European Currencies Start Week Softer, while the Dollar Bloc is Firm snbchf.com

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Marc Chandler
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European Currencies Start Week Softer, while the Dollar Bloc is Firm

Overview: European currencies are trading with a softer bias to begin the new week. Soft preliminary PMIs appeared to be the main culprit but Australia's PMI disappointed ahead of tomorrow central bank meeting, and the Australian dollar's small gain leads the G10 currencies today. The Swedish krona is off around 0.75% before the central bank rate cut, which is expected later this week. There is some speculation of a 50 bp move. The Swiss National Bank is also expected to cut rates for the third time this year, and the franc is off about 0.1%. Most emerging market currencies are softer. China cut its 14-day reverse repo rate by 10 bp and an official briefing tomorrow is expected to result in other easing measures.

European benchmark 10-year rates are mostly 2-4 bp lower, and the German discount is widening. The 10-year US yield is little changed near 3.74%. Most Asia Pacific bourses advanced with notable exceptions in Hong Kong and Australia. After falling 1.4% before the weekend, Europe's Stoxx 600 is steady to slightly higher, despite the poor PMI reading. US index futures are firm. Gold reached a new record high a little above $2631 but has pulled back in Europe and is a hovering near $2620. November WTI rose by 4.8% last week, its best weekly performance since February. The Fed 50 bp rate cut and the escalating Middle East conflict are seen as the drivers. It is little changed today in a roughly $70.70-$71.70 range.

Asia Pacific

Japan's markets were closed for the Autumn Equinox and will get the preliminary September PMI tomorrow. The highlight of the week is Tokyo's September CPI on September 27, the same day that the LDP will select its new leader, who will become the next prime minister. Given the number of candidates (nine), none will likely garner an outright majority, and therefore a run-off the same day is likely where only LDP Diet members vote. The final outcome is likely to be announced while North American markets are open before next weekend. That said, it has not captured the imagination of market participants and does not appear to be impacting the capital markets. Meanwhile, Australia's September PMI showed new weakness. Weakness in the manufacturing sector deepened (46.7 vs.48.5) and services lost their sizzle (50.6 vs.52.5). The composite slipped back below the 50 boom/bust level (49.8 vs. 51.7) and it is the lowest since January. Still, the data had little impact on the Australian dollar, which is one of the few G10 currencies holding its own against the greenback today. The highlight this week is the central bank decision on tomorrow (hawkish hold expected) and August monthly CPI print (expected 3.1% vs. 3.5% in July) on Wednesday. China announced a 10 bp cut in its 14-day reverse repo rate, and officials will hold a briefing tomorrow at which other measures are expected to be announced, including a cut in reserve requirements and a reduction in the 7-day repo rate.

As the US 10-year yield recovered, so did the dollar against the yen. After bottoming last Monday below JPY140, it reached nearly JPY144.50 before the weekend, a two-and-a-half-week high. That held today. It found support in the European morning near JPY143.45. The market may not stray far today, waiting for validation by the Tokyo market tomorrow but the next upside target maybe around JPY145.60, assuming US rates firm. The Australian dollar continues to consolidate, straddling $0.6800 for the fourth consecutive session. It is flirting with the year's high ($0.6840), which is just beyond its reach. The PBOC's fix today took on added significance after the sharp (nearly 0.5%) before the weekend. Today, it was set at CNY7.0531 (CNY7.0644 last Friday and CNY7.0983 last Thursday). The dollar finished last week below CNH7.05. The dollar is firmer today, near CNH7.06 but is trading within the pre-weekend range. The market may be reluctant to extend positions ahead of the Golden Week Holidays (October 1-7).

Europe

Expectations about the pace and extent of ECB and BOE rate cuts at next meetings have not been moved by today's disappointing preliminary PMI report. The signal has not changed. The eurozone's manufacturing sector remains challenged. The manufacturing PMI has not been above 50 since June 2022. After it was unchanged at 45.8 for the three months through August, the manufacturing PMI fell to 44.8 in September, a new low for the year. In contrast, the service PMI has been above 50 since February. The preliminary September estimate of 50.5, the fourth decline in five months. That proved too much for the composite, which fell back below 50 to 48.9, its lowest reading since January. There was little in the UK's PMI that would have tipped off investors, businesses, and policymakers that the economy would stagnate in June and July. The composite PMI has not been below 50 since last October. It was at 52.3 in June and 52.8 in July before rising to 53.8 in August. The preliminary estimate put it at 52.9 in September (53.8 in August). The manufacturing sector is growing a slower than services (51.5 vs. 52.8). Political developments, including the SPDs victory in the east state of Brandenburg and the new French Prime Minister announced the key personnel to draft the new budget. The German 10-year premium over France has been edging wider in recent days and near 80 bp is the widest since early August.

The euro has entered a higher range over the past 4-5 weeks of $1.10-$1.12. It finished last week at the upper end of the range, but the upside momentum has stalled. It was little changed before the disappointing PMI was spurred a quick drop to slightly below $1.1085. It quickly bounced back, and nearby resistance is seen in the $1.1120-35 area. A break of last week's low near $1.1070 sours the tone. The Bank of England's decision to standpat was decided before the FOMC's announcement last week and the strong (more than twice the median forecast in Bloomberg's survey) retail sales (+1%) seemed to underscore its caution. Sterling was rewarded with new two-year highs near $1.3340 before the weekend. It has begun the new week softer, with a pullback to $1.3250. It found a good bid that lifted it back to almost $1.33. The upper Bollinger Band is near $1.3315. Technically, there does not look like anything stands in the way of $1.35.

America

Whether the Fed cuts by another 50 bp in November or December will not be decided by today's PMI. Moreover, in recent months, market participants appear to be giving more credence to the ISM. The highlight of the week is the August personal income, consumption, and deflator. The CPI and PPI contain most of the price pressure signals, and in any event, we know that the Fed is more focused on the labor market than prices as it is confident that inflation is on a path back to the target. The Fed's Powell and Waller referred to the CPI specifically as having been an important data point. Core retail sales pointed to steady US consumption. Although consumption is around 70% of GDP, it tends to be more stable than capital investment and that is why the market may be sensitive to this week's August durable goods orders report. We already know that Boeing's orders dropped to 22 from 72 in July and 45 in August 2023. Excluding transportation, durable goods orders have alternated between increases and decreases for this year. The median forecast is for a flat report in August after a 0.2% decline in July. Boeing shipment slipped to 40 from 43. Excluding aircraft, shipment has fallen by an average of 0.1% a month this year through July and averaged a 0.1% gain in the first seven months of 2023.

It seems like it was more the US dollar's weakness than the Canadian dollar's strength that snapped a five-day greenback advance through the middle of last week. And those losses last Thursday and Friday were sufficient to turn the week south and record its first weekly loss in three. The US dollar has forged a base near CAD1.3540. The CAD1.3600 area capped it in North America in the past two sessions. It is consolidating in a narrow range so far today (~CAD1.3555-CAD1.3580). The US dollar recorded a low last week ahead of MXN19.00 and finished last week with a new high for the week near MXN19.49. It is firm today. The next target is the MXN19.60-MXN19.75 area. The swaps market is pricing in maximum uncertainty about this week's Banxico meeting, pricing in half of a quarter-point cut. The dollar reached the BRL5.40 objective last Thursday following the divergent policy moves the previous day. It bounced back through BRL5.51 before the weekend. If a return to the upper end of the range (~BRL5.68-BRL5.70) is to be avoided, the BRL5.57 area must hold.

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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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