by Marc Chandler
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Overview: US interest rates remain firm and the dollar is mostly consolidating against the G10 currencies, in a muted "Turn Around Tuesday." The greenback is straddling the JPY151 area, its best level since the end of July. Despite bearish price action yesterday, the euro, sterling, and Australian dollar have seen limited follow-through selling and modest upticks today, which so far have not challenged the underlying technical tone. Emerging market currencies are mixed. Asia Pacific currencies are softer, while central European currencies, but the Turkish lira, are firmer.
Equities are under pressure. In the Asia Pacific region, only China and Hong Kong bourses advanced. Japan, Australia, and South Korean markets fell over 1%. Europe's Stoxx 600 is off 0.35% after falling 0.65% yesterday. US index futures are lower. The S&P 500 slipped by almost 0.2% yesterday and has not recovered consecutive losing sessions since early September. The NASDAQ has a four-day advance in tow, but in the futures market, is off 0.6%. The sell-off in global bonds continues. European benchmark yields are 3-5 bp higher. The 10-year US Treasury yield is pushing above 4.20%. Canada and Australia's 10-year yields are jumping 11 bp and 16 bp, respectively. Gold is firm but holding below the record high set yesterday a little below $2741. December WTI is edging higher to a five-day high near $70.75. Last week, the contract was turned back from the 200-day moving average tested on October 14 (~$74.35).
Asia Pacific
If Japan's Liberal Democratic Party does lose its lower house majority, what will happen? If with its coalition partner, Komeito, a majority is maintained, there may be little policy impact. After several years of LDP leadership efforts and aggressive Chinese actions in the region, have seen the public warm to the idea of the re-militarization of Japan. Komeito accepts the need for increased military spending but wants limits on the use of force. A poll by Asahi newspaper raised the possibility the together the governing coalition loses its majority. We suspect that rather than an opposition government, another party could be added to the coalition. The main opposition party, the Constitutional Democratic Party is polling slight less than 15%. Still, at this late stage, polls show 40% are undecided. Public support for the LDP waned due to rise in price pressures and the funding scandal. A dozen LDP member have been denied party support for their campaigns, but if they win, they ostensibly could rejoin the LDP, bolstering its numbers. Still, it seems that the worse the LDP performs, the harder it will be for the new prime minister (Ishiba), and perhaps, the larger the economic package, due next month.
The yen showed little response to the polls, but the surge in US yields helped the greenback post a bullish outside up day against the yen yesterday and reached JPY150.90. The US 10-year yield surged to its highest (~4.20%) since late July. It has risen by more 60 bp since the day before the last FOMC meeting (September 18) and is above the 200-day moving average for the first time since early July. Follow-through buying today lifted the greenback to JPY151.10. The dollar met the (50%) retracement of its losses early July high and is approaching the 200-day moving average (~JPY151.35). Above there, the JPY152.00-JPY152.50 may attract. Speculators in the futures market continue to hold a net long yen position and are being squeezed out. The Australian dollar posted a bearish outside down day and took out last week's lows yesterday. It settled near session lows in North America, but follow-through selling today has been limited to a couple hundredths of a cent today. It held above $0.6650. A move above $0.6700 helps lift the technical tone. The yen's sell-off and rise in US rates weighed on the Chinese yuan. The dollar recovered smartly from a four-day low near CNH7.1080 to almost CNH7.14, yesterday which is holding today, as well. Last week's high was closer to CNH7.1475. Above CNH7.15, the next technical target is the CNH7.18-CNH7.20 area. The PBOC set the dollar's reference rate at CNY7.1223 (CNY7.0982 yesterday).
Europe
This is a quiet week for European economic diary. Next week features the preliminary eurozone CPI and its first estimate of Q3 GDP. The UK's Autumn budget is also anxiously awaited. Ahead of it, the UK reports the government's finances for last month. Although some press reports indicate that a detailed allocation among departments has yet to be finalized, the Health Secretary Streeting said he had reached an agreement with the Chancellor of the Exchequer Reeves on National Health Service funding that includes more funds this year and next. Reports suggest Reeves is considering raising taxes on entrepreneurs when they sell their business, reforming inheritance tax, and extending the freeze on income tax thresholds (which spurs higher taxes amid "bracket creep"). Separately, the Germany government missed last week's deadline to submit its multiyear fiscal plans to the EC. Germany's Finance Minister Linder had seemed to be critical of others (e.g., France and Italy) for opting for a seven-year period to adjust fiscal policy, but reports suggest Germany also may formally opt for the seven-year adjustment. The Germany economy could contract this year for the second year in a row, something not experienced since 2002-2003.
After setting session highs yesterday in the Asia Pacific session slightly above $1.0870, the euro trended lower, especially in the North American session. It returned last Thursday's low near $1.0810, which is holding so far today. A move above the $1.0870 area would lift the technical tone. The US two-year premium over Germany continues to push higher. It is approaching 190 bp today. It bottomed near 135 bp, the least since May 2023 on September 18, the day of the last Fed meeting. The euro has not traded below $1.08 since early August. A break of the $1.0780 area could spur a test on $1.07. Unlike the euro, sterling did not initially push above the pre-weekend high. It trended lower and slipped below $1.2980 in the North American afternoon. The upside has been capped near $1.3015 today and it has been sold to new session lows in Europe near $1.2970. The $1.2960 area corresponds to the (61.8%) retracement of its rally from the August 8 low (~$1.2665). A break of it would target the $1.2865 area.
America
Today's Philadelphia Fed's non-manufacturing survey and the Richmond Fed surveys are not typically market movers. The market's focus is elsewhere; namely the rise in US rates and the prospect of a Trump victory, which is seen as particularly negative for the closest US trade partners, Mexico, Canada, China, and Japan. The US reports September existing home sales tomorrow. It is also not much of a market mover. Through August, existing homes sales have averaged 4.07 mln seasonally adjusted annual rate, down from 4.20 mln in the first eight months of 2023. Even though the average 30-yer fixed rate mortgage has risen in recent weeks, it is still off more than 100 bp over the past year. The Beige Book is also out on Wednesday. It may draw greater attention that usual, as Fed Chair Powell cited in at last month's press conference as a factor encouraging the Fed's cut. The Canadian dollar remains under pressure ahead of the Bank of Canada's Wednesday meeting that is expected to result in a 50 bp rate cut. It has already cut its overnight lending rate by 75 bp in three moves beginning in June. Recall, too, that Bloc Quebecois has threatened to join the Conservatives in a vote of no-confidence in the minority Liberal government if a couple of planks in its platform (boost senior' pension and offer additional protection for farmers from foreign competition) are not approved. Mexico report the IGAE activity index for August. Conceptually, it is like the monthly GDP. It appears to have stalled in August after a 0.58% gain in July. Mexico reports August retail sales on Wednesday and the CPI for the first half of October on Thursday, but the focus is elsewhere; namely the US election and risk of Trump victory, which would seem to threaten Mexico's development strategy.
The Canadian dollar ended a nine-day slide last Tuesday and Wednesday, but it resumed in the second half of last week and extended it yesterday. The greenback reached CAD1.3850 in North America yesterday, its highest level since August 6. It is firm today, but in a narrow range (~CAD1.3820-40). The US dollar's high for the year was set August 5 near CAD1.3945. The US 2-year premium over Canada edged wider yesterday and rose past 100 bp for the first time since 1997. The net short speculative position in the CME futures has surged in the past three weeks from 95.2k contracts to 159.1k (~$11.5 bln). The dollar reached nearly MXN20.0750 yesterday. It pulled back and found support ahead of MXN19.95. The dollar trended lower today, reaching almost MXN19.85 in early European turnover recovering to nearly MN19.95. Emerging market currencies mostly fell yesterday. A Trump victory is understood to be potentially very disruptive for Mexico. Even if Mexico's government were pursuing investor-friendly policies, it would be difficult to see the peso sustain a rally until the results of the US election are clear.
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