous, and the loss of the LDP majority in Japan get it started. The yen gapped lower amid the immediate uncertainty. The yen is off about 0.5% toward the middle of today's range. Leaving aside the Scandis, where are mixed, the other G10 currencies are little changed, +/- 0.15%. The euro has recovered above $1.08, where options for 2.3 bln euros expire tomorrow. Sterling has not been above to re-claim $1.30, where options for GBP600 mln also expire tomorrow. The greenback is straddling the CAD1.39 area, a two-and-a-half month high. Among emerging market currencies, central Europe is mostly doing best alongside the South Korean won and Philippine peso. The dollar is pushing above MXN20.00.
Equities are higher. The Nikkei advanced 1.8% on the weaker yen and hopes of a larger stimulus package. All the large bourses Asia Pacific rally but Taiwan and Singapore. Europe's Stoxx 600 is up nearly 0.4% in late morning turnover, which, if sustained, would be the large rally in more than a week. US index futures are 0.4%-0.7% higher. Bonds are mostly lower. The 10-year JGB yield rose 2.5 bp to 0.96%. Australia's 10-year yield was up seven basis points to almost 4.48%, a three-month high. European yields are firmer, except for France, where Moody's cut France's outlook to negative ahead of the weekend. The French yield is off about half of a basis point. Ahead of the budget later this week, the 10-year Gilt yield is near 4.24%, a three-month high. The 10-year US Treasury yield is up three basis points to 4.27%. Gold is off $16 to about $2731.50 but is trading within the pre-weekend range. Israel's "limited" strike on Iran, and a sense that Iran will not retaliate, sent oil sharply lower. December WTI gapped low and is trading near $67.40, having closed slightly below $71.80 at the end of last week. The low for the month was set on October 1 near $66.
Asia Pacific
The Liberal Democratic Party and Komeito, its coalition partner, failed to secure a majority of seats in the lower chamber of the Diet. This possibility was flagged by polls last week, but the shock triggered extended the yen's sell-off. The yen has fallen for the past four weeks. Prime Minister Iishida says he has no intention of resigning, but it is not immediately clear that he can put a new coalition broader coalition together. In any event the fiscal package that was being put together now looks larger. September jobs report is due first thing tomorrow. September retail sales and industrial production will be reported a few hours before the outcome of the BOJ meeting on October 31. The yen's weakness and election does not impact expectations for the meeting. BOJ Governor Ueda himself seemed to have ruled it out. Meanwhile, Australia's bust week begins slowly. The first important data point, and arguably the most important one, the quarterly CPI is released on Wednesday. It is unlikely to impact next week's RBA decision. Turning to China, the markets do not seem to react much to its industrial profits. Profits in September declined for the first time this year on a year-over-year basis. In September 2023, they had fallen by 9.0% year-over-year and in September 2022 had fallen by 2.3%. China's October PMI is reported on Thursday, and it is arguably too early to see the fruits of the stimulus measures.
As the 10-year US yield rose (~six basis points after the durable goods orders data) ahead of the weekend, the dollar recovered against the yen, after holding a whisker above the 200-day moving average (~JPY151.40). It settled firmed near JPY152.30. The dollar gapped higher today and reached almost JPY153.90 before stalling. It is finding support in Europe ahead of JPY153.00. The Australian dollar fell $0.6600 before the weekend, its lowest level since August 15. The losses were extended to $0.6580 today and recovered to almost $0.6610, where it is struggling. A break of $0.6575 leaves little in the way of $0.6500. The New Zealand dollar has also fallen to levels not seen since mid-August. Its underperformance is understandable given that the central bank is slashing rates. It delivered a 50 bp cut earlier this month and the swaps market is discounting another half-point cut at next month's meeting (November 27). It began the easing cycle in August with a quarter-point step. The dollar made a marginal new high against the offshore yuan, but held slightly below CNH7.15, which it has not traded above since mid-August. A push above there would target the CNH7.20 area. The PBOC set the dollar's reference rare at CNY7.1307 (CNY7.1090 Friday).
Europe
Europe's momentous week has a slow start. The eurozone's first estimate of Q3 GDP (few details) will be published on Wednesday a few hours before the UK Chancellor of the Exchequer delivers the Autumn budget. The net take away for some investors is that the supply of Gilts will increase and last week, the 10-year Gilt yield rose by nearly 10 bp, the most in Europe. More impactful that the eurozone's GDP (expected 0.2% the same as Q2) is the preliminary estimate of October CPI on Thursday. A near-term low in the eurozone's inflation was probably reached in September at 1.7%. It is likely to rise more dramatically next month when the 0.6% decline in November 2023 drops out of the 12-month comparison. The risk of a 50 bp cut in December may diminish.
The euro was turned back ahead of the weekend from almost $1.0840. Buying interest evaporated and the euro bled back through $1.08. The euro fell to almost $1.0780 and recovered to new session highs in the European morning near $1.0820. With the intraday momentum indicators stretched, the recovery may give North American operators a better selling opportunity. Options for 2.3 bln euros expire at $1.08 tomorrow. Ahead of the weekend, sterling was turned down from almost $1.30, where GBP600 mln options expire tomorrow. Sterling fell to $1.2940 before finding bid that took it back to $1.2980. Still, the intraday momentum indicators are stretched and warn of downside risks in North America.
America
Tomorrow's trade and inventory data are the last data points for Q3 GDP that will be reported on Wednesday. The Atlanta Fed's tracker puts at 3.3% while the median in Bloomberg's survey is for 3% growth. Attention quickly shifts to the labor market. The ADP private sector estimate will be reported 15 minutes before the GDP figures. The JOLTS report is out the day before the GDP, but it has lost some of its impact. September's personal income and consumption will be embedded in the GDP estimate and the deflator may tick down, but the signal has already been generated by the CPI and PPI. That brings us to Friday's US employment report. The median forecast in Bloomberg's survey fell to 108k last week. There are both transitory and cyclical factors that look to weigh on the job growth, and it is interesting to note that Bloomberg economists warn of the first negative print in almost four years. The highlight for Canada this week is the August monthly GDP report on Thursday, but it is little implication for the Bank of Canada's decision on December 11. The market is discounting about a 45% chance of another half-point cut. Mexico reports trade its September trade figures today. In the first eight months of the year, Mexico has recorded a $10.4 bln trade deficit. In the January-August 2023, the trade shortfall was about $8.4 bln. Exports are up 3.5% so far this year while imports have risen by 4%. Mexico reports Q3 GDP on Wednesday. Growth looks strong than the 0.3% in Q1 and 0.2% in Q2 put together.
There have been 19 sessions this month, coming into today, and the Canadian dollar has fallen in all but four sessions. It remains vulnerable today. The broad greenback gains saw almost CAD1.3895 before the weekend and briefly poked above CAD1.3900 today. That is the highest level since the year's high in early August near CAD1.3945. The move has been fairly orderly even if persistent. Consider that US dollar's rally in the first half of the month frayed the upper Bollinger Band for 5-6 days running, but the advance since the advance in the second half of October has remained well below it. It is near CAD1.3980 today. After the Russian ruble, the Mexican peso was the weakest emerging market currency before the weekend, falling about 0.65%. It had been up about 0.35% in the week up until then. The dollar traded through MXN20.00 in four sessions last week and is near MXN20.06 now. We expect it to finally close above it, setting up a test on last month's high near MXN20.15. To be sure, it is not just Mexico. The dollar is trading near two-month highs against the Brazilian real (above BRL5.70). It looks poised to challenge the BRL5.80-BRL5.85 area.
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