Marc Chandler

May 19, 2023  $CNY, $USD, China, Commitment of Traders, Currency Movement, Federal Reserve, Germany, Japan, US Overview: Hawkish comments from Fed officials and the first decline in continuing unemployment claims below 1.8 mln in two months boosted US rates and the odds of a June rate hike rose to about 37%. This represents a near tripling of the probability in the past week. It has been a trend with the odds rising in 9 of the past 11 sessions. The two-year note yield has risen for the past five sessions coming into today for a cumulative gain of about 35 bp. This seems to offer the best explanation of the dollar's rebound. However, despite progress, the debt ceiling debate continues, and emergency borrowing from the Federal Reserve is continuing to rise albeit slowly. The dollar approached or tested key technical levels and is consolidating with a softer bias today. The large bourses in the Asia Pacific region rose with the notable exceptions of Hong Kong and the China's CSI 300. Europe's Stoxx 600 is up about 0.65% to extend yesterday's recover, which followed a two-day decline. US index futures are also trading with a firmer bias. The S&P 500 and NASDAQ reached their best level yesterday since last August. Europe's benchmark 10-year yields are mostly 1-2 bp higher today, while the 10-yer US Treasury yield is off slightly more than a basis point to near 3.63%. It reached a two-month high yesterday near 3.65%. Gold held support near $1.950 and is firmer on the back of the softer dollar. Initial resistance is seen near $1975. June WTI is consolidating in a narrow range (~$71.70-$72.65). It settled last week near $70.    Asia Pacific Japan's April CPI was in line with expectations, helped shaped by Tokyo's estimate a few weeks ago. Headline and core prices rose to 3.5% and 3.4%, respectively, from 3.2% and 3.1%. The decline since January 4.3% headline rate mostly reflects the government's subsidies. The cleanest read of the underlying pressures may be the measure that excludes fresh food and energy. It accelerated to a new cyclical high of 4.1%. This is why, despite BOJ Governor Ueda's press for patience, many expect an adjustment as early as next month. It does seem to be increasingly hard to justify a negative overnight rate. It is set at minus 0.10% but the effective rate is about minus 3 bp. Can raising it to zero be that impactful? Still, market talk tends to emphasis the yield-curve control policy. Assuming a change there are three possibilities: abandon it entirely, raise the current band or central rate, target a different rate. At the same time, the timing of the BOJ's move can influence the political calculations of an early election. Hosting the G7 summit in his hometown of Hiroshima, Prime Minister Kishida is in his glory, and knowing (that everyone else knows) that Japan's economy was the fastest among the G7 in Q1. The rapprochement between Tokyo and Seoul is also a significant achievement. Despite the official denials, a summer election remains a possibility. Still, until the June 16 meeting draws near, US rates may be the most important tell for the exchange rate. The correlation between changes exchange rate and the two-year US yield is near 0.70 and slightly above 0.60 with the 10-year. The Chinese yuan is a managed currency, but what does that mean? Officials say they monitor it against a basket of currencies. A heuristic would look for couple of currencies that do the most work. The dollar's movement against the Japanese yen and euro seems to do the trick. We want to see the relationship in a period that allows for distinct phases or disruptions. We want to run the correlations on the change in exchange rates. The correlation between the yuan and euro is typically great and more stable than the correlation between the yuan and yen. The 100-day rolling correlation between the euro and yuan is around 0.61, the upper end of the 6–7-month range. In the second half of 2022, the 100-day correlation was mostly between 0.45 and 0.55. This year, it has been between 0.50 and 0.63. The yuan and yen's rolling 100-day correlation is around 0.48. It was a little closer to 0.50 earlier this month, which is the highest since 2017. In Q3 23, the correlation hovered around 0.2 and rose sharply as the dollar peaked against the yen and the by mid-November the correlation rose to around 0.45. It has held above 0.35 since then and jumped toward 0.50 on May 5.  Read next: US dollar stronger against all the G10 currencies, apart from... against Japanese yen| FXMAG.COM The dollar is snapping a six-day advance against the Japanese yen that carried it from JPY133.75 on May 11 to JPY138.75 yesterday. Softer US rates and what may be a re-acceleration of Japanese inflation helped spur the pullback to slightly below JPY138 in late Asian turnover. Initial support may be near JPY137.70. The bottom end of the Australian's dollar's range (~$0.6600) held yesterday, and the Aussie is consolidating today, reaching almost $0.6660. The intraday momentum indicators are stretched, and nearby support is around $0.6630. The price action reinforces two-and-a-half month trading range (~$0.6600-$0.6800). The dollar's pullback against the yen and euro is consistent with the heavier tone against the Chinese yuan. The greenback initially rose to a new high (since last November) of CNY7.06. It has come off to around CNY7.02. The dollar has risen in the past three sessions and eight of the past 10. From a somewhat longer perspective, it is the fifth weekly dollar gain in the past six weeks. Europe The euro's sell-off is the largest for a two-week period going back to last September. A light economic calendar this week for the eurozone suggests the drivers were elsewhere. We suggest that the key to the euro's 2.3% slide over the couple of weeks reflects an interest rate adjustment in the US while market positioning was extreme. The reception for Germany's 10-year bund sale was strong, 2.3x over-subscribed, the most since August 2020. Yet this week, Germany’s 10-yield tracked the rise in US rates well (~16 bp vs. 13 bp). Yet the key for the exchange rate may be in developments at the short end. The US premium on two-year money rose for the sixth consecutive session yesterday (and 15 of the past 18 sessions). The premium yesterday settled at 150 bp, the most since late March and it is up more than 25 bp since late April.  Meanwhile, the net long speculative position in the futures market rose in the five weeks through May 9. At nearly 180k contracts (notional value ~$24.3 bln), it is the largest net long position since early October 2020. Positioning was extreme and a key part of the fundamental story (rate convergence) changed. Speculators in the futures market have been net long sterling for the four-weeks through May 9. It is the longest they have maintained the net bullish position since July 2021. It is not a big position (~$365 mln), but just that it is finally net long after a sterling rallied 20% from last September's low seems more like a boxer at the end of his punch than the beginning. From the end of March through May 9, the gross longs have soared by 28.3k contracts to 71.6k.(~$5.8 bln notional value). This is the largest gross long sterling position since March 2020. The bears covered in Q4, and the gross short positions fell from almost 110k contracts to 40k by the end of the year. They have been chopped up a bit this year and the gross shorts have bounced around between around 50k and 65k this year. As last Tuesday, the gross short position was the largest for the year (~67k contracts or ~$5.4 bln). The euro made a marginal new low for the move (~$1.0760) earlier today before stabilizing and recovering to almost $1.08. The euro has fallen for the past three sessions and approached the (61.8%) retracement of the rally since March 15, found near $1.0735. The five-day moving average, which the euro has not closed above since May 5, is slightly above $1.0825. A close above it would help stabilize the technical tone. Yet, the intraday momentum indicators are stretched, and the North American market appears to have led the dollar's recovery. Sterling frayed the support at $1.2400 but continues to hover around it. The session high was set in Asia just shy of $1.2430. Sterling needs to settle above $1.2410 to snap the three-day decline. On the downside, the $1.2345 area corresponds to the (38.2%) retracement of sterling's rally from the March 8 low (~$1.1805). Lastly, note that Greece holds national elections this weekend. Even though the economy is doing relatively well, and may even regain investment grade status, the cost-of-living squeeze is making for a tight race. Electoral rules have changed, and many observers see a run-off election likely, possibly in July. America Despite plenty of recession signals, including the inversion of various parts of the yield curve and the continued plunge in the index of Leading Economic Indicators, it appears the US economy is re-accelerating. This early in the quarterly cycle, the Atlanta Fed's GDP tracker is not particularly accurate, but its 2.9% estimate seems fairer than the median forecast in last month's Bloomberg survey of 0.1% annualized growth here in Q2 (Bloomberg's survey is updated later today). Recall that private sector job growth practically doubled in April (230k vs. 123k in March), auto sales rose 7.4% from March on a seasonally adjusted basis to their highest level since May 2021. Core retail sales (excluding autos, gasoline station sales, food services, and building materials) rose 0.7% in April. It follows a 0.4% decline in March and a flat February. Manufacturing output jumped 1.0% in April. The median forecast in Bloomberg's survey was for a 0.1% increase. In the week ending May 12, weekly initial jobless claims unwound the 22k rise in the prior week. Continuing claims slipped below 1.8 mln for the first time in two months. Among the positive developments, we would add the stabilization of bank shares. This is not to be pollyannish. Three headwinds may again challenge business and investors:  the commercial real estate market continues to show signs of stress, lifting of the debt ceiling comes at a cost of a fiscal drag, and the resumption of student loan payments absorb savings. Taking the incoming data on-board, the market has more than doubled the odds of a Fed hike in June this week (from about 13% at the end of last week to around 33% now). In fact, the day after FOMC last met (May 3) the market was still pricing in a risk (albeit de minimis) of a rate cut next month. Since then, the market has moved steadily (nine of the past 11 sessions) toward increasing the likelihood of a hike. Another notable adjustment is gradual scaling back from the aggressive rate cut that had been discounted for this year. There is no meeting in January 2024, so the Jan Fed funds futures contract may offer the cleanest read of year-end 2023 expectations. The implied yield has risen for nine of the past 10 sessions from 4.11% on May 4 to about 4.66% yesterday. It is a little lower today, where the session highlight is the 11:00 am ET appearance of Fed Chair Powell and Bernanke on the same panel at a Fed-hosted monetary policy research conference in Washington. Earlier this morning in the US, NY Fed President Williams will speak at the same conference, while Governor Bowman speaks at a separate event.    The US dollar is within yesterday's range against the Canadian dollar, which was inside Wednesday's range (~CAD1.3435-CAD1.3535). Bank of Canada Macklem seemed to play down the rise in CPI reported earlier this week and opined that inflation was still in a downtrend. The market did not give strong odds of a rate hike next month, but it has slipped a little, but around 18%, it is still nearly twice as high as a week ago. The market has nearly a 75% chance of a hike by the end of Q3 discounted, up from practically no chance a week ago. Only the dollar bloc currencies have risen against the US dollar this week among the G10 currencies, and the Canadian dollar is in the middle with about a 0.5% gain (the New Zealand dollar is best, up 1.4% and the Australian dollar has gained almost 0.2%). As most expected, the central bank of Mexico kept its target rate steady at 11.25% and signaled its intention to keep it there for an extended period. The dollar's session high was made prior to the rate announcement. The greenback has largely held below MXN17.75 since the decision. The favorable underlying case for the peso (carry, near-shoring/friend-shoring, rallying stocks) remain in place. The challenge is that market positioning is extended, and the news known. Although the dollar has risen for the past three sessions, and five of the past six, the technical tone remains weak. A rise through the 20-day moving average near MXN17.80 would change that assessment.    Disclaimer

March 15, 2023  $USD, Australia, China, Currency Movement, ECB, Inflation, Japan, UK, US Overview: The capital markets remain unsettled. Asia-Pacific bourses rose, but European markets are sharply lower, with the Stoxx 600 off 1.3%, giving back the lion's share of yesterday's gains and US equity futures are lower. Benchmark 10-year yields are off 3-9 bp in Europe, with widening core-periphery yields. The yield on the 10-year US Treasury is off a dozen basis points to about 3.56%. Two-year yields are also sharply lower, led by the 15-16 bp decline in Germany and France (Italy's two-year yield off a couple basis points). The two-year US yield is down seven basis points to 4.18%.  The US dollar is firmer against all the G10 currencies but the Japanese yen. The Norwegian krone and euro are under the most pressure, off about 0.5%. After the yen, the Canadian dollar is off the least (~0.20%). Most emerging market currencies are under pressure, and the Mexican peso is bearing the brunt after yesterday's recovery. The peso is off a little more than 1.1%, and the Hungarian forint and South African rand are close behind. Gold is recovering from a pullback to around $1886 and is back above $1900. Demand concerns appear to be weighing on crude oil, and the May WTI contract is pinned near the trough seen yesterday around $71. Asia Pacific As widely expected, China left its key one-year medium lending facility rate steady at 2.75%, though lending volume was stronger than expected, though slightly slower than previously (CNY481 bln vs. CNY499 bln). The series of real sector data reported supports ideas that the world's second-largest economy is on the mend after the initial disruption as Covid policies were reversed. Retail sales rose 3.5% year-over-year in the Jan-Feb period from -1.8% in December, in line with expectations. Industrial output accelerated to 2.4% from 1.3%, just missing expectations. Fixed asset investment was somewhat stronger than expected, rising 5.5% from 5.1% in December. The slump in property investment continued but at a slower pace (-5.7% year-over-year after contracting 10% in December). Surveyed unemployment ticked up to 5.6% from 5.5%. Ironically, the Chinese economy is recovering as the US economy is hit with a new shock. The financial stress is disruptive but is also likely to tighten lending, which was already underway, according to the recent survey of senior loan officers. Australia reports its February jobs figures first thing tomorrow. It has lost jobs over the past two months but is expected to recoup them in February. It lost nearly 32k jobs in December-January, and the median forecast in Bloomberg's survey calls for a 50k increase. Recall that Australia reported a net loss of 43.3k full-time posts in January. The Reserve Bank of Australia meets next on April 4 and the market has all but given up on a rate hike. At the end of February, the futures market had about an 80% chance of a hike discounted but is has been trending lower. The current cash target rate is 3.60% and the swaps market sees it as the peak. As US rates have stabilized, the dollar reached a three-day high against the Japanese yen near JPY135.10. That is the halfway point of the dollar's decline from last week's high near JPY138 to this week's low near JPY132.30. The next retracement target is JPY135.75, while initial support is now around JPY133.80-JPY134.00. The Australian dollar extended yesterday's recovery but was turned back as it approached Monday's high a little shy of $0.6720, where around A$925 mln of options will expire today. It made new session lows in the European morning and a break of $0.6660 could see $0.6600-20. The greenback rose for a second day against the Chinese yuan but remained below Monday's high (~CNY6.9185). Still, the US dollar firm and approaching the 200-day moving average (~CNY6.9045). The PBOC set the dollar's reference rate a little lower than expected (CNY6.8680 vs. CNY6.8696). Europe The market is feeling more confident that the ECB will stick to the 50 bp hike tomorrow that it had signaled before the US financial crisis. In the middle of last week, the swaps market showed high confidence of a half-point move. It fell to about 55% chance on Monday and recovered to almost 74% yesterday and is closer to 83% today. A 50 bp hike would bring the key rate to 3.0%. The terminal rate is seen near 3.50%, which would allow for two additional quarter-point moves. Barring a major surprise on the Chancellor Hunt's spring budget, next week's Bank of England meeting looms large (March 23) and ahead of is the February CPI (March 22). Press reports suggest the new efforts will be focused to blunt the hit coming to businesses in the form of higher taxes and a loss of investment incentives. Tax breaks for new capex, if successful, brings forward investment but does not boost the long-term trajectory of productive capacity. Falling energy prices and stronger tax revenues give the Hunt some room to maneuver, though it could be constrained if the Office for Budget Responsibility cuts its long-term growth forecast. Meanwhile, some half a million teachers, junior doctors, civil servants, and commuter train operators are striking today. Turning to BOE expectations, a week ago, the swaps market had a quarter-point hike fully discounted. It is now closer a little above 50%. The terminal rate was seen between 4.75% and 5.0%. It is now seen between 4.25% and 4.50%. Read next: The payrolls bump was mostly witnessed in leisure, hospitality, retail trading, government and health care| FXMAG.COM The euro reached $1.0760 before sellers got an upper end and pushed the single currency through yesterday's low (~$1.0660). The euro has met the (38.2%) retracement of its bounce from last week's that was found near $1.0670. The next retracement (50%) is by $1.0640 and then (61.8%) is closer to $1.0615. The sharp selling pressure in the European morning is stretching the intraday momentum indicators. There are 1.7 bln euros in options struck at $1.0700 and $1.0750 that expire today and the positioning/hedging around them may be contributing to the euro's pressure today. That said, the euro has traded on both sides of yesterday's range and a close below yesterday's low is a bearish technical development and would warn of the risk of a return to last week's lows near $1.0525. Sterling is faring better, though it too has a heavier bias. It remains well within Monday's range when it recorded a low near $1.2030, where there are options for GBP325 mln that expire today. It is holding above $1.2100 today, but that looks set to crack, which could spur a move toward $1.2050. America The US February CPI was in line with expectations, with the headline rate rising by 0.4% and the core by 0.5%. The year-over-year rates are at 6.0% and 5.5%, respectively. It is the lowest headline rate since September 2021. In Q2 22, headline CPI rose at an annualized rate of more than 10%. Making, a conservative assumption of a 0.5% increase on average per month in Q2 23, the year-over-year rate, and another percentage point will drop off by the end of Q2. Moreover, somewhere around the middle of the year, shelter costs will be falling (it is well appreciated now that the BLS does not use the most current data available which show some softening of rents and owner-equivalent measures). Still, price pressures remain strong outside the base effect. The last three months at an annualized pace, CPI has risen by about 4.0% and the core by around 5.2%. The CPI figures also mean that core PCE deflator is unlikely to ease much from January's 4.7% pace. Today's high-frequency reports include producer prices and retail sales. Producers prices are expected to have continued to slow. The headline pace peaked last March at 11.7%. The 12-month increase stood at 6.0% in January and likely slowed to 5.4% in February, the least since March 2021. The core measure topped at 9.7% in March 2022 and is seen near 5.2% last month, which would be the lowest since May 2021. Retail sales is the more important of the two reports. It covers a little more than 40% of personal consumption expenditures. The 3% jump in January was a bit of a fluke, helped by unusually warm weather and, arguably, the Social Security cost-of-living adjustment. The median forecast in Bloomberg's survey forecast a 0.4% decline in February. The core measure, which excludes auto and gasoline station sales, building materials and food services, used in some GDP models, is also expected to fall after rising 1.7% in January. The Empire State manufacturing survey is also on tap. It is among the first reports for March. It tends not to elicit much of a market response, but it is expected to have softened, with the median forecast in Bloomberg's survey looking for -7.8 after -5.8 in February. The diffusion index has not been positive since last November, which itself was the first positive reading since April. Two days after the Fed, FDIC, and Treasury acted to stem what they thought was a systemic risk, the market still does not appear confident. However, since all depositors will be made whole at the two failed banks, there is not a flight from deposits in general, but reports suggest money-center banks are drawing deposits from others. Still, even assuming one accepts the official moves, they seem to be incomplete. First, the Federal Reserve had the discretion to apply more rigorous regulatory oversight to banks below the $250 bln threshold. This discretion that was not exercised should have led to an independent inquiry not led by Fed Governor Barr, the Vice Chair of Supervision. Of course, there will be other investigations, including congressional hearings. Second, when granting forbearance, the government should insist on an equity stake in some fashion from those who benefit, like they did in the large banks and auto companies, which ultimately showed a profit. The KBW bank index plunged 15.75% last week. The government's announcement was Sunday, and the index gapped lower on Monday. It traded sideways yesterday and closed around 8.5% lower since the government's action.   The US dollar found support near CAD1.3660 and is trading with a firmer bias today. The initial corrective target is around CAD1.3730 and then CAD1.3760. There are options for about $890 mln at CAD1.3725 that expire today. The intraday momentum indicators are overbought. The Mexican peso recovered smartly yesterday as market participants swooped to buy what had been their favorite currency this year. After reaching almost MXN19.18 on Monday, it approached MXN18.5560 yesterday. The US dollar has steadied today and is approaching MXN18.78, meeting the minimum retracement target. The next is closer to MXN18.8550.    Disclaimer

March 13, 2023  $USD, China, Crisis, Currency Movement, Dodd-Frank, Europe, Federal Reserve, Iran, Japan, Saudi Arabia Overview:  The US banking crisis has overwhelmed other market drivers. The strong measures announced as Asia Pacific trading got under way was embraced by the market even though moral hazard issues and gaps in the Dodd-Frank regulatory framework were exposed. The dollar is trading heavily. The prospect of a 50 bp Fed hike next week has evaporated and some are doubting that a 25 bp increase will be delivered. Rate hike expectations for the ECB this week and the BOE next week have been shaved, and the market now favors the RBA to join Canada in pausing as early its meeting next month. Outside of China, Hong Kong, Taiwan and South Korea, equities have traded heavily. The Nikkei was off 1.1% and Europe's Stoxx 600 is more than 2% lower, its biggest loss so far this year. US equity futures have lost the early upside momentum. The most dramatic action is in the debt market, where US 10-year yields are off 14 bp to 3.56%. European benchmark yields are down 13-20 bp, and the 10-year JGB yield is down 10 bp (to slip below 0.30%). US and European two-year yields are off even more (23-35 bp) as the banking crisis is seen impacting the outlook for monetary policy. Lower rates and a weaker dollar saw gold gap higher and approach $1894 before consolidating. May crude has fallen around 1.7% to about $75.40 and give back its pre-weekend gains.  Asia Pacific While China's Xi's third term at pinnacle of state and party signaled continuity, there was much speculation of the changing of top financial officials. However, yesterday it was announced that PBOC Governor, and the finance and commerce ministers have been given new terms. Notably, PBOC Governor Yi and Finance Minister Liu had reached the mandatory retirement age and were dropped from the leadership ranks of the Communist Party last year. Maintaining some of the top personnel at the same a new more centralized and powerful financial regulatory signals a type of balance. Separately, Li Qiang succeeded Li Keqiang as premier. As widely expected, other Xi loyalists were promoted to more senior positions. Of note, Li Shangfu, who has previously been sanctioned by the US will become the new defense minister.  Before the weekend, the Japanese government agreed to join the alternative trade dispute resolution mechanism at the World Trade Organization that had been initiated by the EU to circumvent that US blocking of the appellate process. The "Multi-Party Interim Appeal Arbitration Arrangement as a little more than 50 member, including the EU, China, Brazil, Australia, Canada and Colombia. The first ruling of the parallel mechanism issued at the end of last year in dispute over "French fries between Colombia and the EU (Colombia imposed anti-dumping duties on frozen potato exports from Belgium, Netherlands and Germany).  Read next: To Protect Customer Deposit, SVB UK Will Be Sold To HSBC, The Food Crisis Is Getting Worse| FXMAG.COM For at least a couple of years, Saudi Arabia and Iran were working toward a detente, working through intermediaries (Iraq and Oman). China stepped in relatively late in the process and a deal was struck before the weekend to normalize diplomatic ties. Saudi officials kept US officials apprised along the way, according to press reports. After agreement was announced, the White House said that it supported any efforts to de-escalate the tensions. There is hope that exchange of ambassadors will facilitate a comprehensive peace agreement between the Saudi-led coalition and the Ansarallah resistance in Yemen that could be announced over the next couple of weeks that will be more than the extension of the agreement that ended last October. Yet, it may be too much to expect a rapprochement between Saudi Arabia and Iran. There are still various national interests that divide the two besides the Sunni-Shiite tensions. Meanwhile, Iran's uranium-enrichment is thought to be getting close to weapons-grade and it has been developing longer-range ballistic missiles. Separately, the Saudis have expressed interest in joining the Shanghai Cooperation Organization. Often it seems, many Americans view the world in stark terms of either "with us" or "against us" but the reality is often more nuanced and complicated. The dollar nicked JPY133.00 in the European morning after briefly trading above JPY135.00 in early Asia Pacific turnover. We had cautioned that a sustained break of JPY134 weakens the technical outlook and suggests potential toward JPY132.00. The drop in US rates also dragged down the JGB yield and eases pressure on the BOJ's yield curve control. After posting a bearish outside down day ahead of the weekend, the Australian dollar rallied to a four-day high near $0.6680 before stalling. The $0.6700 area needs to be overcome to lift the tone, and the inability to remain above the pre-weekend high (~$0.6640) is disappointing. The futures market has practically given up on the idea of an RBA rate hike next month. The greenback returned to the CNY6.8665 area after trading above CNY6.9700 before the weekend. The low set earlier this month was around CNBY6.8625. The dollar recovered to back to a little above CNY6.90, where it has steadied. The PBOC set the dollar's reference rate a little stronger than expected (CNY6.9375 vs. CNY6.9366), which seemed to have signaled a desire to temper the dollar's weakness.  Europe The fear of a crisis that spurred a sharp drop in US rates ahead of the weekend pushed European rates sharply lower too. The two-year German note yield tumbled 18 bp (to about 3.10%). That was the biggest single day decline in eight months. The ECB meets this week, and many market participants recall the ECB's hike in 2008 after Bear Stearns ignoble sale and the failure of Lehman. The swaps market shaved the odds of a 50 bp hike this week from nearly a done deal in the middle of last week to a still-confident 80% chance ahead of the weekend and now near 70%. In the risk-off rally, peripheral European debt did not rally as much as the core, which makes intuitive sense, but it illustrates a channel of contagion. To compete with US and China subsidies to more environmentally friendly technologies, the EU proposes to relax the state aid rules. The changes are temporary and will extend through the end of 2025 and allows governments to match the support offered by other countries for targeting investments in a range of industries, including batteries, solar panels, wind turbines, heat pumps, and the production and recycling of rare earth elements. Governments can provide higher levels of support to individual companies where there is a real risk of investment being drawn away from Europe. There appears to be two key safeguards. First, this "forbearance" is not to foster competition between EU members. Second, the rules attempt to ensure that the poor parts of the EU can also have easier access to funds. Since budget rules were relaxed since Russia's invasion of Ukraine, Germany and France accounted for around 70% of state aid measures, which underscore the fear of destabilizing divergence. The euro rose slightly above $1.0735, its best level since the middle of last month. However, it has not been able to sustain the break of $1.0700 and pulled back to around $1.0665 in the European morning. The intraday momentum indicators are overextended, and provided the $1.0650 hold, another try at $1.07 seems reasonable. A break of $1.0650, though, could see $1.06. While ECB rate expectations have been reduced by the US financial crisis, in the UK, the immediate impact is on expectations for Wednesday's spring budget. The UK arm of SVB was sold to HSBC. Sterling traded to $1.2140, a new high for March. It reached almost $1.2115 before the weekend. Like the euro, sterling's upside momentum faded, and it approached initial support near $1.2050 in the European morning. The market also is less confident of a BOE rate hike next week. In the swap market, the odds of a quarter point hike have fallen from almost 100% to 60%. The intraday momentum indicators are also overextended and provided the initial support holds can retest the $1.2100 area in North America. America The US Treasury, Federal Reserve, and FDIC have attempted to ringfence the potential banking crisis, with Signature Bank closed, as well by NY state officials. The Federal Reserve announced a new facility (Bank Term Funding Program), which allows banks to exchange their government, agency, and MBS debt at par for cash for up to one-year. The Treasury will make available $25 bln from the Exchange Stabilization Fund (similarly used during the Great Financial Crisis) to backstop the new Fed facility, but Fed officials do not expect to need it. The cost of accessing the BTFP is one-year OIS plus 10 bp. By accepting the long-term high-quality assets, like Treasuries, agencies, and MBS at par rather than a market prices, more liquidity is available. The collateral requirements of the discount window now will be the same as for the new Bank Term Funding Program, which means a smaller haircut and therefore less unattractive option. The FDIC is invoking the "systemic risk exception" and will cover the gap between the sale of SVB assets and the deposits. Officials confirmed what the market already suspected (revealed preferences) that there were several other banks that were vulnerable. The FDIC is funded by a levy on banks not taxpayers. There may be moral hazard issues here as the uninsured depositors are treated as insured, but not shareholders or necessarily creditors. This is the first post-Dodd-Frank financial crisis, and more work is clearly needed.    The combination of the drop in US rates and the rally in stocks helped lift the Canadian dollar. Before the weekend, the greenback set a new high for the year near CAD1.3860 and today approached CAD1.3710. The Bank of Canada's pause, which had looked like an anomaly before now seems a bit prescient. Still, as the US dollar has returned to previous support around CAD1.3750, which is now serving as resistance. Above there, scope extends back to the CAD1.3785 area. The US dollar has traded on both sides of its pre-weekend range against the Mexican peso (~MXN18.27-MXN18.5950). The close is key for this price action and settlement above the pre-weekend high would suggest corrective forces have not run their course. A move above MXN18.66 could target MXN18.76 initially. However, the intraday momentum indicator is overbought, and this is the kind of peso pullback for which some had been waiting or hoping to offer a new opportunity.    Disclaimer

Overview: Seeing the drama he inspired on Tuesday, the Fed chair tried soft-pedaling the idea that he was signaling a 50 bp hike in March. The market did not buy it. And the odds, discounted by the Fed funds futures rose a little above 70% from about 62% at Tuesday's close. The two-year note yield solidified its foothold above the 5% mark. With the Bank of Canada confirming its pause, the Reserve Bank of Australia does not seem that far behind, and even the Bank of England Governor Baily has recently pushed against the aggressive market pricing, saying that the central bank has moved away from the "presumption" that more rate hikes are needed. The dollar remains firm but mostly consolidating today, ahead of tomorrow's employment report. Some position adjusting ahead of the conclusion of the BOJ's meeting is lifting the yen today, which is the best performing G10 currency, gaining about 0.85%. The US 10-year yield is little changed, slightly below 4% today, while European benchmark yields are mostly 3-4 bp higher. Asia Pacific equity markets were mixed, with Japan and Australia rising and China, Hong Kong, South Korea, Taiwan, and India falling. Europe's Stoxx 600 is off 0.6% to nearly double this loss. US index futures are trading softer. With the greenback and US rates consolidating, gold is finding a reprieve after falling from around $1858 on Monday to a little below $1810 yesterday. April WTI is stuck in a tight range a little above yesterday's low (~$76.10). Lastly, we note that there is much talk about the tax hikes that will be in President Biden's budget proposals. We suggest, given the configuration of Congress that is more about political messaging, perhaps ahead of a formal declaration that he will seek re-election than the actual budget that will be eventually passed. Asia Pacific  China reported February consumer and producer prices, and both were weaker than expected. The end of the Lunar New Year holiday saw food, transportation, and recreation prices moderate, and the year-over-year rate of CPI slow to 1.0% from 2.1% in January. Food price inflation slowed to 2.6% year-over-year from 6.2% in January. Core inflation, excluding food and energy slowed to 0.6% from 1.0%. The new forecast/targets announced at the start of this week's National People's Congress has CPI rising to 3% this year. The market (median forecast in Bloomberg's survey) was at 2.4%. Producer prices fell 1.4% year-over-year, a larger decline than expected after a -0.8% pace in January. It was fifth consecutive monthly decline.  Even with fiscal and monetary stimulus, the Japanese economy continues to struggle and that constrains the policy options of the new leadership at the central bank. Growth in Q4 was revised from 0.2% quarter-over-quarter to flat. The revision is owed to weaker private consumption (0.3% rather than 0.5%). Net exports blunted some of the impact and was revised to 0.4% boost to GDP from 0.3%. Separately, the weekly Ministry of Finance report on portfolio flows shows that Japanese investors turned sellers of global bonds last week for the first time since the end of January. In the first nine weeks of the year, Japanese investors have bought JPY5.35 trillion or about $39.6 bln of foreign bonds. In the first nine weeks of 2022, Japanese investors sold around JPY1.66 trillion foreign bonds. Softer US rates and some anxiety over the conclusion of the Bank of Japan meeting tomorrow has seen the yen strengthen. The US dollar is pulling back from the three-month high set yesterday near JPY137.90 yesterday to almost JPY136.10 today. The week's low was set Monday slightly above JPY135.35. Large options set to expire today at JPY137 (~$1.4 bln) and JPY136.50 (~$1.05 bln) may have added fuel to the pullback. Options for $2.6 bln expire tomorrow at JPY136.00. Ahead of the BOJ meeting and the US employment data, a few hours later tomorrow, overnight yen volatility has spiked to over 41% from around 11.25% late yesterday. The Australian dollar is consolidating losses that took it to a new low since last November (~$0.6570) yesterday. It is inside yesterday's range and needs to rise above the high (~$0.6630) to lift the tone. It seems likely to spend the North American session consolidating. The dollar is also confined to a narrow range inside yesterday's price action against the Chinese yuan. The PBOC set the dollar's reference rate tightly against expectations, unlikely yesterday, when it was set notably weaker. The fix was at CNY6.9666, which is the strongest of the year, while the median in Bloomberg's survey was for CNY6.9667. Europe There is a light European economic calendar today. The next big event is the ECB meeting on March 16, where the staff will also update the economic forecasts. It we take a step back; we note that Germany's 10-year yield rose from around 2% in mid-January to 2.77% last week. The 10-year breakeven (the difference between the inflation-linked and conventional yields) also widened from about 2% to a little above 2.65% last week. However, it has collapsed to almost 2.40% and is near 2.44% now. That is to say that most of the rise in the nominal yield can be explained by an increase in the market-measure of inflation expectations. The higher-for-longer on rates, and the overnight index swaps show a 4.07% policy rate in October, a 70 bp increase since the end of January, seems to be souring the economic outlook. While the inversion of the US 2-10 curve draws much attention, the German curve is also inverted. At nearly 70 bp, the inversion is the most in more than 30 years and is nearly twice as inverted as it was at the end of January. Sweden's economy unexpected grew and grew strongly in January. The 2.0% monthly GDP gain contrasts with the median forecast in Bloomberg's survey for a 0.1% contraction. Household consumption rose by 0.5% (as much as it declined in December), and private sector production and services expanded strongly. The one source of weakness in today's reports was the 20.2% drop in industrial orders, which tends to be a volatile series. It had gains 23.3% in December. The euro is confined to a narrow range between about $1.0540 and $1.0570. There are options for almost 1.8 bln euros at $1.06 that expire today and 1.2 bln euros that expire there tomorrow. The near-term risk still seems to be on the downside and the 1.3 bln euros in options that expire tomorrow at $1.05 may still draw the price action. Yesterday's low was near $1.0525. The UK reports January GDP figures tomorrow and a small gain is expected after the 0.5% contraction in December. The British Chamber of Commerce became the latest to signal that the UK may avoid a recession. Sterling approached $1.18 yesterday and has recovered to almost $1.1890 today. The 200-day moving average is slightly above $1.19. There are options for almost GBP620 mln that expire there tomorrow. America Since Monday, the odds of a 50 bp hike by the Fed on March 22 has risen from about a 25% chance to around a 70% chance. This seems excessive, but arguably prudent ahead of tomorrow's jobs report. The terminal rate expectation has risen to 5.65%, up nearly 20 bp since Monday's settlement, and reflects a recognition of the increased risk of a 5.75% peak. The Beige Book, prepared for the upcoming FOMC meeting, was mixed. While it noted inflation pressures remained widespread, price increases moderated in many districts and prices are expected to continue to moderate. At the same time, growth was said to have accelerated slightly at the start of the year, but the pace in Q3 22 and Q4 22 were already above the Fed's long-term non-inflationary pace. Labor market conditions were "solid," though few districts reported businesses were becoming less flexible with some reduction of remote work options. That seems to be consistent with some easing of the tightness and several districts cited the lack of available childcare impeding work force participation. Some districts report easing of wage pressures, and this was seen as a trend in the coming months. As widely expected, the Bank of Canada stood pat, leaving the overnight target rate at 4.5%. Amid the more general theme of "higher for longer" the Canadian dollar was punished for the less aggressive posture and the Canadian dollar was the weakest of the G10 currencies, losing about 0.25% to fall to new four-month lows. The central bank's statement recognized the tightness of the labor market, and the need for inflation expectation to ease some more, but concluded that on balance the economy is evolving as expected. That includes CPI still falling to around 3% by midyear. It was at 5.9% in January, though the core measures were closer to 5%.  The Bank of Canada is putting emphasis on the cumulative effect of the tightening and the weaker growth to drive down inflation. Still, the market is doubtful that the pause is the peak. The swaps market is pricing about a 25% chance of a hike at next meeting on April 12, down a little bit from Tuesday. However, it is completed discounted by the July 12 meeting, slightly more confident than earlier in the week. That said, the market is still in flux and tomorrow's jobs report is an important data point, though the Bank of Canada will see the March figures (due April 6) before it meets, as well as the February CPI (March 21). In addition, the Bank of Canada may feel less comfortable if the policy rate with the Fed exceeds 100 bp.  Mexico reports February CPI today. It is expected to have slowed to 8.35% on the headline (from 8.45%) and 7.68% at the core level (from 7.91%). Headline CPI peaked slightly above 8.50% last November. The core rate peaked last August and September at 8.70%. The stickiness of price pressures spurred the central bank to lift the overnight target rate by 50 bp at its February 9 meeting. Most had expected a quarter-point move. Banxico meets on March 30 and the risk of another 50 bp hike has increased primarily because of the shift in Fed expectations. The median forecast in Bloomberg's survey sees inflation ending the year around 5.8%.  The US dollar marginally extended yesterday's gains against the Canadian dollar to a little through CAD1.3815 before coming back offered in the European morning and trading to almost CAD1.3790. It is consolidating in a narrow range just inside the upper Bollinger Band (~CAD1.3825). A break of the CAD1.3750 is needed to help stabilize the technical tone. That seems unlikely ahead of tomorrow's jobs reports. Fed Chair Powell's initial comments on Tuesday saw the greenback spike up to almost MXN18.18. However, this was greeted with fresh dollar sales and peso purchases. The dollar recorded a marginally new five-year low today near MXN17.90. It is difficult to talk about meaningful support, but the next important chart area is near MXN17.50. The lower Bollinger Band is near MXN17.85 today.  Disclaimer

March 01, 2023  $USD, Australia, Canada, China, Currency Movement, EMU, Germany UK, Japan, Mexico, US Overview: Many investors may be skeptical of the accuracy of Chinese data, but its stronger than expected February PMI animated the animal spirits and bolstered risk-taking appetites. Asia Pacific equities jumped, led by the 4.2% rally in Hong Kong and a 5% surge in the index that tracks mainland shares. Among the long bourses Australia and Singapore slipped, and South Korean markets were closed for a national holiday. Europe's Stoxx 600 is posting a small gain and US index futures are trading higher. European 10-year yields are mostly 5-6 bp higher, though UK Gilts are bucking the move and the 10-year yield is a little softer. The US 10-year Treasury yield is firm near 3.94%. The dollar is broadly lower. The New Zealand dollar is leading the charge with a 1% gain, followed by the euro, which is up around 0.75% near $1.0665. Sterling is little changed and at the bottom of the G10 performers today. Nearly all the emerging market currencies are higher, save the Russian rouble and Taiwanese dollar. The Mexican peso rose to new five-year highs and the Chinese yuan is posting its largest gain of the year. Gold posted a key upside reversal yesterday and is extending its gains today. It is reached a five-day high near $1838. April WTI initially is trading inside yesterday's range and is pulled between the China re-opening meme and the continued build of US supplies, which API estimated rose for the tenth consecutive week. Asia Pacific China's February PMI jumped more than expected, strengthening the recovery meme, and bolstering risk appetites more broadly. The manufacturing PMI rose to 52.6 from 50.1, which is highest in a decade. The non-manufacturing PMI increased to 56.3 from 54.4, just below the high set in November 2020. This saw the composite rise to 56.4 from 52.9, a new high. The Caixin manufacturing PMI was somewhat less impressive, rising to 51.6 from 49.2 and is seen reflecting a subdued export performance. Yesterday, Japan reported a stunning 4.6% drop in January industrial output. Only one economist in Bloomberg's survey of 28 economist had anticipated a larger contraction. The final February manufacturing PMI stood at 47.7, up from the flash estimate of 47.4, which was the weakest since August 2020. It has not posted a monthly increase since last March. In January it was 48.9, unchanged from December 2022.  Australia's economy expanded by a solid even if not spectacular 0.5% in Q4 22. That follows a 0.7% expansion in Q3. Although Q4 growth was a little less than expected, the year-over-year rate was in line at 2.7%. Separately, Australia reported its newly minted monthly inflation report. January prices slowed to 7.4% year-over-year from 8.4% at the end of last year. This was a larger drop than expected, and initially weighed on the Australian dollar. The RBA sees it falling to 4.8% by the end this year. The median forecast in Bloomberg's survey is not as sanguine as sees a 5.4% pace. Lastly, the final February manufacturing PMI came in at 50.5, up from the flash reading of 50.1. This is the third consecutive month that it hovered around 50 without break below. The dollar was turned back from the JPY137 area yesterday and settled near JPY136.15. The heavier greenback tone saw it slip marginal through yesterday's lows to almost JPY135.60 today. The intraday momentum indicators are stretched and nearby support around JPY135.40-50 may hold, with the help of firmer rates in Europe and the US. The Australian dollar is recovering smartly after making a marginal new low (since early January) near $0.6695. It has risen through yesterday's high (~$0.6760) and a close above there could be a bullish key reversal. Nearby resistance is seen around $0.6800. Initial support is around $0.6750. The Chinese yuan surged after the PMI reports. The dollar peaked Monday near CNY6.9730 reached CNY6.8790 today, a six-day low. It is the third day the greenback has fallen, which halted a four-day rally seen last week. Today's loss, if sustained, would be the largest this year. The PBOC set the dollar's reference rate slightly below expectations (CNY6.9400 vs. CNY6.9411, the median forecast in Bloomberg's survey.  Europe The eurozone's final manufacturing PMI was unchanged at 48.5.  Germany's was revised lower to 46.3 from 46.5.  It was at 47.3 in January and the February reading was the first decline in four months. The French reading was also revised down to 47.4 from the flash reading of 47.9.  In January it was above 50 (at 50.5) for the first time since last August. Italy's manufacturing PMI jumped to 52.0 from 50.4 and was better than expected. The same is true of Spain, where the manufacturing PMI rose to 50.7 from 48.4.  It is the highest since last June. Separately, Germany reported a 2k rise in unemployment last month. The market had looked for aa 10k decline, and January's 22k fall was halved. The unemployment rate was unchanged at 5.5%. German states have reported the February CPI figures and the national estimate will be out shortly. The EU harmonized measure is seen rising by 0.5% month-over-month for a 9.0% year-over-year increase, after a 9.2% rate in January. Recall Spain and France surprised on the upside yesterday. The aggregate report for the eurozone is due tomorrow. The UK's February manufacturing PMI ticked up to 49.3 from the preliminary estimate of 49.2 and 47.0 in January. While still in contraction territory, it is the best reading since last July. The UK also reported stronger than expected consumer credit and mortgage approvals than expected. Although recession expectations are widespread, many are beginning to question it and at least one large bank now says a recession has been averted. Read next: Some McDonald's Locations Don't Promote Hip-Hop Stars' New Meal| FXMAG.COM After a poor close yesterday (on its lows near $1.0575), the euro has popped back and is trading at a five-day high in Europe near $1.0660. Some buying may be related to the 1.5 bln euro options expiring today at $1.06. Initial resistance around $1.0685 may cap upticks given overbought momentum indicators. That said, a close above it would lift the technical tone. Large options at $1.06 and $1.07 expire Friday. Sterling also was turned back yesterday and settled on its lows (~$1.2020), but unlike the euro, has found little new demand. It bounced to almost $1.2090 and held below yesterday's high (~$1.2145). It risen above the 20-day moving average but failed to close above it. It is found today slightly above $1.2060. There are options for nearly GBP500 mln at $1.20 that expire today. America Yesterday's battery of US data is unlikely change economic views. The December house prices are too dated for most, and the January trade deficit was only a little bigger than expect, and the weaker wholesale inventories were partly blunted by the stronger retail inventories and other better-than-expected January reports. The data for February, which included the Chicago PMI, the Conference Board's consumer confidence, and the Richmond Fed's manufacturing survey, were all weaker than expected. The Richmond Fed's business condition measure and the Dallas Fed's service activity report were still in contraction territory, even if a little less so than January. Today's highlights are the final manufacturing PMI and the ISM manufacturing survey. Both are expected to remain below 50 as they have since last October. A warm January bodes well for construction spending, which is seen rising by 0.2% after a 0.4% decline in December. Lastly, auto sales will trickle in through the day, perhaps preventing them from having the impact commensurate with their significance. Auto sales have typically slow in February (last eight consecutive years) and the median forecast in Bloomberg's survey sees auto sales slowing to a 14.7 mln seasonally adjusted annual pace, from 15.74 in January, which were the highest since May 2021.  Canada sees the February manufacturing PMI. It is not typically a market-mover. That said, it fell for the last five months of 2022 before rising back above 50 in January for the first time since last July. The US dollar closed firmly yesterday, but remained within the range set on Monday, which was within Friday's range. Last's Friday's high, which was the greenback's best level since early January, was near CAD1.3665 and the January high was closer to CAD1.3685. The US dollar has come back offered today, with the risk-on sentiment. However, it is holding above yesterday's low (~CAD1.3560), and this has to be taken out to be meaningful. Note that there are options for $500 mln at CAD1.3580 that expire today.  Mexico's economic calendar is more complicated. Sure, February's manufacturing PMI and IMEF surveys will be reported. But two other reports may be more important. First, Mexico reports January worker remittances. There is a clear seasonal pattern for strength in December and weakness in January. Worker remittances have emerged as a key source of capital inflows into Mexico and have been stable to higher, and sufficient to cover the trade deficit. The proper comparison for the January figure (expected ~$4.5 bln) is not December (~$5.4 bln) but January 2022 ($3.9 bln) and January 2021 (~$3.5 bln). The dollar posted a fresh five-year low against the peso yesterday near MXN18.2820. The losses were extended today to almost MXN18.24 before the greenback recovered in the European morning to almost MXN18.30. A nearby cap is seen in the MXN18.33-MXN18.35 area. A push above MXN18.40 would likely trigger stops.     Disclaimer

February 27, 2023  $USD, Canada, China, Currency Movement, Eurozone, Federal Reserve, Germany, Japan, Mexico, Northern Ireland protocol, UK Overview: After last week's flurry of activity that saw the US dollar extend its recovery, it has begun off the new week largely consolidating in relatively narrow ranges. The Australian and New Zealand dollar's remains softer, and the Swiss franc is virtually flat, but the other G10 currencies, led by sterling are posting small gains. A break-through on the Northern Ireland protocol, which has been rumored for a more than a week may be announced shortly. The news stream is light and conducive to the consolidative tone, but the dollar's recovery does not seem complete. Despite weekend protests against AMLO's downsizing of the electoral watchdog and rising tensions with the US over its steel exports, the Mexican peso is the strongest of the emerging market currencies, outside of the Russian rouble and is near the five-year highs set last week.  Asia Pacific equities were mostly lower after the pre-weekend losses in North America and Europe. Europe's Stoxx 600 has recouped its decline from the end of last week, and US index futures are trading with a firmer bias. Benchmark 10-year yields are firmer, mostly 1-3 bp higher in the US (near 4.84%) and Europe. UK Gilts are an exception and are five basis points higher near 3.65%. Gold is flat near $1811. It is off about 3% over the past two weeks. April WTI is also flat near $76.30. It has fallen by around 4.5% over the past couple of weeks. News of the US 200% tariff on Russian aluminum (and derivatives) seem to be having little immediate impact. Asia Pacific The BOJ caps the 10-year on-the-run bond at 0.50%. The generic yield has not settled below there since February 9. The presumed near governor of the Bank of Japan, Ueda spoke for the second day before the Diet. He did not add much to what he said last week. He is prepared to adjust monetary policy when inflation is sustainably above 2%. Yet, Ueda agrees that despite the headline being more than twice as high, it is not sustainable as it reflect cost-push inflation and not strong demand. Moreover, he expects inflation to begin falling. Tokyo's January CPI at the end of the week will be the first test of this hypothesis, which we share. It is a very good indicator the national figures. We identified three forces that should begin easing Japanese price pressures:  government subsidies, falling energy prices, and the appreciation of the yen on a trade-weighted basis.  During the 2008-2010 Global Financial Crisis, a common meme was to draw comparisons between the US/Europe and Japan. While Japan had already been there in terms of expanding the central bank's balance sheet as the zero-bound of interest rates were approached. It was not, though, the first country to adopt a negative policy rate. That dubious honor goes to Denmark in 2012. A op-ed in the Financial Times, citing bank research, suggests it is now China who is turning Japanese.  Of course, the collapse of Japan's property bubble more than three decades ago still seems to be the go-to comparison. Japan and China (along with several countries in East Asia) shared a common development model, which in political economy is known as export oriented. Import substitution, the other major model was favored after WWII, but the experience of several Latam countries that were arguably large enough to try it, further encouraged East Asian model of export-driven industrialization. The scale that China must operate on given its size is overwhelming. And it would be regardless of its political structure. One key difference is what comes next. Japan has a lost decade. China most likely will not. The IMF projects Chinese will expand by 5.2%, which is also the median forecast of economists in Bloomberg's survey. We suspect that if they are wrong, it is on the low side. Coming from the annual National People's Congress (starting March 5) new economic targets will announced. The dollar is consolidating the pre-weekend gain that carried it to about JPY136.50 and is in a little more than half of a yen range above JPY136.00. The JPY136.65 area corresponds to the (38.2%) retracement of the dollar's decline since the multiyear high set in late October near JPY152.00 and the 200-day moving average is near JPY137.15. A break of JPY136.00 could see a pullback toward JPY135.35-50. That said, we like it higher and suggest potential toward JPY140.00. The Australian dollar is seeing last week's 2.2% drop extended. It had begun last week testing the $0.6900-20 area and today slipped slightly below $0.6700. The low for the year set on January 3 a little above $0.6685. The lower Bollinger Band is around $0.6705. The selling pressure does not appear exhausted, and the $0.6720-40 area may now cap upticks. The dollar is snapping a four-day advance against the Chinese yuan, and it is only the second decline since February 9. The pullback is only after the greenback poked above CNY6.9730, a two-month high. The PBOC set the dollar's reference rate at CNY6.9572, well above the pre-weekend fix of CNY6.8942. This reflects the dollar's rally after the mainland's regular session ended on Friday. The fix was tight to market expectations (CNY6.9570). The yuan has fallen by about 2.9% here in 2023, which is a middling performance in Asia and among emerging market currencies. Europe Part of the narrative that helped feed the euro's recovery, especially its latter phase, from the multi-year low in late September (~$0.9535) to the early February high (~$1.1035) was reduced left-hand tail risk (dramatic negative outcome). The relatively warm winter, conservation, lower energy prices eased fears. Now as the market is pricing the outlook for Fed policy, the economic outlook in Europe is less certain. Initially, Q4 22 German GDP was expected to be flat. It came in at -0.2%. At the end of last week, it was revised to -0.4%. Consumption and capital spending were weaker than projected. Although the flash February composite PMI jumped back above the 50 boom/bust level for the first time since last June, and the confidence measures have been tracking improvement, the economy may still be contracting. The median forecast in Bloomberg's survey projects a 0.4% contraction this quarter. The German 2-year yield rose nearly 12 bp before the weekend and after GDP report and is up a few more basis points today. The yield has risen by 50 bp in its three-week advance. Read next: EUR/USD Pair Is Trading Around 1.0560, USD/JPY Is Above 136.20, GBP/USD Gained| FXMAG.COM The data highlight of the week is the preliminary February CPI. Given the base effect, the 0.5% monthly rise will allow the year-over-year headline rate to ease to 8.2% from 8.6%. Recall in February 2022, the eurozone's CPI rose by 0.9%. More significantly, in March 2022 consumer prices surged by 2.4%. As this drops out of the 12-month comparison, the headline rate will fall sharply. The more pressing problem comes from the core rate, which reached a new cyclical high in January of 5.3%. The median projection in Bloomberg' survey is for it to be unchanged in February. Eurozone money supply growth last month was weaker than expected (3.5% vs. 3.9% median forecast in Bloomberg's survey and 4.1% in December) and business confidence reports were softer than expected. However, the euro is stabilizing in a narrow range after making a marginal new low closer to $1.0530. It has approached $1.0570. Resistance may extend to $1.0580. There are options for around 1.65 bln euros that expire today at $1.05. There is another set of options (~1.3 bln euros) that expire there tomorrow. A break-through on the Northern Ireland protocol may be announced shortly but the prospects do not appear to be lending sterling much support. It is holding below $1.20 after taking out the pre-weekend low by a few hundredths of a cent as it frayed the 200-day moving average (slightly below $1.1930). The intrasession momentum indicators are over-extended, warning of the follow-through buying in North America may be limited. America The strength of personal consumption last month (1.8% in nominal terms and 1.1% in real terms) coupled with firmer than expected deflators strengthen the conviction of the direction the market was already moving. The two-year note yield jumped almost 12 bp to rise above 4.80%, for the first time since 2007. The swaps market pushed a little closer to a 5.50% terminal Fed funds rate. Good economic news is still seen as negative for the equity market and the major US indices fell by at least one percent ahead of the weekend. The 2-10-year inversion is testing the area (a couple basis points around -85 bp) that held in early December and earlier this month, which is the most in more than 40 years. On the other hand, of note is Fed Chair Powell's preferred measure the three-month bill yield compared with its 18-month forward rate. It is about 21 bp inverted but is has climbed steadily as the economic data strengthened. It has been around -100 bp before the January employment report. We expect the next batch of high-frequency data to provide evidence for our hypothesis that the market is getting carried away by the recent reports. The next batch of data begins today with the January durable goods orders. Due to the volatility of commercial aircraft orders, the headline rate is seen falling by 4% after a 5.6% rise at the end of last year. However, excluding aircraft and military, capital goods orders are expected to have fallen for the third consecutive month and the fourth time in the past five months. Although auto sales likely slowed and the ISM services, which provided a 1-2 punch with the jobs report on February 3, the market may need to see the next employment report (March 10) to take the January-fluke hypothesis more seriously.   Canada reports Q4 current account figures. A deficit in line with the Q3 shortfall of C$11 bln is expected. It would translate into about an CAD18 bln deficit for the year. It recorded a nearly C$20 bln merchandise trade surplus. It will feed into the Q4 GDP estimate due tomorrow. Still, the Canadian dollar may see marginal impact from the report. It is consolidating last week's losses that saw the greenback climb to CAD1.3665. It had begun the week near CAD1.3440. Mexico reports its January trade balance. Last year, Mexico recorded a trade deficit of about $26.5 bln. It has run a small deficit in 2019 and large surplus in 2020. The deficit returned in 2021. Recall that January 2022, Mexico posted a record deficit of nearly $6.3 bln. Note that Mexico's steel exports to the US have become a potential flashpoint, and there were large demonstrations over the weekend against the dilution of the electoral watchdog. The dollar's surge saw it test MXN18.50 at the end of last week. It has come back offered and is probing the MXN18.35 area. The greenback appeared to carve out a little shelf near MXN18.30-MXN18.33 last week. Stops below there still seem vulnerable.      Disclaimer

February 23, 2023  $USD, Currency Movement, ECB, EMU, Federal Reserve, Japan, Mexico, South Korea Overview:  The prospect that the Federal Reserve tightening cycle continues into early Q3 is underpinning the greenback today against most of the G10 currencies. The dollar bloc is the notable exception, and they are posting minor gains, perhaps encouraged by the firmer equity markets. The minutes of this month’s FOMC meeting appear to show wide support for quarter point hikes going forward and there did not seem to be much discussion of the conditions that would allow for the central bank to pause, which the market had expected around by the end of Q2. The euro has been sold below $1.06, while the greenback is holding just below JPY135 ahead of a big day tomorrow in Tokyo, which seen national inflation figures and BOJ Governor nominee Ueda questioned in the Japanese parliament. A hawkish hold by the Bank of Korea, signaling the risk that the pause is short lived, is helping the South Korean won lead the emerging market currencies today, but the Mexican peso continues its dramatic advance and is trading at new five-year highs today. Asia Pacific equities were mostly lower following yesterday’s losses in the US. However, Taiwan and South Korea bucked the trend. Europe’s Stoxx 600 is holding on to minor gains. US equity futures are firmer, and the S&P 500 is looking to snap a four-day skid. Benchmark 10-year yields are mostly a little higher. The 10-year US Treasury yield is up a couple basis points near 3.94%, while European rates are 1-2 bp points higher. Italy’s 10-year yield is slightly softer. UK Gilts are under the most pressure as the 10-year yield rise four basis points. Gold recorded an outside down day yesterday and is consolidating little changed near $1827 in the European morning. April WTI fell to a two-week low yesterday near $73.80 and is also consolidating today. API reportedly saw another large build of US crude stocks for the ninth consecutive week. If confirmed by the EIA later today, it would point to US crude inventory near a 21-month high. Natgas is pinned near its lows. Asia Pacific There are three important events in Japan tomorrow. First, the national January CPI figures will be reported. The Tokyo CPI out earlier warns of new cyclical highs for the national figures, north of 4% for the headline and core rate (excludes fresh food). There is good reason to suspect this could prove to be the cyclical high as government subsidies, falling energy and wheat prices, and the appreciation of the yen on a trade-weighted basis dampen price pressures. Second, the weekly Ministry of Finance portfolio flows will be reported. As we have noted, after selling around $180 bln of foreign bonds last year, Japanese investors have been net buyers in the first six weeks of the year (~$19.5 bln). The rise in the US 10-year yield this month recoups the decline seen in January, leaving the yield nearly flat net-net since the end of last year. The cost of hedging for six months is practically unchanged from the end of last year (2.6% vs. 2.5%, forward points as a percentage of spot). Third, the nominee to replace BOJ Governor Kuroda Ueda, will appear before the Diet. He is unlikely to break new ground or commit to any course of action, though he may endorse a policy review and reiterate his view that the Japanese economy still needs monetary support. He may be asked about the wage hikes recently announced by two large auto companies. South Korea's central bank stood pat as widely expected but gave a strong signal that another hike will likely be forthcoming, supporting global theme of higher for longer. The key 7-day repo rate was left at 3.5%, but five of the six board members agreed that there may be scope for another hike after pausing. Last month, only three board members shared that opinion. One member dissented from today's decision in favor an immediate quarter-point hike. The central bank shaved its growth forecast for this year to 1.6% from 1.7%. The South Korean economy contracted in Q4. It also pared its inflation forecast to 3.5% from 3.6%. Read next: Tesla Opens Its Global Engineering Headquarters In Palo Alto, California| FXMAG.COM The dollar remains in a narrow range against the Japanese yen as it continues to hover around JPY135. Today's range through the European morning is roughly JPY134.70-JPY134.95. A convincing move above JPY135 would target the JPY136.50 area next. A further rise in US interest rates and/or clear signal from Ueda tomorrow of no immediate intention to raise rates or exit yield-curve control may be the impetus. The Australian dollar briefly dipped below $0.6800 yesterday but is holding above it today. The 200-day moving average is slightly above $0.6800 and the Aussie has not closed below it since early January. A move above the $0.6850-65 area is needed to lift the technical tone. The greenback continues to grind higher against the Chinese yuan. It has only fallen once since February 9 and that was on this past Monday. It reached almost CNY6.90 today, its highest level since January 4. The next technical target may be around CNY6.9340. The reference rate was set at CNY6.9028 (vs. median projection of rCNY6.9024 in Bloomberg's survey), suggesting no protest yet from the PBOC. Lastly, we note the South Korean won is up about 0.6% to lead the emerging market currencies after the hawkish hold by the central bank. Europe While the shift in market expectations for the terminal Fed funds rate has been the key driver of the dollar's recovery this month, the terminal rate for the European Central Bank has also crept higher. At the end of 2022, the implied policy rate for the end of 2023 in the overnight index swaps market, was 3.44%. It now is near 3.65%. This means that the backing up of US short-term rates has not translated into as much of a widening of its two-year premium over Germany, as one might have expected. The US premium peaked early last August near 277 bp. Even in early November, the premium was still above 260 bp. It fell sharply and reached 145 bp a couple of days before the strong January US employment and service ISM were reported on February 3. The rate differential peaked a few days later a little more than 185 bp. It has been hovering around 175 bp for the bast two weeks (+/- 3 bp). Incorporating the delayed Germany CPI figures fueled an upward revision to the aggregate eurozone January inflation estimate. The headline rate stands at 8.6%, up from 8.5%. The core rate was revised to 5.3%, a new cyclical high, from 5.2%. The stronger than expected flash PMI reported earlier this week and today's revised inflation report will strengthen the hawks at the ECB, some of whom seem to want to pre-commit to another 50 bp hike. A move of that magnitude has already been signaled for the mid-March meeting. The following meeting is May 4. The pullback in the euro may also bolster their case. The euro briefly slipped below $1.06 yesterday in the volatile reaction to the FOMC minutes. Yet, the $1.0605 settlement was the lowest of the year. It has been pushed lower in the European morning to record a low slightly above $1.0585. The next important chart area is closer to $1.05 (and then $1.0460). However, the intraday momentum indicators are oversold and the strength, or indeed, the lack thereof, of the bounce may help shape day traders’ strategy. A move above $1.0630 may be needed to help stabilize the tone. Sterling continues to trade within Tuesday's range (~$1.1985-$1.2145). Resistance is seen near $1.2130, where the 20-day moving average is found. It has not traded closed above that moving average since February 1. Its intraday momentum indicators are also oversold, and initial resistance is seen in the $1.2060-80 area. America Today's look at Q4 22 US GDP is not so important for market participants. Weekly initial jobless claims will cover the same week as February employment surveys and may draw more attention. That said, the 517k rise in January nonfarm payrolls was a bit of a fluke. The early call for February is that job growth slowed to 200k, which if true would the slowest since the end of 2020. The Atlanta Fed's GDPNow tracker will be updated tomorrow, but the results of Bloomberg's latest (Feb 14-20) survey of (66) economists were reported yesterday. The median forecast for Q1 growth has been revised to 0.5% from flat and a contraction is still seen in Q2 (-0.5% vs. -0.6%) and Q3 (-0.1% vs. -0.3%). Also, the median forecast for CPI was raised to 4% from 3.7% previously. The Fed's Bostic and Daly (non-voters) speak today, while several speak on tomorrow (Jefferson, Mester, Bullard, Collins, and Waller). The FOMC minutes failed added little new insight, except that "almost all" members thought downshifting to a 25 bp hike was appropriate, meaning that the hawkishness of Mester and Bullard (and possibly Kashkari) did not find broader support. While it would seem to reduce the likelihood of a re-acceleration next month, the market seems to see the rate hike cycle extending into July. Mexico reports the bi-weekly CPI for the first half of February. The 0.35% (headline) and 0.39% (core) median projection in Bloomberg's survey is still too high for the central bank, even though it will allow the year-over-year rates to decline slightly. The minutes from the February 9 central bank meeting, which surprised the market with a hawkish 50 bp hike will be released. The overnight rate stands at 11% and the swaps market sees potential to 11.75% in 25 bp increments over the next six months.  The US dollar is trading inside yesterday's range against the Canadian dollar (~CAD1.3515-CAD1.3570). A break of yesterday's lows, perhaps encouraged by the S&P 500 snapping a four-day fall, could signal a test on the CAD1.3480-CAD1.3500 band of support. It takes a break of CAD1.3450 to signal anything important. The US dollar stalled near MXN18.48 yesterday and has been sold to new five-year lows today, slightly below MXN18.30. There is little meaningful support ahead of MXN18.00, though we suspected some support may be found around MXN18.25.    Disclaimer

February 22, 2023  $USD, Canada, Currency Movement, FOMC, Italy, Japan, RBNZ, US Overview: The surge in US interest rates and sharp losses in US stocks sent the dollar broadly higher in North America yesterday. The $42 bln of two-year notes auctioned by the US Treasury saw the highest yield in more than a quarter-of-a-century (4.67%) and it still produced a small tail. Sterling, helped by its own surprisingly strong data, was the only G10 currency to have gained against the surging dollar. Still, no important technical levels were breached, though the greenback rose to nearly seven-week highs against the Canadian dollar. The US dollar also rose to new highs for the year against the Japanese yen before settling at about JPY135.00. Rising US rates and falling stocks are the main driver and the FOMC minutes later today are the focus. While the US economic calendar is light today, Fed speakers return tomorrow, and the data highlight is the PCE deflator on Friday. The major US equity indices lost at least 2% yesterday and are little changed today. However, global equities were dragged lower, with sharp losses in Japan, Korea, and India. Europe's Stoxx 600 is off about 0.85%, the third largest swoon this year. European bond yields are mostly 1-2 bp higher. The G10 currencies are mostly heavier, but the yen and Swiss franc are slightly firmer, while the New Zealand dollar is virtually flat despite the 50 bp hike. Among emerging market currencies, the Mexican peso continues to shine, but nearly the rest are softer. Gold is holding above yesterday's $1830 low but is not making much of a recovery. April WTI is extending its pullback for the sixth consecutive session to trade below $76. Asia Pacific The Reserve Bank of New Zealand slowed the pace of its tightening by hiking the overnight cash target rate by 50 bp to 4.75%. It continues to see a peak at 5.5%, but now it is seen in Q4 23 rather than Q3. While headline inflation is easing, the central bank argued the core rate is too high and employment is "beyond the maximum sustainable level." The RBNZ said it was too early to assess the impact from the cyclone and the fiscal response. It continues to see an economic contraction beginning in Q2 but expects it to be short and shallower. The next meeting is on April 5 and the swaps market sees about a 50% chance of another 50 bp move. The New Zealand dollar initially traded higher in response, reaching about $0.6250 from about $0.6215 but has given it back to trade little changed on the day. Japan's January services producer prices edged up to 1.6% year-over-year. They peaked last June at 2.1%, and had slowed to 1.5% pace, the lowest since Q1 22. They averaged about 2.1% in the few months before Covid struck. The inflation focus in Japan is not about service prices but goods prices, not about producer prices, but consumer prices. The national consumer prices will be released early Friday. The Tokyo CPI warns of another jump in the national figures and the median forecast (Bloomberg survey) is for a 4.3% year-over-year pace. This would be a new cyclical high and could very well prove to be the highwater mark. Next week Tokyo's February CPI will be released. It does a good job of anticipating the national figure. We look for government subsidies, the appreciation of the yen on a trade-weighted basis, and the decline in energy and wheat prices to ease price pressures. Read next: The AUD/USD Pair Remains Under Selling Pressure, The GBP/USD Pair Is Below 1.21 Again| FXMAG.COM The dollar reached nearly JPY135.25 yesterday, a new high since last December's BOJ surprise. While it has held today, the greenback found support around JPY134.55. With US rates little changed, the exchange rate is seen consolidating. For the second consecutive session, the 10-year JGB pushed above its 0.50% cap. The BOJ bought bonds and offered five-year low-cost loans to banks to buy government bonds. The Australian dollar edged closer to $0.6800, slipping fractionally through last week's low. The 200-day moving average is about $0.6805. The $0.6780 area marks the (38.2%) retracement of the rally from the middle of last October's low (~$0.6170) and is the next important chart area. The greenback rose to almost CNY6.90 today, its best level since January 4 and slightly through the 200-day moving average (~CNY6.8885). The reference rate was set at CNY6.8759, tightly against expectations (CNY6.8760). Europe In a process that is difficult to disentangle cause and effect, or perhaps as an example of reciprocal causality, the weakening euro, rising yields, and widening peripheral premiums within the eurozone go hand-in-hand. The euro has moved back toward $1.06, which it has not traded below since January 6. The 10-year German Bund yields more than 2.50% and is challenging the high from the end of last year (~2.57%), which has not been seen in a dozen years. It is a similar story with France's 10-year yield, but almost 50 bp higher. Italy's 10-year yield is approaching 4.50%. Last year's peak was near 5.00%. Spain's 10-year yield peaked at the end of last year slightly above 3.65%, an eight-year high. It moved above 3.50% yesterday. Italy's 10-year premium over Germany pushed above 190 bp yesterday for the first time in over a month. Its two-year premium widened to above 50 bp, which it had not seen since January 2. Spain and Portugal's premium over Germany has also widened, but not as much as Italy. Italy's debt burden makes it particularly vulnerable, yet there is another consideration too. Italy's 2021 and 2022 budget deficit is likely to be revised up next week when the stats office assesses the impact of the tax credits initially aimed to encourage green building renovations. The cost has been estimated to in excess of 110 bln euros. There were various elements and the one that was terminated was called "the super-bonus." It was not well-targeted and the use of tradeable (between financial institutions and businesses) helped create the environment for misuse. That said, the initiative did appear to bolster the construction sector in 2021 and helped set the stage for a broader economic recovery. It had been enacted by the coalition government led by Prime Minister Conte from the Five-Star Movement. Former Prime Minister Draghi intervened to curb some of the program's excesses, and last week the Meloni government stopped the program altogether. A key judgment call that the Eurostat may decide, is whether the tax credits are "payable" or "non-payable" which will determine how the cost will accounted; whether is front-loaded or amortized over several years. The euro peaked on Monday a little above $1.07 and has been sold to about $1.0625 today. Last week's low was slightly below $1.0615. A break of the $1.0600 opens the door to a potential move toward $1.0460-$1.0500. There are options for 1.3 bln euros at $1.0550 that expire today. The intraday momentum indicators are oversold but with the FOMC minutes later today, the North American market may show limited enthusiasm for the euro. Resistance may be seen in the $1.0640-50 area. Sterling posted an outside up day yesterday by trading on both sides of Monday's range and settling above its high. It reached almost $1.2150 and has been sold to about $1.2065 today. Initial support is seen near $1.2050. On the top side, the $1.2100-20 area may offer a nearby cap. America The string of constructive US economic data continued yesterday and drove interest rates higher. It seems US rates are being driven higher more by the data than Fed's rhetoric. The flash composite PMI rose above the 50 boom/bust level for the first time since last June. It stands at 50.2 and is due to the recovery in the service PMI to 50.5 from 46.8.  Separately, the Philadelphia Fed's non-manufacturing survey also improved in February to 3.2 from 6.5.  The manufacturing sector is doing less well, which was a clear pattern in the eurozone and UK flash reports. The US flash manufacturing PMI rose to 47.8 from 46.9.  It is the second consecutive month that the weakness moderated. The Empire State manufacturing survey and the Philadelphia Fed survey picked up similar contractionary impulses from the manufacturing sector. Elsewhere existing home sales disappointed. The median forecast in Bloomberg's survey called for a 2% increase in January, but instead they fell by 0.7% and the December decline was revised to -2.2% from -1.5%. Existing home sales have not increased since last January and 4.00 mln unit (SAAR) is the slowest since 2010. Today, there may be keen interest in the FOMC minutes from the meeting earlier this month that delivered a 25 bp hike. As seems rather common recently, the market had one reaction to the Fed's statement and decision and then reversed during Powell's press conference. The message from the Fed is that price pressures remain, and it will take more than moves to reach a level of restriction that it will be comfortable pausing. After a clear campaign to bring the target rate above is seen as the long-run appropriate level, officials believe the pace of tightening can return to a more normal pace of 25 bp. Some of the discussion, like easing of financial conditions may be less relevant. Also, the market has dramatically scaled back ideas of a Fed cut late this year. The last meeting of the year is on December 13. The January 2024 meeting concludes on the last day of the month. The market's bias toward a cut saw the implied yield of the January contract fall to more than 40 bp less than the September contract most recently on February 2. It stood at 18.5 at yesterday's settlement, the smallest discount since early last October. Weaker than expected Canadian retail sales, excluding autos in December, coupled with the more modest increase in price pressures may have lent support to the Bank of Canada's pause that was being questioned after the recent unexpectedly strong employment report. Headline inflation rose by 0.5% (0.7% was expected), allowing the year-over-year rate to fall below 6% for the first time since last February. The base effect suggests the rate is likely to fall sharply over the next couple of months. The US two-year yield shot up 11 bp to 4.73% as it approaches last year's high reached in early November near 4.80%. The two-year Canadian yield was dragged up by eight basis points. However, the more significant weight on the Canadian dollar was from the broad risk-off move. The correlation between changes in the S&P 500 and the Canadian dollar on a 60-day rolling basis is little changed since the start of the year around 0.75.   The US dollar is extending its gains against the Canadian dollar. It has reached CAD1.3560, its best level since January 6. Options for about $475 mln at CAD1.3550 expire today. The CAD1.3600 area offers the next chart area, but the year's high was set near CAD1.3685. The gains in Europe have stretched the intraday momentum indicators and initial support is seen at CAD1.3520-30. The Mexican peso is one of the few currencies gaining on the greenback today. The US dollar recovered yesterday to around MXN18.4830 after testing the five-year low near MXN18.3350 seen last Friday and Monday.  It held MXN18.48 today and slipped back to MXN18.4135. A consolidative session seems likely.    Disclaimer

February 20, 2023  $USD, China, Currency Movement, EU, Mexico, UK The dollar is mostly softer, but turnover is mostly quiet.  The Swedish krona leads the move after higher-than-expected underlying inflation.  It is a mild risk-on day with equities moving higher too.  In the Asia Pacific region, China stood with the CSI 300 up almost 2.5%.  Europe’s Stoxx 600 is up fractionally to recoup most of the pre-weekend decline.  US equity futures are narrowly mixed.  European bond yields are little changed, with a couple of exceptions:  Sweden 6-7 bp higher on the back of the inflation and UK yields a few basis point softer even though the UK is expected to report its large January budget deficit in a quarter of a century tomorrow.    China indicated it will propose a peace plan for Russia-Ukraine on February 24, the anniversary of Russia’s invasion.  It says it territorial integrity must be preserved and the UN Charter, but Russia’s security needs must be recognized.  It is not exactly clear what it means, and it comes as the US says Beijing is considering providing Russia lethal aid, which sounds partly like a diplomatic creation as China, India, and Turkey buy Russian oil giving it money to purchase lethal aid from Iran, for example.  Is it hard to picture a quid-pro-quo, like the missiles in Turkey that were removed (quietly) after the Cuban Missile Crisis?  Imagine China says we will not provide lethal aid to Russia is the US stop providing lethal aid to Taiwan.  Meanwhile, Europe is discussing a joint effort to buy ammunition.   As expected, China left its loan prime rates steady but separately, reported the first year-over-year increase in foreign direct investment since last June.   There is some optimism that a deal on the Northern Ireland protocol is at hand.  Prime Minister Sunak is expected to update parliament as early as tomorrow.  It seems like a key issue, which the EU does not seem prepared to budge on is the role for the European Court of Justice.  In his rush to get a deal done, former PM Johnson has committed to scrapping the ECJ’s role.  The Democratic Unionist Party in Northern Ireland is not keen on Sunak’s proposals, which recognize the role of the ECJ.  The DUP refuses to take part in the Northern Ireland power sharing arrangement created by the Good Friday Agreement, which is 25-years old this April.  Since the ECJ’s actual role is minimal this issue may really be symbolic.    Read next: USD/JPY Pair Is Above 134.00, EUR/USD Pair Holds Below 1.07, GBP/USD Pair Managed To Rebound| FXMAG.COM The Mexican peso has been on fire.  It is the strongest currency here at the start of 2023.  Wide interest rate differentials speak to the carry, while Bolsa also appears to be drawing funds.  Foreign direct investment is also demand for the peso.  The overnight target rate is at 11.00% and the Deputy Governor Heath of the central bank said the terminal rate may be 11.25%-11.75%.  The swaps market puts it at the upper end of that range.  The dollar settled last week (~MXN18.3720) at a low since 2018 and below the lower Bollinger Band (~MXN18.3855).  I have been suggesting a medium-term target near MXN18.0.  As one would imagine with the sixth loss in seven sessions, the dollar is stretched.  In corporate news, Femsa (among other things, the largest Coca Cola bottler in Mexico) is paring its Heineken stake (ostensibly favorable for the peso) but may consider the purchase of a US convenience store chain (peso negative).  It is consolidating today, with the greenback a little firmer around MXN18.43.  Initial resistance may be in the MXN18.45-MXN18.50 area.   Indicative ranges through the European morning:  Euro $1.0673-$1.0705, JPY133.95-JPY134.55,  Sterling $1.2015-$1.2057, CAD1.3450-CAD1.3495, Australian dollar $0.6857-$0.6919.   Tuesday features the preliminary February PMI, minutes from the recent Reserve Bank of Australia meeting, and the German ZEW survey.   In addition to the flash PMI, the US also seeing existing home sales.  Canada reports retail sales and CPI.         Disclaimer

February 16, 2023  $USD, Australia UK, China, Currency Movement, Federal Reserve, Italy, Japan, Switzerland, US Overview:  On the heels of a dramatic jump in US job creation and firmer than expected year-over-year CPI, the US reported a larger than expected jump in retail sales and a strong recovery in manufacturing output. Few think that economic momentum that the recent data implies can be repeated, the "no landing" camp has gained adherents. We suspect that says more about psychology than the economy. The US two-year note is threatening to snap a five-day 20 bp advance today and is coinciding with a somewhat heavier dollar tone. There is a batch of US economic data today, including PPI, weekly jobless claims, and housing starts and permits. Several Fed officials speak today, including St. Louis Fed's Bullard, who is among the leading hawks. China reported new house prices did not fall last month. It is the first time it has said this since August 2021. Nevertheless, mainland equities bucked the strong regional advance following the recovering of US equities yesterday. Europe's Stoxx 600 is extending its advance for the fourth consecutive session, while US futures are slightly softer. Benchmark 10-year yields are mostly 1-2 bp lower, putting the US 10-year around 3.78%. A softer US dollar and interest rates are helping gold stabilize after falling to $1830 yesterday. The low for the year is closer to $1825. April WTI is steady after initially extending yesterday's recover from about $77.50 to about $79.75 today. Asia Pacific Japan reported a record trade deficit last month of about JPY3.5 trillion (~$26 bln), which was still a little smaller than expected as exports rose 3.5% year-over-year rather than fall 1.7% as the median forecast in Bloomberg's survey had it. In December exports has risen 11.5%. And Japanese imports rose a milder 17.8% rather than 20.6% as economists expected. Of note exports to China fell a little more than 17%, led by autos, parts, and notably chip-making equipment. Exports to the US rose 10.2% and by 9.5% to the eurozone. Separately, the Ministry of Finance reported that Japanese investors bought JPY716 bln of foreign bonds last week. It was the second consecutive week of purchases, and in the two weeks, Japanese investors bought the most amount of foreign bonds since August (JPY1.8 trillion). Australia's jobs data disappointed, and the Australian dollar initially fell in response before recovering in the face of a broader pullback in the US dollar. Australia reported a loss of 11.5k jobs. Economists had expected a 20k increase. Moreover, it lost 43.3k full-time positions after growing a revised 14.4k in December (initially17.6k). The unemployment rate rose to 3.7% from 3.5%. The central bank delivered a 25 bp hike last week and the next meeting is on March 7. The futures market does not have another 25 bp hike fully priced in until the April 4 meeting. The US dollar reached JPY134.35 yesterday, its best level since the year's high was set on January 6 slightly above JPY134.75. It is consolidating in a narrow range and held above JPY133.60, with chart support seen around JPY133.50. There are options for $3.2 bln that expire tomorrow at JPY135. The poor jobs data saw the Australian dollar retest yesterday's low near $0.6865, holding above the month's low set closer to $0.6855. Session highs were record in late Asia Pacific turnover around $0.6935, which stretched the intraday momentum indicators. Yesterday's high was by $0.6990. The greenback reached CNY6.8640, its best level since January 6 but retreated below yesterday's settlement to test the CNY6.8550 area in late dealings.  Of note, the 50-day moving average has fallen below the 200-day moving average for the first time since May of last year. Meanwhile, the PBOC set the dollar's reference rate a little stronger than expected (CNY6.8519 vs. CNY6.8508). Lastly, as expected the Philippines central bank raised its policy band 50 bp to 5.50%-6.00%.  Europe Recent developments provide an opportunity to review two internal European market developments. First, we note that the rightist government in Italy carried the local elections in Lombardy and Lazio. In the latter, it turned out the center-left government. Salvini's League gained ground in Lombardy, but the strain in the coalition is coming from Berlusconi blamed Ukraine war on Zelenskyy. Prime Minister Meloni has supported the EU's criticism of Putin and efforts to defend Ukraine. Still, the latest polls suggest Italian support for Ukraine as slipped over the past year, and slightly more than 40% support sending weapons to Ukraine. Still, Berlusconi's comments caused saw teeth-gnashing and cries of protest from within the EPP (European People's Party, the center-right coalition in the EU parliament). According to Politico, at members from at least nine countries have threatened to boycott the gathering planned shortly in Naples, if Berlusconi attends. Ahead of next year's EU parliament elections, there was a desire reach out to Meloni. Tajani, an ally of Berlusconi, Italy's foreign minister and deputy PM, has reiterated the government's support for Ukraine, which is endorsed by the EPP. EC President von der Leyen and the president of the EU parliament Metsola hail from the EPP. Italy's 10-year premium over Germany fell from a little above 250 bp in late September to almost 170 bp in mid-January. It spiked back to 200 bp at the start of February but is hovering in the 180-185 bp area. The two-year premium peaked around 70 bp in late September and fell to almost 27 bp in mid-January. It has traded mostly between 35-45 bp this month. Read next: Tesla Will Make Supercharger Network, Visa Will Allow The Use Of Cryptocurrencies To Settle Transactions| FXMAG.COM Second, after the euro rose above CHF1.0 for the first time since last July, the single currency has pulled back to around CHF0.9850. Switzerland reported higher than expected January CPI (3.3% year-over-year for 2.8%) and the core rate is above 2% (2.2%) for the first time this century. The SNB meets on March 23. It will have another inflation report (March 6) in hand before it meets. Still, a 50 bp move is expected, which lift the policy rate to 1.5%. The swaps market is pricing in one more quarter point hike, possibly in June, to reach the peak.  The euro has steadied after falling from $1.08 on Tuesday to $1.0665 yesterday. It reached almost $1.0725 today. Resistance is seen in the $1.0735-50 area, which may be tested in the North American session. The euro has set a few lows in the $1.0655-65 area this month, and stops are likely building below there. Sterling has also steadied today. It briefly traded below $1.20 yesterday for the first time in a week, though it has not settled below there since January 5. It recovered to around $1.2075 today. Initial resistance is seen by $1.21. The intraday momentum indicators are stretched late in the European morning, suggesting it may struggle as North American activity resumes.  America  Since the monster January jobs report and strong services ISM on February 3, the markets have been in a new phase. Short-term US rates have surged and the dollar, which had peaked in late September/early October has bounced smartly. Retail sales had collapsed by a little more than 1% last November and December jumped 3% last month, blowing past expectations. Similarly, manufacturing output slumped by 0.8% and 1.8% in November and December, respectively, rose by 1% last month.  Ironically, the unusually warm weather may have helped lift retail sales and weighed on industrial output via weaker utility output. Industrial output was flat last month.   Until February 3, the swaps market was not convinced that the Fed funds target would peak above 5% and now it is flirting with 5.25%. The prospect of a rate cut this year has fallen from a sure thing to about a 50/50 proposition. The upside correction in the dollar we anticipated may be of a greater duration and magnitude.  The Dollar Index, which we had projected to test 103.80-104.00 could extend toward 105.50-106.50, for example.  Still, we suspect the talk of "no landing" says more about market psychology that the real economy. January's snap back was outsized and unlikely to be repeated. The inversion of yield curves and fall of M2 herald foretell of economic challenges, even if with a lag. Tomorrow, the US reports the index of leading economic indicators. It has not risen since last February. It is off 7.5% over the past six months annualized and such weakness has clearly been associated with recessions (see above chart).  The Fed's Mester, Bullard, and Cook speak today. The key issue is whether the recent data has swayed officials to change what they saw as the terminal rate in December. Recall that seven officials thought it ought to be above the median 5.1%. Lastly, we note that President Biden will shortly nominate a candidate to replace Brainard, and vice chair of the Fed. Brainard, was rumored to have been a likely candidate to be Treasury Secretary if Clinton won in 2016 and is seen as a possible replacement if Yellen steps down next year. Reports speculate that the new Chicago Fed president Goolsbee, a former adviser to Obama, is a likely candidate for the vice chair role. Although the US talks about reforming the multilateral organizations, it seems most likely that the changes will not include breaking from tradition that lets an American lead the World Bank. The current president, Malpass has indicated plans to resign around mid-year, nearly a year before his term expires.  Before we get to the LEI, there are today's reports of PPI, housing starts and permits, weekly jobless claims and the Philadelphia Fed's February business survey. Producer prices have some components that economists use to fine-tune expectations for the PCE deflator due at the end of next week. In and of themselves, though producer prices may generate a muted market response. Sequentially prices may rise (in December the headline fell by 0.5% and the core rose by 0.1%), but the year-over-year pace is expected to continue to slow. Still, what is driving consumer prices are not so much goods as services (which typically are not resource intensive). Housing start are expected to have declined last month, which would be the fifth consecutive monthly fall, but permits, a leading indicator, are expected to snap a three-month decline with a 1% gain. Meanwhile, weekly initial jobless claims may have bottomed in late January around 183k. They rose for the first time in six weeks in the week ending February 3 and are expected to have risen to 200k last week. If true, that would translate into the first increase of the four-week moving average since early December. That said, it is this week's activity that will be reported next week that coincides with the monthly February jobs report.  The US dollar recovered from CAD1.3275 on Tuesday to CAD1.3440 yesterday, seemingly driven by US data and the volatility of US equities. A quieter tone has emerged today, and the greenback barely traded above CAD1.3400, where options for $470 mln expire tomorrow. Support is seen around CAD1.3340-50 today. The US S&P 500 still offers a reasonably good direction cue. The US dollar spiked from MXN18.50 to about MXN18.75 yesterday. But once again a bounce in the greenback was sold and it settled close to MXN18.5855. It is hovering near there and has spent little time above MXN18.60 today. It looks set to consolidate after setting 4 1/2-year lows. Chart resistance may be closer to MXN18.65, while the MXN18.55 area looks firm.     Disclaimer

February 15, 2023  $USD, China, Currency Movement, EMU, Inflation, Japan, Oil, Poland, UK, US Overview: Although the US January CPI was in line with expectations, the year-over-year rate was a little firmer than expected. Still, the measure that Fed Chair Powell has underscored, core services, excluding shelter moderated with a 0.3% month-over-month gain. US rates shot up and this lent the dollar support, while weighing on equities and risk sentiment. The US two-year note yield rose to almost 4.64% yesterday, the highest in three months. The greenback is higher with the Australian and New Zealand dollars knocked the most (~1.3% and 0.9%, respectively). Softer UK inflation is taking a toll on sterling (~-0.8%). The large bourses in Asia were mostly lower, with India a notable exception. Europe's Stoxx 600 has shrugged off the global headwinds and is posting a minor gain. It is up for the sixth session in the past seven. US index futures are 0.2%-0.4% lower. Ten-year UK Gilt yields are off 10 bp, while core eurozone yields are down a couple of basis points, with Italy, Spain, and Portugal are lagging. The 10-year US Treasury yield is flat near 3.74%. March WTI is consolidating at lower levels after reports indicate API figures showed an 11 mln barrel build of US stocks, which if confirmed by DOE data today, would be the largest rise in five weeks and bring holdings to their highest level since June 2021. Separately, IEA boosted its forecast for global demand by 500k barrels in Q1 as the Chinese economy re-opens. World consumption is seen up 2 mln barrels a day this year to 101.9 mln. Still, it sees the global oil market in surplus in H1 and notes the resilience of Russian supplies. Asia Pacific Japan reports its January trade figures first thing tomorrow. The strong seasonal pattern is clear. Japan's trade balance typically (19 of the past 23 years) improves in December and deteriorates in January (without fail since 2000). True to form, economists anticipate significant deterioration to almost JPY4 trillion (~$30 bln) more than twice the shortfall in December (JPY1.45 trillion). Even the seasonally adjusted measure is likely to blow out to a new record of JPY2.4 trillion (from JPY1.72 trillion in December). Foreign demand has weakened, and Japanese exports may have fallen year-over-year last month for the first time since February 2021. In May and again in August last year, Japanese imports approached a 50% increase year-over-year. A combination of falling prices and the recovery of the yen has seen import growth fall slightly below 21% in December and may have remained there in January. As widely expected, China kept its medium-term one-year lending facility rate steady at 2.75%. It has been there since last August when a 10 bp cut was announced. Although the data from the Lunar New Year holiday was constructive, continued weakness in the property market and foreign demand (exports have fell on a year-over-year basis in each of the last three months of 2022) suggests that more support for the economy may be provided later this year. The steady MLF rate means there is little chance for the loan prime rates to fall next week (1-year rate at 3.65% and the 5-year rate at 4.30%). The PBOC provided for a net injection via the MLF of nearly CNY200 bln (~$29 bln). Meanwhile, note that China's 10-year bond yield cannot keep pace with the backing up of US rates. Earlier this month, the US premium had fallen to 50 bp and now is approaching 90 bp. It finished last year around 105 bp, after making an extreme in October and November around 150 bp. The US dollar edged up to almost JPY133.50, its best level since January 6. It has recorded higher lows consistently this week. Important resistance is seen near JPY135, which has not been seen since the December surprise. Initial support is seen around JPY133.00 and then JPY132.50. The inability of the Australian dollar to sustain the momentum above $0.7000 yesterday was disappointing and may have encouraged some sales today. Central bank Governor Lowe defended the need for higher interest rates. His seven-year term expires in September, and it is not clear that he will get an extension as his previous two predecessors did. Tomorrow, Australia reports January employment figures and a bounce back after soft December numbers is expected. The Aussie is holding slightly above this week's low set Monday near $0.6890. A break of it targets last week's low around $0.6855. The greenback reached CNY6.8490 today, which it has not seen since January 6. There are options for nearly $2.2 bln struck at CNY6.85 that expire today. While Chinese figures show foreign investors bought a record amount of Chinese equities last month (~$27.7 bln) the proverbial bloom is off the rose and the CSI 300 has been trending lower for the past couple of weeks and the index that tracks Chinese shares in Hong Kong is off 10% from its late January peak. Today's reference rate for the dollar was set at CNY6.8183, tight against expectations (Bloomberg survey) for CNY6.8189.  Europe With the eurozone's Q4 GDP confirmed yesterday at 0.1% and 1.9% year-over-year (2.1% US), today's December data was not so important. The takeaway, which was already more or less known, was that the regional economy finished last year on a weak note. Early this month, we learned that retail sales fell a dramatic 2.7% in December. It was easily the weakest report of last year and was the second decline in Q4. Today, we learned that industrial production fell by 1.1% in December, rather than the 0.8% expected. However, the sting may have been lessened by the upward revision in the November figures to show a 1.4% gain instead of 1.0%. Still, it was the second monthly decline in Q4. The eurozone experienced a terms of trade shock last year, but the worst was in Q3. The decline in natural gas prices and oil, coupled with the recovery of the euro on a trade weighted basis (recouping last year's decline in full) has helped the eurozone's external balance improve in Q4. Today's December figures showed an 18.1 bln euro deficit bringing the Q4 shortfall to 80.75 bln euros from 122.4 bln in Q3. Read next: USD/JPY Is Above 133.30, GBP/USD Droped Form $1.21 to $1.20, The Aussie Pair Is Trading Below $0.69| FXMAG.COM UK CPI slowed last month but remains at a double-digit. Still, the 0.6% decline on the monthly print is the first decline since last January and matches the largest decline since January 2019. The year-over-year rate fell to 10.1%, a little lower than expected from 10.5% in December. The core rate eased to 5.8% from 6.3%. Today's CPI report has essentially offset the impact from the strong labor market report earlier this week. The swaps market shows about 23 bp of tightening is priced in for next month's meeting, down from nearly 29 bp yesterday, and little changed from the end of last week.  Tomorrow's an important day in Poland. EU judges are expected to hand down their non-binding opinion about the estimated $17 bln of foreign currency (mostly Swiss franc) mortgages. The banks are seeking relief or face collectively, according to Polish regulator last October, PLN100 bln (~$22.5 bln) hit (though the franc has depreciated by about 6% against the zloty since the end of last September). The case is being watched closely. Separately, Poland's President Duda threw a splinter into the government's hope of freeing up around 35.5 bln euros of EU recovery funds by changing the judicial measures that the EC found objectionable. Duda requested that Poland's high court reviews the legislation. The risk is these holds up the process and that the EU funds will not be freed up ahead of the parliament election (seen in October-November). The euro briefly traded above $1.08 yesterday for the first time since February 6. It was unable to sustain the move. It settled slightly below $1.0740 yesterday and was sold to $1.07 before findings a bid in late Asia Pacific turnover. Sellers emerged in the European morning near $1.0730. Options for 1.44 bln euros expire today at $1.07. We suspect these may be challenged in the North American morning rather than the 775 mln euros in expiring options at $1.08. Initial support below $1.07 is seen near $1.0670-80. Sterling rejected the push above $1.2250 yesterday and is under pressure today. It is probing the $1.2070 area in the European morning. It held $1.2030 at the start of the week, but a break of $1.20 could see sterling return to last week's low near $1.1960. The 200-day moving average is found closer to $1.1945. America The markets responded dramatically to the January CPI figures, where the month-on-month changes met expectations, but the year-over-year rates were a little firmer than expected, even if lower sequentially. Shelter contributed to about half the increase (and accounts for about a 1/3 of the CPI basket). It is widely acknowledged that the methodology lags behind what is actually happening, and there will likely be some catch-up around mid-year). Food and energy prices were also firm. Unexpectedly used vehicle prices fell, and more broadly, durable goods prices fell by 0.1% (after having fallen by 0.8% in November and December). The Federal Reserve will see another CPI report before it meets later next month. In February 2022, CPI rose by 0.7% and by 1.0% in March. The Q2 22 increase was also dramatic:  it rose by 0.4% in April, 0.9% in May, and 1.2% in June. The futures market has 5.25% Fed funds priced in early H2. The December contract now yields 15 bp less than the September contract. It peaked a month ago near 34 bp, showing that the market has dramatically scaled back "bets" of a rate cut this year, but has not given it up entirely.  Although parts of tomorrow's PPI report will help fine-tune forecast for the January PCE deflator (due February 24), the focus today shifts back to the real sector. Recall that the US economy was particularly weak as last year wound down. Retail sales fell by 1% in November and 1.1% in December. We will likely learn that consumers returned last month. The median forecast in Bloomberg's survey is for a 2% rise. Autos and gasoline likely accounted for nearly half the gain. January industrial production will also be reported. It fell every month in Q4 22. Manufacturing itself fell by 1.1% in November and 1.3% in December. Both are expected to have recovered last month. The median forecast in Bloomberg's survey sees a 0.5% increase in industrial output led by a 0.8% rise in manufacturing. Capacity utilization peaked last April near 80.2%. It was at 78.7% in December, the lowest since of the year, but it likely recovered back above 79%. The housing market has been exceptionally weak, contracting at an annualized pace of around 25% in both Q3 and Q4. January housing starts will be reported Thursday. The four-month decline to finish 2022 may have been extended last month, but permits are thought to have risen for the first time since last September. Anecdotal reports suggest more housing traffic, and mortgage rates have pulled back. January existing home sales (released February 21) likely rose for the first time since January 2022.   The risk-off mood that has weighed on the Antipodeans today has also knocked the Canadian dollar lower. The greenback is hovering near CAD1.34, the high for the week after bouncing from CAD1.3275 yesterday. There are options for almost $700 mln at CAD1.34 that expire today. Last week's high were around CAD1.3475. Still, the intraday momentum indicators are stretched, suggesting last week's high may be safe. The US dollar briefly traded below MXN18.50 yesterday for the first time in four-and-a-half years. It has bounced back smartly today and returned to yesterday's high of almost MXN18.6750. However, sellers emerged in the European morning, pushing it back to MXN18.6150. Initial support is seen in the MXN18.58 area.    Disclaimer

February 13, 2023  $USD, BOJ, Canada, Currency Movement, Federal Reserve, Germany, Italy, Japan Overview: A consolidative tone is mostly the theme of the day. The revisions to the US CPI announced before the weekend add to the uncertainty and focus on tomorrow's report. At the same time, investors watch ongoing air space activity that has led to a few objects being shot down over the US and Canadian airspace. Yet the fear of escalation seems too mild still, but China's ability to secure a rapprochement and leave its "wolf diplomacy" behind is strained, even as it renews imports (coal) from Australia. Its aerial harassment of Taiwan reportedly continued over the weekend. Chinese bourses were the only large market in the Asia Pacific region that advanced today. Despite the yen's pullback, Japanese stocks were sold with the Nikkei off almost 0.9%. Meanwhile, Europe's Stoxx 600 has recouped about half of last week's 0.6% loss. US equity futures are narrowly mixed. US and European bonds have steadied after last week's sharp sell-off. The 10-year US Treasury is little changed near 3.73%, while European benchmark yields are mostly 2-3 bp lower. The dollar is mostly softer, but mostly +/- 0.15%. The yen weakest of the G10 currencies. The greenback has recovered to within spitting distance of last week's high (~JPY132.90) after slipping briefly below JPY130 before the weekend. Most emerging market currencies are softer. Gold is finding support ahead of $1850, its low in a little more than a month. March WTI is consolidating within the pre-weekend range. Tomorrow OPEC makes its monthly report, and the IEA follows on Wednesday.  Asia Pacific The market is still trying to grasp the meaning of the pre-weekend news that Bank of Japan deputy governor Amamiya turned down the promotion and that former deputy governor Ueda will formally get the nod tomorrow. First, if Amamiya was Prime Minister Kishida's first choice and that represented continuity, it reveals the government's preference. Second, as Ueda did in 2000, when the BOJ pre-maturely raised rates, as recently as last July, he cautioned against too early of an exit from the extraordinary monetary policy. Third, the reported appointment of Uchida as a deputy governor may also be telling. He was an important aide to Amamiya and supported BOJ Governor Kuroda. Finally, although there may not be a substantive change in policy in the coming months, led by Ueda, the BOJ may begin providing insight into the sequencing of an exit strategy. Separately, Japan reports Q4 22 GDP tomorrow. It looks to have rebounded after a 0.8% contraction (at an annualized rate) in Q3. Government spending and a recovery in consumption likely offset weaker investment and inventory accumulation. Net exports likely contributed around 0.4% rather than cut 0.6% as it did in Q3. Still, the focus is squarely on the outlook for monetary policy. It was a bear market for global bonds and speculation that the BOJ was going to exit extraordinary monetary policy may have encouraged Japanese investors to sell around $180 bln of foreign bonds (~8%) of their holdings. The dollar briefly dipped below JPY130 before the weekend, a six-day low, but recovered to settle d near JPY131.35. The greenback's gains have been extended through the Asia Pacific session and through the European morning to reach slightly above JPY132.75. There are options for about $610 mln at JPY133 that expire today. The high so far here in February has been JPY132.90. Some accounts are seen positioning ahead of tomorrow's US CPI. The Australian dollar initially extended the pre-week slippage and recorded a low near $0.6890 before recovering to $0.6940. Recall that last week's low was closer to $0.6855, the low since January 6. The highlight of the week is employment report on Thursday. The greenback gapped higher against the Chinese yuan today, largely reflecting its pre-weekend gains. After closing on its highs near CNY6.8145, the US dollar has not traded below CNY6.8210 today. Today's price action filled the old gap left on the charts from January 9. If the yuan were a freely floating currency, the dollar looks to have carved out a technical bottom that suggests near-term potential toward CNY6.90. The PBOC set the dollar's reference rate at CNY6.8151, slightly above the median in Bloomberg's survey for CNY6.8146.  Europe During the 2021 local election in Berlin, a snafu prompted city's high court to rule a "do-over."  The problem arose from the marathon being held on the same day, which caused a logistical nightmare. Berlin has been plagued by an assortment of local problems while its government was led by a center-left coalition (SPD, Greens, and Die Linke). The SPD took the brunt of the voter dissatisfaction, and it ran a weak campaign to boot, according to the press. Yesterday, the CDU received the most votes (~28.2%), but it is not clear that it can put together a majority government of the center-right. A center-left government seems likely, but perhaps with a green mayor. As one would expect, there did not seem to be market reaction to the election results. While the Berlin election was driven by local politics (despite the Financial Times headline), Italy's elections in Lombardy and Lazio are being framed as a referendum on the right-of-center national government.  The voting began yesterday and continues today. The Lombardy government is led by the League, and the drama here is whether Prime Minister Meloni's Brothers of Italy gain ground at the expense of Salvini's League. The Lazio region, which includes Rome, is a different story. The right hopes to seize control from the center-left, which has been in disarray since losing the national election last September. It is fragmented and has been unable to form a united front. On the national level, the fractious coalition has found common ground with its anti-immigration efforts while towing a mainstream line on other international issues, including aid to Ukraine. Meloni's popularity and the support of the Brothers of Italy (~29% in recent polls vs. ~9% for the League and ~7% for Berlusconi's Forza Italia) irk and threaten Salvini and Berlusconi. The Brothers of Italy garnered 26% of the vote in the general election. Ironically, success in these local elections, especially if the Brothers of Italy do well, could increase the tensions in the national coalition. The euro traded poorly ahead of the weekend and extended marginally to almost $1.0655 (~1/10 of a cent below Friday's low). It has recovered but is little changed on the day. There are large options that expire at $1.07 today and tomorrow (1.15 bln euros and 2.25 bln euros, respectively) that may help cap upticks. Sterling is trading with a heavier bias, as well. It settled last week slightly above $1.2060 and has not been able to rise much above $1.2070 today. It looks set to retest last week's low near $1.1960 and the 200-day moving average closer to $1.1945. A break could spur a test on last month's low around $1.1850. America Ahead of the weekend, the US revised the CPI basket weights; the net impact is that it showed less deceleration in Q4 22 than the previous basket. This is a technocratic exercise and is not about the preferences of either the Biden administration or the Federal Reserve. A judgment call is how often the weighting should be adjusted. It had been every other year, which has been changed to annually. The adjustment shows the headline rate finished the year at 5.1%, not 4.3%, and the core rate is at 4.6% rather than 3.1%. The seasonal revisions showed CPI rise by a little less than 10% in Q1 22 at an annualized pace and slightly more than 10% in Q2. This slowed to about 2.5% in Q3 and around 1.6% in Q4 22. Even with a 0.5% in the headline rate in January (and 0.4% in the core rate), the base effect will show a slowing of price pressures and, barring a new shock, will continue through H1 23. In broad terms, as supply chains are repaired and demand normalizes, the disinflation in goods prices may have largely run its course. The next phase of the adjustment will likely come from services, and here the BLS calculation of shelter costs lags what is happening on the ground. Read next: GBP/USD Started The New Week In A Calm Way, EUR/USD Is Waiting For US CPI Report| FXMAG.COM The surge in nonfarm payrolls reported on February 3 helped spur the adjustment to US rate expectations that, in turn, helped fuel one of largest bounces in the US dollar since it topped out last September/October. Canada reported its own hellacious employment report before the weekend. It created 10x more jobs than the median forecast in Bloomberg's survey project. Moreover, of the 150k jobs, slightly more than 121k were full-time positions. The participation rate jumped to 65.7% from a revised 65.4% (initially 65.0%), though the unemployment rate was unchanged at 5.0%. The risk is that the Bank of Canada's pause, announced last month, is a bit shorter than expected. The risk of a rate a final rate hike around the middle of the year is being reflected in the swaps market. The US two-year yield rose almost 23 bp last week, the most since November. Canada's two-year yield rose almost nearly 28 bp, the most since last August. The US dollar recorded an outside down day against the Canadian dollar in response to the strong Canadian employment data before the weekend. There has been no follow-through selling today and the greenback rose from about CAD1.3345 to CAD1.3380, where the 20-day moving average is found. A move above CAD1.3380 could see CAD1.3420. The US dollar peaked last week against the Mexican peso near MXN19.29. It was dragged down by the more aggressive than expected rate hike (50 bp), falling to about MXN18.64 ahead of the weekend before settling at MXN18.67. It is consolidating today, as if the market is catching its breath before challenging the support near MXN18.50 seen earlier this month. Separately, concerns about a change in Brazil's inflation target and President Lula's rhetoric about the central bank's independence helped lift the US dollar a little above BRL5.30 at the end of last week, the highest in about a month. The greenback reversed lower and settled on its low near BRL5.2140. Support today is seen around BRL5.16-BRL5.17.     Disclaimer

February 07, 2023  $USD, Currency Movement, EMU, Japan, PRC, RBA, Trade Overview:  After large moves yesterday, the capital markets ae quieter today. Stocks are mostly firmer, and the 10-year US yield is a little softer near 3.62%. Strong nominal wage increases in Japan and a hawkish hike by the Reserve Bank of Australia helped their respectively currencies recover, though remain within yesterday's ranges. The euro briefly traded below $1.07, and sterling has been sold through $1.20. That said, a consolidative tone the main feature today through the European morning.  Gold has steadied after falling $63 an ounce last week. News that China boosted its gold holdings for the third consecutive month should be placed within the context of its overall reserve growth. Consider that the dollar value of its reserve rose by nearly $56.8 bln last month. Its gold purchases were less than $800 mln. March WTI is recovering from yesterday's drop to a two-month low near $72.25 to approach $76 today. News that Saudi Arabia unexpectedly lifted prices for Asian customers ostensibly helped crude extend the recovery that began yesterday. US natgas is steady after snapping a three-day slide at the end of last week.  Asia Pacific  Winter bonuses helped lift Japanese labor cash earnings in December. Winter bonuses rose almost 7.6% year-over-year. wages rose 1.9%, the most since 1997. Labor shortages in what would be consider core services in the US, helped lift base pay in those sectors. Real wages rose by 0.1%, the first positive reading since last March. The spring round of wage agreements is anxiously awaited, but most economists look for something less than 3%, a threshold identified by the Bank of Japan, after a 2.2% increase last year. At the end of January, Japan reported a 1.1% rise in retail sales, exceeding the median forecast in Bloomberg's survey for a 0.7% increase. The November decline deepened in the revision (-1.3% vs. -1.1%). Household spending, a broader category, more like real US personal consumption expenditures, fell 1.2% year-over-year in November, the first such contraction since last May, and fell 1.3% in December. Month-over-month real spending fell 2.1% in December after a 0.9% contraction in November. As widely expected, the Reserve Bank of Australia hiked its cash target rate by 25 bp to 3.35%. The RBA warned of further hikes in the "coming months." It expects CPI to come down to 4.75% this year from 8.4% in Q4 22 and to 2-3% by mid-2025. The formal monetary statement at the end of the week is expected to offer more insight, but the immediate takeaway was to lift expectations for the terminal rate to closer to 4.0%. The combination of stronger than expected inflation and optimism over the re-opening of China helped lift the Australian dollar by slightly more than 3.5% in January, to lead the G10 currencies. The sell-off, ostensibly triggered by the dramatic US dollar rally after the incredible jobs data has seen it fall nearly 2.4% here in February before today's bounce. The re-opening of China and an apparent rapprochement with Beijing may help Australia's trade going forward, but its exports fell in each of the last three months of 2022 and the trade surplus fell to a four-month low in December. Still, Australia is benefitting from the positive terms of trade shock. Consider that in 2022, it recorded a trade surplus of A$139.6 bln. In 2019, the surplus was about A$66.6 bln. Read next: BP raised the Q4 dividend to 6.61p taking the total dividend for the year to 24.08p, as well as adding another share buyback for Q1 of $2.75bn| FXMAG.COM The dollar gapped higher against the yen yesterday and today has been confined to yesterday's range (~JPY131.50-JPY132.90). The gap, which has added significance as it appears on the weekly bar charts not just the daily, is found between JPY131.20-50. We suspect that it is what technicians refer to as a "normal" gap and will be filled shortly. Our target for the Australian dollar's pullback was $0.6850 ahead of next week's CPI. It nearly reached it yesterday (~$0.6855). The seemingly hawkish hike by the RBA has seen the Aussie recover but not above yesterday's high (~$0.6965). It may take a move above $0.7000 to lift the technical tone. The US dollar is also consolidating within the range seen yesterday against the Chinese yuan (~CNY6.7710-CNY6.8055). If it were a free-floating currency, we would note that the five-day moving average looks poised to cross above the 20-day moving average for the first time since last November. China reported its reserves rose to $3.184 trillion in January, the highest level since last March and the fourth consecutive increase. Valuation adjustments, given the dollar's decline. News that China boosted its gold holdings (~15 tons, which cost about $770 mln). To keep it in perspective, consider that the dollar value of reserves rose by about $57 bln last month. The PBOC set the dollar's reference rate at CNY6.7967. The median estimate in Bloomberg's survey was for CNY6.7948. Europe Germany and Spain reported December industrial production figures. The aggregate report for the eurozone is due on February 15. German output fell by a whopping 3.1%, well beyond the 0.8% fall expected. In line with expectations and the biggest drop since last March. Note that unlike the US, for example, German industrial production includes construction, which has been a particularly weak sector. The construction PMI average 41.6 in November-December last year, the weakest two-month period since May-June 2020 as Covid was ravaging and supply disruptions were widespread. For its part, Spain's industrial output snapped a three-month drop, rising 0.8% in December, well better than the 0.2% expected. Recall, Spain defied expectations that it contracted in Q4 22 and instead grew by 0.2%. Still, household consumption and business investment fell in Q4. The government has cut the VAT on many food items, subsidies to cushion the higher energy prices have been extended, and the minimum wage hiked (8% or about $100 a month). France, hobbled by rail strikes today, reported a larger than expected December trade shortfall of 14.9 bln euros. The median forecast was for a 12 bln deficit. Last year, France recorded an average monthly trade deficit of 13.65 bln euros, which was nearly twice the average deficit in 2021 (~7.2 bln euros). Before Covid and the Russian invasion of Ukraine, the average monthly deficit in 2019 was about 4.8 bln euros. The current account deficit widened to what appears to be a record of 8.5 bln euros in December and brings the 2022 deficit to 50 bln euros from a surplus of about 8.6 bln euro in 2021 and 12.8 bln euros in 2019. Our target for the euro of $1.07 ahead of next week's US CPI was not aggressive enough. The euro briefly dipped below there today before steadying the in European morning. Initial resistance is now seen near $1.0750. A convincing break of the $1.07 area would target the $1.0615 area next. Sterling also extended yesterday's losses and to trade to almost $1.1985. We have suggested a retest of last month's low near $1.1860 was possible before the US CPI. Ahead of that, we note the 200-day moving average is near $1.1950 today. America In terms of market reaction, the US trade figures have been eclipsed by the employment report and the CPI. Moreover, we already know that net exports added about 0.8 percentage points to Q4 GDP. However, this does not appear likely to repeat itself soon. The advanced December report on merchandise trade signals a deterioration. The merchandise deficit rose to $90.3 bln from $82.9 bln in November. Still, through November the US trade deficit averaged $80.6 bln a month last year and averaged $70.4 bln in 2021. In 2019, before Covid struck, the average monthly trade shortfall was about $46.6 bln. Even though some producers use China as an export platform for shipments back to the US, the US trade deficit with China averaged nearly $32.7 bln a month through November last year. The US deficit averaged $29.5 bln in 2021 and $28.6 bln in 2019. Canada reports its December merchandise trade balance. The surplus, which surged to nearly C$4.2 bln last May, has been shrinking. In fact, it fell into deficit in November (small, C$41 mln deficit). The surplus is the Sept-Nov period was C$216 mln, but for the first 11 months of 2022, it averaged $1.8 bln. A C$500 mln deficit is the median forecast in Bloomberg survey for December. Nevertheless, we find the Canadian dollar more sensitive to the general risk environment and periodically, the change in oil prices, than its monthly trade figures. Fed Chair Powell will be interviewed at the Economic Club in Washington at midday. His reaction to the jobs data may be of most interest. Atlanta Fed's Bostic said yesterday IF the economic strength were to persist, the Fed funds terminal rate would likely be higher. President Biden's State of the Union address will be delivered later today. The press reports it will include a billionaire tax and a proposal to quadruple the tax on share buybacks.   We saw potential for the dollar to rise toward CAD1.3550 ahead of next week's CPI. It reached CAD1.3475 yesterday and is trading within yesterday's range (~CAD1.3390-CAD1.3475) so far today. There are options for around $900 mln struck in the CAD1.3480-CAD1.3500 area that expire today. We note that the five-day moving average is set to cross above the 20-day moving average today or tomorrow for the first time since late December. Initial support is seen in the CAD1.3370-90 today. We had projected the dollar to rise into the MXN19.30-50 area. The greenback briefly traded above MXN19.29 yesterday. It is consolidating in a narrow range between roughly MXN19.07 and MXN19.18 today. We anticipate it holding above MXN18.99.    Disclaimer

February 02, 2023  $USD, BOE, BOJ, Currency Movement, ECB, Fed Overview: The failure of the Federal Reserve to push harder against the market's dovish views and the easing of financial conditions encouraged a risk-on trade that saw the dollar and yields slump and equities rally. There has been limited follow-through dollar selling today, and a small recovery ahead of the Bank of England and European Central Bank meetings. The intraday momentum indicators suggest a weaker US dollar in the North American morning is likely. Despite the talk of a petro-yuan and the like, most Middle East countries, but Qatar, raised rates after the Fed, and Hong Kong Monetary Authority did as well. Most Asia Pacific bourses were mixed, but South Korea and Taiwan markets continued to rally and lead the region. Europe's Stoxx 600 is snapping a three-day drop and is recouping it in full of a 0.75% advance. US futures are mixed, with Meta's earning helping to lift the Nasdaq. The S&P 500 futures are a little firmer and the Dow a bit softer. The rally in US Treasuries spilled over and are lifting European bonds today. The UK Gilts, which have been seeing strong foreign demand are on fire. The 10-year yield is off 10 bp today, falling to 3.20%. March WTI recorded an outside down day yesterday, falling to almost $76 a barrel. It is consolidating today in the lower end of yesterday's range. Meanwhile, US natgas futures price is at its lowest level since early Q2 21. Asia Pacific After buying about JPY1.8 trillion (~$14 bln) of foreign bonds in the first two weeks of January, Japanese investors resumed their divestment in the second half of the month. They sold roughly JPY1 trillion in the past two weeks. Meanwhile, the Bank of Japan bought a record amount of JGBs last month (~JPY23.7 trillion, or around $180 bln). The previous record, last June, was slightly more than JPY16 trillion.  Separately, a focus this month is on the likely nomination of the two deputies at the BOJ and Governor Kuroda's replacement. Former Deputy Governor Hiroshi Nakaso, who seen as a candidate for Governor was appointed earlier today to the financial advisory body of the APEC. Nakaso has recently laid out an exit strategy from the BOJ's extraordinary policy. This would appear to take him out of the race. Ironically, the absence of Deputy Governor Masayoshi Amamiya from the public pronouncements seems to shift the pendulum in his favor to replace Kuroda. Many see him to signal greater continuity, initially. Former Deputy Governor Hirohide Yamaguchi has been a more vocal critical of the BOJ's policy. His appointment would likely spur the greatest market reaction as many would see it as a clearer sign of a fundamental change in BOJ policy. The dollar traded near JPY130.40 yesterday and broke down to JPY128.55 in the reaction to the Federal Reserve. A combination of broad dollar weakness and a sharp decline in US yields underpinned the yen, and follow-through dollar selling sent slightly below JPY128.20 to its lowest level since January 19. The low last month was set a couple of session earlier around nearly a full yen lower. The dollar recovered back above JPY129 in late Asian trading and is consolidating in the European morning. The intraday momentum indicators warn of likely new dollar selling as the North American session gets underway. The Australian dollar has fallen to around $0.6985 on Tuesday and rebounded smartly yesterday to $0.7145, a new high since last June. It edged up a little further today, reaching almost $0.7160. The central bank meets next week, and the market leans toward a 25 bp hike. The Australian dollar has pulled back to almost $0.7120 in Europe. The intraday momentum indicators are getting stretched, suggesting here too new US dollar selling is likely in North America. The greenback gapped lower against the Chinese yuan, reaching almost CNY6.7065 before rebounding. Still, the gap, which extends to yesterday's low (~CNY6.7395) has not been filled. Today's high has been around CNY6.7260. Rather than lean against the dollar's weakness (yuan strength), the PBOC set the dollar's reference rate lower than the median projection in Bloomberg's survey (CNY6.7130 vs. CNY6.7147). Europe It is about the Bank of England and the European Central Bank today. The Bank of England will most likely hike 50 bp. As we noted, several large banks have switched their calls to 25 bp. If the BOE were to deliver that, sterling would likely come under pressure for the same reason the dollar did yesterday. The swaps market sees a terminal rate of between 4.25% and 4.50% from 3.50% now. A quarter-point hike may see the market adjust to a lower terminal rate. The leaves the ECB positioned to be the most hawkish of the three. ECB President Lagarde pre-committed to a 50 bp hike today, and the sticky core rate of January's CPI (though German data was noticeably missing) keep expectations for a 50 bp move in March high (~75% chance). The downside risks for the euro area have diminished, helped by a warmer winter, lower energy prices, and what appears to be a resilient labor market. The December eurozone unemployment rate stood at 6.6%, the cyclical low first reached last October. It was at 7.5% in Q4 19. The euro popped out of the consolidation range it has been stuck in and reached $1.10 yesterday. Follow-through buying lifted it to almost $1.1035 today but it has come back offered in Europe. It is traded near session lows in the European morning near $1.0980. There are chunky options struck at $1.10 that expire today and tomorrow (~900 mln and 1.4 bln euros, respectively). While retracement targets of the three-day rally are seen near $1.0945 and $1.0920, the intraday momentum indicators have stretched, suggesting a recovery after the ECB meeting is likely. For its part, sterling remains within the well-worn ranges. Although it posted an outside day yesterday by trading on both sides of Tuesday range, it held below $1.24 and saw the smallest of follow-through buying today (1/100 of a cent). It has come back offered and is among the weakest of the G10 currencies (off ~0.40%). The intraday momentum indicators are stretched as support near $1.23 is approached. America The pattern holds. The market initially read the statement as hawkish mostly based on the reference to future increases, as in plural. However, Chair Powell did not convince the market and it quickly reversed, sending the yields and the dollar lower and stocks higher. Unlike his prepared remarks at the December press conference, Powell made no mention of financial conditions. When the issue was raised in the Q&A, he hardly pushed back, noting that conditions had "tightened significantly" over the past year and did not materially change since the December meeting. This is to say that Powell did not push hard against market developments and expectations. The implied yield of the June Fed funds futures actually slipped a couple of basis points. The two-year note yield fell nine basis points (to ~4.11%), the biggest move since the dismal retail sales and industrial production figures on January 18. Moreover, when the dust settled, the market was more convinced (marginally) of a rate cut before the end of the year. The implied yield of the December Fed funds futures fell to 31 bp below the September contract from 28 bp at the end of last week and Tuesday's close. The US reports Q4 unit labor costs and productivity today. These are derived from the GDP report and will likely show moderation in unit labor costs and a rise in productivity. Economists seem to pay more attention to them than the market. Durable goods and factory orders are also on tap. We already know that Boeing orders and military aircraft orders helped lift durable goods orders in December, and without transportation order, slipped. That leaves the weekly jobless claims, which unexpectedly have been below 200k for the past two weeks. Still, with the national employment report out tomorrow, a significant market reaction is unlikely. Canada reports December building permits, which are expected to have fallen after the heady 14.1% jump in November. Mexico reports January domestic auto sales and December leading indicators. Neither is a market mover. The US dollar's broad decline post-FOMC yesterday saw it reach almost CAD1.3265, its lowest level since the middle of last November. It drew slightly closer to CAD1.3260 earlier today and has rebounded back to almost CAD1.3295. A move above CAD1.3300 could see CAD1.3330-50. The Bank of Canada signaled it is on hold and the exchange rate still seems sensitive to the general risk appetites, even if a little less than seen earlier last month. The Mexican peso is a different story. It is trading at its best level since Covid struck. The US dollar in front of MXN 18.8730 and the 20-day moving average and crashed below MXN18.60 yesterday. Follow-through dollar selling pushed it to almost MXN18.5250 today. The next target is in the MXN18.40-50 area and a break of that points to a move toward the MXN18.00 area, last seen in 2018. To be sure, the intraday momentum indicators are stretched here too.     Disclaimer

January 16, 2023  $USD, BOJ, Canada, China, Currency Movement, Germany, UK, US Monday Ranges:  Euro: $1.0802-$1.0874 JPY/$: JPY127.23-JPY128.87 GBP: $1.2172-$1.2289 CAD/$: CAD1.3353-CAD1.3418 AUD: $0.6941-$0.7019 MXN/$: MXN18.7313-MXN18.8566   Rumors of an emergency BOJ meeting sent the dollar to its lows in Tokyo, slightly below the pre-weekend low (~JPY127.46). The on-the-run (most current) 10-year yield settled above the 0.50% cap and the generic 10 has not traded below the 0.50% level since January 5. The market is pressing hard, and volumes in the futures market are elevated. News of higher producer prices (10.2% year-over-year in December from a revised 9.7% in November that was initially 9.3%) did not help matters. The median forecast was for 9.5%. The BOJ meeting concludes Wednesday.    China reports a slew of December data first thing Tuesday, including Q4 GDP. The economy was fragile before the exit from zero-Covid policy. The median forecast in Bloomberg’s survey calls for a 1.1% quarter-over-quarter contraction. Separately on Monday, the PBOC kept the benchmark 1-year lending facility rate steady at 2.75% and increased the volume from CNY650 bln to CNY779 bln, slightly less than expected. New house prices fell 0.25% in December, matching November’s decline. The market continues to look through the near-term woes and anticipates a stronger recovery. Foreign investors continue to pour back into Chinese stocks. The CSI 300 rose by nearly 1.6% on Monday, lifting  the year-to-date gain to 6.9%. Mainland shares that trade in HK are up 9.6% so far this year. Although the PBOC continued to set the dollar’s reference rate near expectations, on Monday, the dollar closed higher against the yuan, and above the pre-weekend high. The dollar snapped a three-day slide and closed up 0.5%, which is the biggest gain since late November. Read next: Ebury's Matthew Ryan talks Forex market - Euro, British pound and more - 16/01/23| FXMAG.COM   Foreign investors are also buying S Korean shares. The Kospi rose by 0.6% to extend its advancing streak for the ninth consecutive session. It is up 7.3% so far this year. Australia’s ASX 200 gained 0.8% on Monday and has risen for the past four sessions. It has risen in eight of the past nine sessions for a nearly 5% gain this year.    The euro and sterling traded quietly in Europe. Sentiment has improved on the margin. At the end of last week, German figures suggest the economy stagnated in Q4 rather than contract. And the UK economy surprised by growing in November (0.1%) after expanding in October (0.5%). It contracted by 0.8% in September. Lower energy prices may be helping. Despite a cold snap, natural gas prices fell to fresh 16-month lows. Europe’s Stoxx 600 rose 0.4% on Monday, its fourth consecutive gain. It has fallen in only two sessions so far this year and is up nearly 7% YTD. Tomorrow, Germany reports its ZEW investor survey, and the UK releases its latest employment data.    Tomorrow, in the US, the Empire State manufacturing survey is due. It is the first reading for January, and it is expected to improve to -8.6 from -11.2. NY Fed President William speaks. Wednesday brings retail sales (likely weak), PPI (softer), and industrial production (likely the third consecutive decline). The Beige Book will be released late in the session, and the November TIC data on portfolio capital flows as the equity market closes. On Wednesday, the Fed’s Bostic Harker, and Logan are scheduled to speak. Monday, Canada reported softer than expected November manufacturing sales (flat vs. 0.3% median forecast) and a 1.3% rise December existing home sales.    The Bank of Canada meets on January 25. The market is pricing in about a 75% chance of a quarter-point hike. On Tuesday, Canada reports December CPI, which is projected to ease to 6.4% from 6.8%, which would be the lowest since February. The underlying core measures may slip a little.     Disclaimer

January 11, 2023  $USD, Australia, Bonds, Brazil, China, Currency Movement, EMU, Mexico Overview: Fed Chair Powell did not push against the easing of US financial conditions when he ostensibly had an opportunity yesterday. This coupled with expectations of another decline in the US CPI, which will be reported tomorrow, has kept the greenback mostly consolidating the losses seen last Friday and Monday. With a light calendar today, continued sideways movement is the most likely outlook for the North American session today. The rise in US yields seen yesterday are being pared today. While Chinese equities softened, most other large bourses in the Asia Pacific area, gained, led by a 1% gain in the Nikkei, advanced. Europe's Stoxx 600 is recouping most of yesterday's losses, and US futures are a little firmer. Despite the surge in supply, the European bond market rally continues, and benchmark yields are off 7-9 bp today. February WTI is firm, though the API estimated a huge build of 15 mln barrels, which is confirmed by the EIA later today, it would be the largest increase in US crude stocks since early 2021.  Asia Pacific In addition to boosting quotas for oil imports, reports suggest Beijing grant record quotas for local government special bonds and allow for a larger budget deficit target. To be sure, it is not strong stimulus seen in 2008, but a central government deficit of around 3% of GDP (slightly larger than the ~2.8% said to have been recorded last year) and CNY3.8 trillion (~$550 bln) would translate into a general government deficit of around 6% of GDP. The slowing of aggregate lending last month was the not signal. The policy signal seems to be one of greater economic pragmatism on a number of fronts, technology, property, lending, while still encouraging the reduction of off-balance sheet borrowing. China has also ended, or at least, eased its embargo on some Australian goods, especially coal. Separately, it was reported last week that China was backtracking from its CNY1 trillion subsidy effort for its semiconductor sector. The capital-intensive approach, a hallmark of China, worked well in other sectors, including solar panels, autos, and steel, but reports suggest senior officials are disappointed with the results to date in the semi space. It seems more likely that it will a different approach then abandon the strategic sector. Australia reported much stronger than expected November retail sales and new cyclical high in the new monthly CPI gauge. The median forecast for retail sales in Bloomberg's survey was for a 0.6% gain after a 0.2% decline in October. Instead, retail sales jumped 1.4%, the most since January, and the October decline weas revised away and replaced with a 0.4% gain. The "Black Friday" sales appeared to give a boost to household goods, apparel, and department store sales. The risk is that it borrows from the future. Consumer prices accelerated to 7.4% in November from 6.9%. The median forecast in Bloomberg's survey was for 7.2%. The trimmed mean measure rose 5.6% from a revised 5.4% (initially 5.3%). Separately, job vacancies fell 4.9% in the three-months through November. It is the second consecutive quarterly decline. In the quarter ending in August, vacancies slipped 2.8%. Australia reports December jobs data next week, and the central bank will see the traditionally quarterly inflation report (January 24) before the RBA meets on February 7. The cash target rate sits at 3.10%. Many observers are more inclined to see a 15 bp hike because to bring it back to quarter point increments.  The terminal rate is expected to be reached near mid-year around 3.75%, with less than 50% chance it reaches 4.0%. The dollar traded at a marginal new high for the week near JPY132.75, but without much momentum, perhaps as US rates come back softer. Support was found ahead of JPY132.00 compared with yesterday's low around JPY131.40. Japan reports November current account figures tomorrow, but it typically is not a market-mover. The Australian dollar is the strongest of the G10 currencies today, rising about 0.3% against the US dollar, but holding below yesterday's high (~$0.6830) and Monday's (~$0.6950).  While the inflation and retail sales data may have helped, new six-month highs in iron ore and copper prices (largely on the China story) are also seen as supportive. The greenback has held yesterday's range against the Chinese yuan (CNY6.7530-CNY6.7900) in quiet turnover. The yuan strength has not seen a strong pushback from Chinese officials. The PBOC set the dollar's reference rate slightly weaker than the median in Bloomberg's survey anticipated (CNY6.7756 vs. CNY6.7784). Read next: Pietro Beccari Will Be The Louis Vuitton’s CEO, Departures Several Top Executives At Rivian| FXMAG.COM Europe The year has begun with dramatic issuance of investment grade bonds in Europe and the US. Eurozone investment grade corporates, including financial institutions, and sovereigns have raised around 145 bln euros in the opening two weeks of the year. Investment grade dollar issuance has surpassed $80 bln so far and now the US Treasury is joining. It sold $40 bln three-year notes yesterday. The yield was a little lower than the previous auction (3.98% vs. 4.09%) but generated a higher bid-cover (2.84x vs. 2.55x), and indirect bidders, which include asset managers and foreign central banks, took down more (69.5% vs. 61.7%). Some observers feared that demand for US Treasuries is drying up. Today the US sells $32 bln of 10-year notes and Thursday, $18 bln of 30-year bonds. Through yesterday, the US and eurozone benchmark yields are off sharply this year. The US 10-year yield is off 27 bp.  Eurozone 10-year yields have fallen 25-45 bp, with peripheral premiums over Germany narrowing (as is often the case in a falling rate environment). In Europe, UK 10-year Gilts have underperformed. The yield is off 10 bp.  However, the laggard in the G10 is Japan, where the 10-year JGB yield is up about nine basis points as it pushes against the new 0.50% cap. Germany and France reported stronger than expected November industrial output figures recently, but Spain disappointed today. Instead of falling by 0.4% as economists expected, industrial production fell by 0.7%, and adding insult to injury October's decline was revised to 0.6% from 0.4%. Separately, Italy surprised with a 0.8% surge in November retail sales. The median forecast in Bloomberg's survey was for a 0.3% fall. October's 0.4% decline was revised to a 0.3% fall. On Friday, the aggregate eurozone November industrial production data and trade balance will be reported. With a mild winter so far and low energy prices, which in turn could reduce the fiscal costs of subsidies, many are still hopeful of a short and shallow downturn. Next month, embargo on Russia's refined oil products starts. For the second consecutive session, the euro is trading in a narrow of about half-of-a-cent at the upper end of the range seen on Monday (~$1.0635-$1.0760). Recall that before the US employment data and ISM services, the euro had fallen $1.0485, its lowest level since December 7. This type of consolidation is often seen as construction. The next target above the $1.0760 is around $1.08. Ideas that tomorrow's US CPI will soften again appears to be encouraging the euro bulls to maintain positions even though the upside momentum has eased. Sterling also remains confined to Monday's range (~$1.2085-$1.2210) but is a bit softer. Still, it is holding above yesterday's low near $1.2110. Turnover is quiet. The UK reports November GDP data on Friday and appears at the mercy of the broad moves in the greenback until then. America Fed Chair Powell did not address the outlook for policy so much as to acknowledge that pursuing tighter policy may not be popular. BOE Governor Bailey and Powell pushed back against ideas that their central banks have an important role to play in climate change.  This is different from what we have heard from the ECB, the PBOC, and the BOJ. The other three Fed officials that have spoken this week (Bowman, Bostic, and Daly) have, in their own ways, expressed a hawkish view. Still, the Fed funds futures price in about a 1-in-4 chance of a 50 bp hike on February 2, virtually unchanged since the mid-December FOMC meeting.  Meanwhile, the Atlanta Fed's GDPNow tracker lifted its projection of Q4 growth to a heady 4.1% from 3.8% last week, owing to slightly better consumption and stronger domestic investment. The median Fed dot sees long-term non-inflationary growth at 1.8%. Note that no forecast in Bloomberg's survey with 56 respondents see growth above 3.0%, and that forecast of 3% is from Bloomberg's economic team.   While the US and Canadian calendars are light today, including no scheduled Fed speakers, Mexico reports November industrial production, where economists expected a 0.3% decline. Yet the relative strength of the peso appears to be coming from the financial markets rather than the goods market, though exports to the US remain strong. The high interest rates and relatively stable peso makes for attractive carry strategies. Brazil's IPCA December CPI was a little firmer than expected and today the focus shifts to November retail sales where a small decline is anticipated. The former Justice Minister and a former commander of Brasilia's military police have been arrested over the weekend attack on the capital. Bolsonaro, who seemed to condemn the violence, reportedly used his Facebook account to share videos of voter fraud conspiracies. Still, the Brazilian real recouped Monday's loss in full yesterday, rising a little more than 1% and the Bovespa extended its gains for the fifth consecutive session.     The US dollar fell to roughly seven-week low on Monday against the Canadian dollar near CAD1.3360. It has been consolidating since with a firmer bias. It reached CAD1.3445 yesterday and has held just below it today, while remaining above CAD1.3400. A move above CAD1.3465, which would probably accompany weaker US equities, could spur gains toward CAD1.3500. Meanwhile, the greenback has edged lower against the Mexican peso and is poised to challenge the MXN19.04 level seen at the end of last November. The MXN19.00 may offer psychological support, and the lower Bollinger Band is found slightly above it, but recall that before Covid struck, the greenback was near MXN18.55.      Disclaimer

January 05, 2023  $USD, BOJ, Currency Movement, FOMC, Germany, Japan, jobs, Trade, UK Overview: The US dollar is consolidating in a mixed fashion today. The FOMC minutes drew much attention but failed, at least initially, to spur a significant shift in expectations. The pricing in the Fed funds futures strip is still consistent with a cut later this year, which the minutes were clear, no officials anticipate. Today's US ADP jobs estimate, and November trade balance are being overshadowed by tomorrow's nonfarm payroll figures. The Fed's Harker, Bostic, and Bullard speak today. They should be expected to stay on message, which is leaning against any premature easing of financial conditions. Meanwhile, strong buying of Chinese stocks through the Hong Kong link, and the rally in mainland shares that trade in Hong Kong suggest investors continue to look past the current Covid disruptions. Beijing continues to promise measures to support the economy. The yuan traded at new four-month highs today. Europe's Stoxx 600 is struggling to sustain gains, with a three-day rally in tow. US futures are slightly firmer. Among the G10 currencies, the Swiss franc and Japanese yen have edged up, while sterling and the Canadian dollar are laggards, off about 0.25% near midday in Europe. Asia Pacific As others have noted, one of the problems with the basic balance approach to foreign exchange valuation is that is does not necessarily pick-up hedging transaction, and this is particularly important in trying to understand the impact of the BOJ's decision to double the yield band of the 10-year JGB. What the basic balance approach will pick-up is that foreign investors sold a record of nearly JPY5 trillion (~$36.2 bln) of Japanese bonds in the week ending December 23.  Ironically, many observers seem more concerned that with higher yields at home, Japanese investors would dump foreign bond holdings. In fact, they did sell, but less than half of what they divested in the previous week and about a tenth of what foreign investors sold. What the basic balance won't be able to explain well is the surge in the yen. The yen strengthened by nearly 4% against the dollar on December 20, the day the BOJ moved.  For the week as a whole, while foreign investors were dumping Japanese bonds, the yen strengthened by 2.8% and subsequently extended those gains.  Some observers may scoff at foreign investors buying the near-zero yielding JGBs in the first place, but that is mostly, it seems, because they do not understand the trade: Long JGBs short the yen. The profit was not to be found buying the JGBs but in swapping the yen for dollars. This is to say, the attractiveness of the play was in the hedge not the initial purchase of JGBs, and that hedge is not found in the basic balance approach to foreign exchange. Today, the Japanese government sold JPY2.7 trillion (~$20.5 bln) 10-year bonds at an average yield of 0.5%, the new upper limit of the BOJ's band and the highest rate since 2015. Demand outstripped supply by 4.76-times, which is higher than the average of the past ten auctions. After being surprised by the BOJ last month, many see it as a step toward normalization with more steps likely this year.  BOJ Governor Kuroda denied this and the BOJ record purchases of JGBs last month underscored his claim. Still, the BOJ's next meeting concludes on January 18 and new forecasts will be provided. The focus is on its inflation forecasts and several reports suggest that it may revise up its core rate forecast up from 2.9% this fiscal year and 1.6% in the next two years. Yet, the median forecast in Bloomberg's survey sees the core rate at 2.0% this year and 1.4% in 2024. The dollar recovered from its brief dip below JPY130 yesterday, and following the FOMC minutes, settled near session highs above JPY132.60. Follow-through buying was limited to the JPY132.90 area, a new high for the week. Nearby support is seen around JPY132.00. A move above JPY133.50 lifts the technical tone. The Australian dollar traded above its 200-day moving average yesterday for the first time since last June (~$0.6850) but failed to sustain it on a closing basis. Today, it is consolidating in a half-cent range above $0.6800, where there are nearly A$700 mln in options expiring (and another A$385 mln at $0.6805). It looks likely to be a consolidative session in North America too. The dollar traded heavily against the Chinese yuan today and recorded a new four-month low near CNY6.8680. The yuan may have been helped by demand for Chinese stocks, amid promises for more pro-growth policies, even though the lack of transparency over Covid was criticized by the World Health Organization. Demand for Chinese stocks via the link with Hong Kong rose to its highest level in seven weeks. The PBOC set the dollar's reference rate at CNY6.8926 compared with the median forecast in Bloomberg's survey for CNY6.9131, tight against the median projection in the Bloomberg survey for CNY6.8917. Europe News that the eurozone's producer prices fell in November and slowed the year-over-year pace to 27.5% from 30.8% seems largely immaterial from investors' and policymakers' perspective.  Tomorrow's December CPI is more important. Each of the Big Four reported lower than expected harmonized CPI headline figures. This is owing to lower energy costs, for which governments have offered tax breaks or subsidies. Headline eurozone CPI is likely to have fallen below 10% for the first time since last August. Core inflation is seen to be sticky. It was at the cyclical high of 5.0% in both October and November. There is risk that it ticks up. Germany's trade surplus rose for the third consecutive month in November. The 10.8 bln euro surplus is the largest since last January. The three-month average stands at 6.7 bln euros, the highest in nine months. Month-over-month exports to outside of the eurozone rose by about 9.1%. Exports to the US rose by 5%, while shipments to China rose 9.3%. German exports to the UK surged nearly 26% month-over-month in November.  However, overall, exports fell by 0.3%, but shipments in October were revised to a 0.8% gain from an initial 0.6% decline. Meanwhile, weakness in domestic demand (the median forecast in Bloomberg's survey is for the German economy to have contracted by 0.5% in Q4 22, and to shrink by the same amount in Q1 23) weighed on imports. Imports fell 3.3% in November, more than three-times what the median forecast anticipated. Tomorrow German reports November retail sales, which may have bounced back after the 2.7% decline reported in October. Factory orders are also due, and here weakness in domestic and foreign demand is likely to be evident. The Bank of England's business survey found expectations that inflation is still accelerating, and wage pressures continue. The survey results come during extending public sector strike activity that has closed the large rail stations today and limited train access to some airports. The survey found expectations for year-ahead inflation to rise to 7.4%, up from 7.2% in the previous month's survey. Wage expectations rose 0.5% to 6.3%, even as few companies reported hiring difficulties. Separately, the final service and composite PMI readings were in line with the flash report. The services PMI slipped to 49.9 from 50.0 preliminary but retains the bulk of the improvement from 48.8 in November. The composite PMI remained at 49.0, up from 48.2, where it was in October and November.  The euro is in narrow range at the upper end of yesterday's (~$1.0540-$1.0635). There is no momentum to speak of and the market appears to be waiting for North American leadership.  Our bias is lower, on ideas that tomorrow's US jobs data may begin the shift of expectations toward a 50 bp hike by the Federal Reserve. We note that the 5-day moving average looks set to slip below the 20-day moving average for the first time since mid-October, reflecting the stalling of the euro's recovery from the multi-year low in late September. For its part, sterling is in a three-quarter-cent range above $1.20 today. There are options for about GBP755 mln at $1.20 that expire today. Sterling has not managed to trade above $1.21 yet this week. A break of $1.20 could see $1.1950, though the week's low is closer to $1.1900. America The US also reports its November trade figures today. The deficit widened in September and October and narrowing consistently since the supply chain disruption/inventory management challenge led to record shortfall in March 2022 of nearly $107 bln.  The deficit shrank to $65.8 bln as of August, but in October had widened to $78.2 bln. However, the advanced report on merchandise trade suggests a substantial improvement took place in November. The goods trade deficit narrowed to $83.3 bln from $98.8 bln in October. Of the $15.5 bln improvement, nearly two-thirds are accounted for by the small deficit on consumer goods. Exports fell 3.1% in November, while imports were reduced by 7.6%.  The ADP changed their methodology in estimating the change in US employment and caution against using it as a lead indicator for the BLS nonfarm payroll report. Nevertheless, some market participants will react to today's report as if it were. What comes out from a broad array of readings on the labor market is that it remains quite resilient. Yesterday's JOLTS data showed about 400k more job opening than economists expected, the October data were revised higher by around 180k. Weekly jobless claims fell in the survey week but the four-week moving average has stable around 220k-230k for the past 10 weeks. The ISM manufacturing employment diffusion index has been straddling the 50-level in H2 22 and rose to 51.4 in December, it highest since August. The FOMC minutes generated much discussion with its caution against easing financial conditions and it reported that no official sees a rate cut this year. That said, the Fed funds futures marginally increased the likelihood of a 50 bp hike on February 1 to about 38%. The spread between the implied yield of the September and December Fed funds futures contracts continues imply expectations for a rate cut late this year. The December yield has been at last 20 bp lower than the September yield since the softer than expected CPI report on November 10.   Canada reports its November merchandise trade balance today. The improvement in the Canada's trade balance faltered in recent months. Consider that the Q2 average was a C$3.35 bln surplus, while in three-months through October its was at less than C$0.5 bln. That said, the market does not appear particularly sensitive to the report. The US dollar frayed support yesterday and today near CAD1.3480, but it is still largely holding. We suspect there may be potential toward CAD1.3550 today, ahead of tomorrow's jobs report. The greenback recovered from the MXN19.26 area yesterday to settle a little above MXN19.38. It poked above MXN19.43 earlier today but has come back offered in the European morning. Still, the intraday momentum indicators suggest yesterday's lows look safe, at least in North American morning.      Disclaimer

November 14, 2022  $USD, Brazil, China, Currency Movement, Federal Reserve, France, inflation expectations, Japan, UK Overview: China’s new initiatives to support the property sector helped lift the Hang Seng. And while the China’s CSI 300 edged higher both the Shanghai and Shenzhen composites fell. Most Asia Pacific markets fell, while Europe’s Stoxx 600 is posting a small gain. US futures are sporting modest losses. European benchmark 10-year yields are 3-5 bp lower, including UK Gilts ahead of Thursday’s budget that is expected to confirm new borrowing (Office for Budget Responsibility projects to be GBP70 bln more than previously anticipated). The 10-year US Treasury yield is about seven basis points higher near 3.88%. The dollar is mostly firmer after last week’s sharp losses. The yen is leading to the downside with about a 1.3% loss, while the Canadian dollar is holding up the best, off around 0.2%. A small handful of Asian currencies, including the Chinese yuan, are posting small gains against the greenback. Higher yields and a stronger dollar are paring last week’s sharp gold gains. It is off a little less than 1%. December WTI rallied nearly 2.9% before the weekend and is also off nearly 1% today. The cold spell in the US is helping natgas recoup its pre-weekend loss of more than 5%. Similarly, though more volatile, Europe’s natgas benchmark is recovering fully the 10.5% drop seen at the end of last week. Iron ore continues to rebound. Today’s 3.1% advance comes on top of the more than 14% rally over the past two weeks. December copper’s four-day rally is stalling, and it is off 2.3%. It rallied about 13.5% over the past two weeks. December wheat snapped a four-day before the weekend with a nearly 1.3% bounce. It is come back offered and is trading about 1% lower.    Asia Pacific China has launched two multi-point programs to revive the property market and allow a more focused implementation of its zero-Covid policy. So much depends on the implementation that it is hard to discern the real impact. Moreover, given the excess capacity in the housing market, even with the 16-points to be implemented and lending renewed, many Western observers are skeptical that the underlying challenges will be addressed. Reducing mass testing, resisting overzealous lockdowns, reducing the number of days in quarantine for inbound travelers, dropping the punishments against airlines for bringing into too many sick passengers sound well and good, but they may not herald the kind of pivot some in the financial press are claiming. Chinese officials themselves claim that policy is not being relaxed, and the number of cases is surging to 7–8-month highs. Japan reports its first estimate of Q3 GDP first thing tomorrow. It is expected to slow from 0.6% quarter-over-quarter to 0.2% largely on the back of slower consumption. Consumption rose 1.2% in Q2 and is seen having grown about a quarter as much. Business spending may have increased a little and inventories may not have been a drag (-0.3% in Q2). Despite the yen's weakness, net exports were likely a drag after contributing slightly in Q2. The GDP deflator, which is often seen as among the best metrics of overall price pressures, may show the most deflationary pressure this year. After falling 0.3% in Q1 and 0.5% in Q2, the median forecast in Bloomberg's survey projects a -0.6% reading.  The dollar slid to its lowest level against the yen since late August ahead of the weekend, slightly below JPY138.50, but has rebounded back above JPY140 in the European morning. It had stalled in front of there in Asia, but stops, perhaps related to the roughly $510 mln option (at JPY140) that expires today, saw it quickly trade up to JPY140.40. The rebound in US yields was also supportive. Nearby resistance is around JPY141.00. The Australian dollar initially rose through the pre-weekend high marginally on some optimism arising from China's measures but has succumbed to mild profit-taking pressures. It was knocked back from nearly $0.6725 to slightly below $0.6665. A break of $0.6650 could spur a retreat toward $0.6600. The greenback may have completed a three-day 3.4% decline against the Chinese yuan that took it to its lowest level since September 20 (~CNY7.0255). Optimism about the Covid and property measures helped the yuan recover. China may boost the lending at the one-year Medium-Term lending facility tomorrow and it reports October economic activity. The PBOC set the dollar's reference rate at CNY7.0899, nearly matching the median projection in Bloomberg's survey for CNY7.0903. Europe While tighter US monetary policy, via rate and the balance sheets, are well known, we have argued that many observers do not seem to be aware of the magnitude of the fiscal tightening that is taking place. The budget deficit is set to be more than halved from last year. After the Great Financial Crisis, it took several years to deliver the magnitude that is being experienced this year. The UK is engaging in its own double-barrel effort. The Bank of England is one of the few central banks that have begun to actively sell bonds it bought during QE rather than the more passive approach of limiting the re-investment of maturing proceeds. The BOE also signaled that it will begin selling the GBP19 bln (~$22 bln) Gilts purchased to help stabilize the markets (Sept 28-Oct 14). These sales of long-term bonds and inflation-linked instruments will begin at the end of the month. The operations will be demand-led, in a reverse enquire window, rather than at a preannounced pace so as to be responsive to market conditions and interest. It will publish additional operational details next month. Meanwhile, the highlight this week is Chancellor Hunt's budget statement on Thursday. Spending will be cut, and taxes will rise, even if the precise details are not fully known. The windfall tax on oil and gas firms appears earmarked to increase. Also, more revenue is to be had on bracket-creep, while lowering the threshold for paying the top rate. Still, the Office for Budget Responsibility warns borrowing will be around GBP70 bln more than previously anticipated. The UK's Telegraph reported over the weekend that the US has given the UK and EU until April to reach an agreement on the Northern Ireland Protocol. It is when President Biden is expected to visit Northern Ireland and commemorate the 1998 Good Friday Agreement, for which the US is a guarantor. However, the article's only detail was a far cry from the US setting the deadline as the headline claimed: "...and White House officials have privately indicated that he [Biden] would be happier if the situation was resolved before then." The Democratic Unionist Party has boycotted the Northern Ireland Assembly since the May election over the Protocol. New elections were delayed last week potentially until April 13, three days after the anniversary in hope of the deal by then. The UK is demanding that the role for the European Court of Justice in adjudicating disputes over the Protocol is eliminated. This has become the latest sticking point. More promising was the Telegraph's story that UK and France have reached an agreement to limit migration. The UK apparently has agreed to pay GBP60 mln to France to share intelligence on the people being smuggling through the English Channel and boost the number of officers on the beaches to limit the proportion of migrants leaving France for the UK. The UK had demanded that British "officials" would be allowed to join the patrol of the French beaches, but Paris could not abide. Instead, some British immigration officials would be part of a joint control center. The stronger than expected eurozone September industrial output figures (0.9% vs. 0.5% median forecast and August revised to 2.0% from 1.5%) failed to deter the market from paring the euro's advance. It did rise a few hundredths of a cent above the pre-weekend high but continued to work its way lower through the European morning and slipped below $1.03. The low in the North American session before the weekend was near $1.0265 and that may offer the nearby target. Sterling's pre-weekend high was near $1.1855, and initially it was bid slightly through $1.1870 in early Asia Pacific trading, but when it stalled, momentum traders appear to take profits. Sterling fell to about $1.1745 and another attempt on the upside stalled near $1.1830. It came under new selling pressure in the European morning and the market may have its sights set on the roughly GBP560 mln options that expire at $1.1715 today. America The busy week of US economic reports begins slowly. Many economic calendars do not include it, but the results of the Federal Reserve's October survey of consumer inflation expectations will be reported today. In September, the one-year expectation had fallen to 5.4% from 5.7%, the lowest since September 2021. By comparison, the University of Michigan's survey found expectation in September slipped from 4.8% to 4.7%, and then rose to 5.0% in October. Last week's preliminary results showed a tick up to 5.1%. The Fed's survey saw three-year expectations edge up to 2.9% from 2.8% and the five-year outlook rise to 2.2% from 2.0%. The University of Michigan's survey showed the 5–10-year inflation forecast outlook rose to 2.9% in October from 2.7% in September, and then, the preliminary estimate for October rose to 3.0%. It has been between 2.7%-3.1% since the start of last year. The Fed's Waller pushed hard against the market exuberant response to the softer than expected inflation print. He argued that it was only one print, and that the Fed has more work to do. But he was preaching to the converted. The market is well aware of those facts and continues to price in not only a 50 bp hike next month but more hikes next year. Governor Cook also reiterated what is widely recognized the more and longer the Fed hikes the more it risks overdoing it. Governor Brainard and NY Fed President Williams speak today, and they too are unlikely to break fresh ground. No official that has spoken before or after the CPI report to give any reason to expect a dissent at the December meeting, which slows the pace of tightening from 75 bp to 50 bp, which had been tipped in the September dot plot. Brazil has been a market darling this year, but concerns about the new government's fiscal plans has pushed it from second place behind the Russian rouble to third place, below the Mexican's peso as well. With a new team in place, including naming a finance minister, Lula appears to be pushing for a constitutional amendment that would allow welfare expenditures to be permanently outside of the budget cap. The cap limits spending increases to inflation. Constitutional amendments require 3/5 of both houses to support it in two votes. The Brazilian real was the weakest currency in the world last week, falling 3% against the weakening greenback. The Bovespa fell 5%, bucking the global equity rally.    The US dollar fell to almost CAD1.3235 ahead of the weekend, culminating a 1.5% weekly drop. It was the fourth consecutive weekly decline for the greenback, the longest losing streak since October 2021. The modest unwinding of risk-sentiment and the firmer tone for the US dollar, has seen the greenback recover to CAD1.33. The next upside target may be near CAD1.3350. Many find the Mexican peso's weakness ahead of the weekend difficult to comprehend, but we suspect it was the result of unwinding short yen carry trades that were used to finance long peso positions. As the yen strengthened dramatically, positions were unwound. The dollar shot up from new two-and-a-half year lows (~MXN19.2655) to a little above MXN19.59. A move now through MXN19.63 may signal a move toward MXN19.70-75.      Disclaimer

Policymakers have often said that exchange rates should reflect fundamentals. What does that really mean? Can they do anything but that? It begs the question of which fundamental factors they should reflect. Therein lies the rub.  We are still struck by the latest Bank for International Settlements figures. Their survey found that the average daily turnover in the foreign exchange market was $7.5 trillion a day. World trade last year was about $22.5 trillion. The foreign exchange market sees that every three days. Nevertheless, many still see trade as the factor that exchange rates should bring into balance. Many observers are surprised when the Chinese yuan depreciates, as it has this year, despite a huge trade surplus ($730 bln through October, a 43% increase from the first 10 months of 2021). At the same time, most accounts of the dollar's strength since January 6, 2021 (yes, that January 6 when the Dollar Index bottomed and the euro peaked) say little, if anything, about the US trade deficit. Through September this year, the deficit was nearly $746 bln (up from $620 bln in the same period last year). Instead, the dollar's strength seems most often attributed to the aggressive tightening, real and anticipated, by the Federal Reserve. Given the relative size of the market for capital and the market for goods and services, we tend to emphasize drivers of capital to understand and anticipate exchange rate movements. Put this in concrete terms. That $730 bln trade surplus China recorded this year through October is swamped by the Chinese yuan's $500 bln a day turnover. Moreover, Chinese exports are not the same as the demand for the yuan. This is because most of China's trade is not conducted in yuan. From a different but consistent perspective, Antonia Foglia (from Belgrave Capital and Banco del Ceresio) argued in the Financial Times recently that hedging the dollar exposure of the some $14 trillion of US bonds owned by foreign investors, is an important, even if overlooked, driver of the dollar's exchange rate. However, given this year's precipitous decline in US bonds, the dollar hedges need to be reduced, which entails buying the dollar and selling the local currency. He estimates that roughly half of the US Treasuries are in official hands and are not likely hedged, and he conservatively estimates that half are owned by the private sector and half again are hedged. The 20% decline in the value of Treasuries this year translates into around $700 bln of hedge-related dollar buying. We have made a parallel argument regarding the Japanese yen's so-called safe haven status. Observers have often seen that the yen strengthens risk-assets decline. However, it is difficult to know the difference between buying to go long and buying to cover a short. We argue that the yen has often been used as a funding currency. With near-zero interest rates, it is borrowed, and the proceeds are used to buy higher-yielding and/or more volatile assets. When that higher-yielding or volatile asset goes south, the funding currency is bought back, and the position is unwound. This gives the illusion of a safe haven when something entirely different is taking place. II Last week was a watershed. The softer-than-expected US CPI figures and the inversion of the 3-month-18-month bills, a part of the curve that Fed Chair Powell had drawn attention are part of the macro developments that helped mark the end of the dollar's historic rally. We thought it had already topped against sterling when the pound plummeted to record lows at the end of September, and our conviction was growing that the greenback had peaked against the Canadian dollar when CAD1.35 gave way. Position adjustment may trump fundamentals in the near term, but the dollar looks oversold for the first time in months.   While US producer prices may draw some attention, the focus in the week ahead will be on the real sector. Helped by stronger auto sales (14.9 mln, best since January and nearly 15% above Oct 2021), retail sales are expected to rise by around 1% after a flat report in September. The core measure, which excludes autos, gasoline, building materials, and food services, is rising by 0.3%. Retail sales pick up about 40% of consumption, which has been softening. It averaged 1.2% a month in Q1, 0.8% in Q2, and 0.3% in Q3. On the other hand, industrial production is expected to have slowed from 0.4% in September to 0.1% in October. Such a print would bring down the three-month moving average to about 0.14%, its lowest since last September. Yet, industrial capacity utilization remains at elevated levels. In September, it was slightly above the last cyclical high set in August 2018. Indeed, it has not been this high (80.34%) since the Great Financial Crisis, when it peaked a little above 81%. It is the interest-rate-sensitive housing market that the tightening of financial conditions is being felt most acutely. Housing starts look to break the sawtooth pattern of alternating between increases and decreases this year with back-to-back declines. On average, starts have fallen 1.9% a month on average this year through September. In the Jan-Sept period last year, housing starts fell by an average of 0.2%. As a result, existing home sales likely fell for the ninth consecutive month in October. It is the most prolonged slump since the Great Financial Crisis, though inventory levels were around four times higher back then. Limited inventory now compounds the problem of higher mortgage rates.  China reports October, industrial production, retail sales, investment, and surveyed jobless rate on November 14. The economy appears to be stabilizing at what is historically considered soft levels. The median forecast in Bloomberg's survey sees the world's second-largest economy expanding by 1.5% quarter-over-quarter in Q4. It is expected to begin a streak of quarterly increases of 1.0%-1.2%. The market is more interested in modifications of its Covid regime, especially given the flare-up of cases, but also additional efforts to support the economy. If the one-year Medium Term Lending Facility rate (2.75%) is not reduced and/or the volume is not increased (from CNY500 bln), speculation of a cut in reserve requirements will likely be heightened. The fact that the UK economy is set to contract for the next several quarters may remove some of the market sensitivity of the UK's high-frequency data. At the same time, it may heighten the focus on the inflation reports. The BOE expects CPI to peak shortly but is still committed to tightening financial conditions. The central bank meets in the middle of December. The swaps market has a 50 bp hike discounted and a little bit more, perhaps conditional on the fiscal statement due November 17. An austere budget of tax increases and spending cuts is likely, though, at this late date, there still seem to be several unresolved issues. The latest talk suggests that the tax rate of the top bracket may be increased or its threshold lowered. There has also been talk that the National Health Insurance tax on employers may be raised. An increase in the inheritance tax may be under consideration, as well. The eurozone's September trade deficit is a good reminder of the deterioration in its external balance this year. With Q3 GDP already released and set to be updated, the trade balance may be short of practical importance. The eurozone recorded a trade deficit of almost 229 bln euros through August. In the first eight months of 2021, the trade surplus was about 124 bln euros. With the largest economy in the eurozone, Germany, headed for recession, the ZEW survey may not be very interesting. The expectations component fell to its lowest level in August since the Great Financial Crisis, a ticked up slightly in October. The assessment of the current situation has continued to deteriorate. It has risen twice since September 2021. At -72.2 in October, it was the poorest assessment since August 2020. While existing home sales in the US through September have fallen by about 23% this year, existing home sales in Canada have slowed by more than 35%. They have slowed for seven consecutive months. Canadian housing starts have fared considerably better. They rose a modest 2.5% last year and are up by a quarter this year. Housing starts rose by the most this year in September, with a 10.8% surge. Typically, a pullback the following month is recorded after such a significant increase. Yet, the highlight of the week will be Canada's October CPI reading. The headline has slowed since peaking in June at 8.1%. It stood at 6.9% in September. It is likely to have decelerated again last month, helped by a favorable comparison to last October when Canada's CPI rose by 0.7%. Looking forward, the base effect is less friendly in November and December. The underlying core measures have been stickier. The Bank of Canada has three, averaging 5.3% in August and September, which is 0.2% off the peak seen in June and July. In the US, average hourly earnings slipped below 5% year-over-year for the first time since last December, and average pay (permanent workers) in Canada rose 5.5% in October. After the Bank of Canada hiked rates by half a point instead of 75 bp on October 26, the market immediately anticipated a 25 bp hike at the last meeting of the year (December 7). However, the strength of the employment report and wages prodded the market into thinking a 50 bp hike was more likely. A firm CPI report would likely push the market more in that direction. Australia reports its October employment figures. The job market down under was fairly steady until Q3. In Q4 21, and the first two quarters of this year, Australia grew full-time positions by 54.0k to almost 57k a quarter. In Q3, it lost full about 1k full-time jobs. This probably overstates the case and was largely the result of a sharp drop in July, the first loss of full-time positions since last October. Indeed, an average of 34k full-time people were hired in August and September. The Reserve Bank of Australia meets on December 6. The swaps market does not have a quarter-point hike fully discounted. Yet it sees the terminal cash target rate around 4% in a year compared with the 2.85% prevailing now.  Lastly, two international gatherings will attract attention in the coming days. The first is the Asia Pacific Economic Cooperation (APEC) which meets in Bali November 14-15. US President Biden will likely miss it due to a granddaughter's wedding, but the highlight may be a meeting between Japan's Prime Minister Kishida and China's Xi. They have not met since Kishida become prime minister. Former Prime Minister Abe visited Beijing in 2019, and there were plans for Xi to come to Japan in 2020 but were disrupted by Covid. Regional security is a crucial issue for Japan. Its own security is seen at risk if China were to move on Taiwan. Tokyo appears close to a defense agreement with the UK and possibly the Philippines. The G20 meets in Bangkok November 18-19. The host, Indonesia, is neutral and invited Russia's Putin and Ukraine's Zelenskyy. Recall that earlier this year, Biden called for Russia to be removed from the G20. Ukraine is not a member of the G20, and Zelenskyy said he would not attend if Putin did. The latest reports suggest Putin will not attend. Reports suggest Biden intends to meet with Xi at the G20 meeting. Taiwan and trade are obviously the two most salient issues. It would be the first face-to-face meeting since Biden was elected two years ago. Biden may hope to repeat Nixon's tactic of putting more space between Moscow and Beijing, and Putin's invasion of Ukraine has done Xi no favors. NATO is stronger, Europe is tied more tightly to the US via energy and defense,  and Japan and Australia, to name two, are even more wary of China's regional ambitions. Still, given what appears to be a bipartisan consensus in the US of the strategic challenge posed by Beijing, it is not clear what the US can offer China to induce a change in behavior.   The statement issued afterward will likely demonstrate the old adage that a camel is a horse made in committee. With several countries not wanting to take sides on key issues, judging from the voting patterns at the UN, the G20 may be downgraded by the US in favor of the G7 again.  Disclaimer Capital Flows Outstrip Trade Flows and that is Where to Look for Drivers of FX

November 09, 2022  $USD, Brazil, China, Currency Movement, ECB, EMU, Federal Reserve Poland, Japan, Mexico Overview: It is difficult to see the impact of the US midterm election in the immediate aftermath. The dollar is stronger against all the major currencies, but this seems to be mostly position adjusting ahead of tomorrow’s CPI report after a pullback in recent days. While Japanese, Chinese and Hong Kong shares fell, strong foreign buying lifted Taiwan’s shares by nearly 2.2% and South Korea’s Kospi rose more than 1%.  The Stoxx 600 in Europe is snapping a three-day advance and its 0.85% decline is giving back yesterday’s gains in full.  US equity futures are trading with a heavier bias.  US and UK 10-year yields are a couple basis points higher, while most European benchmark yields are off 1-3 bp.  Among the G10 currencies, sterling and the New Zealand dollar are bearing the brunt of the greenback’s recovery, while the Japanese yen and Swiss franc are the most resilient. Among emerging market currencies, the South Korean won continues atop the leaders’ board.  Central European currencies are among the weakest. Firmer Hungarian inflation (21.1% year-over-year) is dragging the forint lower, and there is some uncertainty ahead of Poland’s central bank meeting outcome that is weighing on the zloty. Gold jumped 2.2% yesterday to move above $1700 for the first time in a month and is holding above there today as it pulls back a bit. December WTI fell 3% yesterday, its biggest loss since mid-October and follow-through selling pushed it to around $87.25. It settled above $91 last week. A few weeks delay in reopening the Freeport export platform sent US natgas prices down 11.6% yesterday and there has been a little additional selling today. Europe’s benchmark rose 4.7% yesterday and is slightly higher today. Regulators extended support to the Chinese property market, and this may have held iron ore and extended its rebound for the seventh consecutive session.  On the other hand, December copper is giving back half of yesterday’s 2.2% gain.  December wheat is trading softer ahead of the USDA’s World Agricultural Supply and Demand estimates.   Asia Pacific Japan reported a larger than expected current account surplus in September but a larger than expected trade deficit.  The current account rose to JPY909 bln from a revised JPY694.2 bln in August (initially reported as JPY58.9 bln).  The trade balance, on a balance-of-payments basis, was JPY1.759 trillion.  The median forecast in Bloomberg's survey was for a JPY1.684 trillion shortfall.  Japan's current account report includes some details about Japanese foreign investment.  We note that after buying US Treasuries in August for the first time in 10 months, Japanese investors returned to the sell side (`JPY2.4 trillion or ~$16.5 bln).  While Japanese investors sold most other sovereign bonds in September, they bought a small amount of Swedish bonds.  The dollar value of Japan's reserves fell by $43 bln last month.  This is about what one would expect given the intervention (~JPY6.3 trillion). Other aspects of valuation adjustments look to have largely netted out.  Most other reserve currencies appreciated against the dollar while bond prices tended to have retreated.  Since the end of last year, the dollar value of Japan's reserves has fallen by about $200.5 bln.  Most of the decline reflects the sharp decline in bond prices this year and the strength of the dollar against other reserve currencies.   China's October producer prices fell 1.3% year-over-year, the first negative print in nearly two years.  Part of the drop in PPI can be explained by the base effect and the surge in prices last year after shutdowns in the US, Europe, and elsewhere ended.  In addition, commodity prices have eased this year.  The year-over-year decline in construction commodities intensified last month and energy prices (oil and coal) softened.  China's consumer inflation slowed to 2.1% in October from 2.8%. Food inflation, the main driver of Chinese CPI slowed from 8.8% in September to 7.0%, though pork prices rose.  Core CPI was unchanged at 0.6%. It has been at or below 1% for seven consecutive months. The easing of service prices (0.4% from 0.5%) is thought to reflect weaker demand related to the zero-Covid policy.    Many observers are focused on China's zero-Covid policy that they may be missing new efforts to bolster the economy.  Just like the typically LDP policy thrust is for easy monetary and easy fiscal policy, new lending is the go-to-answer for China.  Large banks are under pressure to boost lending starting now in Q4 to manufacturing and infrastructure projects.  At the same time, local governments are being allocated quotas for 2023 infrastructure bonds.  They will launch in January and ostensibly will be used for key prospects in transportation, new/green energy, and infrastructure.  Consistent with this could be another cut in reserve requirements.  There are two other reasons why the reserve ratio may cut in addition to supporting the economy.  First, some are identifying the tightening of the ratio of reserves to deposits.  Cutting reserves would help address that.  Second, this month, there are around CNY1 trillion of maturing loans from the PBOC to the commercial banks.  A 50 bp cut in reserve requirements frees up that amount.  The PBOC has also been a bit stingy lately in its reverse repo operations.  The funds could be rolling into the Medium-Term Lending Facility, where the rate and volume is expected to be announced in the middle of next week.   The JPY145 level is a key support for the dollar.  The greenback has not traded below there since October 7. It has been approached several times and has held, though the reaction bounce has become more muted.  A convincing break could quickly see JPY143.50-JPY144.00.  Initial resistance is seen in the JPY146.00-20 area.  The Australian dollar is hovering around yesterday's settlement a little above $0.6500 after reaching its best level yesterday since late September (~$0.6550).  Initial support is seen around $0.6480 and near $0.6445.  The greenback continues to trade well within the broad range against the Chinese yuan seen last Friday amid speculation that the zero-Covid policy was going to be relaxed.  It is within yesterday's CNY7.2210-CNY7.2625 range. The US dollar also remains well below the CNY7.3275 peak recorded last week.  The PBOC set the dollar's reference rate at CNY7.2189 compared with the projection (median in Bloomberg's survey) of CNY7.2275.   Europe While the market is focused on the Fed and where its terminal rate may be, yields in Europe have risen quickly.  The yield on the two-year German bund has risen from about 1.95% on November 1 to 2.35% yesterday, though it has pulled back today. The yield is rose for the past six sessions. As prices gapped lower yesterday, the yield gapped higher, and it is the highest since 2008. The gap has not been filled today. The US 2-year premium over Germany posted a two-month peak when the Fed met last week near 2.65%.  It has fallen every session through yesterday when it dipped below 2.40%.  It had not traded below 2.40% since late September, the 2.35% area may be more important.  It is the 200-day moving average and the US premium has not been below the average since June 2021.   We looked for the rate differential to peak before the dollar peaked against the euro.  Its two-year premium peaked three months ago near 2.77%.  The euro bottomed, so far, in late September around $0.9535.  We lean to that being an important low and note that the euro's downtrend line, drawn off he February, March, June, August, and September highs was violated last month but it was not sustained.  The euro moved back above it on Friday after the jobs data and amid talk of China changing its Covid policy.  The trendline comes today near $0.9850.   The ECB's monthly survey found consumer expectations for one-year inflation edged up to 5.1% in September from 5.0% in August.  The median three-year view was steady at 3%.  Pessimism over the economic outlook increased as a deeper contraction is now expected over the next 12 months (-2.4% from -1.7%).  Separately, a study by the Irish central bank and Indeed, found that wages were 5.2% higher than a year ago in October but appear to have steadied.   Yesterday, the euro took out the October high by 1/100 of a cent as it extended its rally to about 3.5 cents over the past three days.  The euro held again, slightly below $1.01. Today it is consolidating in about a fifth of a cent on either side of $1.0065. It approached support, which we peg near the $1.0035 high seen Monday, in the European morning. We had expected the dollar to trade stronger ahead of tomorrow's US CPI figures.  Sterling rose to almost $1.16 yesterday.  It had risen 4.5 cents over the past three sessions but today has slipped through yesterday's low near $1.1430 in European dealings but found a bid near $1.1420. A break of $1.1400 could see a test on $1.1375. A break of that would be disappointing, though the week's low in another cent lower.  Lastly, the central bank of Poland meets, and the market is mixed about the outlook.  It paused last month over three dissents and year-over-year CPI rose to a new cyclical high of 17.9% in October.  A slight dovish majority led by central bank Governor Glapinski may prevail.  In any case, Poland is seen to be at or near its terminal rate.   America No fewer than nine Fed officials talk between today and Thursday.  Williams, Barkin, and Kashkari speak today, but Williams has already spoken in Switzerland, and Kashkari speaks after the markets close.  That leaves Barkin.  The president of the Richmond Fed, Barkin does not have a vote on the FOMC this year and is a centrist.  Barkin is in favor of slowing the pace down while recognizing the Fed’s work is not done.  Last week, he said that is it conceivable that the terminal rate is above 5%, but that is not a plan, Barkin admitted.  The takeaway for him from last week's employment report is that the labor market remains tight.  Barkin also explained that inflation has not eased much because business have not met much resistance from customers or competitors.  Some businesses, he said, are still announcing price increases.   Mexico reports its October CPI figures today ahead of Banxico's rate decision tomorrow.  The monthly report is expected to show a slower year-over-year rate (8.45% vs. 8.70% in August and September).  The core rate is a bit stickier and made a new cyclical higher in September (8.28%) and may have extend it toward 8.45% last month.  Almost regardless of the print, Mexico is widely expected to hike its target rates by 75 bp, matching the Fed's move.  The new rate will be 10%.  Mexico is one of the few countries that have a target rate above the current inflation rate.  The swaps market sees the terminal rate in Mexico at around 10.80%.  There is some risk, we subjectively put it at around 1-in-3 that there is some discussion of some greater degrees of freedom, even if limited, from Fed policy going forward.  The peso is near its strongest level since March 2020.   We have suggested that the US dollar has formed a large head and shoulder pattern against the Canadian dollar broke the neckline at CAD1.35 last week.  It projects toward CAD1.30.  Yesterday, the greenback briefly traded below CAD1.34 for the first time since September 21.  Ideally, in today's consolidation, it will hold below CAD1.3500.  The US dollar's downside momentum against the Mexican peso stalled in front of MXN19.43 over the past two sessions.  It is bid today above MXN19.57.  Initial resistance maybe encountered in the MXN19.60 area.  The dollar jumped to almost BRL5.25 yesterday after approaching BRL5.02 on Monday, its lowest level since last August.  However, it reversed to settle a little below BRL5.15.  The market appears a bit nervous about the composition of the new government and its fiscal plans.       Disclaimer

October 24, 2022  $USD, Australia, BOJ, Brazil, Canada, Currency Movement, EMU, intervention China, Mexico, UK Overview:  Japanese efforts to curb the weakness of the yen provided drama today. What many suspect was intervention before the weekend was wearing off and officials may have sold dollars again today in front of JPY150. Despite initial success, the dollar is back near JPY149.50 as the North American session is about to begin. The end of the Chinese Congress has seen the yuan weaken to new lows. While the large bourses in the Asia Pacific region rose, China and Hong Kong were notable exceptions and foreign investors sold what appears to be a record of mainland shares today. Europe’s Stoxx 600 is seeing early gains pared, while US futures are pointing to a lower opening. The US 10-year yield is a little softer, slightly below 4.20%, while EMU yields are as much as three basis points lower. With Sunak seen as the next PM and austerity returning, Gilts have rallied, and the 10-year yield is off 17 bp. While the US dollar recovers from its pre-weekend slide, sterling is the best performer by being little changed. The Antipodeans have been hit the hardest and are off 1.3%-1.6%. Led by central Europe and the South African rand, most emerging market currencies are also weaker today. Gold briefly pushed above its 20-day moving average (~$1667) for the first time in a couple of weeks and has been sold off to below $1645. The pre-weekend low was near $1617.50. December WTI is off 1.5% after it rose 0.5% last week. US natgas continues to come off. It is down 2% today, its seventh consecutive decline. It fell 23% last week, which was its ninth consecutive weekly decline. Europe’s natgas benchmark is off 14.8% today, falling below 100 euros for the first time since June. It fell 18.7% last week, its eighth consecutive weekly drop. Iron ore is paring the 1.1% gain seen before the weekend, while December copper has come back offered (~1%) after rallying about 4.5% in the last two sessions. December wheat is off 1.1% today and it is giving back the gains scored in the second half of last week.   Asia Pacific Japan appeared to intervene in the foreign exchange market earlier today. It injected more volatility. It drove the dollar from JPY149.70 to JPY145.55 but it has resurfaced above JPY149.00. This follows dramatic price action before the weekend. Amid a sharp drop in US two-year yields that many attribute to a newswire article that did not seem to break any new ground but played up the coming debate at the Fed about the trajectory of policy, the dollar reversed lower broadly, but especially against the yen. The market knew it was on thin ice, to speak, as it took the dollar for the thirteenth consecutive session to new highs above JPY150. Officials see the same thing the market participants see when they look at a chart. There is very little in the way of a move to JPY160. One newswire reported intervention, but others suggested the market panicked, given positioning, for a large sell order into the European fix and strong yen buying in the futures market. Japanese officials refused to comment. The dollar did not take out the intervention low set last month (~JPY140.35). It took the market nearly three weeks to take out the pre-intervention high (~JPY145.90). The dramatic conclusion of the China's Communist Party Congress, with Xi's predecessor being escorted out, encapsulates the key takeaways. Its Xi's Show. A faction within the Chinese Communist Party has taken control of the party, and therefore the state. There are no centers of power that can challenge him. The direction China is moving is more nationalistic, less interested in market reforms, and more strident in its desire to challenge the international order. This also means no abandonment of the zero-Covid policy. Last week, there was a lockdown in an area in Beilun that has large warehouses and container yards, underscoring the ongoing and unpredictable disruptions.  China reported the data postponed by the Congress. Growth in Q3 rose to 3.9% quarter-over-quarter and year-over-year. It helped by a recovery in industrial output (6.3% year-over-year, up from 4.2% in August). Retail sales disappointed, rising 2.5% year-over-year, slowing from the 5.4% pace seen in August. Final consumption accounted for 2.1% of the 3.9% growth. Investment accounted for about 0.8% and net exports added almost 1.1%. Property investment contracted by 8% year-over-year after falling 7.4% in August. Home prices eased by 0.28%. They have fallen every month starting last September. The trade surplus rose to $84.7 bln. Exports rose 5.7%, faster than expected but down from 7.1% year-over-year in August. Imports rose by 0.3%, the same pace seen previously. Lastly Japan's flash composite PMI rose to 51.7 from 51.0. It is the second monthly increase. The manufacturing component eased slightly to 50.7 from 50.8, while the services element rose to 53.0 from 52.2. Australia's preliminary composite PMI eased to 49.6 from 50.9. It is the first sub-50 reading since January. Manufacturing softened to 52.8 from 53.5, while services slowed to 49.0 from 50.6. The dollar traded between about JPY146.25 to JPY151.95 before the weekend and has traded between JPY145.55 and JPY149.70 today. The intervention provided cheap dollars to buy. There is some speculation that the BOJ may tweak its yield curve control when it meets later this week but recall that the IMF's regional head endorsed it on the sidelines of the recent annual meeting. One-month implied volatility reached almost 17% today, the highest since March 2020. Three-month implied vol matched the pre-weekend 14.8%, also the highest since 2020. The Australian dollar initially saw follow-through buying after the big outside day recorded ahead of the weekend. It peaked near $0.6410 and fell to $0.6285 by earlier European activity. The intraday momentum is overextended. Resistance is now seen near $0.6350. Note that Australia's new budget will be unveiled tomorrow. The dollar rose to new highs against the Chinese yuan. It reached almost CNY7.2635, or almost 0.5% from Friday's close. After setting the reference rate near CNY7.11 before and during the Congress, it was set at CNY7.1230 today. That put the upper band at CNY7.2655. Separately, but related foreign investors sold about CNY17.9 bln of mainland shares via the exchange links with Hong Kong, which appears to be a new record. Europe The US Treasury has queried dealers about a potential buyback program. The idea is that the Treasury would increase the size of its bond offerings and use those new funds to buy back off-the-run, i.e., less liquid issues. The German Finance Agency is dealing with a different but similar problem of liquidity. There is a relatively wide premium of Bunds to swaps. To address it, the amount of securities that the Bundesbank can lend in the repo market was boosted by 54 bln euros ahead of the weekend. This entails raising the amount by 3 bln euros for 18 different issues. After capital's strike against Truss's fiscal plans, the question is will it strike Italy. The new Italian government is in place. Yet, all the way to the alter, there was bickering and politicking. One cannot help but wonder about its longevity. A key metric is the premium Italy pays over Germany. It peaked in late September slightly below 255 bp and finished last week 20 bp lower. It has not been less than 220 bp since mid-August. The Italian 2-year premium also peaked in late September a little more than 130 bp. It finished last weak below 100 bp and near the lower end of its two-month range. Reports suggest Draghi left behind a cushion of around 9 bln euros that will help the new government address early challenges that may arise. Prime Minister Meloni is expected give an important speech tomorrow. The eurozone flash October composite PMI fell to 47.1 from 48.1, weaker than expected. It is the sixth consecutive decline and the lowest since May 2020. The manufacturing PMI fell to 46.6 from 48.4 and the services reading fell to 48.2 from 48.8. In Germany, the manufacturing PMI fell to 45.7 from 47.8 and service slipped to 44.9 from 45.0. The composite is at 44.1 (from 45.7). France is holding up slightly better. The composite is at 50.0 (down from 51.2). Manufacturing slowed to 47.4 from 47.7, not quite as bad as anticipated, while services PMI eased to 51.3 from 52.9. In the UK, Sunak took a commanding lead and could be named party leader (and therefore Prime Minister) as early as tonight. If so, he will oversee a weak economy and fiscal shortfall of an estimated GBP40 bln. Moreover, he is not popular among the members (rank-and-file) and has not won a single election. The problem with calling for a general election is that the polls show the Tories will lose. Meanwhile, the flash composite PMI fell to 47.2 from 49.1. October is the third month below 50 and it is the lowest since January 2021. Manufacturing fell to 45.8 from 48.4 and services weakened to 47.5 from 50.0. After Friday's big advance, the euro extended its gains to almost $0.9900. It was turned back and recorded a low a little below $0.9820 in the European morning. There are options for nearly 1.5 bln euro at $0.9800 that expire today. If that area offers support, the $0.9865 area offers provides the nearby cap. Sterling briefly traded to almost $1.1410, stalling ahead of last week's high near $1.1440. It has returned to the $1.13 area. A break could see $1.1250 again, but the intraday momentum indicators suggest it might not get there. America The Federal Reserve established a reverse repo facility for foreign central banks during Covid. This allows them (and international agencies like the IMF) to have a risk-free cash portfolio that pays interest instead of using T-bills and money market instruments. For the US, it can help minimize the market impact of its withdrawals. Foreign central banks have around $330 bln in this facility. Also, the Fed's custody holdings for foreign officials have fallen by about $77 bln this year through October 19. This may sound like a large number; it is 2.25% of the holdings at the end of last year. This is a much smaller drawdown than one would expect, given the valuation change this year. Therefore, it appears that there has been a modest addition to compensate for most of the valuation change (the Bloomberg US Treasury Index is off about 15% this year). With the Fed in the quiet period ahead of the upcoming meeting, the focus today is on the preliminary PMI. The composite is expected to have remained below 50 for the fourth consecutive month. The highlight of the week is the Q3 GDP estimate on Thursday. The median estimate in Bloomberg's survey is for 2.3% annualized growth after a 0.6% contraction in Q2. The Atlanta Fed's GDPNow tracker is at 2.9%. Meanwhile, the US Treasury will raise $144 bln in coupons this week, including $24 bln of two-year floating rate note. Expectations that the Fed will hike by 75 bp on November 2 was virtually untouched before the weekend. What did change was the view of the December meeting. The odds of another 75 bp was scaled back from about a three-quarters chance to a little better than 1-in-3. The news wire article underscored what had been said by officials recently include Brainard and Daly (Friday). Perhaps that is what the data will decide. At the same time, the Fed's staff revised down its assessment of the economy's non-inflationary output speed limit because of the poor productivity numbers and the low labor force participation. If that view is taken aboard, it means that the economy may have to slow further than previously estimated, narrowing path to the proverbial soft landing even further.  There are no Canadian economic reports ahead of Wednesday's Bank of Canada meeting. Expectations for another 75 bp move is strong (fully discounted in the swaps market). After this move, the market has the Bank of Canada slowing dramatically its pace. Mexico report reports CPI for the first half of October. While the two-week pace may have accelerated, the year-over-year rates are expected to be little changed at 8.6% and 8.3%, for the headline and core, respectively. Banxico will match the Fed's hike when it meets on November. This week is Brazil's turn. The central bank meets on Wednesday. The market thinks its tightening cycle is over with the Selic at 13.75%. It was at 9.25% at the end of last year and 2.0% at the end of 2020. The Brazilian real's 4.9% appreciation against the dollar this year makes it the world's best performer. Initial follow-through greenback selling after the pre-weekend downside reversal, saw it approach CAD1.3600. But the risk off mood took hold and the US dollar has recovered to almost CAD1.3750. This area represents the (38.2%) retracement of the US dollar's pullback from the October 13 two-and-a-half-year high near CAD1.3980. The next retracement (50%) is slightly below CAD1.3800. The intraday momentum indicators are stretched. The US dollar was sold to a new low for the month against the Mexican peso ahead of the weekend around MXN19.8860. It is now near MXN20.00. Last week's high was about MXN20.1760. There may be scope now toward MXN20.05 or a little higher.    Disclaimer

October 20, 2022  $USD, Australia, Canada, Currency Movement, Current Account, Japan, Turkey, UK, US Overview: China and Japan continue to struggle to stabilize their currencies, while global interest rates rise. The offshore yuan has fallen to new lows but in late dealings the onshore and offshore yuan have recovered. The dollar also traded above JPY150 for the first time since 1990 and the market knows it is on thin ice as with the threat of official intervention. A risk-off mood permeates. Equity markets have retreated in the Asia Pacific region and Europe. US futures are also trading lower. Benchmark 10-yields are 1-3 bp higher in Europe, and 10-year US Treasury yields reached a new high around 4.17% before steadying. The greenback is mixed. Among the G10 currencies, the Australian and Canadian dollars are firmer, while sterling, the Swiss franc, and Swedish krona are nursing small losses. Emerging market currencies are also mixed. Central Europe is outperforming East Asia. Gold recorded a new low for the month near $1622.50 before catching a bid. Initial resistance is seen near $1640. December WTI extended yesterday’s recovery and reached a new four-day high near $86.30. The nearby cap is seen in front of $88.00. Natural gas is snapping a four-day drop in both the US and Europe’s benchmark. Iron ore tumbled 2.4% to new lows below $90. However, copper is jumping back 1.4% in what could be its first gain in five sessions. December wheat, which has lost 2.3% over the past two sessions is recouping a little more than 1% today.  Asia Pacific The dollar rose above JPY150 for the first time since 1990 and there has been no sign of intervention. Ironically, the weaker yen is one of the factors pushing up Japanese yields, which in turn spurs BOJ purchases, which in turn underscore the monetary divergence that weighs on the yen. In regularly scheduled and unannounced purchases, the BOJ bought about JPY1.3 trillion today (~$8.5 bln). The yen's weakness aggravates the terms-of-trade shock in the first instance. Japan reported a slight narrowing of the September trade deficit to JPY2.09 trillion from JPY2.8 trillion. Export growth accelerated to 29% year-over-year from 22%, while import growth slowed to 45.9% from 49.9%. Tomorrow, Japan reports September CPI. The core rate, which excludes fresh food, is seen rising to 3%, while the measure that excludes both fresh food and energy may tick up to 1.8% from 1.6%. The BOJ meets next week. Its forecasts may change, but policy is a different story. Employment in Australia ground to a near halt in September, gaining less than 1000 jobs. This may overstate the case, a little. The loss of part-time positions more than offset the 13.3k increase in full-time posts. Still, the loss of momentum is clear. The three-month moving average of full-time posts is slightly negative the lowest this year. The other metric held in better. The participation rate was unchanged at 66.6%, and the unemployment was steady at 3.5%. The Reserve Bank of Australia meets on November 1 and is expected to hike the target rate 25 bp to 2.85%. The dollar poked above JPY150 in early European turnover and quickly fell back to about JPY149.70. It just as abruptly snapped back to the JPY149.90 area. The market knows it is tempting official action and is skittish. Indeed, the entire session range was set in a little more than 30 minutes. Without international cooperation, we see BOJ intervention most likely confined to Tokyo hours and that the second operation will not yield the same results as the first. Late September's record intervention immediately knocked the dollar back about 5.5 yen. Follow-through selling initially saw the Australian dollar fall to a three-day low near $0.6230 before bouncing back to new session highs in the European morning near $0.6280. The intraday momentum indicators are getting stretched, suggesting a run to yesterday's highs around $0.6325 may be too much. The dollar traded to CNY7.2480 today, its highest level since late September. It pulled back a little away from the CNY7.25 level and is trading near CNY7.2360 in late turnover. The prime lending rates were left unchanged today. Even without the latest weakness of the yuan, a cut was not expected. The PBOC lifted the dollar's reference rate to CNY7.1188. That puts the upper end of the 2% band a little above CNY7.26. The greenback reached CNH7.2790 against the offshore yuan, a new high. It has pulled back to below the CNH7.2550 area. Europe Out of the frying pan, into the fire. So goes the UK Prime Minister whose honeymoon may be measured in hours. Her tenure is still be debated. It is not about economic policy so much anymore, as Truss has accepted the reversal of her fiscal experiment. She did not win the leadership challenge among the Tory parliamentary members, but their job was to narrow the field to two candidate and let the rank-and-file decide. And chose they did. Now, a new effort by the MPs to force her out short of an election, which polls say the Conservatives are sure to lose. Meanwhile, Home Secretary Braverman was forced to resign after violating cabinet confidentiality. Braverman was a candidate herself party leader but was knocked out early. Her resignation letter was also a biting criticism of Truss. Ironically less than 24 hours earlier, in a rhetorical flourish, Braverman called the Labour Party and the Lib Dems, a "coalition of chaos, it's the Guardian-reading, tofu-eating wokerati."  Truss tried tightening the screws on a vote on fracking, Tory MPS were threatened with expulsion from the party if they voted against the beleaguered government and controversial issue even in some strong Tory districts. The Chief whip, the parliamentary enforcer resigned as did her deputy. And then in a dramatic reversal, it appears Truss persuaded them to retract their resignations to end a dramatic day. The eurozone reported a 26.3 bln euro August current account deficit. Like, Japan, the eurozone has experienced a significant terms-of-trade shock and a marked deterioration of its external balance. Consider that last August, the EMU recorded a 17.1 bln surplus, or that this year it has recorded an average monthly deficit of 9.2 bln euros compared with an average surplus of 28.3 bln euros in the first eight months of last year. The euro initially extended yesterday's losses to about $0.9755 before recovering to almost $0.9800, where options for nearly 2 bln euros expire today. We suspect that they have largely been neutralized, but today's high is about $0.9795. The intraday momentum indicators suggest there may be a little more upside potential, but the $0.9820 area looks like the best that can be hoped for today, barring new developments. Sterling has sulked to almost $1.1170 in the European morning. On the downside, there are options for GBP480 mln at $1.1145 that roll off today. If Truss does step down, we suspect sterling can bounce initially. While we suspect a major low is in place, a move above $1.15 would add credence to this view. More immediately, the $1.1250 area looks to offer the initial cap. Lastly, Turkey's experiment is set to continue. Despite CPI above 84%, the central bank is expected to cut its one-week repo rate by 100 bp (to 11%) for the third consecutive move. The lira is off about 28.5% this year, of which about 5% has been recorded in the past three months. America The Beige Book was unexpectedly dour. However, it did not deter the surge in US interest rates. The anecdotal report prepared for the November 1-2 FOMC meeting gave an overall sense of slowing activity and easing of some price pressures. Businesses were worried about demand. Several districts reported easing of labor market conditions. In broad strokes, here is a scenario, which seems to be gaining credence:  Q3 growth is a bit of catch-up the first half and most of the payback will be from trade. The US economy may nearly stagnate or worse over the next few quarters. Monetary and fiscal brakes are being slammed. Inflation is high but the year-over-year comparison has too long of a memory, as it were. US headline CPI rose at an annualized rate of around 10% in Q1 and Q2. It slowed to 2.0% in Q3. The Fed, as Bullard suggests, may front load more hikes this year and ratify market expectations (that he helped shape), meaning 75 bp moves in November and December. Frontloading takes on new meaning if one is in a hurry to get inflation down, so it is in a better position to act if when the economy warrants. The implied yield of the December 2023 Fed funds futures is about 17 bp below the implied yield of the September 2023 contract.  September housing starts reported yesterday were weaker than expected, slowing after jumping almost 14% in August. Existing home sales are on tap for today and they are expected to have continued to fall. January was the last month-over-month increase. Mortgage demand has cratered as one would expect. Also, the drying up of the refinance market also cuts into a source of income (consumption?) as previously, owners were often tempted to take out equity. Also, weekly initial jobless claims are rising again but the levels are modest. Still, looking ahead, it seems reasonable to assume the labor market conditions are likely to weaken. The October Philadelphia Fed survey may confirm the weak sentiment seen in the Empire State survey last week. The price sub-indices draw attention given the market's sensitivity to inflation. Four Fed officials have scheduled appearances, but only Hacker (around midday ET) may address the economic issues. Canada's CPI was stronger than expected and this sparked a new appreciation for the risks that the Bank of Canada delivers another three-quarter point hike next week. The headline rose slightly, and the market had expected a small decline. The year-over-year rate eased to 6.9% from 7.0%., not quite as much as expected. That said, the pace of inflation stopped cold in Q3. Consider, and CPI rose at an annualized pace of more than 13% in Q1 and almost 12% in Q2. Q3? Minus 0.4%. The average of the core rates was little changed because of the upward revision to the August series. In the swaps market the odds of a 75 bp move surged from almost 25% to 85%. That failed to give the Canadian dollar traction as the risk-off (proxy S&P 500) was the flavor of the day. For the third session, the US dollar has found offers above CAD1.38 that caps the greenback. A close below CAD1.3720, where the 20-day moving average is found, would be a cautionary note for the greenback. This moving average has not been violated on a closing basis for over a month. Without new US dollar strength, the 5-day moving average can fall below the 20-day moving average early next week. It would be the first time in two months. The greenback firmed to a marginal new high for the month yesterday against the Mexican peso near MXN20.1760. With a few exceptions, the MXN20.20 area has capped the dollar since mid-August. For those needing to buy peso, this area may be attractive. Initial support today is seen near MXN20.05-MXN20.10.    Disclaimer

October 17, 2022  $GBP, $USD, Bank of Canada, BOJ, China, Currency Movement, Federal Reserve, Hungary, Intervention, SNB, UK Overview: The markets have returned from the weekend with a greater appetite for risk. Equities and bonds are rallying, and the dollar is better offered. China, Hong Kong, South Korea, and Indian bourses advanced. Mainland shares edged higher even though Zhengzhou, a city of one million people, near an iPhone manufacturing hub was locked down due to Covid. Europe’s Stoxx 600 is up nearly 0.5% to extend its recovery into a third session. US futures are trading a little more than 1% higher. European benchmark bond yields are 10-12 bp lower and the 10-year US Treasury yield is seven basis points lower to 3.95%. The reversal of the UK’s fiscal policy and a new Chancellor of the Exchequer has seen British Gilts rally strongly. The 30-year Gilt that traded briefly above 5.0% last week is off 34 bp today to 4.44%. A break of 4.25% would target 4.0%. Sterling is leading the major currencies higher today with around a 1% gain. The greenback is trading lower against all the major currencies, though it is virtually flat against the yen. Emerging market currencies are more mixed. Asian currencies are mostly softer, while the South African rand and Mexican peso join the central European currencies moving higher. Gold has stabilized after falling nearly 3% last week. It is approaching $1660, and the nearby cap is seen closer to $1670. December WTI is little changed. It fell 7.3% last week after rallying 16% the previous week on OPEC+ cuts. US natgas is off 3.4%. It gapped lower and is at its lowest level since mid-July. Natgas prices in Europe are tumbling as a cap is being discussed. Europe’s benchmark is at its lowest level since late June. It is down 4% today. It fell 9% last week, for its seventh consecutive weekly decline. Iron ore prices fell 2% today, giving back the pre-weekend gains in full. December copper is about 0.25% firmer, recouping half of what it lost ahead of the weekend. December wheat is starting the new week with a 1.4% advance after tumbling 3.6% at the end of last week. Asia Pacific Xi's speech at the 20th Party Congress in China seemed to offer little but a new confirmation of the current trajectory. In some ways, leaving out the political structure (I know, it is a bit like asking Mrs. Lincoln, "despite that, how was the play?), Xi sounded like many leaders of other countries while underscoring that economic development was the top priority. He talked about "common prosperity" limiting income and wealth inequality, recognizing markets' decisive role in allocating resources, and that housing is "for living not speculating." Reports indicate that in his two-hour speech, Xi had a section on "human capital." Xi's views on welfare are not so different than many liberals and neo-liberals in the US and Europe, and on more than one occasion, he has warned that welfare supports "lazy people."  Xi's emphasis on self-reliance (the word counters say he said it twice after not citing it at all in his 2017's speech) may be a recognition of the US tightening technology noose. Earlier this month, the Biden administration took the strongest steps to block China from developing start-of-the-art semiconductor capabilities, which have dual use--civilian and military. The full ramifications of the latest US controls are still rippling through the industry. Still, it appears that US citizens, including green card holders, cannot support the development or production of semiconductor chips at many (28) Chinese firms, which means employment and sales, shipping, servicing, and support. Taiwan's intelligence estimates that around 200 US passport holders are employed in Chinese semiconductor companies. It will work through third countries too. Even though the US is not the center of chip fabrication that it once did, US software is critical in chip design. Some pundits claim this "coup-de-grace" is a significant blow to this key industry. As the share prices have shown, it will also hurt several US chip companies. There is some speculation that the Bank of Japan may be intervening quietly and read into the BOJ's daily balances, the possibility that it sold a little less than $7 bln dollars to defend the yen. The first intervention last month was a record near $20 bln. To go from trying to muscle the market to quietly offering support to the yen seems unlikely. Moreover, the whipsaw in the exchange rate that is the intervention hypothesis is supposed to explain took place after the stronger than expected US CPI figures on October 13 in the North American session. That said, the Ministry of Finance Kanda did warn last month that "stealth" intervention was possible and that official confirmation would not always be provided. If the BOJ did intervene, which we doubt, did not have much impact. The dollar reached JPY148.85 ahead of the weekend more than a full yen higher than seen on October 13. It is in a little less than half-a-yen range today below JPY148.80. If we are right that intervention in Japan's time zone, then the dollar is likely to make its highs in Europe or North America. The Australian dollar rose to a marginal new high for the week ahead of the weekend before reversing and settling on its low slightly below $0.6200. It is trading with a firmer bias today, though it stalled near $0.6250 in the European morning, where options for A$465 mln expire today. A bit higher, $0.6270 are another set of options for nearly as much (~A$425 mln) will also roll off. The greenback remains firm against the Chinese yuan and is trading above CNY7.20. The high from late September was a little above CNY7.25. As expected, the benchmark Medium-Term Lending Facility rate was unchanged at 2.75%. The PBOC has steadied the daily dollar fix to around CNY7.10 and continued today with a CNY7.1095 reference rates. The median in Bloomberg's survey was for CNY7.1977. This appears to be the widest gap. Reports suggest that Chinese state banks swapped yuan for dollars in the forward market and sold dollars in in the onshore market to support the yuan. Europe The SNB has tapped the Fed's dollar-swap line for the past two weeks. On October 5, nine counterparties took $3.1 bln; last week, 15 institutions got $6.27 bln for a week. There are two general views. The first sees it as troublesome and an expression of the global stress being stoked by the reduction of dollar liquidity and growing systemic risks. A large Swiss bank has been the subject of rumors and speculation for weeks, but the number of counterparties suggests something more/bigger. The second view the use of US swap lines to secure the dollar as part of an arbitrage-like opportunity. Taking the dollars from the SNB's swap line, swapping them for Swiss francs, and depositing them with the SNB is a nearly risk-free pickup of an estimated 40-50 bp. Earlier, a similar type of arbitrage seemed to drive dollar-based investors' demand for Japanese government bonds. Then, the currency swap was greater than the bond's interest rate. Separately, while much of the coverage of central bank intervention has focused on Asia, some suspect the SNB may have quietly sold dollars near CHF1.00. The idea is that the SNB has become particularly hawkish and wants to resist currency weakness. The dollar is the second most important currency for Switzerland. Total sight deposits fell 3% last week, which one would expect amid dollar-selling intervention. Still, as we have previously suggested, it is also consistent with the SNB's efforts to mop up excess liquidity. Total sight deposits have fallen by nearly 20% over the past four weeks or CHF134.7 bln. When the UK government scrapped the cut to the highest marginal tax, many said it was a U-turn. We thought it was a relatively small dilution of its fiscal thrust. The shift before the weekend to embrace the Johnson/Sunak corporate tax increase is more significant and cost Chancellor Kwarteng his job. Hunt, whose fellow MPs rejected his bid to be Prime Minister, is the new Chancellor. Reports suggest he is committed to delivering the fiscal statement on October 31. Hunt may drop the one-percentage point cut in income tax that was to be implemented next year. The focus shifts from taxes to spending. One issue is whether welfare payments will be raised to blunt inflation, as Johnson had promised. Hunt is expected to make a statement late in the UK morning on measures to support fiscal sustainability and then will address the House of Commons a few hours later. Hungary surprised the market before the weekend. Last month, it signaled that it was done lifting rates and would focus on draining liquidity. The central bank introduced a new one-day deposit facility at 18%, compared with the base rate of 13%. It also indicated that it would use reserves to counter the rise in energy prices. That could cost around $1.5 bln a month. As a result, the forint recovered by about 4.2% against the euro ahead of the weekend. There has been no follow-through forint buying today and the euro recovered from about HUF416.35 to HUF419.25 before steadying in the European morning.  The euro held above the pre-weekend low slightly below $0.9710. Then it rallied nearly half a cent through the European morning. A consolidative tone is threatening. Last Thursday and Friday's high were recorded a little above $0.9800 and this remains the nearby cap. Options for almost 1.6 bln euro struck at $0.9800 expire on Thursday. Sterling is up around a cent in the European morning around $1.1275. It did initially slip through the pre-weekend low to dip below $1.1150 but recovered quickly. The high from the end of last week was $1.1365-80 this needs to be overcome to lift the tone and signal a re-test on the $1.1500 area. America The robust September employment data was followed by a stronger-than-expected CPI and respectable retail sales (0.4% core and August revised to 0.2% from 0). Despite the lagged nature of the data points, if the Fed were to say to its critics that after raising the Funds target by 225 bp and doubling the pace of the balance sheet unwind over the past 100 days, we venture that interest medium-and long-term US rates would rise rather than fall. Core CPI is at a new cyclical high. Headline inflation is higher. Frankly, the Federal Reserve seems to be moving in the opposite direction. Encouraged by Bullard, the market will take more seriously the chances of a 75 bp hike in December after a 75 bp hike in early November. The October Empire State manufacturing survey is on tap today (unlikely to be a big market mover), and while no Fed officials are scheduled to speak, the revelation that Bostic may have violated the Fed's trading rules is being discussed by market participants. Bostic and Kashkari speak tomorrow ahead of the Beige Book on Wednesday. The combination of stepped-up hawkish rhetoric by Bank of Canada Governor Macklem, despite words of caution from the IMF about risks of recession from the collective hikes, and the prospects of a more aggressive Fed has lifted expectations for a 75 bp hike next week. After the Reserve Bank of Australia raised rates by a quarter-of-a-point, some observers thought it was a tell for a more moderate pace by Canada. Still, Macklem put that to bed, The market accepted that a 50 bp was most likely, but in recent days, expectations for a 75 bp move have increased. The swaps market now sees about an 78% chance of another three-quarters point move. Firmer equities can help the Canadian dollar pare last week's 1% decline. The Canadian dollar fell to new two-and-a-half-year lows in the middle of last week. Trading remained choppy in the second half of the week and the greenback finished slightly below CAD1.39. It has not been above CAD1.3880 today and there are options for nearly $900 mln at CAD1.3900-05 that expire today. We suspect that they may have been neutralized ahead of the weekend. A break of CAD1.3800 could spur a move toward CAD1.3740-50 today. The greenback is offered against the Mexican peso, and it is approaching the lower end of its recent trading range. It has not traded below MXN19.9350 this month, but a break could signal a move to the bottom of the wider range, which extends to around MXN19.80. It is a quiet week for Mexican data and the highlight is the August retail sales report on Friday. A small rise is expected.    Disclaimer Source: Sterling and UK Debt Market Respond Favorably to the Return of Orthodoxy - Marc to Market

Overview:  The rise in global interest rates continues. The US 10-year yield is a few basis points to near 3.15% and European benchmarks are mostly 5-6 bp higher. Of note, the sharp sell-off in UK Gilts is being extended. Yesterday’s 10 bp rise has been followed by another 14 bp surge today. Italian bonds are also getting hit. The 10-year yield is up a little more than 10 bp. The US dollar is mostly firmer against the major currencies, though the yen and Australian dollar are little changed. Among the emerging market currencies, a small number of Asian currencies, including the Chinese yuan and South Korean won are firmer, but most are under pressure. Equity markets in the Asia Pacific region were mixed, but the downside bias is evident in Europe, where the Stoxx 600 is lower for the fourth consecutive session and seven of the last nine. It is at new lows since mid-July. US futures are narrowly mixed and have a three-day loss in tow. Gold is also making new lows for the August and traded at $1711 having been above $1800 in the middle of the month. Iraq says its exports will not disrupted by the violent demonstrations helped the October WTI contract reverse lower yesterday (possible key downside reversal) and today it is testing the 200-day moving average near $89. US natgas is steady after falling 3.3% yesterday. Europe’s Dutch benchmark is up nearly 5% to snap a three-day slide of over 20%. Iron ore jumped nearly 3.8% to resurface above $100 and halt the two-day slide of almost 8%. December copper is slipping lower for the fourth session and is trading near four-week lows below $354. December wheat is slipping further after falling 2.7% yesterday.  Asia Pacific China's composite August PMI eased to 51.7 from 52.4. The contraction in the manufacturing sector continued with the PMI below 50 for the second consecutive month (49.4 vs. 49.0). The drought, power outages, Covid disruptions, and the ongoing drag from the end of the property bubble are hobbling the economy. The drop in supplier delivery times (49.5 from 50.1) are illustrative. Output and new orders continued to fall. The non-manufacturing PMI slowed to 52.6 from 53.8. Construction, reflecting, the emphasis of government efforts on manufacturing remained a bright spot at 56.5, albeit down from 59.2 in July. Japan's industrial production and retail sales were better than expected. Industrial production has surged 9.2% in June (month-over-month) in a response to the re-opening of Shanghai from Covid lockdowns and many expected a small pullback in in July. Instead, the preliminary estimate has it growing by another 1% in July. Autos, boilers, and turbines output grew, according to the report. Retail sales rose by 0.8% in July, more than twice the median in Bloomberg survey after the June series was revised to show a 1.3% decline rather than 1.4%. Autos, food, and beverages led the better-than-expected report. Today's data suggests a firm start to Q3. Economists expect the world's third-largest economy to expand by around 2.0% in Q3. The US claims, and echoed by many media outlets, that it is not seeking to change the status quo about Taiwan, but that Beijing is. Beijing claims that it is the US that is the antagonist. Both assessments seem correct. Leave aside Pelosi's visit and the other official visits, often using US military aircraft. Forget about reports of US military advisers in Taiwan for nearly two years. Consider a bill before Congress that proposes to declare Taiwan an important non-NATO ally. Consider Senator Blackburn's suggestion earlier this week that it is "may be" time to revisit the US one-China policy President Biden has intimated as much on several occasions only to have his comments "walked back." Beijing is no innocent bystander. It continues to harass Taiwan and challenge others in the South China Sea, including the Philippines and Japan. Yesterday, Taiwan fired warning shots for the first time at a PRC drone near an offshore island. Beijing struck a secret deal with the Solomon Islands a few months ago and one of the consequences has become clearer in recent days. Last week, a US coast guard ship was denied refueling permission by the Solomon Islands, which has declared a moratorium on all US Navy visits pending an update of its protocol of procedures. The US embassy was closed in the Solomon Islands nearly two decades ago, but plans on re-opening it, according to press reports earlier this year. The yen did not react much to the better-than-expected local data, and the firm US yields kept the US dollar firm. The greenback is little changed, but so far, holding below yesterday's high slightly above JPY139.05. It is also holding above yesterday's low just above JPY138.00, where the five-day moving average is found. The Australian dollar finished North American session on its lows yesterday, near $0.6855. There has been no follow-through selling yet today and the Aussie poked above $0.6900 before finding new offers, which is also where the five-day moving average is found. Position-adjusting around the expiration of options for A$400 mln today at $0.6875 and tomorrow for A$720 mln at $0.6867 may be contributing to the choppy tone. For the sixth consecutive session, the PBOC set the dollar's reference rate below market expectations (Bloomberg survey) as CNY6.8906 vs. CNY6.9083. The dollar gapped higher on Monday against the yuan. It entered the gap today, which extends to last Friday's high around CNY6.8730 and recorded a low near CNY6.8870. Its sideways movement follows a two-and-a-half week gain of about 2.3%. Europe France reported slightly softer inflation but also considerably weak consumer spending. The EU harmonized CPI rose 0.4% in August for a 6.5% year-over-year rise (6.8% in July). France caps on energy prices run until the end of the year, but the government is considering new measures and the EU is considering collective action. Service price inflation was sustained, and food and manufactured goods prices accelerated. Consumer spending fell 0.8% in July compared with a 0.2% decline median projection in Bloomberg's survey. June's 0.2% increase was shaved to 0.1%. The third quarter is off to a weak start. After contracting by 0.2% in in Q1, the French economy expanded by 0.5% in Q2. The 0.3% forecast for Q3 might be a bit optimistic. Italy's harmonized CPI jumped to 9.0% from 8.4%. Many economists had hoped for a dip to 8.2%. The month-over-month gain of 0.8% followed a 1.1% decline in July. Recall that yesterday's German inflation edged up to 8.8% from 8.5% and Spain's eased to 10.3% from 10.7%. The aggregate eurozone inflation figures were worse than expected. The headline rose to 9.1% from 8.9%. However, more troubling was the jump in the core rate to 4.3% from 4.0%. The median forecast in Bloomberg's survey looked for a 4.1% year-over-year core rate. The euro was sold to session lows (~$0.;9975) a few minutes before the report. The swaps market is pricing in a slightly greater chance of a 75 bp hike next week by the ECB, just shy of a 66% chance. It was about 50% at the end of last week. There is a dramatic interest rate adjustment taking place in Europe, which over time, will likely impact the foreign exchange market. Yesterday, we noted that the Germany two-year interest rate more than doubled in the past two weeks (from about 0.50% on August 16 to almost 1.20% on Monday and about 1.18% today). This has overwhelmed the increase in US yields and sliced the US premium to about 230 bp, the lowest since early July. The UK 2-year Gilt is not slouch. It has played a bit of catch-up yesterday and traded above 3% for the first time since 2008. It spent most of July and the first half of August below 2%. At the start of the year, the UK and US two-year yields were near parity. The more aggressive trajectory of Fed policy had given the US a 135 bp premium as recently as mid-August. The premium has collapsed to around 45 bp, the least since mid-March. After holding above $0.9900 on Monday's test, the euro reached $1.0055 yesterday before sold in North America back down to $0.9980. Today's low has been about $0.9975, and the intraday momentum indicators suggest it could stabilize for a little. The nearby cap may be around $1.0020. With the August CPI estimate behind it, the next two key events are this Friday's US jobs report and next week's ECB meeting. Sterling was sold to new two-year lows yesterday near $1.1620 and remains pinned in the trough today. It has recorded lower highs this week, and today, for the first, time has not traded above $1.1700. However, like the euro, the intraday momentum indicators for sterling suggest some consolidation is likely in the North American morning. America Two recent business surveys have caught our attention. First, a survey of CFOs by Deloitte found that 73% regarded persistent inflation as bigger threat than a recession, with the other 27% more concerns about a recession. What is a bit surprising by this is that judging from the recent earnings many businesses have been able to lift prices to more than covering rising costs, including wages. Adjusted pre-tax profits rose 6.1% in Q2 over Q1, which had seen a 2.2% decline quarter-over-quarter. By another metric that measures pre-tax profits as a percentage of gross value added, corporate profit margins rose 15.5% in Q2, the widest in more than 70 years. Separately, and somewhat less surprising, a survey by the US-China Business Council of its 117 members found over half attributed plans to cancel or delay investment plans in China due to its Covid-related restrictions. Most said the negative effects were reversible, but 44% said it would take "years" to restore confidence. ADP launches a new methodology for its estimate of private sector employment today. In its press release, it claims the report will be more robust, using granulated data based on payrolls covering 25 mln US workers. In addition, estimate of the current month's nonfarm private sector employment change, it will also provide weekly data from the previous month by industry and business size. A new pay measure is also being introduced. ADP did not provide an estimate for July, pending this methodological change. The median forecast in Bloomberg's survey of 15 economists is for a 300k increase, though the average is a bit lower at 280k. Yesterday's report on job openings (July JOLTS) was around 850k more than expected and the June series was revised higher. The Fed funds futures are pricing in about a 75% chance that the third 75 bp hike will be delivered next month. It was about a two-thirds chance before Fed Chair Powell spoke at Jackson Hole. The dramatically smaller than expected Canadian Q2 current account surplus reported yesterday (C$2.7 bln rather than the C$6.8 bln expected warns of downside risks with today's Q2 GDP report. The current account surplus in the first quarter was revised sharply as well (C$2.7 bln from C$5.0 bln). Bloomberg' survey of a dozen economist generated a median forecast of 4.4% annualized pace after 3.1% expansion in Q1. The monthly GDP figures are more troubling. The cumulative monthly increases n Q1 were 1.4%. June figures will be reported today. The median forecast calls for a 0.1% increase, which would bring the Q2 cumulative increase to 0.4%. We note that Canada's 10-year breakeven has risen from about 1.93% at the start of last week to 2.20% today. On the other hand, the five-year breakeven has eased about six basis points at the same time and is below 2.10% today. The Bank of Canada meets next week, and although the market flirted with another 100 bp increase, it appears to recognize a 75 bp move is more likely. Separately, a small and minor cabinet reshuffle is expected later today, with no policy implications.   The US dollar is trading at new highs for the month today against the Canadian dollar. Yesterday, it traded above CAD1.31 for only the third time this year but closed slightly below it. It is extending the leg up that began last week near CAD1.29 and has approached CAD1.3115. The spike high recorded in the middle of last month was near CAD1.3225. The intraday momentum indicators are stretched but the key remains the broader risk appetite (S&P 500 proxy). Initial support now may be in CAD1.3060-80 area. The greenback is trading firmly against the Mexican peso and is near a seven-day high above MXN20.22. The high set on August 19 around MXN20.2670 is the key to the immediate outlook. A move above it, could spur a move toward MXN20.35-37. But, if it holds, it may signal a consolidative phase. That said, note that the five-day moving average is poised to cross above the 20-day moving average for the first time since late July.    Disclaimer   Source: EMU August CPI at 9.1%, while the Core Rate Jumps to 4.3%

Overview: Corrective pressures were evident yesterday and they extended today in Asia and Europe but seem to be running their course now. Market participants should view these developments as countertrend and be wary of waning risk appetites in North America today. Most Asia Pacific equities rallied earlier today, save China and Hong Kong. Europe’s Stoxx 600 has retraced most of yesterday’s losses and US futures are trading higher. Benchmark bond yields are softer with the US 10-year note yield off about 3.5 bp to below 3.07%. European yields are mostly 3-5 bp lower, but UK Gilts are pressured by reports that foreign investors were heavy sellers last month. The US dollar surrendered earlier gains yesterday and is mostly lower today. The Australian dollar is leading the charge, despite a much sharper than expected fall in building approvals. Among emerging market currencies, only the Philippine peso and Taiwanese dollar are failing to push higher. Gold is soft, despite the weaker greenback and lower yields. It is nursing losses for the third session. After a sharp 4.25% gain yesterday, October WTI is pulling back by around 1.75% today toward $95. US natgas is off 2%, while Europe’s benchmark has extended yesterday’s 19.5% drop with a further 6.6% slide today. China’s property sector woes are weighing on the steel sector and iron ore prices have fallen 8% over the past two sessions and is below $100 for the first time this month. December copper is off 1% after falling 2.3% yesterday. December wheat is paring yesterday’s 4.6% gain.  Asia Pacific Japan reported that its unemployment rate was unchanged in July at 2.6%. The job-to-applicant ratio unexpectedly ticked up to 1.29 from 1.27. The upticks in the yen, however, are more related to the pullback in US yields than the developments in the Japanese economy. Tomorrow, Japan reports July industrial output, and after the 9.2% surge in June, related to the lagged response to re-opening in Shanghai likely eased a bit. Retail sales offer the opposite trajectory. They fell a whopping 1.3% in June and likely stabilized in July, allowing for a small gain. In June apparel and general merchandise purchases were particularly weak. Rising interest rates are squeezing Australia's property market more intensely than expected. Building approvals plunged 17.2% in July, six-times more than the median forecast in Bloomberg's survey. The drop was driven by the private sector apartments rather than houses. The number of private sector approvals was the lowest since January 2012. The disappointment did prevent the Australian dollar from recovering today, amid the general pullback in the US dollar, but the odds of a 50 bp hike next week were shaved to around 65% from 70% yesterday. Rains in Sichuan have eased the energy emergency allowing large-scale industry to result production this week. The provincial government downgraded the emergency to level-one from level-two yesterday and several companies (including Toyota, Honda, and Foxconn) indicated a resumption of production. Cooler weather was also helping reduce household demand for electricity. Yet, Sichuan has gone from drought to flood. Reports suggest that nearly 325 mines, including 60 coal mines, with 5000 workers have been asked to take shutdown for precautionary reasons. Meanwhile, the zero-Covid policy has led to lockdowns in parts of Shenzhen. Softer US rates and a downside correction in the US dollar after reaching JPY139 yesterday has seen the greenback ease toward JPY138.15. The JPY137.95 area corresponds to a (38.2%) retracement of the dollar rally since before Powell spoke at Jackson Hole at the end of last week. We suspect the corrective pressure have been exhausted or nearly so and expect North American traders to buy the dollar the on the dip. Yesterday's low was slightly above JPY137.35. The Australian dollar took out a neckline of what may be a potential head and shoulder top yesterday but recovered to close above it (~$0.6850). Follow-through buying today has lifted it to around $0.6955. Here too, we think the short squeeze has nearly run its course in the European morning. The $0.6965-70 area may offer the nearby cap. For the fifth consecutive session, the PBOC set the dollar's reference rate lower than the market (median in Bloomberg's survey) expected, and the gap today (~249 pips) was the most since the Bloomberg survey began four years ago (CNY6.8802 vs. CNY6.9051). The PBOC seemed willing to accept an orderly decline of the yuan, especially given the divergence of monetary policy, but wants to avoid a vicious cycle. This was underscored by its announcement of a consultation period as it considers a news policy to require prior approval for companies wishing to sell long-term debt in offshore markets. At the same time, we read the fixing as a type of affirmation through negation, i.e., the PBOC's action acknowledges the strength of the demand for dollars. The dollar rose to a two-year high yesterday, after rising nearly 2% over the previous two weeks. Today, it slipped less than 0.1%. Europe Attention turns to eurozone's August inflation, ahead of tomorrow's aggregate report. Spain began with a 0.1% month-over-month increase that saw the harmonized year-over-year pace ease for the first time in four months. It slipped to 10.3% from 10.7%. However, the core rate rose to 6.4% from 6.1%. German states have reported, and they all showed of the year-over-year rate, even as the month-over-month change moderated to 0.2%-0.4%. The median forecast in Bloomberg's survey sees a 0.4% increase in the harmonized rate for an 8.8% year-over-year increase (from 8.5% in July). The risk is on the upside. With the surge in energy prices, the Bundesbank chief Nagel warned that Germany inflation could rise to over 10%. The EU is holding an emergency energy ministers meetings on September 9 to consider efforts to coordinate a response. The focus appears capping gas prices and/or decoupling electricity prices from gas prices. EU countries have already "spent" and estimated 280 bln euros on tax cuts or subsidies for energy. Quietly, the German two-year yield has doubled in the past two weeks from 0.53% on August 15 to 1.10% yesterday. The German yield has risen faster than comparable US yield. As a consequence, the US 2-year premium has fallen below 240 bp for the first time since early July. It recorded a three-year peak on August 5 a little more than 277 bp. One of the spurs to the more than 22 bp increase in the German two-yield over the past two sessions has been the push from some of the hawks for a 75 bp move at next week's ECB meeting. While it is noteworthy that it was not done via leaks to the press this time, as sometimes is has appeared in the past, and the market seems to think it is likely. The swaps market shows it be a little more than a 60% chance of materializing, up from about a 20% chance a week ago. Our own subjective assessment is that a steady series of 50 bp hikes is more likely to achieve a consensus than a jump to 75 bp and a return to 50 bp or even 25 bp. Given the fragile economic condition, and with little to gain from a larger move than cannot be achieved through the ECB's forward guidance, a stable, predictable course is likely preferable. That said, the provocative tactics of the hawks seems to be an attempt to deliver a fait accompli to the ECB. If they deliver a 50 bp hike, they will appear as dovish versus expectations and could pressure the euro lower in disappointment. The short-covering bounce in the euro began yesterday when the $0.9900 area held. There are a little more than 3 bln euros in options struck there that roll-off today. The gains maybe spurring demand related to 1.55 bln in options struck at $1.00 that expire tomorrow. The euro is at its best level since Powell spoke. Just prior to the Fed Chair's speech last week, the euro spiked to $1.0090. This area should provide a cap now. Sterling's recovery off yesterday's two-year low (~$1.1650) seems less inspired and has not been able to push above yesterday's high (~$1.1785). And even if it does, the upticks will likely be limited to the $1.18 area, which is the (61.8%) retracement of the decline since the high set before Powell spoke (($1.1900). The intraday momentum indicators are stretched by the gains of a little more than half a cent in the European morning. Separately, the decision by the Hungarian central bank is awaited. It is expected to hike the base rate by 100 bp today after hiking by 300 bp last month. This move will bring the base rate to 11.75%. It was at 2.4% at the end of last year.    America The two-year breakeven has now fallen slightly more than 25 bp over the past three sessions to about 2.70%. Over the three sessions, the nominal two-year yield has risen by a grand total of three basis points to 3.42%. The odds of a 75 bp hike next has edged to about 75% from about 66% before Powell spoke at Jackson Hole and gave no signal besides saying it could be 50 bp or 75 bp move. The difference, the 25 bp is coming in addition to the other anticipated moves. What this means is the market now sees the year-end Fed funds target closer to 3.75% rather than 3.50%. The implied yield of the March 2023 Fed funds futures is pricing in about an 80% chance of a hike in Q1, unchanged for the third consecutive session. The market also continues to price in 7-9 bp of easing by the end of next year as it has for the past five sessions. Ahead of the US jobs data, which are the highlight of the week, with the ADP estimate tomorrow, house prices, the Conference Board's consumer confidence, and the JOLTS report on job openings are featured today. While the Fed's Kashkari's comments about the stock market and the Fed's objective of tightening of financial conditions are really revealing anything new, the undiplomatic expression seemed to set the chins wagging. Equity prices are part of the financial conditions but so are interest rates, ease of credit, and asset prices more generally. House price inflation appears to be slowing and this alongside weaker financial asset prices are part of the process. Canada reports its Q2 current account surplus, which is reflecting the positive terms-of-trade shock. Consider that in 2019, before Covid, Canada recorded a C$47 bln current account deficit. With a Q2 surplus of C$6.8 bln expected, it would mean Canada has recorded a nearly C$11 bln current account surplus in H1 22. Tomorrow, Canada reports Q2 GDP and it is expected to have accelerated to around 4.4% form 3.1% in Q1. Still, even with today's modest gain, the Canadian dollar is off about 2.7% this year against the US dollar. The broader risk environment is a more important driver of the exchange rate. Mexico reports its July unemployment rate. It is expected to have ticked up to 3.53% from 3.35%. The market does not appear sensitive to this time series. Tomorrow, the central bank's inflation report is due, but it’s unlikely to impact expectations for a 75 bp hike late September. The US dollar set a new high for August near CAD1.3075 before pulling back toward CAD1.2990. Follow-through selling today has been limited to the CAD1.2970 area, just above CAD1.2965 retracement objective. The momentum indicators suggest that losses below that will be limited and instead the greenback could recover toward CAD1.3025. The Mexican peso's resilience is evident. It continues to trade well within this month's range. The dollar has built a base around MXN19.81 and has not closed above the 20-day moving average (~MXN20.0735) since August 2. However, further dollar losses today look limited.     Disclaimer   Source: Turn Around Tuesday Began Yesterday, Likely Ends before Wednesday

Overview: The reverberations from last week continue to roil the capital markets today. Equities and bonds have been sold and the greenback bought. Most of the large markets in Asia Pacific fell by more 2%, including Japan’s Nikkei, Taiwan’s Taiex, and South Korea’s Kospi. Ironically, the Shanghai and Shenzhen Composites eked out minor gains, but the CSI 300 still eased. Europe’s Stoxx 600 is off 1% after falling nearly 1.7% before the weekend. US futures warn of another lower opening. Recall that the major indices gapped lower last Monday as well. The US 10-year yield is up 7 bp to 3.11%, probing last week’s highs, while the two-year yield reached new highs near 3.48% before steadying. European benchmark yields are 12-13 bp higher. The dollar is firmer against all the major currencies. Most of the European currencies but the Norwegian krone and British pound are off modestly, while the yen, the Australian dollar and sterling are off more than 0.5%. Emerging market currencies are under pressure, though the Hungarian forint and Czech koruna are steady to firm. Rising rates and a stronger dollar are no match for gold, which has been sold to a new low for the month (~$1720.45). There appears little support in front of $1700. October WTI is firm near $93.75. Talks with Iran will carry over into next month. US natgas slipped fractionally last week and is up nearly 2.5% today to about $9.55 after testing $10 last week. News that Germany is near its 85% tank capacity objective for next month has seen Europe’s benchmark soften a little (off ~1.8%). Iron ore is giving back most of last week’s 4.7% gain. December copper is off 3.4% after posting a minor gain last week (~0.7%). December wheat rallied 4.4% last week and is off almost 1% today.  Asia Pacific As China's Xi awaits the coronation for a third term, the challenges seem to be intensifying. Shijiazhuang, the provincial capital of the Hebei province that borders Beijing is in a partial lockdown for three days, which started yesterday, and includes the suspension of subways and non-essential business operations. It is a city of more than 11 mln people and follows lockdowns in other parts of Hebei last week. Power shortages are leading to rolling blackouts in different regions and compounding the challenge arising from the end of property boom. The economic toll spurred the government into action recently with rate cut and new lending/spending initiatives mostly concentrated on infrastructure. Over the weekend, China reported that industrial profits fell 1.1% in the Jan-July period. They had risen by 0.8% in the first half. The decline in profits dovetails with the deepening of the economic slump seen in a batch of data reported recently. While several central bankers used the Jackson Hole gathering to brandish their anti-inflation credentials, BOJ's Kuroda stuck fast to his commitment to easy monetary policy. He argued that nearly all of Japan's inflation is a function of higher commodity prices. He said that inflation would decelerate next year toward 1.5%. It was 2.6% in July, but 1.2% excluding fresh food and energy. Kuroda's inflation outlook is not much different than the market’s. A recent Bloomberg survey found a median forecast for Japan's 2023 CPI of 1.3% at the headline rate than 1.4% core. July retail sales in Australia surged 1.3%, the most in four months, and four-times more than the median forecast in Bloomberg's survey. It did nothing for the Australian dollar, which extended the pre-weekend sell-off. Still, the resilience of the Australian consumer was impressive despite the cost-of-living squeezes. Gains were recorded in five of the six retail categories., with only demand for household goods softening. The Reserve Bank of Australia meets on August 6 and the swaps market has a little more than a 70% chance of 50 bp hike discounted and about 150 bp priced between now and the end of the year. The jump in US rates helped lift the dollar to JPY139.00 in late Asia turnover. It is the highest since July 15, the day after the 24-year high was set near JPY139.40. Japan's Cabinet Secretary Matsuno noted that the government is closely was closely watching market movements. However, the price action can hardly be surprising given the divergent messages at Jackson Hole. The greenback's momentum stalled a bit. Initial support is seen near JPY138.50. Although there was not take-up at the BOJ's offer to buy bonds today, the 0.25% cap on the 10-year is being approached again. The Australian dollar recorded a bearish outside down session ahead of the weekend by trading on both sides of Thursday's range and settling below Thursday's lows. Follow-through selling today has seen it approach $0.6840, new lows for the month. Importantly from a technical perspective, it appears to have broken the neckline of a possible head and shoulders top that projects through the two-year lows set in mid-July near $0.6680. Nearby resistance is now seen around $0.6870. The dollar gapped sharply higher against the Chinese yuan. It reached a new two-year high of CNY6.9225 and did not trade below CNY6.90 today. The pre-weekend high was about CNY6.8730. Since August 10, the greenback has risen by roughly 2.50%. The CNY7.0 is an important psychological level, but it peaked in September 2019 near CNY7.1850 and revisited it in May 2020 (~CNY7.1780). For the fourth session, the PBOC set the dollar's reference rate weaker than the median in Bloomberg's forecast as it moderates the pace of the dollar's rise. Today's fix was at CNY6.8698 vs. expectations for CNY6.8794. Europe Europe is on the verge of a recession. Indeed, it may have already begun. It is not going to deter the European Central Bank or the Bank of England from continuing to aggressively tightening monetary policy. A few ECB members from creditor countries, like Austria and the Netherlands, want the central bank to consider raising rates by 75 bp at next month's meeting. They do not yet seem to represent a majority, but it is not like the members from the periphery are advocating a quarter point move.  The surge in natural gas and electricity prices promise to drive inflation higher and intensify the squeeze on the cost-of-living. Before the weekend, the UK regulator (Ofgem) confirmed what was suspected. The cap on gas and electricity will be lifted by 80% on October 1. This likely means that UK inflation will rise above the BOE's latest forecast of 13.2%, and the new UK government face strong pressure to help households and businesses. It had previously committed GBP30 bln to households but that was three months ago. To cover the same proportion now of the increase would require another GBP14 bln, according to some estimates. We had thought that increased military spending would replace some of the Covid-related spending, and while that may be true, it now seems that energy subsidies and the like will also generate wider deficits. It may also lead to increased nationalization of the parts of the energy sectors. Sweden holds legislative elections on September 11 and the law-and-order and anti-immigration party that has been shunned by the mainstream parties appears to be surging in the polls. The Swedish Democrats could be the second largest party after the ruling Social Democrats. Three different polls published last week give it 1/5-1/4 of the vote compared with 30% for the government. The Moderates have been pushed into third place with 16-18% support. The center-right bloc of the Moderates, Christian Democrats, and Liberals could ally with the Swedish Democrats. The polls show it is virtually tied with the center-left bloc of Social Democrats, Left, Centre, and Green parities. Separately, Sweden reported the economy expanded by 0.9% in Q2, missing 1.4% expectations, though Q1 was revised from a 0.8% contraction to a 0.2% expansion. Sweden's CPI was at 8.5% in July and the underlying measure, which uses fixed interest rates, and is the target measure was at 8.0%. The policy rate stands at 0.75%, following the 50 bp hike in June. The Riksbank meets on September 20 and the swaps market is pricing in a large hike (~100 bp). The euro retested last week's 20-year low near $0.9900, and when it held a small, short-covering bounce in early European activity lifted it to almost $0.9960. A combination of bearish sentiment and options for nearly 1.6 bln euro at $1.000 may deter a move above parity. The session high is a little shy of $0.9990. For its part, sterling slumped to a new two-year low near $1.1650. It posted a bearish outside down day ahead of the weekend. Sterling has met the double top objective near $1.17, we had monitored that had a $1.20 neckline. The spike low in March 2020 saw it trade to almost $1.1410. Sterling is finding some support in the European morning, and the $1.17 area now should offer resistance. America Fed Chair Powell terse speech at Jackson Hole before the weekend did not appear to change expectations for the trajectory of monetary policy. The implied yield of the March 2023 Fed funds futures contract continued to trade about 20 bp above the December 2022 contract as it had for a couple of weeks. This points to a strong expectation of a rate hike n Q1 23. The implied yield of the December 2023 Fed funds futures was about seven basis points below December 2022 contract. This implies a small chance of a cut late next year. These spreads were virtually unchanged in response to the Fed Chair's speech. Powell did succeed in doing was to drive down the two-year breakeven, which speaks to the much-maligned anti-inflation credibility of the Federal Reserve. The two-year breakeven dropped almost 16 bp before the weekend to 2.74%. Consider that it was near 4.5% as recently as mid-June. This speaks to the increase in the real rates, which in turn punished equities and risk assets more broadly. One common refrain against the Federal Reserve is that is does not have tools to address the supply shocks that have lifted prices. Another tact, illustrated by a paper presented at Jackson Hole, is that fiscal policy is responsible for around half of the recent increase in inflation and that when inflation is of a fiscal nature, monetary alone does is not effective. There are at least two answers to these criticisms. First, it underscores our claim that the extent of fiscal tightening has not been appreciated. The budget deficit is expected to fall to below 4.5% of GDP this year from 10.8% last year. Consider that after the Global Financial Crisis, the US deficit peaked around 10% of GDP (2009) and did not fall below 5% of GDP until 2013. Second, Powell address this in his Jackson Hole Speech in the first lesson of the 1970s inflation. Price stability, regardless of what threatens it, is the Fed's responsibility. He argued that the Fed needs to constrain demand to bring it in line with supply.    What will be a data-packed week, culminating with August nonfarm payrolls, will begin slowly, with only the Dallas Fed manufacturing survey and the sale of $96 bln in 3- and 6-month bills on tap for today. The risk-off mood has sent the greenback through last week's highs (~CAD1.3060-5) against the Canadian dollar. The next chart area is seen around CAD1.3100-35, and the two-year high set in mid-July (~CAD1.3225). The intraday momentum indicators are flagging and warning of the risk of some backing and filling before those highs are attacked. Initial support is seen in the CAD1.3030-50 band. Meanwhile, the greenback appears to have built a base around MXN19.82 and looks poised to challenge recent highs near MXN20.26. It reached MXN20.15 in Asia before pulling back to below MXN20.10. Further easing toward MXN20.05 may provide a lower risk entry.    Disclaimer   Source: Stocks and Bonds Sell Off, while the Dollar Rallies

The poor preliminary PMI readings, the ongoing European energy crisis, and the recognized commitment of most major central banks to rein in prices through tighter financial conditions are risking a broad recession. These considerations are weighing on sentiment and shaping the investment climate. Most high-frequency data due in the days ahead will not change this, even if they pose some headline risk.   What we have seen among some central bankers applies to market participants too  It is not so much that these central bankers are congenitally doves or hawks, but they are simply activists. Whether conditions warrant tighter or easier monetary policy, the activists lead the charge and are more aggressive than most of their colleagues in both directions. Similarly, some market participants are just extreme in their views. On the one hand, given that market returns are often characterized by fat tails, it makes sense that market views are not normally distributed. Hugging the median (there is rarely truly a consensus, despite the market jargon) draws little attention and is unlikely to promote sales of research products and newsletters.   On the other hand, depending on the corporate culture, there may be little incentive to take the risk of standing out from the crowd  It is as if some take Keynes to heart: "Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally." Sometimes, corporate culture is broad enough to accept either approach, allowing the idiosyncrasies of the economist/analyst wider latitude. However, some are conditioned to fear being wrong that they do not let themselves be right. For them, being part of the crowd is safe. Being part of the consensus nearly always gets less pushback than being an outlier.   II Three high-frequency economic prints next week will likely move the markets whether they meet expectations or not: China's PMI, the eurozone's CPI, and the US employment report  These are the three biggest economies, and each is struggling to put it mildly. The data are unlikely to change this view but could impact the policy outlook. In addition, extreme weather aggravates existing challenges, including the energy crisis, supply chain disruptions, and inflation pressures.   The US, Japan, the eurozone, and Australia's preliminary composite PMIs fell below the 50 boom/bust level  Ironically, the UK's held slightly above, though the Bank of England of a recession that will extend into 2024. Where is China?   Its July composite stood at 52.5. It had been below 50 due to the lockdowns associated with its zero-Covid policy from March through May. It reached a 15-month high in June of 54.1.    In the US, we argued that back-to-back quarterly declines in output were a bit of a statistical quirk stemming from the challenge of managing inventories in the current economic environment and trade, to a lesser extent  While recognizing that a sustained economic contraction was likely, we did not think it actually had begun and expected policymakers to act accordingly.   In China's case, the economic data is consistent with growth  The median forecast in Bloomberg's survey sees the world's second-largest economy expanding by 3.4% quarter-over-quarter after a 2.6% contraction in Q2. However, Chinese officials are acting as if it were in a recession or will be shortly. It unexpectedly shaved its benchmark one-year medium-term lending facility rate and allowed lending prime rates to be cut. The larger (15 bp) cut in the five-year rate clearly reflected the ongoing concerns about the housing market. Beijing is using command functions and coordinating capabilities to push lending from banks to the property sector and new local government borrowing for infrastructure projects. It has accepted a weaker yuan against the US dollar. It fell to a new two-year low last week. The softer the PMI, the more the market will look for further easing, including reducing required reserves.   On August 31, the eurozone publishes its preliminary estimate of the month's CPI  Headline inflation accelerated to 8.9% in July, surpassing the US 8.5% pace. The median forecast in Bloomberg's survey is for the pace to tick up slightly to 9.0%. In addition, the core rate is seen edging up to 4.1% from 4.0%.  Many EMU members are helping struggling households by cutting the VAT on energy or other subsidies, but the price of energy is rising even quicker  While there is some debate over whether US inflation has peaked, there is less debate in Europe. Prices are still rising. Seasonal patterns may be distorted, but July's monthly change has been less than June since 2003. August's monthly CPI has increased more than July's since 2000, with the one exception of 2020 when it matched July's 0.4% decline. This month's inflation is expected to rise by 0.4% after the 0.1% increase in July. The weakness of the euro also risks boosting prices. The single currency is off about 2.5% this month after falling roughly 4.8% in the previous two months.  The European Central Bank meets on September 8  The swaps market is confident that even though the flash PMI warns that output is contracting, the ECB will continue to hike rates. Following the half-point increase in July, the market expects another 50 bp hike next month. More than that, the swaps market has about a 50% chance of a 75 bp move. Press reports confirmed that several ECB officials want to discuss a three-quarter point hike. That said, they do not appear in the majority. Not to get too far ahead of the game, but the market is pricing in around 85 bp of tightening in Q4 (two meetings, October 27 and December 15). The latest Bloomberg survey found a median forecast for the euro to finish the year at $1.02. This seems increasingly optimistic. A one-standard-deviation band around the year-end forward suggests a mathematical range of about $0.9430 to $1.0675. While the median is in the upper third of the range, our subjective idea would put it in the bottom third.  That brings us to the US August employment report on September 3, just before the long holiday weekend (Labor Day, US markets closed)  Recall that nonfarm payrolls rose about twice as much as expected in July, 528k. That the average growth in the first seven months was slightly above 470k. In the Jan-July period last year, the US grew about 555k jobs a month on average. However, that appears to have underestimated US job growth. In the benchmark revisions announced last week. The US added 571k more private sector jobs in the year through March, which translates into around 47.6k more a month.   The median forecast in Bloomberg's survey has crept up in recent days to 300k  The unemployment rate, which slipped to a new low of 3.5%, is expected to remain unchanged, while a 0.4% rise in average hourly earnings could see the year-over-year pace ticked back to 5.3% year-over-year. It was at 5.2% in June and July. By nearly any reckoning, that would still be a solid report and one that will likely encourage the Fed to deliver another 75 bp hike when it meets in late September.    Market sentiment has swung back and forth a bit over the likelihood of a third consecutive 75 bp hike  Despite the poor housing sector data and the dismal PMI, the Fed funds futures market finished last week discounting a little more than a 2/3 chance of a 75 bp instead of 50 bp. Such a move would lift the target to 3.00%-3.25%. The pricing suggests that Fed will likely slow the hikes going forward. The market is pricing in a year-end rate between 3.50% and 3.75%. The market is pricing in a strong probability of a hike in Q1 23 (~80% chance). This was unchanged from before Powell's speech at Jackson Hole. In the middle of last month, the Fed funds futures market had priced in 60 bp of cuts next year. That was the gap between the implied yield of the December 2022 Fed funds futures and the December 2023 contract. It finished last week near seven basis points., about two basis points less than before Powell's speech. III The dollar's two-week rally that began August 10-11 may not be over despite the volatility spurred by position adjusting around Powell's Jackson Hole speech Powell specifically warned that some pain will be associated with efforts to rein in inflation, which the Fed is committed to doing. That seems to suggest some economic weakness will not interfere with its course until inflation convincingly moves back towards its target. Other major central banks, but the Bank of Japan, have implied pretty much the same thing.   Dollar Index:  DXY rallied from a six-week low near 104.65 on August 10 to slightly above 109.25 on August 23. However, it stopped short of the mid-July high of almost 109.30. The sell-off before the weekend took it briefly through 107.60 to set a new low for the week before recovering to almost 108.90. The MACD is rising albeit more gently, but the Slow Stochastic is overextended and suggests that this leg up is getting long in the tooth. Still, the prospect of another healthy job report at the end of next week may deter a significant retreat. The pre-weekend low approached the minimum (38.2%) retracement of the leg up (~107.50).  Euro:  The euro recorded a new 20-year low near $0.9900 on August 23, seeming to complete the leg down that began on August 10 at around $1.0370. However, the Jackson Hole-related position adjustment saw it recover to $1.0090, which marginally surpassed the (38.2%) retracement objective (~$1.0080). The next retracement (50%) and the 20-day moving average are found in the $1.0135-40 area. Yet, the euro continues to struggle and settled nearly cent off its session highs before the weekend. The MACD descent has slowed, and the Slow Stochastic is moving sideways in oversold territory. Selling into upticks continues to be the preferred strategy. A significant low does not appear to be in place. Potential next week to toward $0.9800, maybe.   Japanese Yen:  The greenback reached JPY137.70 on August 23 and settled into a narrow range in dull dealing for the remainder of the week. Although the dollar traded on both sides of Thursday's range ahead of the weekend, it remained mired in the range established on August 23 (~JPY135.80-JPY137.70). The MACD looks constructive, but the Slow Stochastic is poised to turn lower. The US 2- and 10-year yields reached their highest level in two months, which underpins the dollar. Above the JPY137.70 area, the next resistance may be encountered near JPY138.20-40, but there is little standing in the way of another run at the JPY140 area.   British Pound:  Sterling posted a bearish outside down the day before the weekend by trading on both sides of Thursday's range and settling below Thursday's low. The Jackson Hole-related position adjustment stalled at $1.19, shy of the $1.1930 (38.2%) retracement target. It reversed low and fell to $1.1735, just above the two-year low on August 23 (~$1.1720). The MACD is trending lower, but the Slow Stochastic is moving sideways in oversold territory. The 2020 low slightly above $1.14 beckons, and there is little on the charts to prevent it. Sterling cannot sustain upticks even though its discount to the US on two-year yields has fallen from around 135 bp on August 9 to 45 bp in the middle of last week before finishing around 60 bp.   Canadian Dollar:  The US dollar had given back about half of the gains scored since August 11 (~CAD1.2730 to almost CAD1.3065) before Powell spoke at Jackson Hole. That retracement and the 20-day moving average converged around CAD1.2895. The sharp sell-off of US equities ahead of the weekend saw the greenback jump to almost CAD1.3045. The MACD is rising gently, while the Slow Stochastic has begun moving sideways near its highest level in two months near overbought. The poor price action in the S&P 500, with the upside gap on the weekly charts left unfilled before the breakdown to the lowest level since August 2, warns that the US dollar could challenge the CAD1.31 area in the coming days. The nearly two-year high was set on July 14 at around CAD1.3225. That may be the next important chart area.   Australian Dollar:  Like the Canadian dollar, the Australian dollar has recovered half of the losses seen in the latest leg down that began from the August 11 high near $0.7135 and bottomed on August 23 around $0.6855. The Aussie staged a key reversal from that low and closed above the previous day's high. That retracement objective was near $0.7000 and the next (61.8%), and it was briefly surpassed before the weekend and Aussie's reversal back to $0.6900 to take out the previous session's low.   The MACD is not generating a strong signal, while the Slow Stochastic is curling higher after dipping into oversold territory. A return to the $0.6855 area looks likely, and below that could see $0.6800, though a return to the two-year low set in mid-July near $0.6680 cannot be ruled out.   Mexican Peso:  The dollar forged a bottom against the peso in mid-August around MXN19.81-82. That is also roughly where the dollar bottomed in late June. The greenback bounced to MXN20.2665 and retreated last week to around MXN19.85. The momentum indicators are not generating strong signals, but the floor looks strong. In the face of the sharp US equity losses, and the broader risk-off mood, the peso was surprisingly resilient.  It rose by about 0.65% last week. Initial resistance may be near MXN20.06 and then MXN20.11-13. Latam currencies generally outperformed within the emerging market space last week. Four of the top five emerging market currencies were from Latam, led by the Chilean peso's 5.9% rally. The current intervention program runs out on September 30 but could be extended. The intervention to support the Chilean peso after it fell to record lows last month has given the currency a reprieve but could exacerbate the current account deficit, which reached 8.5% of GDP in Q2.   Chinese Yuan: The Chinese yuan slumped to two-year lows last week as policy divergence grew more acute with the latest Chinese rate cuts. More easing of monetary policy is expected, and there is some speculation that another cut in required reserves could materialize in early Q4. China's discount to the US on 10-year bonds rose for the fourth consecutive week, and at 37 bp, was the largest weekly close since June. The PBOC has fixed the dollar weaker than expected over the last few sessions, and the magnitude seems sufficient to suggest a warning from Chinese officials not to get too carried away. That seems similar in spirit to the reports that the State Administration of Foreign Exchange called a few banks last week and warned them about large speculative yuan sales. We suspect the message is that while a weaker yuan is acceptable, the current pace is not. The next objective is around CNY6.90, but the risk of a move to CNY7.0, which did not seem so likely a couple weeks ago, seems more so now.      Disclaimer   Source: The Week Ahead: Dollar Bulls Still in Charge

Overview: Ahead of the much-anticipated speech by Federal Reserve Chair Powell, the Fed funds futures are pricing in about a 70% chance of a 75 bp hike next month.  The US 10-year yield is up nearly five basis points today to 3.07% and the two-year yield is firm at 3.38%.  Asia Pacific equities were mostly higher, with China the main exception among the large markets, after US equities rallied yesterday.  Europe’s Stoxx 600 is off about 0.3% to bring this week’s loss to a little over 1%.  It would be the first back-to-back weekly loss in two months.  US futures seeing yesterday’s gains pared.  Europe’s benchmark 10-year yields are mostly 4-8 bp higher.  The greenback is mixed with the European currencies mostly higher, led by the euro, pushing above parity where options for 1.5 bln euros expire today.  The dollar bloc and yen are nursing losses.  The firmer euro tone appears to be lending support to the central European currencies, while the South African rand and Thai baht are off a little more than 0.5% to pace the declines.  Gold set the high for the week yesterday near $1765 and is struggling to stay above $1750 today. October WTI is up 1% today and 3.4% for the week.  It posted an outside down day yesterday to fell 2.5% but is consolidating quietly today. Europe’s natgas benchmark is off 0.5% to pare this week’s gain to around 25.2% after rallying 20.3% last week.  The US natgas is gaining for a third day, up 2.2%.  It was nearly flat on the week coming into today. Iron ore rose almost 3% to bring this week’s gain to 5.2%, the strongest weekly advance this month.  September copper is up 1.4% after yesterday’s 1.5% advance. December wheat is firm after a four-day rally was snapped yesterday. Poor weather is seen behind the week’s 3% gain.   Asia Pacific Tokyo's August CPI, which does a good job of reflecting national forces, rose more than expected.  The headline rate rose to 2.9% from 2.5%, its highest in 30 years.  The core measure, which excludes fresh food, stands at 2.6%, up from 2.3%.  Several banks are now warning it could surpass 3% in Q4.  A little more than half of Japan's inflation stems from fresh food and energy, with which CPI rose 1.4% from a year ago, up from 1.2%.  The Bank of Japan meets on September 22 and is expected to remain the outlier among the high-income countries and maintain the current policy setting, with the target rate at -0.10%.   There are three developments in China to note.  First, after several initiatives, which individually have been played down by observers as not going far enough, China's high-yield bond market, dominated by the property sector, have shown some new domestic interest.  The back-to-back gains are the first in four months. Second, there appears to be some progress in US-China talks about US regulators access to the accounting records of Chinese companies that list on American exchanges.  These Chinese companies have been instructed to prepare audit working papers to bring to Hong Kong to be reviewed by US officials.  Although mainland equities have languished this week (CSI 300 is off 1%), Hong Kong stocks have rallied.  The Hang Seng gained 2% this week, half of which came earlier today.  The HK China Enterprise Index (mainland companies that trade in HK) rose 3% this week.  Third, dubbed teapot, the independent oil refiners in the Shandong province have cut their run-rates to 61.3% this week, the lowest since May.  This seems to reflect the poor state of the economy, hampered by the extreme weather and shortage of electricity.   The dollar rose 2.65% against the yen last week but has gone nowhere in recent day. It continues to chop in Tuesday's range (~JPY135.80-JPY137.70). The ranges have gotten steadily narrower. Today's range has been roughly JPY136.40 to JPY137.15.  Two images come to mind, a spring coiling (dollar bullish) or a sideways affair.  Momentum indicators are mixed.  The exchange rate still seems sensitive to US interest rate developments.  The Australian dollar reached a six-day high yesterday near $0.6990, and although it closed firmly, there has been no follow-through buying.  It has consolidated down to $0.6950.  A convincing move through $0.6940 may refocus attention on the downside.  The PBOC again set the dollar's reference rate lower than the market (Bloomberg survey) expected at CNY6.8468 vs. CNY6.8542.  The gap was half of yesterday's, which was the most since February 2020.  Nevertheless, the market still extended the greenback's gains.  Around CNY6.8620, the dollar is up about 0.2% today and 0.65% for the week.  If sustained, it will be highest weekly close since August 2020.    Europe The record of last month's ECB meeting, where it delivered its first rate hike with a half-point move did not tell us anything we did not already know.  First, the rise in inflation to near 9% was the catalyst for the rate hike. That there were some who wanted a quarter-point move is not surprising.  The preliminary estimate of this month’s CPI will be released on August 31.  The month-over-month pace is expected to rise by 0.3% after a 0.1% gain in July.  However, the base effect will translate this in a slightly slower year-over-year rate (8.8%). The core rate is expected to be steady at 4.0%, though the risk is on the upside. The market has fully priced in a 50 bp hike at the September 8 meeting, the swaps market is consistent with around a chance of 75 bp move, which seems a bit exaggerated.  While there is some debate in the US whether inflation has peaked, in the eurozone this may be a brief respite.   Like the FOMC minutes, the ECB's record of its meeting should not be understood as an objective report of the meeting, but another channel by which officials communicate to the market.  In its record, the ECB insists that the 50 bp rate hike should be seen accelerating removal of accommodation, what it calls front-loading, rather than raise the terminal rate.  While many press accounts repeated it, the market seems less sanguine.  Consider that on July 1, the swap market had the policy rate at 1.23% in mid-June 2023.  Now it is 1.77%.  ECB officials were cognizant that the economies were slowing, and a recession may be near.  However, in what seems to be an innocuous comment observed that governments may be better positioned to address it.  What is striking is that this goes against ordoliberalism, which Draghi and others said its part of the ECB's DNA.  Ordoliberalism reject Keynesian demand management through fiscal policy.   We had thought there was a quid pro quo at the July ECB meeting, which allowed for the larger rate hike in exchange for the new Transmission Protection Instrument.  However, if this was case, the hawks have the advantage.  There appear to be so many hurdles to its use that, like the Outright Market Transactions (announced with Draghi's "whatever it takes") it may never be used.  The ECB's record indicated that the Governing Council would take into account analysis by the EC, the European Stability Mechanism, the IMF, "and other institutions", alongside the ECB's own analysis, with no ranking provided.  Unlike the OMT, which was to be triggered at a country's request, the TPI is done at the ECB's discretion.   The euro slipped through yesterday's low by a couple hundredths of a cent in Asia but has come back bid in Europe, and pushed above $1.00, where options for 1.5 bln euros expire at the same time today that Fed Chair Powell is scheduled to begin presenting in Jackson Hole.  The single currency has not closed above parity this week and set a new 20-year low on Tuesday slightly ahead of $0.9900.  It seems like the recent price action is more about market positioning than new developments.   Sterling set a range on Tuesday between $1.1720, a new 2-year low, and $1.1880.  It has not traded out of that range in subsequent action.  Near $1.1825, sterling is virtually flat this week against the dollar and about 0.35% first against the euro. Press reports suggest that Truss, who looks set to become the new Prime Minister in a couple of weeks could trigger Article 16 that would allow the suspension of some parts of the Northern Ireland protocol as early as September 15, when the existing arrangements that allowed for easier checks expire.  Between this, Italy's election on September 25, and the ongoing energy and extreme weather challenges cast a pall over the outlook.  America Fed Chair Powell's long-awaited speech at Jackson Hole is a few hours away, and the market is pricing in about a 70% chance that the Fed hikes 75 bp next month.  Of course, there is important data due before the FOMC meeting concludes on September 21 including the jobs report next Friday and CPI on September 13.  Still, it is unlikely that either report changes that overall assessment that the labor market remains strong, even if job growth slows a bit from the unexpectedly sharp 528k jump in July nonfarm payrolls, and that price pressures are far too high, even if the pace eases a little.  Those who insist on reading Powell dovishly seem to be focusing on the line in the recent FOMC minutes, which noted that many members recognized the risk that the Fed could overdo it.  However, what these observers seem to under-appreciate is that the observation was in the context of a general assessment of the risks and the minutes recognized an even greater risk that inflation expectations get embedded.  Indeed, in recent weeks there have been numerous essays claiming that the era of low inflation is over, due to various structural factors, including the re-shoring and pullback from globalization, the integration of large populations in central Europe and Asia, and the costs of sustainable development.   We do not think Powell is as dovish as the many pundits argue, and despite this era for forward guidance, we think it best to focus on what the Fed does rather than what it says in this context.  Among the high-income countries, no central bank has been as aggressive as the Federal Reserve, even if some like the Bank of England began normalizing policy earlier.  In addition, starting in a few days, the pace that the Fed will shrink its balance sheet will double to $95 bln a month. If dovish and hawkish are to signify anything of importance, they cannot be understood in the abstract, but placed in a context.  By the Fed's own history, and in comparison, to other high income central banks, several of whom have higher inflation than the US, it has acted expeditiously this year and knows that it is not done.  Many of those who criticize the Fed for not being even more aggressive are also among those that have the most pessimistic economic outlooks.  It is an easy space to occupy if one is not held accountable. For whom do they speak? Even the hawks at the Bundesbank are not hawkish enough for many of these critics.   Play the player or play the game?  What Powell actually says may not means as much in the short run as to how the market responds.  Consider the FOMC minutes again.  When they were initially reported, the pundits said it was dovish and the December Fed funds futures made new session highs on August 17 and follow-through buying the next day.  We insisted that a dovish reading was a mistake, and although the subsequent economic data have mostly been weaker than expected, the December Fed fund futures have sold off and the implied yield rose to new highs for the month (~3.54%) yesterday. Similarly, since those "dovish minutes" were released, the implied yield of the October Fed funds futures contract (no FOMC meeting in October, so arguably a cleaner read than the September contract) has risen by 5.5 bp, reflecting perceptions of heightened Rather than focusing on Powell's exact words, we suspect it may be more fruitful to focus on the market's penchant for reacting as if the Fed were dovish.   Ahead of Powell, the US reports a bevy of data, which include the advanced estimate of US merchandise July trade figures, and inventory, and personal income and consumption data.  Given the importance attributed to Powell's speech, the data is likely to be more important for economists as they work on their Q3 GDP forecasts than market participants.  The PCE headline deflator, which the Fed official targets are expected to slip toward 6.4% from 6.8%. The core deflator is projected to tick lower to 4.7% from 4.8%.  The CPI, which comes out first, and is based on different methodology, has stolen the deflators thunder and was cited by Powell in explaining the larger-than-signaled hike in June.  Mexico also reports July trade figures today.  Mexico's trade balance is deteriorating sharply.  The Q2 monthly average deficit was $2.69 bln.  In Q2 21, it was in surplus by $927 mln.  This has been blunted a little by surging worker remittances, and the July report is next week.  Worker remittances averaged $5.01 bln in a month in Q2 22 (vs. $4.3 bln in Q2 21). The US dollar set a five-day low yesterday, slightly below CAD1.2900.  It was probing the CAD1.3060 area in the first two sessions this week.  It is near CAD1.2935 in the Europe, and it needs to resurface above CAD1.2960-80 to open the upside again.  If the yen takes is cues from US yields, the Canadian dollar takes its from the general risk appetite reflected in the US S&P 500. Initial support is seen now near CAD1.2920.  The US dollar slipped to seven-day lows against the Mexican peso yesterday (~MXN19.85) and recovered through the North American session to MXN19.98.  It is trading sideways today above MXN19.92.  The intraday momentum readings seem to favor the dollar's upside today provided that the MXN19.90 area holds.      Disclaimer   Source: Jackson Hole and More

Overview: It seems that many market participants had the same thing in mind, cut dollar longs before the Jackson Hole gathering. The Antipodeans lead the majors move, encouraged perhaps by China’s new economic measures, with around a 1% gain. The euro and sterling are up about 0.35% and are the laggards. Emerging market currencies are higher as well, with the notable exception of India and Turkey, which are nursing small losses. Equities are having a good day. All the major bourses, but India, rose in the Asia Pacific area, led by the 3.6% surge in HK. South Korea’s 25 bp hike did not prevent the Kospi from rallying over 1% today. The Stoxx 600 is up by about 0.3%, and US futures are 0.5%-0.6% better. European 10-year benchmark yields are 4-7 bp lower and the periphery is doing better than the core. The 10-year US Treasury yield is off a couple basis points to 3.08%. Gold is rising for the third consecutive session. Near $1765, it has retraced half of its losses since the mid-month high above $1800. October WTI is little changed after rallying 5% in the past two sessions. US oil inventories have fallen by about 10 mln barrels in the past two weeks, the biggest two-week drawdown in a year. The market also appears to be getting more skeptical that Iranian oil is going to come back soon. US natgas is giving back half of yesterday’s 1.5% gain, while Europe’s benchmark is up 8.7% on top of yesterday’s 10.8% increase. It is up by more than a quarter this week. China’s infrastructure plans did nothing for iron ore, which snapped a three-day advance by pulling back 0.5%. On the other hand, September copper has fully recovered yesterday’s 1.4% fall. September wheat is off for the first time in four sessions.  Asia Pacific Japan's government wants to double down on nuclear power. Prime Minister Kishida wants a committee of government ministers and outside advisers to consider calling for building new nuclear plants in its report due later this year. Before the Fukushima nuclear accident in 2011, nuclear power provided almost 30% of Japan's electricity. In 2020, nuclear power accounted for less than 5% of Japan's electricity. Russia's invasion of Ukraine, the volatility of the global energy market, and the need to boost sustainable growth favors nuclear power, according to this line of thinking. Japan's Ministry of Economy, Trade, and Industry is a strong proponent of developing nuclear power. Still, it is not an immediate solution of any problem. New, large-scale plans would take a decade or more to construct. Smaller nuclear plans, using the newest technology might not be operational until early 2040s, according to some estimates. Japan currently has seven nuclear plants operating. The prime minister wants more existing plants to re-open. A poll earlier this year found that for the first time since that 2011 accident a slim majority (53%) in Japan favor re-opening nuclear plants. Responding to a string of data which suggests that the Chinese economy may struggle to grow by even 3% this year, the State Council announced 19 measures yesterday to support the economy. The measures included almost CNY1 trillion (~$146 bln) of new borrowing/spending for state policy banks and local governments for infrastructure projects, and some deferment of payments due to the government. These measures plus the small rate cuts that have been delivered in the past week or so are seen as modest palliatives to what is increasingly a stressed economy. The NASDAQ Golden Dragon China Index of PRC companies that trade in the US jumped 2.5% yesterday, anticipating today's surge in Hong Kong's Hang Seng (~3.6%) and CSI 300 (~0.8%) The Chinese yuan is off about 1.7% so far this month. This is almost as much as it depreciated in the May-July period. While Chinese officials seem to have accepted the decline, they seem to be wary of unintended consequences. The PBOC's dollar fix yesterday and today was weaker than expected and some saw this as a warning shot. Consistent with this was a Reuters report that China's foreign exchange regulator warned several banks against shorting the yuan. There are at least two reasons why Chinese officials want to move gradually. First is that price pressures may be mounting and second is to avoid a vicious cycle of weaker yuan spurring capital outflows, which weakens the yuan. Foreign holdings of Chinese bonds (sovereign and policy bank bonds) appear to have fallen by a little more than 1% last month to CNY3.6 trillion (~$525.5 bln). The dollar is inside yesterday's range against the Japanese yen (~JPY136.15-JPY137.25). It has drifted to the lower end of the range in Europe. Yesterday's range was within Tuesday's range (~JPY135.80-JPY137.70). The greenback appears nesting as the market awaits Fed Chair Powell's comments at Jackson Hole tomorrow. Note that the US two- and 10-year yields are around two-month highs ahead of it. This has helped lift the greenback to around JPY137.70. Follow-through yield gains may be needed for it to re-challenge high set last month near JPY139.40. The Australian dollar is up over 1% to a seven-day high a little below $0.7000, which corresponds roughly to the (50%) retracement objective of the slide since the month's high on August 11 around $0.7135. Like China's rate cut, so too with the new spending announcement, many trade the Aussie as if it were a proxy sometimes for China. The intraday momentum indicators are stretched. Initial support is seen around $0.6960. The PBOC set the dollar's reference rate at CNY6.8536. The market (Bloomberg survey median) expected CNY6.8656. The dollar has largely been confined to yesterday's range. While it eased a little more than 0.10% against the onshore yuan, it slipped more than twice as much against the offshore yuan. Lastly, as expected South Korea's central bank delivered the expected 25 bp hike (lifting the seven-day repo rate to 2.5%). Headline CPI is running north of 6% and additional hikes are likely. The won rose by 0.5%, its second consecutive gain, after falling for the previous six sessions. Europe While Japan is pushing nuclear, Germany is set to boost coal-fired power generation this year. Steag GmbH will add 2.3 gigawatts to its system within three months to replace about a quarter of the natural gas it uses to generate electricity. More broadly, the government is planing to re-open 6.9 gigawatts of coal and 1.9 gigawatts of lignite and push back planned for another 15 years. Uniper SE, is set to re-start an 875-megawatt coal plant in northern Germany next week. Yesterday, the German government announced it will give preference to transport fuels by rail to accelerate the access of power plants. Berlin also announced some conservation measures, including a ban on heating private swimming pools, and some areas in public buildings. The minimum office temperature will be reduced to 66 Fahrenheit (19 Celsius) and banning most outside lighting for monuments and buildings. Economic Minister Habeck says the measures announced will reduce natural gas use by 2% (saving 10.8 bln euros) over the next two years. German economic news was less poor than expected today. The initial estimate of no growth in Q2 was revised to show 0.1% growth. Consumption and government spending were stronger than expected, but capital investment was considerably weaker. The IFO investor survey seemed surprisingly resilient. The current assessment slipped to 88.5 from 88.7 and expectations were practically unchanged too (80.3 vs. 80.4). The overall business climate metric stands at 88.5 (from 88.7). Still to come is the record of last month's ECB meeting and the market will be looking for more color on the new Transmission Protection Instrument. The euro is firm. After holding below parity yesterday, it popped up in Asia to poke slightly above $1.0030. The week's high was set Monday closer to $1.0045. Yesterday's push lower, the new 20-year low set Tuesday near $0.9900 held and sparked what appeared to be a short-covering bounce into the European close. We suspect that some euro bears moved to the sideline ahead of Jackson Hole. There are options for 2.5 bln euros that expire today at $1.00. Some of the buying may be to neutralize the option. Initial support is seen around $0.9980. Sterling is trading firmer, and like the euro, it has held below the week's high (almost $1.1880). It may make another run for it, but the momentum indicators are getting stretched. Yesterday, the Office of National Statistics showed that for the first time, the UK did not import fuel from Russia in June. Prior to Russia's invasion of Ukraine this year, Russia accounted for almost a quarter of UK's refined oil imports, 6% of crude imports, and almost 5% of its gas imports. America Despite the US five-year yield rising to its best level in nearly two months (~3.25%), the concession did little to induce participation in yesterday's $45 bln five-year note auction. It generated a full basis point tail, stopping at 3.23% and a poor bid-cover (2.3), Earlier yesterday, the re-opening of the two-year floating rate note with a $22 bln offering, also saw a weak bid-cover (2.57 vs. 3.13 last and a 3.2 average in the last 10 such auctions. We are tempted to write-off the lackluster participation to the summer and ahead of Chair Powell's speech on Friday. In addition to $110 bln in four-and eight-week bills to be sold today, the US Treasury also will sell $37 bln of seven-year notes. The yield has risen by almost 50 bp over the past month and still the concession may not be sufficient to draw strong demand. The next long maturity is not until September 12-13 and the re-opening of the 10-year note and 30-year bond. The US reports weekly jobs claims today, which appear to have stabilized recently around 250k. Yesterday's benchmark revisions added about 571k private sector jobs to the job growth reported in the year through March. This translates to an average of around 47.5k jobs a month. Also today, Q2 GDP revisions and the 0.9% contraction is expected to be shaved, with knock-on effects on productivity and unit labor costs later. The Kansas Fed's manufacturing survey is on tap too, but it is not a market mover. Lastly, the Atlanta Fed's GDPNow tracker sees Q3 growth at 1.4%, down from 1.6% previously.  Brazil's IPCA CPI measure for the first half of August fell to 9.6% year-over-year from almost 11.4% last month. The market had hoped for a slightly larger decline (Bloomberg median 9.49%). It was the first month-over-month decline since May 2020. It was the third consecutive drop in the year-over-year rate, which peaked at 12.2%. The full month's report is due September 9. It peaked at 12.13% in April and stood at 10.07% last month. The government has pushed through several anti-inflation measures, including caps on utility and fuel taxes and the effect was seen with a nearly 17% drop in gasoline prices and a 5.25% fall in transportation costs. The central bank meets on September 21. It hiked the Selic rate by 50 bp earlier this month to 13.75% and said it would review the need for a "residual adjustment" in September. The central bank may stand pat without declaring an end of the tightening cycle as price pressures remain elevated. In contrast, Mexico mid-August CPI accelerated more than expected with the headline rising to 8.62% from 8.14%. The core rate rose to 7.97% from 7.75%. Banxico hiked rates five times so far this year. The first three moves were half-point increments and the last two were 75 bp steps. It meets a week after the Fed next month. At the bare minimum it can be expected to match the US move but could go 75 bp even if the Fed does not. Today, Mexico is expected to shave its preliminary Q2 GDP rise of 2.0% and minutes from last month's meeting. After consolidating against the Canadian dollar yesterday, the US dollar has been sold today. It slipped marginally through CAD1.29 to meet the (50%) retracement objective of the rally that began off the August 11 low near CAD1.2730. The low was set in the European morning but was not confirmed by the intraday momentum indicators, a warning not to chase the greenback lower, at least immediately. Initial resistance is seen around CAD1.2950. The US dollar is easing against the Mexican peso for the fourth consecutive session, which followed a four-day gain last week. It is finding bids today around MXN1985, and a break could see a test on the MXN19.81-82 area that marked the low in late June and again near the middle of this month. The low for the year was set in late May around MXN19.4140.     Disclaimer   Source: Dollar Longs Pared as Jackson Hole Gathering is set to Start

Overview:  A simply dreadful flash US PMI stopped the dollar's four-day rally in its tracks. It followed news that the eurozone, Japan, and Australia's composite PMIs are below 50 boom/bust level. However, the dollar recovered, even if not fully as the market seemed unconvinced that the data could change Fed Chair Powell's message at Jackson Hole on Friday. A consolidative tone is evident today. Asia Pacific equities were mixed. China and Hong Kong fell more than 1% while South Korea, Australia, and India posted gains. Europe’s Stoxx 600 is off for the fourth consecutive session, the longest spill in a couple of months. US futures are straddling unchanged levels. The US 10-year yield is around 3.04%, little changed, while European benchmark rates are 2-4 bp higher. Japan’s 10-eyar yield edged up near 0.22% is once again drawing close to the cap. Gold is firm near $1750, but unable to build much on yesterday’s nearly $12 rally. October WTI is extending its rally since the Saudi’s threatened to reduce supply and Israel is pushing back against the US-Iran deal. US natgas fell 5% yesterday and is about 1.75% firmer today. The European natgas benchmark has jumped almost 7% today to recoup fully yesterday’s 6.5% pullback, which snapped a four-day rally. Iron ore rose 0.5%. It was the third advancing session, the longest rally this month. September copper is giving back about half of yesterday’s 1.2% gain. September wheat is up 2% to bring the gain to 9% since last Thursday.   Asia Pacific In addition to the usual corporate analysis and credit, ESG ratings and investment orientation have become increasingly important. However, the meaning of ESG and ratings not uniform. Arguably, it is where "organic" was a couple of decades ago, and it is still evolving. Some of dismissive and suggest it is a "woke” fad. Japan's Government Pension Investment Fund (GPIF), the largest pension fund in the world, reports that seven of the eight ESG funds it invests in beat the benchmarks in the fiscal year that ended in March. Over the past five years, it said that all eight funds have outperformed. Since US Pelosi's visit to Taiwan, a few other US elected officials have visited Taiwan. UK officials and Japanese officials have either visited or planned to visit Taipei. China has continued its aerial harassment of the island. and repeatedly crossing the median line in the Taiwan Straits. In a recent report, the Atlantic Council argued that one of the lessons from Ukraine, is that the US "strategic ambiguity" is not an effective deterrence, and that the US should be unequivocal in its support. These developments, alongside reports that US military advisors have been in Taiwan since before the 2020 election and the number of "misstatements" by President Biden that were clear signs of support that were "walked back", all play into the hardliners in Beijing who think the US is trying to change the status quo. Congress is considering a bill that would codify some of it. The US strategic ambiguity is ostensibly not about one-China but on how the US would respond to Beijing's use of military power to unite the country. This was not meant to deter China as the military planners would have to game out the US response no matter its declaratory policy. The chief function is to deter Taiwan from declaring independence unilaterally and dragging the US into a war of its making. However, Taiwan, as it stands now, is not a member of organizations based on state sovereignty, like the UN and IMF. The bill that is likely to get more attention in Q4 proposes to recognize Taiwan as an important non-NATO ally and seek to promote Taiwan's membership in international forums. Both sides are giving the other reason to think that they are trying to change the status quo. The dollar is in a narrow range against the Japanese yen today of around a third of a yen on either side of yesterday's settlement, which was slightly above JPY136.75. US yields are slightly softer, and the dollar is closer to session lows (~JPY136.35) in the European morning. The greenback can spend the North American session on the JPY136-handle. The Australian dollar is also in a narrow range as the market awaits fresh news. It has spent most of the local session and the European morning below yesterday's $0.6930 settlement. Meanwhile, the greenback has edged higher against the Chinese yuan. It made a marginal two-year high almost at CNY6.8680. In the past two week, the yuan has fallen by a little more than 2% against the dollar, which has risen broadly. The setting of the PBOC's reference rate today could be the first sign that officials want the market to go slowly. The dollar fix was at CNY6.8388, a wider than usual gap and below the market (Bloomberg survey) estimate for CNY6.8511. Of note, the US dollar did not make a new high against the offshore yuan today. Yesterday's high of almost CNH6.8850 held. Europe On top of the energy crisis, and extreme weather, an economy seemingly slipping inexorably toward a recession, while inflation is still accelerating, Italy's national election is a month away. The three-party alliance on the right continues to dominate drawing about 47% support. The Brothers of Italy remains the largest, accounting for a little more than half that support. Many observers assume that the success of the right reflects a shift in the Italian politics. However, the simpler explanation is the disarray of the center-left. The Democratic Party draws second highest support, less than half a percentage point (within the margins of error) of the Brothers of Italy. The problem is that the center-left has been unable to form a pact like the right has done. The once populist power, the Five Star Movement, the largest party in the current parliament, appears to have lost its way, a partly the cause and effect of its fragmentation. There are several other small groupings that would be more at home with the center-left but have been able to coalesce into an alliance. Still, it is notable that Brothers of Italy leader Meloni argued for more Europe in her debate with the Democratic Party leader Letta. Letta sounded like the nationalist, advocating a temporary price control for gas. Meloni backed an EU-wide cap, which Draghi supported. As Benjamin Franklin told the thirteen colonies on the east coast of the North American continent they prepared to fight against the greatest empire at the time, "hang together or hang separately."  Italy's 10-year premium over Germany is near 2.35%. It reached a two-year high in mid-June slightly above 2.40%. In late July, it also tested 2.40%. Italy offers around 100 bp more than Germany for two-year borrowing. The peak since the Covid panic in March 2020, was set late last month near 1.30%. The extra that is demanded from Italy is not about inflation. Italy's two-year breakeven (difference between the conventional yield and inflation-protected security) is about 4.40% compared with Germany's two-year breakeven near 7.10%. Italy's 10-year breakeven is slightly below 2.25%. Germany's is near 2.45%. Both report August's EU harmonized CPI next week. In July, Italy's inflation stood at 8.4%, just below Germany's 8.5%. Not only is Italian inflation lower than Germany's and is expected to remain so, but it is also growing faster. On a workday adjusted basis, the Germany economy grow 1.4% year-over-year in Q2. Italy expanded by 4.6%. The UK's online paper, The Independent, reported that UK imports from Russia have plummeted by nearly 97% since the invasion. They totaled GBP33 mln in June, it noted, citing data from the Office of National Statistics. The collapse reflected government sanctions and actions of companies seeking alternatives to Russian goods beyond the official sanctions. Today' s is Ukraine's Independence Day and marks the sixth month since the Russian invasion. Reports suggest the US will announce a new $3 bln arms package for Kyiv. The euro was squeezed to almost $1.0020 yesterday after the disappointing US data, but it was short-lived, and it finished the North Americans session near $0.9970. The single currency is in about a third of a cent range today and has not been able to resurface above $1.0, where there are large options that expire there tomorrow (2 bln euros) and Friday (1 bln euros). An expiry today for 720 mln euros at $0.9950 has likely been neutralized. Sterling traded in a broad range yesterday (~$1.1720-$1.1880) and exceeded both sides of Monday's range. However, the close was neutral, well within Monday's range, which set the tone for today's quiet session. Sterling has been confined to less than half a cent range above $1.1800. It settled near $1.1835 and has spent most of the Asian session and the European morning below it. The next level of support is seen in the $1.1760-80 band. America There can no explaining away the weakest composite US PMI since May 2020 and drop in new home sales five-times more than the median forecast in Bloomberg's survey. Yet did not seem to be bipolar as conventional wisdom has it, swinging between recession and inflation anxiety. The implied yield of the October Fed funds contract rose two basis points to 2.95%, unchanged on the week. Another way to look at it, the odds of a 75 bp hike in September stands at almost 60% compared with 52% at the end of last week and slightly less than 50% the prior week (August 12). Nor did equities recover from Monday's gap lower opening. Indeed, while the S&P 500 and NASDAQ largely traded within Monday's range, the Dow Industrials continued to sell off. It is approaching the (38.2%) retracement of the rally off the mid-July low (~30144) found near 32700. A similar retracement in the S&P 500 is near 4095. The NASDAQ found support near its retracement around 12350. The US reports the preliminary estimate of July durable goods orders. The real sector data has held up better than the survey data. One element of durable goods orders that may not be appreciated by economists yet is what appears to be a surge in US arms sales abroad. There seems to be a synchronized arms build-up and demand for US-made weapons is clear. Separately, today's report will be flattered by the jump in Boeing orders. The company reported 130 orders last month, the most since June 2021 after 50 orders in June. Of those orders 27 came from foreign companies up from 20 in June, and the most since January. On the other hand, its deliveries fell to 26 from 51, the least since February. The focus is on the Fed's Jackson Hole symposium that begins tomorrow. Fed Chair Powell is set to speak Friday (10 am ET). Some observers expect him to play up the element in the minutes that recognized the risk that the central bank would tighten too much. However, in the minutes, it was set up in contrast to the bigger risk that inflation getting embedded into business and household expectations. We recognize the market's penchant for reading/hearing a dovish twist to Powell and the Fed even though they are tightening policy faster than most observers had imagined even a few months ago. The pace of the balance sheet adjustment is also set to double starting next month. Separate from the FOMC minutes, the minutes from the discount rate meeting were reported yesterday, and both the Minneapolis and St. Louis Feds called for 100 bp hike in the discount rate before the July 26-27 FOMC meeting but did not convince their colleagues. Nine favored a 75 bp increase, while the KC Fed called for a 50 bp increase. George, the President of the KC Fed supported a 75 bp increases in the Fed funds target at last month's meeting.   The US dollar posted a big outside down day yesterday against the Canadian dollar, trading on both sides of Monday's range and settling below Monday's low. However, there has been no follow-through today and a consolidative tone is evident. It settled near CAD1.2955 and has spent no time below it so far today. It has been capped around CAD1.2985. With softer equities, we ae inclined to see the greenback push back above CAD1.3000 and see resistance near CAD1.3020-30. The US dollar fell yesterday for the second day against the Mexican peso. Its 0.80% drop was the most in nearly two weeks. Selling today has extended its loss to around MXN19.9365, a four-day low. Mexico reports CPI for the first half of August. It is expected have accelerated, with the year-over-year rate rising to 8.55% form 8.14%. The core rate is seen slightly above 7.8% from 7.75%. The central bank meets late next month and another 75 bp hike seems most likely.      Disclaimer   Source: New Recession Worry Stalls Dollar Express but Doesn't Derail It

Overview:  The poor eurozone PMI underscores likely recession and weighs on the single currency, which was sold to a new 20-year low.  Rather than a "Turn Around Tuesday"  a broadly consolidative session is unfolding.  Asian and European equities are weaker, while US futures are positive but little changed.  Benchmark 10-year bond yield are mostly firmer and the premium offered by Europe's periphery is edging higher.  The US 10-year is little changed near 3.02%.  Most non-European major currencies are firmer, with the exception of the Australian dollar.  The euro struggles to sustain even the most modest of upticks.  Emerging market currencies are mostly lower.  The Mexican peso is an notable exception.  It is the strongest in the EM space today, followed by the Indonesian rupiah, where the central bank hiked its key rate by 25 bp.  Gold's early gains are being reversed, but it is within yesterday's range.  October WTI has extended yesterday's recovery, sparked by Saudi Arabia's threat to cut output.  US natgas is higher for the third session and is up nearly 8% in this run.  Europe's natgas benchmark is about 2% lower after yesterday's 12.3% spike. Iron ore is up a second day, while September copper has recouped yesterday's minor (~0.35%) loss. September wheat is advancing for a third session for a cumulative gain of 7%.   Asia Pacific Japan's recovery is faltering, and the government is already cobbling together a supplemental spending bill.  While the preliminary manufacturing PMI show a slowing expansion (51 vs. 52.1), the service PMI in contracting (49.2 vs. 50.3) for the first time since March.  The composite was dragged lower and the 48.9 reading (from 50.2) is consistent with a contraction in output. Australia's preliminary August PMI was similar as Japan's.  Slower manufacturing output (54.5 from 55.7), while the service sector contracted (49.6 from 50.9).  The composite slipped below the 50 boom/bust level to 49.8 from 51.1.  It is the fourth consecutive decline in the composite and the first sub-50 reading since January.  The Reserve Bank of Australia meets on September 6.  The futures market is not convinced that the poor PMI stands in the way of another 50 bp hike. In fact, the cash rate futures show the greatest chance (70%) of a half-point move this month, up from about 62.5% yesterday.   The dollar firmed to a marginal news high for the month against the yen today near JPY137.70.  Yesterday's high was about JPY137.65.  Today's session, so far, has been one of consolidation.  Initial support is seen around JPY137.00.  Only a close below JPY136.70 would challenge the bullish dollar posture.  Yesterday's Australian dollar bounce where it took out the pre-weekend high, ostensibly on the China's rate cuts was a bull trap.  It dropped almost 1% to nearly $0.6860 before finding support. It traded higher, even after the poor PMI and met sellers at $0.6900, who drove it to a marginal new low (~$0.6855) since July 19.  In choppy trading it is firmer in Europe.  A move above $0.6900 would be helpful, but a push above $0.6930 would help lift the technical tone.  Meanwhile,  the yuan's adjustment lower continued and the Chinese currency fell to new two-year lows against the dollar.  The greenback reached CNY6.8660 before pulling back and is hovering around little changed levels around CNY6.8485 near midday in Europe.  The PBOC's dollar fix showed no sign of a protest.  It was set at CNY6.8523, a little above the Bloomberg survey median of CNY6.8511.   Europe The flash EMU PMI was poor.  The manufacturing sector was also unchanged at 49.7 (from 49.8), while the service sector is barely expanding (50.2 vs. 51.2).  The composite showed output falling further (49.2 vs. 49.9).  It is the lowest the composite has been since early last year. All three measures in Germany remained below 50, thought the manufacturing sector, a little less so (49.8 vs 49.3).  While the German composite had fallen below 50 in July (and sank further in August, 47.6 vs. 48.1), the French composite slipped below 50 (49.8) for the first time since February 2021.   The UK flash PMI was softer but the mixed.  The manufacturing PMI sunk to 46.0 from 52.1, well below expectations, and the magnitude of the drop was notable, especially after having fallen for the previous three months.  The services PMI was little changed at 52.5 from 52.6, and above expectations.  The composite eased to 50.9 from 52.1.  It is the lowest reading since early last year.  Here too the market does not seem dissuaded from its rate hike expectations.  The swaps market is fully pricing in a 50 bp hike at the mid-September BOE meeting and about a 1-in-3 chance of a 75 bp move instead.  By that time, a new Tory leader and Prime Minister will likely be providing some additional fiscal support.  The Dutch natural gas European benchmark (one-month forward) has doubled here in Q3 after more than doubling in the first half.  By some estimates, it has reached the equivalent of $500 a barrel for crude oil.  The energy crisis, which is being exacerbated by a severe drought, has eclipsed Covid as the most pressing European challenge.  It is a blow that makes a recession practically unavoidable and contribute to the pressure on the euro, which fell to new 20-year lows.  The one-year forward of German electricity rose by more than a quarter yesterday to a record 710 euros for a megawatt hour before pulling back, which is almost twice as much it was at the end of July.  In France, a similar contract rose 16% to 840 euros, more than 2/3 higher than at the end of last month. French nuclear reactors were operating at 43% of their capacity yesterday, down from 48% before the weekend.  There was an unplanned outage at one plant and another two were halted for scheduled maintenance.   German Chancellor Scholz was in Canada yesterday trying to secure supplies.  His government is still debating about extending the life of three nuclear plants that are scheduled to shutdown at the end of the year.  Economic Minister Habeck noted that the extending the deadline would save, at most, 2% of German gas consumption.  However, he did leave open the possibility that the Isar 2 plant in Bavaria might be extended.   The low water level having limited the energy shipments on the Rhine.  Bavaria produces the most solar power among German states, it has a restrictive wind turbine licensing regime.  Habeck was also critical of Bavaria for neglecting other sources of energy generation and blocked the expansion of power transmission lines to bring wind energy from northern Germany to its industry.  There is fear that the Gazprom's three-day shutdown of the Nord Stream 1 pipelines August 31 is a prelude to and extended stoppage.   After hovering tightly below $0.9950 for most of the Asian session, the poor PMI seemed to drive the euro to the session low near $0.9900 before the single currency recovered back to $0.9950. A 600 mln euro option there expires today.  Thursday and Friday see a combined 3 bln euro in options at $1.0 expire, while on Friday, 2 bln euros of options at $0.9850 roll off.  The bears are in the driver’s seat.  Sterling was sold to a new low as well, dipped briefly through $1.1720.  In the five sessions through today, sterling has fallen nearly 4.25-cents.  It has met the measuring objective of the double top pattern that had unfold in the first half of the month.  The $1.1780-$1.1825 band offers the nearby cap.   America The Fed funds futures market sees the greatest chance of a 75 bp hike next month since the bounce after the surprisingly strong employment report on August 5.  Yesterday's increase was third in a row and the most since that jobs report.  The two-year note yield jumped a little more than 10 bp to 3.34%, the upper end of where it has traded for two months. The only data out yesterday was the Chicago Fed's national activity report, which blew away market expectations by rising to 0.27 instead falling to -.25. However, that report was for July and today's the preliminary August PMI is due.  Moreover, markets typically do not put much emphasis on this report.  Instead, it seems the market is positioning ahead of Powell's Jackson Hole speech.   The US also reports new homes sales.  The July housing starts and existing home sales were weaker than expected and the risk to the Blomberg survey median for a 2.5% fall is on the downside.  That said, it is clear that slower housing market activity is desirable by the Federal Reserve as part of its effort to tighten financial conditions.   The EU seems to think Iran's response to its proposal was "reasonable" seems to add pressure on the US.  However, Saudi Arabia's oil minister made an unexpected move.  Claiming that the lack of liquidity and extreme volatility in the oil market was diverging from "fundamentals" and that OPEC+ may be forced to respond.  In this context, the "response" would be to reduce supply.  Although the oil minister did not link his comments to the possibility of Iranian oil returning to the market, this seemed to be the subtext, and the oil market responded accordingly.  October WTI, which had been off a little more than 4% yesterday recovered nearly fully in late dealings.  From almost $86.25, October WTI settled near $90.35.  It has traded above $92.00 today for the first time since August 12.  The US dollar made a marginal new high for the month against the Canadian dollar earlier today, just shy of CAD1.3065.  However, a consolidative tone has emerged.  Initial support is seen in the CAD1.2990-CAD1.3000 area.  A break below CAD1.2965 would lift the Loonie's tone and would likely coincide with stronger equity market gains.  The S&P 500 and NASDAQ gapped lower yesterday, and the gaps appears on the weekly charts, and leave bearish island tops behind. Those gaps are important from technical perspective and are either breakaway gaps or measuring gaps, and in either case bearish.  That would seem to warn about the downside risks to the Canadian dollar, which is particularly sensitive to the risk environment.  The Mexican peso is faring better.  The US dollar did not take out the pre-weekend high (~MXN20.2670) yesterday and is set to start the North American session at a three-day low.  Around MXN20.04, the US dollar retraces 50% of what it gained since the August 15 low (~MXN19.8125).  The next corrective target is around MXN19.9860.       Disclaimer Source: Surging Energy Prices Pushing Europe Closer to Recession

Overview: The euro traded below parity for the second time this year and sterling extended last week’s 2.5% slide. While the dollar is higher against nearly all the emerging market currencies, it is more mixed against the majors. The European currencies have suffered the most, except the Norwegian krone. The dollar-bloc and yen are also slightly firmer. The week has begun off with a risk-off bias. Nearly all the large Asia Pacific equity markets were sold. Chinese indices were a notable exception following a cut in the loan prime rates. Europe’s Stoxx 600 is off by around 1.20%, the most in a month. US futures are more than 1% lower. The Asia Pacific yield rose partly in catch-up to the pre-weekend advance in US yields, while today, US and European benchmark 10-year yields are slightly lower. The UK Gilt stands out with a small gain. Gold is being sold for the sixth consecutive session and has approached the (61.8%) retracement of the rally from last month’s low (~$1680) that is found near $1730. October WTI is soft below $90, but still inside the previous session’s range. US natgas is up 2.4% to build on the 1.6% gain seen before the weekend. It could set a new closing high for the year. Gazprom’s announcement of another shutdown of its Nord Stream 1 for maintenance sent the European benchmark up over 15% today. It rose almost 20.3% last week. Iron ore rose for the first time in six sessions, while September copper is giving back most of the gains scored over the past two sessions. September wheat rallied almost 3% before the weekend and is off almost 1% now.  Asia Pacific Following the 10 bp reduction in benchmark one-year Medium-Term Lending Facility Rate at the start of last week, most observers expected Chinese banks to follow-up with a cut in the loan prime rates today  They delivered but in a way that was still surprising. The one-year loan prime rate was shaved by five basis points to 3.65%, not even matching the MLF reduction. On the other hand, the five-year loan prime rate was cut 15 bp to 4.30%. This seems to signal the emphasis on the property market, as mortgages are tied to the five-year rate, while short-term corporate loans are linked to the shorter tenor. The five-year rate was last cut in May and also by 15 bp. Still, these are small moves, and given continued pressures on the property sector, further action is likely, even if not immediately. In addition to the challenges from the property market and the ongoing zero-Covid policy, the extreme weather is a new headwind to the economy. The focus is on Sichuan, one of the most populous provinces and a key hub for manufacturing, especially EV batteries and solar panels. It appears that the aluminum smelters (one million tons of capacity) have been completed halted. The drought is exacerbating a local power shortage. Rainfall along the Yangtze River is nearly half of what is normally expected. Hydropower accounts for a little more than 80% of Sichuan power generation and the output has been halved. Officials have extended the power cuts that were to have ended on August 20 to August 25. Factories in Jiangsu and Chongqing are also facing outages. According to reports, Shanghai's Bund District turned off its light along the waterfront. Japan's Prime Minister Kishida tested positive for Covid over the weekend  He will stay in quarantine until the end of the month. In addition to his physical health, Kishida's political health may become an issue. Support for his government has plunged around 16 percentage points from a month ago to slightly more than 35% according to a Mainchi newspaper poll conducted over the weekend. The drag appears not to be coming from the economy but from the LDP's ties with the Unification Church. Meanwhile, Covid cases remain near record-highs in Japan, with almost 24.8k case found in Tokyo alone yesterday. Others are also wrestling with a surge in Covid cases. Hong Kong's infections reached a new five-month high, for example. The dollar reached nearly JPY137.45 in Tokyo before pulling back to JPY136.70 in early European turnover  It is the fifth session of higher highs and lows for the greenback. The upper Bollinger Band (two standard deviations above the 20-day moving average) is near JPY137.55 today. We suspect the dollar can re-challenge the session high in North America today. The Australian dollar is proving resilient today after plunging 3.45% last week. It is inside the pre-weekend range (~$0.6860-$0.6920). Still, we like it lower. Initial support is now seen around $0.6880, and a break could spur another test on the lows. That pre-weekend low coincides with the (61.8%) retracement of the rally from last month's low (~$0.6680) to the high on August 11 (~$0.7135). The Chinese yuan slumped to new lows for the year today. For the second consecutive session, the dollar gapped higher and pushed through CNY6.84. The PBOC set the dollar's reference rate at CNY6.8198. While this was lower than the CNY6.8213, it is not seen as much as a protest as an at attempt to keep the adjustment orderly. Europe Gazprom gave notice at the end of last week that gas shipments through the Nord Stream 1 pipeline would be stopped for three days (August 31-September 2) for maintenance  The European benchmark rose nearly 20.3% last week and 27% this month. It rose 35.2% last month and 65.5% in June. The year-to-date surge has been almost 380%. The energy shock seems sure to drive Europe into a recession. The flash August PMI out tomorrow is expected to see the composite falling further below the 50 boom/bust level. Bundesbank President Nagel, who will be attending the Jackson Hole symposium at the end of this week recognized the risk of recession but still argued for the ECB rate increases to anchor inflation expectations. The record from last month's ECB meeting will be published on Thursday. There are two keys here. First, is the color than can be gleaned from the threshold for using the new Transmission Protection Instrument. Second, the ECB lifted its forward guidance, which we argue is itself a type of forward guidance. Is there any insight into how it is leaning? The swaps market prices in another 50 bp hike, but a slight chance of a 75 bp move. The German 10-year breakeven (difference between the yield of the inflation linked bond and the conventional security) has been rising since last July and approached 2.50% last week  It has peaked in early May near 3% before dropping to almost 2% by the end of June. It is notable that Italy's 10-year breakeven, which has begun rising again since the third week of July, is almost 25 bp less than Germany. Several European countries, including Germany and Italy, have offered subsidies or VAT tax cut on gasoline that have offset some of the inflation pressures. Nagel, like Fed Chair Powell, BOE Governor Bailey, and BOJ Governor Kuroda place much emphasis on lowering wages to bring inflation down. Yet wages are rising less than inflation, and the cost-of-living squeeze is serious. They take for granted that business are simply passing on rising input costs, including labor costs, but if that were true, corporate earnings would not be rising, which they have. Costs are being passed through. Later this week, the UK regulator will announce the new gas cap for three months starting in October  Some reports warn of as much as an 80% increase. It is behind the Bank of England's warning that CPI could hit 13% then. The UK's wholesale benchmark has soared 47.5% this month after an 83.7% surge last month. Gas prices in the UK have nearly tripled this year. The UK's 10-year breakeven rose by 38 bp last week to 4.29%, a new three-month high. Although the UK economy shrank slightly in Q2 (0.1%), the BOE warned earlier this month that a five-quarter recession will likely begin in the fourth quarter. Unlike the eurozone, the UK's composite PMI has held above the 50 boom/bust level. Still, it is expected to have slowed for the fourth month in the past five when the August preliminary figures are presented tomorrow. The euro and sterling extended their pre-weekend declines  The euro slipped below parity to $0.9990. The multiyear low set last month was near $0.9950. The break of parity came in the early European turnover. Only a recovery of the $1.0050-60 area helps stabilizes the tone. Speculators in the futures market extended their next short euro position in the week through August 16 to a new two-year extreme and this was before the euro's breakdown in the second half of last week. The eurozone's preliminary August composite PMI due tomorrow is expected to show the contraction in output deepened while the market is expecting the Fed's Powell to reinforce a hawkish message on US rates. After falling to almost $1.1790 before the weekend, sterling made a marginal new low today, closer to $1.1780. The two-year low set last month was near $1.1760. The $1.1850-60 area offers an initial cap. Strike activity that hobbled the trains and underground spread to the UK's largest container port, Felixstowe, which handles about half of the country's containers. An eight-day strike began yesterday. Industrial activity is poised to spread, and this is prompting Truss and Sunak who are locked in a leadership challenge, to toughen their rhetoric against labor. America This is a busy week for the US  First, there is supply. Today features $96 bln in bills. Tomorrow sees a $60 bln three-week cash management bill and $44 bln 2-year notes. On Wednesday, the government sell another $22 bln of an existing two-year floating rate note, and $45 bln five-year note. Thursdays sale includes four- and eight-week bills and $37 bln seven-year notes. There are no long maturities being sold until mid-September. The economic data highlights include the preliminary PMI, where the estimate for services is forecast (median in Bloomberg's survey) to recover from the drop below the 50 boom/bust level. In the middle of the week, the preliminary estimate of July durable goods is expected. Shipments, which feed into GDP models is expected to rise by 0.3%. The revision of Q2 GDP the following day tends not to be a `big market movers. Friday is the big day. July merchandise trade and personal income and consumption measures are featured. Like we saw with the CPI, the headline PCE deflator is likely to ease while the core measure proves a bit stickier. Shortly after they are released, Powell addresses the Jackson Hole gathering.  Canada has a light economic diary this week, but Mexico's a bit busier  The highlight for Mexico will be the biweekly CPI on Wednesday. Price pressures are likely to have increased and this will encourage views that Banxico will likely hike by another 75 bp when it meets late next month (September 29). The July trade balance is due at the end of the week. It has been deteriorating sharply since February and likely continued.    The US dollar rose more than 1% against the Canadian dollar over the past three sessions. It edged a little higher today but stopped shy of the CAD1.3035 retracement objective. Initial support is seen near CAD1.2975-80. With sharp opening losses expected for US equities, it may discourage buying of the Canadian dollar in the early North American activity. The greenback is rising against the Mexican peso for the fifth consecutive session. However, it has not taken out the pre-weekend high near MXN20.2670. Still, the next important upside technical target is closer to MXN20.3230, which corresponds to the middle of this month's range. Support is now seen near MXN20.12.    Disclaimer   Source: No Relief for the Euro or Sterling

For many, this will be the last week of the summer. However, in an unusual twist of the calendar, the US August employment report will be released on September 2, the end of the following week, rather than after the US Labor Day holiday (September 5).   The main economic report of the week ahead will be the preliminary estimate of the August PMI  The policy implications are not as obvious as they may seem. For example, in July, the eurozone composite PMI slipped below the 50 boom/bust level for the first time since February 2021. It was the third consecutive decline. Bloomberg's monthly survey of economists picked up a cut in Q3 GDP forecasts to 0.1% from 0.2% and a contraction of 0.2% in Q4 (previously 0.2% growth). Over the past week, the swaps market has moved from around 80% sure of a 50 bp hike next month to a nearly 20% chance it will lift the deposit rate by 75 bp.  The UK's composite PMI fell in three of the four months through July  However, at 52.1, it remains above the boom/bust level, though it is the weakest since February 2021. The Bank of England's latest forecasts are more pessimistic than the market. It projects the economy will contract by 1.5% next year and another 0.3% in 2024. It has CPI peaking later this year at around 13% before falling to 5.5% in 2023 and 1.5% in 2024. Market expectations have turned more hawkish for the BOE too. A week ago, the swap market was pricing in a nearly 90% chance of another 50 bp hike. After the CPI jump reported in the middle of last week, the market fully priced in the 50 bp move and a nearly 30% chance of a 75 bp hike.   Japanese officials have successfully turned back market pressure that had driven the benchmark three-month implied volatility to 14% in mid-June, more than twice as high as it was at the start of the year  It slipped below 10% in recent days. The BOJ was forced to vigorously defend its 0.25% cap on the 10-year bond. It has spent the better part of the past three weeks below 0.20%. The BOJ has not had to spend a single yen on its defense since the end of June. However, with the jump in global yields (US 10-year yield rose 20 bp last week, the German Bund 33 bp, and the 10-year UK Gilt nearly 40 bp) and the weakness of the yen, the BOJ is likely to be challenged again.   The economy remains challenging  The composite PMI fell to 50.2 in July from 53.2 in June. It is the weakest reading since February. It has averaged 50.4 through July this year. The average for the first seven months last year was 49.0. The government is working on some support measures aimed at extending the efforts to cushion the blow of higher energy and food prices. Japan's Q2 GDP deflator was minus 0.4%, which was half of the median forecast in Bloomberg's survey, but it shows the tough bind of policy. Consider that the July CPI rose to 2.6%, and the core measure, which the BOJ targets, excludes fresh food, rose to 2.4% from 2.2%. The target is 2%, and it was the third month above it. Tokyo will report its August CPI figures at the end of the week.   Australia's flash PMI may be more influential as the futures market is nearly evenly split between a 25 bp hike and a 50 bp move at the September 6 central bank meeting  The minutes from the RBA's meeting earlier this month underscored its data dependency. However, this is about the pace of the move. The target rate is currently at 1.85%, and the futures market is near 3.15% for the end of the year, well beyond the 2.5% that the central bank sees as neutral. The weakness of China's economy may dent the positive terms-of-trade shock. The Melbourne Institute measure of consumer inflation expectations fell in August for the second month but at 5.9%, is still too high.  Through the statistical quirkiness of GDP-math, the US economy contracted in the first two quarters of the year  A larger trade deficit did not help, but the real problem was inventories. In fairness, more of the nominal growth resulted from higher prices than economists expected rather than underlying activity. Still, it does appear that the US economy is expanding this quarter, and the high-frequency data will help investors and economists assess the magnitude. While surveys are helpful, the upcoming real sector data include durable goods orders (and shipments, which feed into GDP models), July personal income and consumption figures, the July goods trade balance, and wholesale and retail inventories.   Consumption still drives more than 2/3 of the economy, and like retail sales, personal consumption expenditures are reported in nominal terms, which means that they are inflated by rising prices  However, the PCE deflator is expected to slow dramatically. After jumping 1% in June, the headline deflator is expected to increase by 0.1%. This will allow the year-over-year rate to slow slightly (~6.5% from 6.8%). The core deflator is forecast (median, Bloomberg's survey) to rise by 0.4%, which given the base effect, could see the smallest of declines in the year-over-year rate that stood at 4.8% in June. Given the Fed's revealed preferences when it cited the CPI rise in the decision in June to hike by 75 bp instead of 50 bp, the CPI has stolen the PCE deflator's thunder, even though the Fed targets the PCE deflator. Real consumption was flat in Q2, and Q3 is likely to have begun on firmer footing.   The softer than expected CPI, PPI, and import/export prices spurred the market into downgrading the chances of a 75 bp hike by the Fed next month  After the stronger than expected jobs growth, the Fed funds futures priced in a little better than a 75% chance of a 75 bp hike. It has been mostly hovering in the 40%-45% range most of last week but finished near 55%. It is becoming a habit for the market to read the Fed dovishly even though it is engaged in a more aggressive course than the markets anticipated. This market bias warns of the risk of a market reversal after Powell speaks on August 26.   At the end of last year, the Fed funds futures anticipated a target rate of about 0.80% at the end of this year. Now it says 3.50%. The pace of quantitative tightening is more than expected and will double starting next month. There is also the tightening provided by the dollar's appreciation. For example, at the end of 2021, the median forecast in Bloomberg's survey saw the euro finishing this year at $1.15. Now the median sees the euro at $1.04 at the end of December. And even this may prove too high.    The FOMC minutes from last month's meeting recognized two risks. The first was that the Fed would tighten too much. Monetary policy impacts with a lag, which also acknowledges that soft-landing is difficult to achieve. The market initially focused on this risk as is its wont. However, the Fed also recognized the risk of inflation becoming entrenched and characterized this risk as "significant." The Jackson Hole confab (August 25-27) will allow the Fed to help steer investors and businesses between Scylla and Charybdis.  Critics jumped all over Fed Chair Powell's claim that the Fed funds target is now in the area the officials regard as neutral. This was not a forecast by the Chair, but merely a description of the long-term target rate understood as neither stimulating nor restricting the economy. In June, all but three Fed officials saw the long-term rate between 2.25% and 2.50%. To put that in perspective, recall that in December 2019, the median view of the long-term target was 2.50%. Eleven of the 18 Fed officials put their "dot" between 2.25% and 2.50%. The FOMC minutes were clear that a restrictive stance is necessary, and the Fed clearly signaled additional rate hikes are required. The discussions at Jackson Hole may clarify what the neutral rate means.  Barring a significant downside surprise, we expect the Fed will deliver its third consecutive 75 bp increase next month. The strength and breadth of the jobs growth while price pressures remain too high and financial conditions have eased encourages the Fed to move as fast as the market allows. However, before it meets, several important high-frequency data points will be revealed, including a few employment measures, the August nonfarm payroll report, and CPI.   The market is also having second thoughts about a rate cut next year  At the end of July, the implied yield of the December 2023 Fed funds futures was 50 bp below the implied yield of the December 2022 contract. It settled last week at near an 8 bp discount. This reflects a growing belief that the Fed will hike rates in Q1 23. The March 2023 contract's implied yield has risen from less than five basis points more than the December 2022 contract to more than  20 bp above it at the end of last week.   Let's turn to the individual currency pairs, put last week's price action into the larger context, and assess the dollar's technical condition  We correctly anticipated the end of the dollar's pullback that began in mid-July, but the power for the bounce surprises. Key technical levels have been surpassed, warning that the greenback will likely retest the July highs.   Dollar Index: DXY surged by more than 2.3% last week, its biggest weekly advance since March 2020. The momentum indicators are constructive and not over-extended. However, it closed well above the upper Bollinger Band (two standard deviations above the 20-day moving average), found near 107.70. Little stands in the way of a test on the mid-July high set around 109.30. Above there, the 110-111.30 area beckons. While the 107.50 area may offer some support now, a stronger floor may be found closer to 107.00.   Euro:  The euro was turned back from the $1.0365-70 area on August 10-11 and put in a low near $1.0030 ahead of the weekend. The five-day moving average slipped below the 20-day moving average for the first time in around 3.5 weeks. The MACD is trending lower, while the Slow Stochastic did not confirm the recent high, leaving a bearish divergence in its wake. The only caution comes from the euro's push through the lower Bollinger Band (~$1.0070). Initially, parity may hold, but the risk is a retest on the mid-July $0.9950 low. A convincing break could target the $0.96-$0.97 area. As the euro has retreated, the US two-year premium over Germany has trended lower. It has fallen more than 30 bp since peaking on August 5. We find that the rate differential often peaks before the dollar.   Japanese Yen: The dollar will begin the new week with a four-day advance against the yen in tow. It has surpassed the (61.8%) retracement objective of the pullback since the mid-July high (~JPY139.40) found near JPY136.00. The momentum indicators are constructive, and the five-day moving average has crossed above the 20-day for the first time since late July. It tested the lower band of the next resistance bans seen in the JPY137.25-50 area at the end of last week. But it appears poised to re-challenge the highs. As volatility increases and yields rise, Japanese officials return to their first line of defense: verbal intervention.  British Pound: Sterling took out the neckline of a possible double top we have been monitoring that came in at $1.20. It projects toward the two-year lows set in mid-July near $1.1760, dipping below $1.18 ahead of the weekend. As one would expect, the momentum indicators are headed lower, and the five-day moving average has fallen below the 20-day moving average for the first time in four weeks. It has closed below its lower Bollinger Band (~$1.1910) in the last two sessions. A convincing break of the $1.1760 low clears the way to the March 2020 low, about 3.5-cents lower. Initial resistance is now seen around $1.1860 and, if paid, could signal scope for another 3/4 to a full-cent squeeze.  Canadian Dollar:  The Canadian dollar was no match for the greenback, which moved above CAD1.30 ahead of the weekend for the first time in a month. The momentum indicators suggest the US dollar has more scope to advance, and the next target is the CAD1.3035 area. Above there, the CAD1.3100-35 band is next. The high since November 2020 was recorded in the middle of July around CAD1.3225. After whipsawing in Q1, the five- and 20-day moving averages have caught the big moves. The shorter average crossed above the longer moving average last week for the first time since July 21. Initial support will likely be encountered near CAD1.2935.   Australian Dollar:  The Aussie was sold every day last week. It is the first time in a year, and its 3.4% drop is the largest since September 2020.   The rally from the mid-July low (~$0.6680) to the recent high (~$0.7135) looks corrective in nature. Before the weekend, it tested the rally's (61.8%) retracement objective. The momentum indicators are falling, and the Slow Stochastic did not confirm this month's high, creating a bearish divergence. A break of the $0.6850-60 area may signal follow-through selling into the $0.6790-$0.6800 band, but a retest on the July low is looking increasingly likely. Initial resistance is now seen near $0.6920.   Mexican Peso:  The peso's four-day slide ended a six-day run. The peso lost about 1.6% last week, slightly better than the 2.25% slide of the JP Morgan Emerging Market Currency Index. This month, the US dollar peaked around MXN20.8335 and proceeded to fall and forged a base near MXN19.81. It has met the (38.2%) retracement objective around MXN20.20 before the weekend. The next (50%) retracement is near MXN20.3230. The 200-day moving average is closer to MXN20.41. The dollar is probing the 20-day moving average seen a little below MXN20.24. The momentum indicators have only just turned up for the greenback. We suspect there may be potential to around MXN20.50 in the coming days.   Chinese Yuan:  The yuan was tagged with more than a 1% loss against the dollar last week, its biggest decline in three months. A combination of poor Chinese data, its small rate cut, and a resurgent US dollar spurred the exchange rate adjustment. At the end of July, China's 10-year yield was about 11 bp on top of the US. However, it switched to a discount after the US jobs data (August 5), and the discount grew every day last week, reaching 35 bp, the most since late June. After gapping higher before the weekend, the greenback reached nearly CNY6.8190, its highest level since September 2020. The next target is around CNY6.85, but given the divergence of policy, a move back toward CNY7.00, last seen in July 2020, maybe a reasonable medium-term target. The PBOC's dollar fix ahead of the weekend showed no protest of the weaker exchange rate.     Disclaimer   Source: Flash PMI, Jackson Hole, and the Price Action

Overview:  The dollar is on fire. It is rising against all the major currencies and cutting through key technical levels like a hot knife in butter. The Canadian dollar is the strongest of the majors this week, which often outperforms on the crosses in a strong US dollar environment. It is off 1.5% this week. The New Zealand dollar, where the RBNZ hiked rates this week by 50 bp, is off the most with a 3.5% drop. Emerging market currencies are mostly lower on the day and week as well. The JP Morgan Emerging Market Currency Index is off for the fifth consecutive session, and ahead of the Latam open, it is off 2.1% this week. Asia Pacific equities were mostly lower, and Europe’s is off around 0.4%. It was flat for the week coming into today. US futures are lower, and the S&P and NASDAQ look poised to snap its four-week advance. Gold, which began the week near $1800 is testing support near $1750 now. Next support is seen around $1744.50. October WTI is consolidating in the upper end of yesterday’s range, which briefly poked above $91. Initial support is pegged near $88. US natgas is softer for the third successive session, but near $9.04 is up about 3.2% for the week. Europe’s benchmark is up 1.7% and brings this week’s gain to almost 20%. Demand concerns weigh on iron ore. It was off marginally today, its fifth loss in six sessions. It tumbled 8.8% this week after a 1.15% gain last week. Copper is up fractionally after rising 1.3% yesterday. September wheat is trying to stabilize. It fell more than 4% yesterday, its fifth loss in a row. It is off around 8.5% this week. Asia Pacific Japan's July CPI continued to rise  Th headline now stands at 2.6%, up from 2.4% in June, up from 0.8% at the start of the year and -0.3% a year ago. The core measure that excludes fresh food accelerated from 2.2% to 2.4%. It is the fourth consecutive month above the 2% target. Excluding both fresh food and energy, Japan's inflation is less than half the headline rate at 1.2%. It was at -0.7% at the end of last year and did not turn positive until April. The BOJ's next meeting is September 22, and despite the uptick in inflation, Governor Kuroda is unlikely to be impressed. Without wage growth, he argues, inflation will prove transitory. With global bond yields rising again, the 10-year, the market may be gearing up to re-challenge the BOJ's 0.25% cap. The yield is finishing the week near 0.20%, its highest since late July. Separately, we note that after divesting foreign bonds in recent months, Japanese investors have returned to the buy side. They have bought foreign bonds for the past four weeks, according to Ministry of Finance data. Last week's JPY1.15 trillion purchases (~$8.5 bln) were the most since last September.  China surprised the markets to begin the week with a 10 bp reduction in the benchmark 1-year medium-term lending facility rate  It now stands at 2.75%. It was the first cut since January, which itself was the first reduction since April 2020. Before markets open Monday, China is expected to announce a 10 bp decline in the 1- and 5-year loan prime rates. That would bring them to 3.60% and 4.35%, respectively. These rates are seen closer to market rates, but the large banks that contribute the quotes are state-owned. There is some speculation that a larger cut in the 5-year rate. The one-year rate was cut in January, but the 5-year rate was cut by 15 bp in May. The dollar is rising against the yen for the fourth consecutive session  It has now surpassed the JPY137.00 area that marks the (61.8%) retracement of the decline from the 24-year high set-in mid-July near JPY139.40. There may be some resistance in the JPY137.00-25 area, but a retest on the previous high looks likely in the period ahead. The Australian dollar is off for the fifth consecutive session and this week's loss of 3% offset last week's gain of as similar magnitude and, if sustained, would be the largest weekly decline since September 2020. The Aussie began the week near $0.7125 and recorded a low today slightly below $0.6890. The $0.6855-70 area is seen as the next that may offer technical support. The PBOC set the dollar's reference rate at CNY6.8065 (median in Bloomberg's survey was CNY6.9856). The fix was the lowest for the yuan (strongest for the dollar) since September 2020. Yesterday's high was almost CNY6.7960 and today's low was a little above CNY6.8030. To put the price action in perspective, note that the dollar is approaching the (61.8%) retracement of the yuan's rise from mid-2020 (~CNY7.1780) to this year's low set in March (~CNY6.3065). The retracement is found around CNY6.8250. Europe UK retail sales surprised to the upside but are offering sterling little support  Retail sales including gasoline rose by 0.3% in July. It is the second gain of the year and the most since last October. Excluding auto fuel, retail sales rose by 0.4%, following a 0.2% gain in June. It is the first back-to-back gain since March and April 2021. Sales online surged 4.8% as discounts and promotions drew demand, and internet retailers accounted for 26.3% of all retail sales. Separately, consumer confidence, measured by GfK, slipped lower (-44 from -41), a new record low. Sterling is lower for the third consecutive session and six of the past seven sessions. The swaps market continues to price in a 50 bp rate hike next month and about a 1-in-5 chance of a 75 bp move. Nearly every press report discussing next month's Italian elections cited the fascist roots of the Brothers of Italy, which looks likely to lead the next government  Meloni, who heads up the Brothers of Italy and has outmaneuvered many of her rivals, and may be Italy's next prime minister, plays the roots down. She compares the Brothers of Italy to the Tory Party in the UK, the Likud in Israel, and the Republican Party in the US. The party has evolved, and the center-right alliance she leads no longer wants to leave the EU, it is pro-NATO, and condemns Russia's invasion of Ukraine. The center-right alliance may come close to having a sufficient majority in both chambers to make possible constitutional reform. High on that agenda appears to transform the presidency into a directly elected office. The Italian presidency has limited power under the current configuration, but it has been an important stabilizing factor in crisis. Ironically, the president, picked by parliament, stepped in during the European debt crisis and gave Monti the opportunity to form a technocrat government after Berlusconi was forced to resign in 2011. Fast-forward a decade, a government led by the Conte and the Five Star Movement collapsed and a different Italian president gave Draghi a chance to put together a government. It almost last a year-and-half. Its collapse set the stage for next month's election. The center-left is in disarray and its inability to forge a broad coalition greases the path for Meloni and Co. Italy's 10-year premium over German is at 2.25%, a new high for the month. Last month, it peaked near 2.40%. The two-year premium is wider for the sixth consecutive session. It is near 0.93%, more than twice what it was before the Draghi government collapsed. Some critics argue against the social sciences being science because of the difficulty in conducting experiments  Still an experiment is unfolding front of us. What happens when a central bank completely loses its independence and follows dubious economic logic?  With inflation at more than two decades highs and the currency near record lows, Turkey's central bank surprised everyone by cutting its benchmark rate 100 bp to 13% yesterday. Governor Kavcioglu hinted this was a one-off as it was preempting a possible slowdown in manufacturing. Even though President Erdogan promised in June rates would fall, some observers link the rate cut to the increase in reserves (~$15 bln) recently from Russia, who is building a nuclear plant in Turkey. The decline in oil prices may also help ease pressure on Turkey's inflation and trade deficit. The lira fell to new record-lows against the dollar. The lira is off about 7.5% this quarter and about 26.4% year-to-date. Significant technical damage has been inflicted on the euro and sterling  The euro was sold through the (61.8%) retracement objective of the runup since the mid-July two-decade low near $0.9950. That retracement area (~$1.0110) now offers resistance, and the single currency has not been above $1.01 today. We had suspected the upside correction was over, but the pace of the euro's retreat surprises. There is little from a technical perspective preventing a test on the previous lows. Yesterday, sterling took out the neckline of a potential double top we have been monitoring at $1.20. It is being sold in the European morning and has clipped the $1.1870 area. The low set-in mid-July was near $1.1760, and this is the next obvious target and roughly corresponds to the measuring objective of the double top.  America With no dissents at the Fed to last month's 75 bp hike, one might be forgiven for thinking that there are no more doves  Yet, as we argued even before Minneapolis Fed President Kashkari, once regarded as a leading dove, admitted that his dot in June was the most aggressive at 3.90% for year-end, hawk and dove are more meaningful within a context. Kashkari may be more an activist that either a hawk or dove. Daly, the San Francisco Fed President does not vote this year, suggested that a Fed funds target "a little" over 3% this year would be appropriate. She said she favored a 50 bp or a 75 bp move. The current target range is 2.25%-2.50%. and the median dot in June saw a 3.25%-3.50% year-end target. St. Louis Fed President Bullard says he favors another 75 bp hike next month. No surprise there. George, the Kansas, Fed President, dissented against the 75 bp hike in June seemingly because of the messaging around it, but it's tough to call her vote for a 50 bp hike dovish. She voted for the 75 bp move in July. She recognizes the need for additional hikes, and the issue is about the pace. George did not rule out a 75 bp hike while cautioning that policy operates on a lag. Barkin, the Richmond Fed President, also does not vote this year. He is the only scheduled Fed speaker today.  The odds of a 75 bp in September is virtually unchanged from the end of last week around a 50/50 proposition.  The October Fed funds implies a 2.945% average effective Fed funds rate. The actual effective rate has been rocksteady this month at 2.33%. So, the October contract is pricing in 61 bp, which is the 50 bp (done deal) and 11 of the next 25 bp or 44% chance of a 75 hike instead of a half-point move. Next week's Jackson Hole conference will give Fed officials, and especially Chair Powell an opportunity to push back against the premature easing of financial conditions  The better-than-expected Philadelphia Fed survey helps neutralize the dismal Empire State manufacturing survey. The median from Bloomberg's survey looked for improvement to -5 from -12.3. Instead, it was reported at 6.2. Orders jumped almost 20 points to -5.1 and the improvement in delivery times points to the continued normalization of supply chains. Disappointingly, however, the measure of six-month expectations remained negative for the third consecutive month. Still, the plans for hiring and capex improved and the news on prices were encouraging. Prices paid fell to their lowest since the end of 2020 (energy?) and prices received were the lowest since February 2021. The Fed also asked about the CPI outlook. The median sees it at 6% next year down from 6.5% in May. The projected rate over the next 10-years slipped to 3%. Canada and Mexico report June retail sales today  Lift by rising prices, Canada's retail sales have posted an average monthly gain this year of 1.5%. However, after a dramatic 2.2% increase in May, Canadian retail sales are expected (median in Bloomberg' survey) to rise by a modest 0.4%. Excluding autos, retail sales may have held up better. Economists look for a 0.9% increase after a 1.9% rise in May. Through the first five months of the year, Mexico's retail sales have risen by a little more than 0.5% a month. They have risen by a 5.2% year-over-year. Economists expected retail sales to have slowed to a crawl in June and see the year-over-year pace easing to 5.0%. The greenback rose the CAD1.2935 area that had capped it in the first half of the week. It settled near CAD1.2950 yesterday and is pushing closer to CAD 1.2980 now. Above here, immediate potential extends toward CAD1.3035. The US dollar is gaining for the third consecutive session against the Canadian dollar, the longest advancing streak in a couple of months. Support is seen in the CAD1.2940-50 area. The Mexican peso is on its backfoot, and is falling for the fourth session, which ended a six-day rally. The dollar has met out first target near MXN20.20 and is approaching the 20-day moving average (~MXN20.2375). Above there, the next technical target is MXN20.32. The broader dollar gains suggest it may rise above the 200-day moving average against the Brazilian real (~BRL5.2040) and the (38.2%) of the slide since the late July high (~BRL5.5140) that is found near BRL5.2185.    Disclaimer   Source: The Dollar is on Fire

Overview: The sell-off in European bonds continues today. The 10-year German Bund yield is around four basis points higher to bring three-day increase to about 22 bp. The Italian premium over Germany has risen by almost 18 bp over these three sessions. Its two-year premium is widening for the fifth consecutive session and is above 90 bp for the first time in almost three weeks. The 10-year US Treasury yield is a little softer near 2.88%. Most of the large Asia Pacific equity markets fell, with India a notable exception. Europe’s Stoxx 600 snapped a five-day rally yesterday with a 0.9% loss. It is slightly firmer today, while US futures are hovering around yesterday’s closing levels. The greenback is firm against most of the major currencies. The Australian and Canadian dollars  and Norwegian krone and sterling are the most resilient today. The Philippines, like Norway hiked 50 bp but unlike Norway, the currency has not been bought. Most emerging market currencies are softer today. Gold is trying to break a three-day slide after approaching $1760. It settled last week at $1802. October WTI found a base a little below $85.50 and is around $88.50 near midday in Europe. The week’s high was set Monday by $91.50. US natgas is up 1.1% to recoup yesterday’s loss in full. Europe’s benchmark is extended this week’s run. It finished last week near 205.85 and now is around 232.00, a 12.7% gain after 6% last week. Iron ore ended a four-day 8% slide. September copper is recovering from the early drop to near two-week lows ($354.20) and is now near 362.00. A move above yesterday’s high (~$365) would be constructive. The sell-ff in September wheat has accelerated. It is off for the fifth consecutive session and is at its lowest level since January. After falling around 3% in three days from last Friday, it is off more than 5% between yesterday and today. Asia Pacific For good reasons, Beijing and Washington suspect the other of trying to change that status quo over Taiwan  The visits by US legislators may be only the initial efforts by Congress to force a more aggressive US position. It could come to a head in the fall when a bill that wants to recognize Taiwan as a major non-NATO ally and to foster Taiwan's membership in international forums will draw more attention. Meanwhile, US-Taiwan trade talks will begin later this year that was first aired a couple of months ago. At the same time, the Biden administration has been considering lifting some of the tariffs levied by the previous administration, but China's militaristic response to the visits makes it more difficult. Biden wants to lift the tariffs not to reward Beijing but to ease the costs to Americans. The Consumer Technology Association, an industry group, estimated that the tariffs have boosted the bill for American consumer technology companies by around $32 bln. The tariffs are paid to the US government. It seems that in lieu of lifting the tariffs, a broad exclusion process is possible. Related but separately, the Nikkei Asia reported that Apple is in talks to produce its watches and computers in Vietnam for the first time  Two suppliers have been producing Apple Watches in northern Vietnam. A couple of months ago, reports indicated that Apple would more some production of its tablets to Vietnam. Apple's ecosystem is establishing a presence in Vietnam, with nearly two dozen suppliers have factories now, almost doubling since 2018. As a result of these forces and the movement of capacity outside of China, Vietnam's trade surplus with the US is exploding. The $33 bln surplus in 2016 ballooned to $91 bln last year and was nearly $58 bln in the first half. For the past five years, the dollar has traded in a roughly 2% band around VND23000. The greenback is near the upper end of the range. Australia's July jobs report was disappointing  It lost almost 87k full-time positions after gaining nearly 53k in June. Part-time positions increased (46k), leading to a 40.9k loss of overall jobs. The median forecast (Bloomberg survey) was for a gain of 25k jobs. The unemployment rate slipped to a new record low of 3.4% (from 3.5%) but this was due to a sharp drop in the participation rate (66.4% from 66.8%). Ostensibly, this could give the central bank space to be more flexible at its September 6 meeting. However, the futures market as taken it in stride that has left the odds of a 50 bp hike next month essentially unchanged around 57%. This is essentially where it was at the end of last week and the week before. Many are now familiar with China's rolling lockdowns to combat Covid and the implosion of property market, a key engine of growth and accumulation  A new threat has emerged. The extreme weather has seen water levels in Sichuan's hydropower reserves as much as 50% this month, according to report, prompting the shuttering of factories (hub for solar panels, cement, and urea). Dazhou, a city of nearly 3.5 mln people, imposed a 2 1/2-hour power cuts this week that were expanded to three hours yesterday. Office buildings in Chengdu, the provincial capital, were barred from using air conditioning. Many areas in central and northern China imposed emergency measures to ensure the availability of drinking water. The heat and drought threaten summer crops and risk greater food-driven inflation. At the same time, Shanxi, which provides about a quarter of China's coal is worried about floods, it has suspended the operation of more than 100 mines since June. The government-imposed measures to boost output and Shanxi coal output rose by around 16% in H1.  The dollar is confined to a narrow range, straddling the JPY135 area  It has held `below last week's high around JPY135.60 and above the JPY134.55, where options for $700 mln expire today. The Australian dollar has been sold aggressively this week. It began near $0.7115 and tested $0.6900 today, meeting the (50%) retracement objective of the rally from the mid-July low (~$0.6880). It was only able to make a marginal new low today, suggesting that the selling pressure has abated. The next retracement (61.8%) is closer to $0.6855. Initial resistance is seen around $0.6950. After slipping a little yesterday, the greenback returned to its recent highs against the Chinese yuan around CNY6.7960. This year's high was set in May near CNY6.8125. Between Covid lockdowns, the weather disruptions, and the continued unwinding of the property bubble, a weaker yuan may the path of least resistance. The PBOC set the dollar's reference rate at CNY6.7802 compared with expectations from Bloomberg's survey of CNY6.7806. The yuan is falling for the sixth consecutive month against the dollar. Europe The eurozone may not have completed its banking and monetary union, but the ECB said that it would harmonize how banks offer crypto assets and have sufficient capital and expertise  Crypto companies have negotiated with national authorities in several EMU member countries, but common EU licensing rules are unlikely any time soon. There is a patchwork of differing national rules, and in some countries, some types of crypto activity may require a banking license, for example. Norway's central bank hiked its deposit rate by 50 bp and indicated it would "most likely" lift rates again next month What makes today's move somewhat more aggressive that it may appear is that the hike took place at a meeting that did not include an economic update and projections for the future path of policy. Norges Bank acknowledged that the policy rate trajectory would be faster than projected in June and the inflation risks being higher for longer. The deposit rate now sits at 1.75%. Another 50 bp hike next month (September 22) seems likely followed by a 25 bp move in November, the last meeting of the year. The euro briefly popped a little above $1.02 on what was initially seen as dovish FOMC minutes in the North American afternoon yesterday  However, it returned to yesterday's lows low near $1.0145 before finding a bid. The week's low was set Tuesday slightly below $1.0125, which is ahead of the retracement objective we identified near $1.0110. The euro is consolidating as the US two-year premium over Germany falls to its lowest level in a nearly a month (2.54%), and almost 25 bp below the peak seen after the US jobs data on August 5. Labor disputes are crippling UK trains, buses, subways, and a key container port today. Sterling slipped to $1.1995, its lowest level since July 26. The nicking of the neckline of a possible double top was not a convincing violation and sterling has recovered to the $1.2060 area in the London morning. If this is not the peak in sterling, it seems close. Tomorrow, the UK is expected to report a decline in July retail sales, excluding gasoline. This measure of retail sales rose by 0.4% in June, the first increase since last October. The median forecast (Bloomberg survey) is for a 0.3% fall. The swaps market is pricing in a 50 bp hike at the mid-September BOE meeting and about a 1-in-5 chance of a 75 bp move. America US interest rates softened and dragged the dollar lower following the release of the FOMC minutes  The market seems to have focused on the concern of "many" members that it could over-tighten but there was no sign that this was going to prevent them for raising rates further. Indeed, it suggest that the risk of inflation expectations becoming embedded was greater. More hikes were appropriate, the minutes said, and a restrictive stance may be required for "some time". The minutes also played the recent pullback in commodity prices as an indicator of lower inflation, which it still says the evidence is lacking. When everything was said and done the September Fed funds futures were unchanged for the fourth consecutive session. Autos and gasoline held by retail sales in July, but excluding them, retail sales rose by 0.7%, matching the June increase  The core measure, which also excludes building materials and food services rose a solid 0.8%. Retail sales account for around 40% of personal consumption expenditures. The July PCE is due next week (August 26) and picks up service consumption too. The early call is for it to rise by 0.5%. However, it too is a nominal report, and in real terms, a 0.3%-0.4% gain would be a strong showing. The retail sales report lent credence to anecdotal stories about department stores discounting prices to move inventory. Amazon's Prime Day (July 12-13) was claimed to be the biggest so far. Online sales overall surged 2.7%. Today's data includes weekly jobless claims, the Philadelphia Fed survey, existing home sale, and the index of Leading Economic Indicators  Th four-week average of weekly jobless claims rose to 252k in the week ending August 5. Recall the four-week moving average, used to smooth out some of the noise bottomed in the week ending April 1 at 170.5k. They averaged around 238k in December 2019, which was the highest since the first half of January 2018. Continuing claims have edged higher in recent weeks, but at 1.428 mln, they are roughly 20% below the peak at the start of this year. The Philadelphia Fed survey is particularly interesting today because of the disastrous Empire State survey. The median forecast in Bloomberg's survey is for a -5 reading after -12.3 in July. Meanwhile, existing home sales have fallen for five months through June. In fact, new home sales have been fallen every quarter since the end of 2020, with the exception of Q3 21. They fell by an average of 1.7% in Q1 22 and 3.8% in Q2 22. The median forecast is for a nearly 5% decline in July. The market tends not to get excited about the leading economic index series. Economists expected the fifth consecutive decline. The only month it rose this year was February. The US dollar extended its recovery against the Canadian dollar to reach almost CAD1.2950, its highest level since August 8 today  It was pressed lower by new offers in the European morning that drove it back to almost CAD1.2900. The market may take its cues from the S&P 500 and the general risk appetites in the North American session. With the intraday momentum indicators stretched, yesterday's post-FOMC minutes low near CAD1.2880 may offer sufficient support. The greenback rose to a five-day high against the Mexican peso yesterday around MXN20.09. It is consolidating and straddling the MXN20.00 area. Our reading of the technical condition favors the dollar's upside, and the first important target is near MXN20.20. The US dollar gapped higher against the Brazilian real yesterday and approached the BRL5.22 area, where the 20-day and 200-day moving averages converge. The opening gap was closed late on the pullback spurred by the reading of FOMC minute headlines. The price action is similar to the peso, where the dollar has traded heavily since last month but appears to have found a bottom. A break above BRL5.22 would target the month's high near BRL5.3150.       Disclaimer   Source: Fed Minutes were Not as Dovish as Initially Read

Overview: The biggest development today in the capital markets is the jump in benchmark interest rates.  The US 10-year yield is up five basis points to 2.86%, which is about 10 bp above Monday’s low.  European yields are up 9-10 bp.  The 10-year German Bund yield was near 0.88% on Monday and is now near 1.07%.  Italy’s premium over German is near 2.18%, the most in nearly three weeks.  Although Asia Pacific equities rallied, led by Japan’s 1.2% gain, but did not include South Korea, European equities are lower as are US futures.  The Stoxx 600 is struggled to extend a five-day rally.  The Antipodeans are the weakest of the majors, but most of the major currencies are softer. The euro and sterling are straddling unchanged levels near midday in Europe.  Gold is soft in yesterday’s range, near its lowest level since August 5.  While $1750 offers support, ahead of it there may be bids around $1765. October WTI is pinned near its lows around $85.50-$86.00.  The drop in Chinese demand is a major weight, while the market is closely monitoring developments with the Iranian negotiations.  US natgas is edging higher after yesterday 6.9% surge to approach last month’s peak.  Europe’s benchmark is 4.5% stronger today after yesterday’s 2.7% pullback.  Iron ore fell (3.9%) for the fourth consecutive decline. The September contract that trades in Singapore is at its lowest level since July 22.  September copper is a little heavier but is still inside Monday’s range.  September wheat is extending its pullback for the fourth consecutive session.  It had risen in the first four sessions last week. It is moving sideways in the trough carved over the past month.    Asia Pacific   The Reserve Bank of New Zealand delivered the anticipated 50 bp rate hike and signaled it would continue to tighten policy    It did not help the New Zealand dollar, which is posting an outside day by trading on both sides of yesterday's range.  The close is the key and below yesterday's low (~$0.6315) would be a bearish technical development that could spur another cent decline.  It is the RBNZ's fourth consecutive half-point hike, which followed three quarter-point moves.  The cash target rate is at 3.0%.  Inflation (Q2) was stronger than expected rising 7.3% year-over-year.  The central bank does not meet again until October 5, and the swaps market has a little more than a 90% chance of another 50 bp discounted.    Japan's July trade balance deteriorated more than expected    The shortfall of JPY1.44 trillion (~$10.7 bln) form JPY1.40 trillion in June.  Exports slowed to a still impressive 19% year-over-year from 19.3% previously, while imports rose 47.2% from 46.1% in June.  The terms-of-trade shock is significant in both Japan and Europe.  Japan's ran an average monthly trade deficit of about JPY1.32 trillion in H1 22 compared with an average monthly surplus of JPY130 bln in H1 21.  The eurozone reported an average shortfall of 23.4 bln euros in H1 22 compared with a 16.8 bln average monthly surplus in H1 21.  The two US rivals, China, and Russia, have been hobbled by their own actions, while the two main US economic competitors, the eurozone and Japan are experiencing a dramatic deterioration of their external balance,     The 11 bp rise in the US two-year yield between yesterday and today has helped lift the US dollar to almost JPY135.00, a five-day high   It has met the (50%) retracement target of the downtrend since the multiyear peak in mid-July near JPY139.40.  The next target is the high from earlier this month around JPY135.60.  and then JPY136.00.  Initial support now is seen near JPY134.40.  After recovering a bit in the North American session yesterday, the Australian dollar has come under renewed selling pressure and is trading at five-day lows below the 20-day moving average (~$0.6990).  It has broken support in the $0.6970-80 area to test the trendline off the mid-July low found near $0.6965.  A break could signal a move toward $0.6900-10.  The gap created by yesterday's high US dollar opening against the Chinese yuan was closed today as yuan recovered for the first day in three sessions.  Monday's high was CNY6.775 and yesterday's low was CNY6.7825.  Today's low is about CNY6.7690.  For the second consecutive session, the PBOC set the dollar's reference rate a little lower than the market (median in Bloomberg's survey) expected (CNY6.7863 vs. CNY6.7877).  The dollar has risen to almost CNH6.82 in the past two sessions and still trading a little above CNH6.80 today but was sold to nearly CNH6.7755 where is has found new bids.      Europe   The UK's headline CPI accelerated to 10.1% last month from 9.4% in June    It was above market expectations and the Bank of England's forecast for a 9.9% increase.  Although the rise in food prices (2.3% on the month and 12.7% year-over-year) lifted the headline, the core rate, which excludes food, energy, alcohol, and tobacco rose to 6.2% from 5.8% and was also above expectations (median forecast in Bloomberg's survey was for 5.9%).  Producer input prices slowed, posting a 0.1% gain last month for a 22.6% year-over-year pace (24.1% in June).  However, output prices jumped 1.6% after a 1.4% gain in June.  This puts the year-over-year pace at 17.1%, up from 16.4% previously.  The bottom line is that although the UK economy contracted in Q2 and the BOE sees a sustained contraction beginning soon, the market recognize that the monetary policy will continue to tighten.  The market swaps market is fully pricing in a 50 bp hike at the mid-September meeting and is toying with the idea of a larger move (53 bp of tightening is discounted).    What a year of reversals for Germany    After years of pressure from the United States and some allies in Europe, Germany finally nixed the Nord Stream 2 pipeline with Russia.  Putin also got Germany to do something that several American presidents failed to achieve and that is boost is defense sending in line with NATO commitments. The energy crunch manufactured by Russia is forcing Germany to abandon is previous strategy of reducing coal and closing down its nuclear plants.  Ironically, the Greens ae in the coalition government and recognize little choice.  A formal decision on three nuclear plants that were to be shuttered before the end of the year has yet to be made, but reports confirm it is being discussed at the highest levels.     Germany's one-year forward electricity rose by 11% to 530.50 euros a megawatt-hour in the futures market years, a gain of more than 500%     France, whose nuclear plants are key to the regional power grid, is set to be the lowest in decades, according to reports.  France has become a net importer of electricity, while the extreme weather has cut hydropower output and wind generation is below seasonal norms.  The low level of the Rhine also disrupts this important conduit for barges of coal and oil. Starting in October, German households will have a new gas tax (2.4-euro cents per kilowatt hour for natural gas) until 1 April 2024. Economic Minister Habeck estimated that for the average single household the gas tax could be almost 100 euros a month, while a couple would pay around 195 euros.  Also, starting in October, utilities will be able to through to consumers the higher costs associated with the reduction of gas supply from Russia.  This poses upside risk to German inflation.     The euro held technical support near $1.0110 yesterday and is trading quietly today in a narrow (~$1.0150-$1.0185) range today    Yesterday was the first session since July 15 that the euro did not trade above $1.02.  The decline since peaking last week a little shy of $1.0370 has seen the five- and 20-day moving averages converge and could cross today or tomorrow for the first time since late July. We note that the US 2-year premium over German is testing the 2.60% area.  It has not closed below there since July 22.  Sterling held key support at $1.20 yesterday and traded to almost $1.2145 today, which met the (50%) retracement objective of the fall from last week's $1.2275 high.  The next retracement (61.8%) is closer to $1.2175.  The UK reported employment yesterday, CPI today, and retail sales ahead of the weekend.  Retail sales, excluding gasoline have fallen consistently since last July with the exception of October 2021 and June 2022.  Retail sales are expected to have slipped by around 0.3% last month.     America   The Empire State manufacturing August survey on Monday and yesterday's July housing starts pick up a thread first picked up in the July composite PMI, which fell from 52.3 to 47.7 of some abrupt slowing of economic activity  The Empire State survey imploded from 11.1 to -31.3.  Housing starts fell 9.6%, more than four-times the pace expected (median Bloomberg survey -2.1%).  It was small comfort that the June series was revised up 2.4% from initially a 2.0% decline.  The 1.45 mln unit pace is the weakest since February 2021 and is about 9% lower than July 2021.  However, offsetting this has been the strong July jobs report and yesterday' industrial production figures.  The 0.6% was twice the median forecast (Bloomberg's survey) and the June decline (-0.2%) was revised away. The auto sector continues to recover from supply chain disruptions, and this may be distorting typically seasonal patterns.  Sales are rose in June and July, the first back-to-back gain in over a year. To some extent, supply is limiting sales, which would seem to encourage production.  Outside of autos, output slowed (year-over-year) for the third consecutive month in July.     Today's highlights include July retail sales and the FOMC minutes     Retail sales are reported in nominal terms, which means that the 13% drop in the average retail price of gasoline will weigh on the broadest of measures.  However, excluding auto, gasoline, building materials, and food services, the core retail sales will likely rise by around 0.6% after a 0.8% gain in June.  The most important thing than many want to know from the FOMC minutes is where the is bar to another 75 bp rate hike.  The Fed funds futures market has it nearly 50/50.     Canada's July CPI was spot on forecasts for a 0.1% month-over-month increase and a 7.6% year-over-year pace (down from 8.1%)     However, the core rates were firm than average increased.  The market quickly concluded that this increases the likelihood that the central bank that surprised the market with a 100 bp hike last month will lift the target rate by another 75 bp when it meets on September 7.  In fact, the swaps market sees it as a an almost 65% probability, the most since July 20.  Canada reports June retail sales at the end of the week.  The median forecast in Bloomberg's survey is for a 0.4% gain, but even if it is weaker, it is unlikely to offset the firm core inflation readings.     The dollar-bloc currencies are under pressure today, but the Canadian dollar is faring best, off about 0.25% in late morning trading in Europe     The Aussie is off closer to 0.75% and the Kiwi is down around 0.5%.  US equities are softer. The greenback found support near CAD1.2830 and is near CAD1.2880.  Monday and Tuesday's highs were in the CAD1.2930-5 area and a break above there would target CAD1.2985-CAD1.3000.  However, the intraday momentum indicators are overextended, and initial support is seen in the CAD1.2840-60 area. The greenback has forged a shelf near MXN19.81 in recent days.  It has been sold from the MXN20.83 area seen earlier this month.  It has not been above MXN20.05 for the past five sessions.  A move above there, initially targets around MXN20.20.  The JP Morgan Emerging Market Currency Index is off for the third consecutive session. If sustained, it would be the longest losing streak since July 20-22.     Disclaimer   Source: Markets Look for Direction

Overview: After retreating most of last week, the US dollar has extended yesterday’s gains today. The Canadian dollar is the most resilient, while the New Zealand dollar is leading the decline with a nearly 0.75% drop ahead of the central bank decision first thing tomorrow. The RBNZ is expected to deliver its fourth consecutive 50 bp hike. Most emerging market currencies are lower as well, led by central Europe. Equities in Asia Pacific and Europe are mostly higher today. Japan and Hong Kong were exceptions, and China was mixed with small gains in Shanghai and Shenzhen composites, but the CSI 300 slipped. Europe’s Stoxx 600 is stretching its advance for the fifth consecutive session. It is at two-month highs. US futures are softer. The US 10-year yield is slightly firmer near 2.80%, while European benchmark yields are mostly 2-4 bp higher, but Italian bonds are under more pressure and the yield is back above the 3% threshold. Gold is softer after being repulsed from the $1800 area to test $1773-$1775. A break could signal a test on the 20-day moving average near $1761. October WTI tested last week’s lows yesterday near $86 a barrel on the back of the poor Chinese data. It is straddling the 200-day moving average (~$87.95). The market is also watching what seems like the final negotiations with Iran, where a deal could also boost supply. US natgas prices are more than recouping the past two days of losses and looks set to challenge the $9 level. Europe’s benchmark leapt 11.7% yesterday and is up another 0.5% today. Iron ore has yet to a base after falling more than 5.5% in the past two sessions. It fell almost 0.65% today. September copper has fallen by almost 2.5% over the past two sessions and is steady today. Lastly, September wheat is slipping back below $8 a bushel and is trading heavily for the third consecutive session. Asia Pacific Japan's 2.2% annualized growth in Q2 does not stand in the way of a new government support package  Prime Minister Kishida has been reportedly planning new measures and has instructed the cabinet to pull it together by early next month. He wants to cushion the blow of higher energy and food prices. An extension of the subsidy to wholesalers to keep down the gasoline and kerosene prices looks likely. Kishida wants to head off a surge in wheat prices. Without a commitment to maintain current import prices of wheat that is sold to millers, the price could jump 20% in October, according to reports. Separately, and more controversially, Kishida is pushing for the re-opening of nine nuclear plants that have passed their safety protocols, which have been shut since the 2011 Fukushima accident.  The minutes from the Reserve Bank of Australia's meeting earlier this month signaled additional rate hikes will be forthcoming  After three half--point hikes, it says that the pace going forward will be determined by inflation expectations and the evolving economic conditions. The minutes noted that consumer spending is an element of uncertainty given the higher inflation and interest rates. Earlier today, the CBA's household spending report shows a 1.1% jump month-over-month in July and a 0.6% increase in June. The RBA wants to bring the cash target rate to neutral (~2.50%). The target rate is currently at 1.85% and the cash rate futures is pricing in about a 40% chance of a 50 bp hike at the next RBA meeting on September 6. It peaked near 60% last week. On Thursday, Australia reports July employment. Australia grew 88.4k jobs in June, of which almost 53k were full-time positions. The median forecast in Bloomberg's survey envisions a 25k increase of jobs in July.  The offshore yuan slumped 1.15% yesterday  It was the biggest drop since August 2019 and was sparked by the unexpected cut in rates after a series of disappointing economic data. The US dollar reached almost CNH6.82 yesterday, its highest level in three months. It has steadied today but remains firm in the CNH6.7925-CNH6.8190 range. China's 10-year yield is still under pressure. It finished last week quietly near 2.74% and yesterday fell to 2.66% and today 2.63%. It is the lowest since May 2020. As we have noted, the dollar-yen exchange rate seems to be more sensitive to the US 2-year yield (more anchored to Fed policy) than the 10-year yield (more about growth and inflation)  The dollar is trading near four-day highs against the yen as the two-year yield trades firmer near 3.20%. Initial resistance has been encountered in Europe near JPY134.00. Above there, the JPY134.60 may offer the next cap. Support now is seen around JPY133.20-40. The Australian dollar extended yesterday's decline and slipped through the $0.7000-level where A$440 mln in options expire today. It also corresponds with a (50%) retracement of the run-up form the mid-July low (~$0.6680). The next area of support is seen in the $0.6970-80 area. The greenback rose 0.45% against the onshore yuan yesterday after gapping higher. Today it gapped higher again and rose to almost CNY6.7975, its highest level since mid-May. It reached a high then near CNY6.8125. The PBOC set the dollar's reference rate at CNY6.7730, slightly less than the median in Bloomberg's survey (CNY6.7736). The takeaway is the central bank did not seem to protest the weakness of the yuan. Europe The euro has been sold to a new seven-year low against the euro near CHF0.9600 The euro has been sold in eight of the nine weeks since the Swiss National Bank hiked its policy rate by 50 bp on June 16. Half of those weekly decline were 1% or larger. The euro has fallen around 7.4% against the franc since the hike. Swiss domestic sight deposit fell for 10 of 11 weeks through the end of July as the SNB did not appear to be intervening. However, in the last two weeks, as the franc continued to strengthen, the Swiss sight deposits have risen, and recorded their first back-to-back increase in four months. This is consistent with modest intervention. The UK added 160k jobs in Q2, almost half of the jobs gain in the three months through May, illustrating the fading momentum  Still, some 73k were added to the payrolls in July, well above expectations. In the three months through July, job vacancies in the UK fell (~19.8k) for the first time in nearly two years. Average weekly earnings, including bonuses, rose 5.1% in Q2. The median forecast was for a 4.5% increase. Yet, real pay, excluding bonuses and adjusted for inflation slid 3% in the April-June period, the most since at least 2001. The ILO measure of unemployment in Q2 was unchanged at 3.8%. The Bank of England warns it will rise to over 6%. The market still favors a 50 bp hike next month. The swaps market has it at a little better than an 80% probability. The euro is extending its retreat  It peaked last week, near $1.0365 and tested this month's low near $1.0125 in the European morning. The intraday momentum indicators are stretched, and that market does not appear to have the drive to challenge the 1.2 bln euros in options struck at $1.0075 that expire today. With yesterday's loss, the euro met the (50%) retracement objective of the bounce off the mid-July 22-year low (~$0.9950). The next retracement objective (61.8%) is near $1.0110. Nearby resistance may be met near $1.0160-70. Sterling has been sold for the fourth consecutive session. It approached the $1.20-level, which may be the neckline of a double top. If violated it could signal a return to the low seen in mid-July around $1.1760. Sterling is holding in better than the euro now. The cross peaked before the weekend in front of GBP0.8500 and is approaching GBP0.8400 today. A break would look ominous and could spur a return to the GBP0.8340 area. America The Empire State manufacturing survey and the manufacturing PMI line up well  Both bottomed in April 2020 and peaked in July 2021. The outsized decline in the August Empire State survey points to the downside risks of next week's preliminary August manufacturing PMI. Recall that the July manufacturing PMI fell to 52.2, its third consecutive decline and the lowest reading since July 2020. There was little good in the Empire survey. Orders and shipments fell dramatically. Employment was also soft. Prices paid softened to the lowest this year, but prices received edged higher. The US reports housing start and permits and industrial output today The housing market continues to slow from elevated levels. Housing starts are expected to have fallen 2% in July, matching the June decline. It would be the third consecutive decline, and the longest declining streak since 2018. Still, in terms of the absolute level of activity, anything above 1.5 mln units must still be regarded as strong. They stood at almost 1.56 mln in June. Permits fell by 10% in April-May before stabilizing in June. The median forecast in Bloomberg's survey projects a 3.3% decline. Permits were running at 1.685 mln in June. From April 2007 through September 2019, permits held below 1.5 mln. The industrial production report may attract more attention Output fell in June (-0.2%) for the first time this year, and even with it, industrial product has risen on average by 0.4% a month in H1 22, slightly above the pace seen in H1 21. Helped by manufacturing and utility output, industrial production is expected to rise by around 0.3%. In the last cycle, capacity use spent four months (August-November 2018) above 80%. It had not been above 80% since the run-up to the Great Financial Crisis when it spent December 2006 through March 2008 above the threshold and peaked slightly above 81.0%. Last month was likely the fourth month in this cycle above the 80% capacity use rate. Note that the Atlanta Fed's GDPNow tracker will be updated later today. The update from August 10 put Q3 GDP at 2.5%. Housing starts in Canada likely slow last month, which would be the first back-to-back decline this year  The median forecast (Bloomberg's survey) calls for a 3.6% decline after an 8.4% fall in June. Still, the expected pace of 264k is still 10% higher since the end of last year. On Monday, Canada reported that July existing home sales fell by 5.3%, the fifth consecutive decline. They have fallen by more than a third since February. Canada also reports its monthly portfolios. Through May, Canada has experienced C$98.5 bln net portfolio inflows, almost double the pace seen in the first five months last year. However, the most important report today is the July CPI. A 0.1% increase, which is the median forecast in Bloomberg's survey would be the smallest of the year and the year-over-year pace to eased to 7.6% from 8.1%. If so, it is the first decline since June 2021. Similar with what the US reported, the core measures are likely to prove sticky. After the employment data on August 5, the swaps market was still leaning in favor a 75 bp hike at the September 7 meeting (64%). However, since the US CPI report, it has been hovering around a 40% chance. While the US S&P 500 rose reached almost four-month highs yesterday, the Canadian dollar found little consolation  It held in better than the other dollar-bloc currencies and Scandis, but it still suffered its biggest decline in about a month yesterday. The greenback reached almost CAD1.2935 yesterday and is consolidating in a narrow range today above CAD1.2890. The next important chart point is near CAD1.2975-85 and the CAD1.3050. After testing the MXN20.00 level yesterday, the US dollar was sold marginally through last week's low (~MXN19.8150). It is consolidating today and has not been above MXN19.8850. It has come a long way from the month's high set on August 3 near MXN20.8335. The greenback's downside momentum seems to have eased as it stalls in front of MXN19.81 for the third consecutive session.     Disclaimer   Source: Greenback Remains Firm

Overview: Equities were mostly higher in the Asia Pacific region, though Chinese and Hong Kong markets eased, and South Korea and India were closed for national holidays. Despite new Chinese exercises off the coast of Taiwan following another US congressional visit, Taiwan’s Taiex gained almost 0.85%. Europe’s Stoxx 600 is advancing for the fourth consecutive session, while US futures are paring the pre-weekend rally. Following disappointing data and a surprise cut in the one-year medium-term lending facility, China’s 10-year yield fell to 2.66%, its lowest in two years. The US 10-year is soft near 2.83%, while European yields are mostly 2-4 bp lower. Italian bonds are bucking the trend and the 10-year yield is a little higher. The Antipodeans and Norwegian krone are off more than 1%, but all the major currencies are weaker against the greenback, but the Japanese yen, which is practically flat. Most emerging market currencies are lower too. The Hong Kong Dollar, which has been supported by the HKMA, strengthened before the weekend, and is consolidating those gains today. Gold tested the $1800 level again but has been sold in the wake of the stronger dollar and is at a five-day low near $1778. The poor data from China raises questions about demand, and September WTI is off 3.6% after falling 2.4% before the weekend. It is near $88.60, while last week’s five-month lows were set near $87.00. US natgas is almost 2% lower, while Europe’s benchmark is up 2.7% to easily recoup the slippage of the past two sessions. China’s disappointment is weighing on industrial metal prices. Iron ore tumbled 4% and September copper is off nearly 3%. September wheat snapped a four-day advance before the weekend and is off 2.3% today.  Asia Pacific With a set of disappointing of data, China surprised with a 10-bp reduction in the benchmark one-year lending facility rate to 2.75%  It is the first cut since January. It also cut the yield on the seven-day repo rate to 2.0% from 2.1%. The string of poor news began before the weekend with a larger-than-expect in July lending figures. However, those lending figures probably need to be put in the context of the surge seen in June as lenders scramble to meet quota. Today's July data was simply weak. Industrial output and retail sales slowed sequentially year-over-year, whereas economists had projected modest increases. New home prices eased by 0.11%, and residential property sales fell 31.4% year-over-year after 31.8% decline in June. Property investment fell 6.4% year-over-year, year-to-date measures following a 5.4% drop in June. Fix asset investment also slowed. The one exception to the string of disappointment was small slippage in the surveyed unemployment rate to 5.4% from 5.5%. Incongruous, though on the other hand, the jobless rate for 16–24-year-olds rose to a record 19.9%. Japan reported a Q2 GDP that missed estimates, but the revisions lifted Q1 GDP out of contraction  The world's second-largest economy grew by 2.2% at an annualized pace in Q2. While this was a bit disappointing, Q1 was revised from a 0.5% fall in output to a 0.1% expansion. Consumption (1.1%) rebounded (Q1 revised to 0.3% from 0.1%) as did business spending (1.4% vs. -0.3% in Q1, which was originally reported as -0.7%). Net exports were flat after taking 0.5% off Q1 GDP. Inventories, as expected, were unwound. After contributing 0.5% to Q1 GDP, they took 0.4% off Q2 growth. Deflationary forces were ironically still evident. The GDP deflator fell 0.4% year-over-year, almost the same as in Q1 (-0.5%). Separately, Japan reported industrial surged by 9.2% in June, up from the preliminary estimate of 8.9%. It follows a two-month slide (-7.5% in May and -1.5% in April) that seemed to reflect the delayed impact of the lockdowns in China. The US dollar is little changed against the Japanese yen and is trading within the pre-weekend range (~JPY132.90-JPY133.90). It finished last week slightly above JPY133.40 and a higher closer today would be the third gain in a row, the longest advance in over a month. The weakness of Chinese data seemed to take a toll on the Australian dollar, which has been sold to three-day lows in the European morning near $0.7045. It stalled last week near $0.7140 and in front of the 200-day moving average (~$0.7150). A break of $0.7035 could signal a return to $0.7000, and possibly $0.6970. The greenback gapped higher against the Chinese yuan and reached almost CNY6.7690, nearly a two-week high. The pre-weekend high was about CNY6.7465 and today's low is around CNY6.7495. The PBOC set the dollar's reference rate at CNY6.7410, a little above the Bloomberg survey median of CNY6.7399. Note that a new US congressional delegation is visiting Taiwan and China has renewed drills around the island. The Taiwan dollar softened a little and traded at a three-day low. Europe Turkey's sovereign debt rating was cut a notch by Moody's to B3 from B2  That is equivalent to B-, a step below Fitch (B) and two below S&P (B+). Moody's did change its outlook to stable from negative. The rating agency cited the deterioration of the current account, which it now sees around 6% of GDP, three times larger than projected before Russia invaded Ukraine. The Turkish lira is the worst performing currency this year, with a 27.5% decline after last year's 45% depreciation. Turkey's two-year yield fell below 20% today for the first time in nine months, helped ostensibly by Russia's recent cash transfer. The dollar is firm against the lira, bumping against TRY17.97. The water level at an important junction on the Rhine River has fallen below the key 30-centimeter threshold (~12 inches) and could remain low through most of the week, according to reports of the latest German government estimate  Separately, Germany announced that its gas storage facility is 75% full, two weeks ahead of plan. The next target is 85% by October 1 and 95% on November 1. Reports from France show its nuclear reactors were operating at 48% of capacity, down from 50% before the weekend. A couple of reactors were shut down for scheduled maintenance on Saturday.  Ahead of Norway' rate decision on Thursday, the government reported a record trade surplus last month  The NOK229 bln (~$23.8 bln). The volume of natural gas exports surged more than four-times from a year earlier. Mainland exports, led by fish and electricity, rose by more than 20%. The value of Norway's electricity exports increased three-fold from a year ago. With rising price pressures (headline CPI rose to 6.8% in July and the underlying rate stands at 4.5%) and strong demand, the central bank is expected to hike the deposit rate by 50 bp to 1.75%. The euro stalled near $1.0370 last week after the softer than expected US CPI  It was pushed through the lows set that day in the European morning to trade below $1.02 for the first time since last Tuesday. There appears to be little support ahead of $1.0160. However, the retreat has extended the intraday momentum indicators. The $1.0220 area may now offer initial resistance. Sterling peaked last week near $1.2275 and eased for the past two sessions before breaking down to $1.2050 today. The intraday momentum indicators are stretched here too. The $1.2100 area may offer a sufficient cap on a bounce. A break of $1.20 could confirm a double top that would project back to the lows. America The Congressional Budget Office estimates that the Inflation Reduction Act reduces the budget deficit but will have a negligible effect on inflation  Yet, starting with the ISM gauge of prices paid for services, followed by the CPI, PPI, and import/export prices, the last string of data points came in consistently softer than expected. In addition, anecdotal reports suggest the Big Box stores are cutting prices to reduce inventories. Energy is important for the medium-term trajectory of measured inflation, but the core rate will prove sticky unless shelter cost increases begin to slow. While the Democrats scored two legislative victories with the approval of the Chips and Science Act and the Inflation Reduction Act, the impact on the poll ahead of the November midterm election seems minor at best. Even before the search-and-seizure of documents still in former President Trump's residence, PredictIt.Org "wagers" had turned to favor the Democratic Party holding the Senate but losing the House of Representatives. In terms of the Republican nomination for 2024, it has been back-and-forth over the last few months, and recently Florida Governor DeSantis narrowly pulled ahead of Trump. The two new laws may face international pushback aside from the domestic impact  The EU warned last week that the domestic content requirement to earn subsidies for electric vehicles appears to discriminate against European producers. The Inflation Reduction Act offers $7500 for the purchases of electric cars if the battery is built in North America or if the minerals are mined or recycled there. The EU electric vehicle subsidies are available for domestic and foreign producers alike. On the other hand, the Chips and Science Act offers billions of dollars to attract chip production and design to the US. However, it requires that companies drawing the subsidies could help upgrade China's capacity for a decade. Japan and Taiwan will likely go along. It fits into their domestic political agenda. However, South Korea may be a different kettle of fish. Hong Kong and China together accounted for around 60% of South Korea's chip exports last year. Samsung has one overseas memory chip facility. It is in China and produces about 40% of the Galaxy phones' NAND flash output. Pelosi's apparent farewell trip to Asia, including Taiwan, was not well received in South Korea. President Yoon Suk Yeol did not interrupt his staycation in Seoul to meet the US Speaker. Nor was the foreign minister sent. This is not to cast aspersions on South Korea's commitment to regional security, simply that it is not without limits. Today's economic calendar features the August Empire State manufacturing survey  A small decline is expected. The June TIC data is out as the markets close today. Today is also the anniversary of the US ending Bretton Woods by severing the last links between gold and the dollar in 1971. Canada reports manufacturing sales and wholesale trade, but the most market-sensitive data point may be the existing home sales, which are expected to have declined for the fifth consecutive month. Canada reports July CPI tomorrow (Bloomberg survey median forecast sees headline CPI slowing to 7.6% from 8.1% in June).  The Canadian dollar is under pressure  The US dollar has jumped above CAD1.2900 in Europe after finishing last week near CAD1.2780. Last week's high was set near CAD1.2950, where a $655 mln option is set to expire today. A move above CAD1.2920 could target CAD1.2975-CAD1.3000 over the next day or day. A combination of weaker equities, thin markets, and a short-term market leaning the wrong way after the likely drivers today. The greenback posted its lowest close in two months against the Mexican peso before the weekend near MXN19.85. However, it is rebounding today and testing the MXN20.00 area Initial resistance may be encountered around MXN20.05, but we are looking for a move toward MXN20.20 in the coming days. Mexico's economic calendar is light this week, and the highlight is the June retail sales report at the end of the week.    Disclaimer Source: China Disappoints and Surprises with Rate Cut

The bullish dollar narrative was fairly straightforward  Yes, the US main challengers, China and Russia, have been hobbled in different ways by self-inflicted injuries. Still, the driver of the dollar was the expected aggressive tightening by the Federal Reserve. The market accepted that after being a bit slower than ideal (though faster and before many other large central banks), the Fed would move forcefully against inflation, even if it diminished the chances of an economic soft-landing.   However, now the market seems to have a different reaction function  The euro was impressively resilient after the job growth of more than twice expectations. However, the softer than expected US CPI sent the dollar broadly lower, inflicting some apparent technical damage to the charts.  We are reluctant to chase the dollar lower and impressed in a week that the US reported a decline in CPI and PPI that the 10-year bond yield closed a few basis points higher and the first back-to-back weekly increase in two months Technically, it seems that the dollar's pullback, nearly a month-old, move is getting maybe getting stretched. We will try to identify levels that could confirm another leg lower and what would suggest the US dollar may snap back.   Dollar Index:   After reaching almost 107.00 after the stronger than expected jobs data, the Dollar Index fell to almost 104.65 in response to the softer than expected CPI. It was the lowest level since the end of June. The MACD is still falling but oversold. The Slow Stochastic looks poised to turn lower from the middle of the range. Nevertheless, we like it higher in the coming days. We target 106.30 and then 107.00. A move above 107.50 could signal a return to the highs near 109.30 from mid-July. That said, a close below 105.00 would boost the risk of another leg lower.  Euro:  The euro rallied strongly after the softer US CPI, but a key trendline drawn off the February, March, and June highs begins the new week near $1.0375 remains unchallenged. Although the momentum indicators allow for additional gains, we look for the euro to push lower in the coming days. Only a move above the trendline would give it new life. We think the greater likelihood is for the single currency to initially ease toward $1.0180-$1.0200. It may take a break of $1.01 to signal a return to the 20-year low set in mid-July near $0.9950. The US two-year premium over Germany narrowed every day last week for a cumulative 11 bp to near 2.66%. Italy's premium over Germany was trimmed by six basis points. It was the third week of convergence, but at 0.75%, it is still nearly twice what it was in June. Japanese Yen:  The greenback was pushed away from JPY135 by the decline in US rates after the CPI figures. It was sold to about JPY131.75, holding above the month's low set on August 2 near JPY130.40. However, US rates closed firmer on the week despite three softer-than-expected price reports (CPI, PPI, and import/export prices). As a result, the greenback looks poised to test the JPY135.00-50 ceiling. A move above JPY136 would target the JPY137.50 area. We have emphasized the strong correlation between changes in the exchange rate and the US 10-year yield. That correlation is off its highs though still above 0.50, while the correlation with the US two-year yield has risen toward 0.65, the highest in five months.  British Pound:   Sterling rose to $1.2275 in the broad US dollar sell-off in the middle of last week. It stalled in front of the high set on August 2, a little shy of $1.23. This sets up a potential double top formation with a neckline at $1.20. A break would re-target the two-year low set in July near $1.1760. The MACD is set to turn down. The Slow Stochastic is going sideways in the middle of the range after pulling back earlier this month. Sentiment seems poor, and in the week ahead, the UK is expected to report some easing in the labor market, accelerating consumer prices, and another decline in retail sales. Canadian Dollar:   The US dollar fell to near a two-month low last week slightly below CAD1.2730, and slipped through the 200-day moving average on an intraday basis for the first time since June 9. The test of the (61.8%) retracement of this year's rally (early April low ~CAD1.2400 and the mid-July high ~CAD1.3225) found near CAD1.2715 was successful. The US dollar recovered ahead of the weekend back to the CAD1.2800 area. Although the momentum indicators give room for further US dollar losses, we suspect a near-term low is in place and look for an upside correction toward CAD1.2850-CAD1.2900. The Canadian dollar remains sensitive to the immediate risk environment reflected in the change in the S&P 500. The correlation over the past 30 sessions is a little better than 0.60. The correlation reached a two-year high in June near 0.80. The exchange rate's correlation (30 sessions) with oil prices (WTI) set this year's high in early August near 0.60. It is now slightly below 0.50.  Australian Dollar:   Although our bias is for the US dollar to correct higher, the Aussie does not line up quite as well. It broke above the high set at the start of the month near $0.7050 and has held above it. However, its surge stalled slightly above $0.7135, and it consolidated in a narrow range around $0.7100 ahead of the weekend. The momentum indicators are constructive. The main hurdle is the 200-day moving average near $0.7150 and the (50%) retracement of this year's decline (~$0.7660 in early April and ~$6680 in mid-July) found near $0.7170. A break of this area could see a return to the June high by $0.7285.   Mexican Peso:   Latin American currencies had a good week, except for the Argentine peso, which fell by more than 1%, for the dubious honor of being the poorest performer in the emerging markets. Led by Chile (+3.9%) and the Colombian peso (3.8%), Latam currencies accounted for half of the top five performers last week. The peso's 2.7% gain was its best in five months, and the dollar was sold a little through MXN19.85, its lowest level since late June when it reached almost MXN19.82.There seems little to prevent a move toward MXN19.50. Any worries that AMLO's appointments to the central bank would block aggressive tightening of monetary policy must have evaporated as Banxico demonstrated a resolve to hike rates and shadow the US.  Chinese Yuan:   The yuan took a step lower from mid-April until mid-May. Since then, it has been trading within the range more or less seen in the second half of May. That dollar range is roughly CNY6.650 to CNY6.77. For the past month, the dollar has traded between CNY6.72 and CNY6.78, fraying the upper end of the broader range after the greenback surged broadly after the US employment data. Policymakers have signaled concern about inflation and its reluctance to ease monetary policy. It would seem the domestic policy efforts might favor a firm yuan.     Disclaimer   Source: Is the Dollar's Month-Long Pullback Over?

After two-quarters of contraction, many still do not accept that the US economy is in a recession  Federal Reserve officials have pushed against it, as has Treasury Secretary Yellen. The nearly 530k rise in July nonfarm rolls, more than twice the median forecast in Bloomberg's survey, and a new cyclical low in unemployment (3.5%) lent credibility to their arguments. If Q3 data point to a growing economy, additional support will likely be found.   While the interest rate-sensitive housing sector may still feel the squeeze, we note that activity is at historically strong levels  Housing starts are expected to have fallen for the third consecutive month in July. That would be the longest decline since the last four months of 2018. However, around 1.5 mln annualized pace, starts are still elevated. Permits, which are leading indicators, are holding up even better. They peaked at the end of last year a little below 1.9 mln and may have fallen to around 1.65 mln in July. Since the Great Financial Crisis, they were above 1.5 mln only once (October 2019). before the surge began in mid-2020. Existing home sales have come off a bit more  They are expected to have fallen for the sixth consecutive month in July. It is the worst streak since 2013. Indeed, they are likely to fall below the 5 mln annualized mark for the first time since January 2019. Elevated mortgage rates are the highest since 2008 and have squeezed buyers while rising inventories have sparked some anecdotes about price cuts. The number of houses for sale rose for the first time in three years, around three months at the current pace of sales. Below five months of inventory is regarded as tight by realtors. Of interest, first-time buyers accounted for almost a third of the sales in June. Cash sales accounted for a quarter of all transactions in June. Houses were on the market for an average of two weeks last month, the shortest for more than a decade. Recall that new home sales are recorded on contract signings, while the existing home sales are counted on closes.   While the housing market is softening, consumption and output appear to have begun Q3 on solid footing  Retail sales, which account for around 40% of consumption, are expected to have edged by 0.1%-0.2% after a 1.0% rise in June. The drop in gasoline prices will likely be seen here and weigh on the retail sales, which are reported in nominal terms. Core retail sales, which excludes auto, gasoline, building materials, and food services, are expected to have risen 0.6% after 0.8% in June. More people working and earning a little bit more (on average), i.e., the income effect should help underpin consumption.   Manufacturers added 30k people to their payrolls in July, the most in three months and matching last year's average pace  The US has added more manufacturing jobs through July than it did in the same period a year ago (273k vs. 161k). Manufacturing output has disappointed. It fell by 0.5% in both May and June. The decline in vehicle and parts output may have been partially reversed in July amid a recovery in auto sales. Higher commodity prices encouraged mining output in May and June (1.2% and 1.7%, respectively). It may have slowed as commodity prices fell in July. The scorching summer and demand for air conditioning likely boosted utility output, which had fallen in June (-1.4%).  On a year-over-year basis, industrial output often contracts into a recession but not always before the start of the recession  Through June, it has risen by almost 4.2%. The capacity utilization rate is expected to have above 80.0% for the fourth consecutive month. That would match the last cyclical peak in 2018, the longest since the Great Financial Crisis. Utilization rates fall sharply during a recession. In two of the last three recessions, capacity usage fell before the downturn was dated. In the Financial Crisis, the peak coincided with the start of the recession. The US also reports the capital flow data for June (TIC on August 15) While a favorite of reporters and analysts, it is not a market mover. Through May, net long-term foreign capital inflows have been a little more than $465 bln., which is about an 8.5% increase from a year ago. Finally, the Empire State Survey August 15) and the Philadelphia Fed surveys (August 18), the first look into August aside for the weekly jobs claims and mortgage applications. The market appears to put more weight on some components of the Philly survey.   Three economic releases from Japan will draw attention  Japan reports its first estimate of Q2 GDP to kick off the week. The world's third-largest economy contracted at an annualized rate of  0.5% in Q1 but is expected to have rebounded to 2.7% in Q2. That translates into a 0.7% quarterly expansion (seasonally adjusted) after shrinking by 0.1% in Q1. Consumption and business investment rebounded. Inventories were likely unwound. After rising 0.5% in Q1, the median forecast in Bloomberg's survey looks for a 0.3% decline. The GDP deflator has been negative for the past five quarters. It was at -0.5% in Q1, but economists (Bloomberg survey) project a decline to -0.8%.  Despite the GDP deflator still showing deflation's grip, the July CPI (August 19) is likely to show inflation continues to rise above the BOJ's target  It targets the CPI, excluding fresh food, at 2.0%. It stood at 2.2% in June and is likely to have ticked up a little in July. The Tokyo CPI has already been reported. The core measure rose to 2.3% from 2.1%. Tokyo's headline rate increased to 2.5% from 2.3%, and the measure excluding food and energy crept up to 1.2% from 1.0%.  July trade figures will be reported on August 17 Japan is experiencing a  massive terms-of-trade shock. In the first half of this year, Japan reported a JPY7.94 trillion (~$59 bln) deficit. In H1 21,  it had a trade surplus of about JPY810 bln (~$6 bln). The problem is not with merchandise exports. In June, they were up almost a fifth from last year, when they were by nearly 50% over 2020. Imports have surged with food and energy prices. Merchandise imports had risen 46% above the year-ago level in June, and that is after an increase by a third from June 2020.   The UK and Canada report July retail sales and CPI  The UK also publishes its latest employment report, while Canada updates housing starts and portfolio flows. The data poses headline risk, but the macroeconomic backdrop is unlikely to change significantly. The Bank of England warns that the economy will enter a protracted recession that will carry into 2024. The Bloomberg survey found that the median forecast assessed a 45% probability of a recession over the next 12 months.   UK's labor market is fairly strong, and the unemployment rate is at 3.8%, having bottomed at 3.7% in March, the lowest level since 1974. Inflation is rising, and the base effect underscores the upside risk. Last July, CPI was unchanged on the month.   While wage growth may be strong, it is insufficient to cover the rising cost of living and this squeezing consumption June was the first month since October 2021 that retail sales, excluding gasoline, rose. However, UK retail sales, reported in volume terms, have fallen an average of 0.5% a month over the past 12 months. If there is going to be relief for the UK household, it will have to come from the new government. The Bank of England has one objective. Bring down inflation. The swaps market has discounted almost an 85% chance of another 50 bp increase to 2.25% at the September 15 meeting. It sees a year-end rate of around 2.80%, implying nearly 75 bp hikes in Q4.   Canada's labor market improvement is stalling, and it looks like the economy is too The monthly GDP downshifted from 0.7-0.8% in February and March to 0.3% in April and flat in May. Retail sales have been strong, flattered by rising prices. Through May, they have increased by an average of 1.5% a month. The average in the first five months of 2021 was 0.6. Canadian inflation accelerated to 8.1% in June and may have slowed in July for the first time since June 2021. Underlying core measures are expected to have stayed firm. Last month, the Bank of Canada surprised the market with a 100 bp hike in the overnight lending rate to 2.50%. The swaps market briefly took the possibility of a 75 bp hike at the September 7 meeting very seriously but now has slightly better than a 40% chance.  In Australia, the labor market is in focus  It added 60k full-time positions on average a month in Q2 after a 50.5k average in Q1. The pace is likely to moderate. The participation rate of 66.8% set in June was a record high. The unemployment rate of 3.5% was also a record low. There are some signs that the overall economy may be losing some momentum. Still, with CPI accelerating from 5.1% in Q1 to 6.1% in Q2, the Reserve Bank of Australia is tightening policy. After delivering the first hike in May of 25 bp, it lifted the cash target rate in 50 bp clips in June through August. Speculation of another 50 bp hike at the September 6 meeting is seen as slightly better than even money.  The Reserve Bank of New Zealand meets on August 17  It will most likely deliver the seventh hike in the cycle that began last October. After three quarter-point moves, it delivered three 50 bp hikes. The cash target rate now stands at 2.50%. With Q2 inflation rising faster than expected (7.3% year-over-year), unemployment low (3.3% in Q2; record low set last December at 3.2%), more forceful action is possible. However, the swaps market judges it unlikely and has about a 90% chance of a 50 bp hike reflected in current prices. The New Zealand dollar is strong, at its best level in two months, but maybe too strong. Although it closed firmly ahead for the weekend, it looks stretched from a technical perspective, perhaps signaling a "buy the rumor, sell the fact" type of activity.  Norway's central bank, Norges Bank, meets on August 18  A few hours after Norway reports Q2 GDP, Norges Bank makes its rate announcement. Typically, it prefers to adjust policy when it updates its economic assessment, similar in this regard to the European Central Bank. However, last week's CPI shock heightens the risk it breaks from the pattern. Headline CPI jumped 1.3% in July, lifting the year-over-year rate to 6.8%. The median forecast (Bloomberg's survey) was for an unchanged 6.3% pace. The underlying rate, which excludes energy and adjusts for tax changes, surged by 1.5%, nearly twice as much as expected. As a result, the year-over-year change was boosted to 4.5% from 3.6%.   The deposit rate stands at 1.25%  Norges Bank began the tightening cycle last September but has raised it by a cumulative 125 bp. However, among the high-income countries in Europe, only the UK's policy rate is higher. Sweden's inflation is higher at 8.5% (July from 8.7% in June), and its policy rate is 50 bp less than Norway. Since June 16, the day after the FOMC meeting that results in the first 75 bp rate hike, the Norwegian krone has been the strongest major currency, gaining 3.9% against the US dollar and 6.8% against the euro. Look for the dollar to correct higher, even if a 50 bp hike is delivered.    Disclaimer   Source: Week Ahead: More Evidence US Consumption and Output are Expanding, and RBNZ and Norges Bank to Hike

Overview: The markets are putting the finishing touches on this week’s activity. Japan, returning from yesterday’s holiday bought equities, and its major indices jumped more than 2%. China, South Korea, and Australia struggled. Europe’s Stoxx 600 is firmer for the third consecutive session. It is up about 1.3% this week. US futures are also firmer after reversing earlier gains yesterday to close lower on the day. The US 10-year yield is flat near 2.88%, while European benchmarks are 4-6 bp higher. The greenback is mixed. The dollar-bloc currencies and Norwegian krone are slightly firmer, while the Swedish krona, sterling, and the yen are off around 0.3%-0.6%. Emerging market currencies are also mixed, though the freely accessible currencies are mostly firmer. The JP Morgan Emerging Market Currency Index is up about 1.15% this week, ahead of the Latam session, which if sustained would be the strongest performance in three months. Gold is consolidating at lower levels having been turned back from $1800 in the middle of the week. Near $1787.50, it is up less than 0.7% for the week. September WTI is edging higher for the third consecutive session, which would match the longest streak since January. US natgas surged 8.2% yesterday but has come back offered today. It is off 2.3%. Europe’s natgas benchmark is snapping a three-day advance of nearly 8% and is off 1.8% today. Iron ore rose 2.2% yesterday and it gave most of its back today, sliding almost 1.7%. September copper is unchanged after rallying more than 3.3% over the past two sessions. September wheat has a four-day rally in tow but is softer ahead of the Department of Agriculture report (World Agricultural Supply and Demand Estimates). Asia Pacific   Japan and China will drop some market sensitive high-frequency economic data as trading begins in the new week.  Japan will release its first estimate of Q2 GDP. The median in Bloomberg's survey and the average of a dozen Japanese think tanks (cited by Jiji Press) project around a 2.7% expansion of the world's third-largest economy, after a 0.5% contraction in Q1. Consumption and business investment likely improved. Some of the demand was probably filled through inventories. They added 0.5% to Q1 growth but may have trimmed Q2 growth. Net exports were a drag on Q1 (-04%) and may be flat. The GDP deflator was -0.5% in Q1 and may have deteriorated further in Q2. Some observers see the cabinet reshuffle that was announced this week strengthening the commitment to ease monetary policy. The deflation in the deflator shows what Governor Kuroda's successor next April must address as well. China reports July consumption (retail sales), industrial output, employment (surveyed jobless rate), and investment (fixed assets and property).  The expected takeaway is that the world's second-largest economy is recovering but slowly. Industrial output and retail sales are expected to have edged up. Of note, the year-to-date retail sales compared with a year ago was negative each month in Q2 but is expected to have turned positive in July. The year-over-year pace of industrial production is expected to rise toward 4.5%, which would be the best since January. The housing market, which acted as a critical engine of growth is in reverse. New home prices (newly build commercial residential building prices in 70 cities) have been falling on a year-over-year basis starting last September, and likely continued to do so in July. Property investment (completed investment in real estate) likely fell for the fourth consecutive month. It has slowed every month beginning March 2021. The pace may have accelerated to -5.6% year-over-year after a 5.4% slide in the 12-months through June. The surveyed unemployed rate was at 4.9% last September and October. It rose to 6.1% in April and has slipped back to 5.5% in June. The median forecast in Bloomberg's survey expects it to have remained there in July. Lastly, there are no fixed dates for the lending figures and the announcement of the one-year medium-term lending facility rate. Lending is expected to have slowed sharply from the surge in June, while the MLF rate is expected to be steady at 2.85%. Over the several weeks, foreign investors have bought a record amount of Japanese bonds.  Over the past six weeks, foreigners snapped up JPY6.44 trillion (~$48 bln). It may partly reflect short-covering after the run-in with the Bank of Japan who bought a record amount to defend the yield-curve control cap of 0.25% on the 10-year bond. There is another consideration. For dollar-based investors, hedging the currency risk, which one is paid to do, a return of more than 4% can be secured. At the same time, for yen-based investors, hedging the currency risk is expensive, which encourages the institutional investors to return to the domestic market. Japanese investors have mostly been selling foreign bonds this year. However, the latest Ministry of Finance data shows that they were net buyers for the third consecutive week, matching the longest streak of the year. Still, the size is small. suggesting it may not be a broad or large force yet. Although the US 10-year yield jumped 10 bp yesterday, extending its recovery from Monday's low near 2.75% for a third session, the dollar barely recovered against the yen.  After falling 1.6% on Wednesday, after the softer than expected US CPI, the greenback rose 0.1% yesterday and is edging a little higher today. Partly what has happened is that the exchange rate correlation with the 10-year yield has slackened while the correlation with the two-year has increased. In fact, the correlation of the change in the two-year and the exchange rate is a little over 0.60 and is the highest since March. The dollar appears to be trading comfortably now between two large set of options that expire today. One set is at JPY132 for $860 mln and the other at JPY134 for $1.3 bln. Around $0.7120, the Australian dollar is up about 3% this week and is near two-month highs. It reached almost $0.7140 yesterday. The next technical target is in the $0.7150-$0.7170 area. Support is seen ahead of $0.7050. Next week's data highlight is the employment data (August 18). The greenback traded in a CNY6.7235-CNY6.7600 on Wednesday and remained in that range yesterday and today. For the second consecutive week, the dollar has alternated daily between up and down sessions for a net change of a little more than 0.1%. The PBOC set the dollar's reference rate at CNY6.7413, tight to expectations (Bloomberg's survey) of CNY6.7415. Europe   The UK's economy shrank by 0.6% in June, ensuring a contraction in Q2.  The 0.1% shrinkage was a bit smaller than expected but the weakness was widespread. Consumption fell by 0.2% in the quarter, worse than expected, while government spending collapsed by 2.9% after a 1.3% pullback in Q1. A decline in Covid testing and slower retail sales were notable drags. The one bright spot was business investment was stronger than expected. The June data itself was miserable, though there was an extra holiday (Queen's jubilee). All three sectors, industrial output, services, and construction, all fell in June and the trade balance deteriorated. The market's expectation for next month's BOE meeting was unaffected by the data. The swaps market has about an 85% chance of another 50 bp hike discounted.  Industrial output in the eurozone rose by 0.7%, well above the 0.2% median forecast in Bloomberg's survey and follows a 2.1% increase in May.  The manufacturing PMI warned that an outright contraction is possible. Of the big four members, only Italy disappointed. The median forecast in Bloomberg's survey anticipated a decline in German, France, and Spain. Instead, they reported gains of 0.4%, 1.4%, and 1.1% respectively. Industrial output was expected to have contracted by 0.1% in Italy and instead it reported a 2.1% drop. In aggregate, the strength of capital goods (2.6% month-over-month) and energy (0.6%) more than offset the declines in consumer goods and intermediate goods. The year-over-year rise of 2.4% is the strongest since last September. The disruption caused by Russia's invasion of Ukraine and the uneven Covid outbreaks and responses are as Rumsfeld might have said known unknowns.  But the disruptive force that may not be fully appreciated is about to get worse. The German Federal Waterways and Shipping Administration is warning that water in the Rhine River will fall below a critical threshold this weekend. At an important waypoint, the level may fall to about 13 inches (33 centimeters). Less than around 16 inches (40 centimeters) and barges cannot navigate. An estimated 400k barrels a day of oil products are sent from the Amsterdam-Rotterdam-Antwerp region to Germany and Switzerland. The International Energy Agency warns that the effects could last until late this year, and hits landlocked countries who rely on the Rhine the hardest. Bloomberg reported that Barge rates from Rotterdam to Basel have risen to around 267 euros a ton, a ten-fold increase in a few months. The strong surge in the euro to almost $1.0370 on Wednesday has stalled.  The euro is consolidating inside yesterday's relatively narrow range (~$1.0275-$1.0365). The momentum traders may be frustrated by the lack of follow-through. We suspect a break of $1.0265 would push more to the sidelines. The downtrend line from the February, March, and June highs comes in slightly above $1.0385 today. The broad dollar selloff in response to the July CPI saw sterling reach above $1.2275, shy of the month's high closer to $1.2295. Similar to the euro, sterling stalled. It has slipped through yesterday's low (~$1.2180). A break of the $1.2140 area could see $1.2100. That said, the $1.20 area could be the neckline of a double top and a convincing break would signal the risk of a return to the lows set a month ago near $1.1760. America   Think about the recent big US economic news.  It began last Friday with a strong employment report, more than twice what economists expected (median, Bloomberg survey) and a new cyclical low in unemployment. The job gains were broadly distributed. That was followed by a softer than expected CPI and PPI. Some observers placed emphasis on the slump in productivity and jump in unit labor costs. Those are derived from GDP figures and are not measured separately, though they are important economic concepts. Typically, when GDP is contracting, productivity contracts and by definition, unit labor costs rise. In effect, the market for goods and services adjusts quicker the labor market, and the market for money, even quicker. If the economy expands as the Atlanta Fed GDPNow tracker or the median in Bloomberg's survey project (2.5% and 2.0%, respectively), productivity will improve, and unit labor costs will fall. Barring a precipitous fall today, the S&P 500 and NASDAQ will advance for the fourth consecutive week.  The 10-year yield fell by almost 45 bp on the last three week of July and has recovered around half here in August. That includes five basis points this week despite the softer inflation readings. The two-year note yield fell almost 25 bp in the last two weeks of July and jumped 34 bp last week. It is virtually flat this week around 3.22%. The odds of a 75 bp rate hike at next month's FOMC meeting fell from about 75% to about 47%. The year-end rate expectation fell to 3.52% from 3.56%. Some pundits claim the market is pricing in a March 2023 cut, but the implied yield of the March 2023 Fed funds futures contract is 18 bp above the December 2022 contract. It matches the most since the end of June. Still, while the Federal Reserve is trying to tighten financial conditions the market is pushing back. The Bloomberg Financial Conditions Index is at least tight reading since late April. The Goldman Sachs Financial Condition index is the least tight in nearly two months.  US import and export prices are the stuff that captures the market's imagination.  However, the preliminary University of Michigan's consumer survey, and especially the inflation expectations can move the markets, especially given that Fed Chair Powell cited it as a factor encouraging the 75 bp hike in June. The Bloomberg survey shows the median expectation is for a tick lower in inflation expectations, with the one-year slipping to 5.1% from 5.2%. The 5-10-year expectation is seen easing to 2.8% from 2.9%. If accurate, it would match the lowest since April 2021. The two-year breakeven (difference between the conventional yield and the inflation-protected security) peaked in March near 5% and this week reached 2.70%, its lowest since last October. It is near 2.80% now. Mexico delivered the widely anticipated 75 bp hike yesterday.  The overnight rate target is now 8.50%. The decision was unanimous. It is the 10th consecutive hike and concerns that AMLO's appointments would be doves has proven groundless. The central bank meets again on September 29. Like other central banks, it did not pre-commit to the size of the next move, preserving some tactical flexibility. If the Fed hikes by 75 bp, it will likely match it. Peru's central bank hiked its reference rate by 50 bp, the 10th consecutive hike of that magnitude after starting the cycle last August with a 25 bp move. It is not done. Lima inflation was near 8.75% last month and the reference rate is at 6.50%. The Peruvian sol is up about 1.2% this month, coming into today. It has appreciated by around 3.25% year-to-date, making it the second-best performer in the region after Brazil's 8.1% rise. Argentina hiked its benchmark Leliq rate by 950 bp yesterday to 69.5%. It had delivered an 800 bp hike two weeks again. Argentina's inflation reached 71% last month. The Argentine peso is off nearly 23.5% so far this year, second only to the Turkish lira (~-26%). The US dollar fell slightly below CAD1.2730 yesterday, its lowest level since mid-June. The slippage in the S&P 500 and NASDAQ helped it recover to around CAD1.2775. It has not risen above that today, encouraged perhaps by the firmer US futures. Although the 200-day moving average (~CAD1.2745) is a good mile marker, the next important chart is CAD1.2700-CAD1.2720. A convincing break would target CAD1.2650 initially and then CAD1.2600. While the Canadian dollar has gained almost 1.4% against the US dollar this week (around CAD1.2755), the Mexican peso is up nearly 2.4%. The greenback is pressing against support in the MXN19.90 area. A break targets the late June lows near MXN19.82. The MXN20.00 area provides the nearby cap.       Disclaimer   Source: Heading into the Weekend, Dollar's Downside Momentum Stalls

Overview: The US dollar is consolidating yesterday’s losses but is still trading with a heavier bias against the major currencies and most emerging market currencies. The US 10-year yield is soft below 2.77%, while European yields are mostly 2-4 bp higher. The peripheral premium over the core is a little narrower today. Equity markets, following the US lead, are higher today. The Hang Seng and China’s CSI 300 rose by more than 2% today. Among the large bourses, only Japan struggled, pressured by the rebound in the yen. Europe’s Stoxx 600 gained almost 0.9% yesterday and is edging higher today, while US futures are also firmer. Gold popped above $1800 yesterday but could not sustain it and its in a $5 range on both sides of $1788 today. September WTI rebounded yesterday from a low near $87.65 to close near $92.00. It is firmer today near $93.00. US natgas is 1.4%, its third successive advance and is near a two-week high. Europe’s benchmark is also rising for the third session. It is up nearly 8% this week. Iron ore rose 2% today and it is the fourth gain in five sessions. September copper is also edging higher. If sustained, it would be the fifth gain in six sessions. It is at its highest level since late June. September wheat is 1.1% higher. It has risen every session this week for a cumulative gain of around 4.25%.  Asia Pacific In its quarterly report, the People's Bank of China seemed to downplay the likelihood of dramatic rate cuts or reductions in reserve requirements. It warned that CPI could exceed 3% and ruled out massive stimulus, while promising "high-quality" support, which sounds like a targeted measure. It is not tightening policy but signaled little scope to ease. Note that the 10-year Chinese yield is at the lower end of its six-month range near 2.74%. Its two-year yield is a little above 2.15%, slightly below the middle of its six-month range. Separately, Yiwa, a city of two million people, south of Shanghai has been locked down for three days starting today due to Covid. It is a manufacturing export hub. South Korea reported its first drop (0.7%) in technology exports in two years last month. While some read this to a statement about world demand, and there is likely something there given the earnings reports from the chip sector. However, there seems to be something else at work too. South Korea figures show semiconductor equipment exports to China have been more than halved this year (-51.9%) through July. China had accounted for around 60% of South Korea's semiconductor equipment. Reports suggest the main drivers are the US-China rivalry. Semiconductor investment in China has fallen and South Korea has indicated it intensions to join the US Chip 4 semiconductor alliance. Singapore's economy unexpectedly contracted in Q2. Initially, the government estimated the economy stagnated. Instead, it contracted by 0.2%. Given Singapore's role as an entrepot, its economic performance is often seen as a microcosm of the world economy. There was a nearly a 7% decline in retail trade services, while information and communication services output also fell. After the data, the Ministry of Trade and Industry narrowed this year's GDP forecast to 3%-4% from 3%-5%. While the drop in the US 10-year yield saw the dollar tumble against the yen yesterday, the recovery in yields has not fueled a recovery in the greenback. The dollar began yesterday above JPY135- and fell to nearly JPY132.00. Today, it has been confined to a little less than around half a yen on either side of JPY132.85. The cap seen at the end of last week and early this week in the JPY135.50-60 area, and the 20-day moving average (~JPY135.30) now looks like formidable resistance. Recall that the low seen earlier this month was near JPY130.40. The Australian dollar is also consolidating near yesterday's high set slightly below $0.7110. It was the best level in two months. The $0.7050 area may now offer initial support. The next upside target is seen in the $0.7150-70 band, which houses the (50%) retracement objective of the Aussie's slide from the April high (~$0.7660) and the July low (~$0.6680), and the 200-day moving average. The broad greenback sell-off yesterday saw it ease to about CNY6.7235, its lowest level in nearly a month. Despite the less-than-dovish message from the PBOC, it seemed to signal it did not want yuan strength. It set the dollar's reference rate at CNY6.7324, a bit above the median (Bloomberg's survey) of CNY6.7308. Europe Germany's coalition government has begun debating over the contours of the next relief package. The center-left government has implemented two support programs to ease the cost-of-living squeeze for around 30 bln euros. A third package is under construction now. The FDP Finance Minister Linder suggested as one of the components a 10 bln euro program to offset the "bracket creep" of higher inflation putting households into a higher tax bracket. The Greens want a more targeted effort to help lower income families. More work needs to be done, but a package is expected to be ready next month. The International Energy Agency estimates that Russian oil output will fall by around a fifth early next year as the EU import ban is implemented. The IEA warns that Russian output may begin declining as early as this month and estimates 2 mln barrels a day will be shut by early 2023. The EU's ban on most Russian oil will begin in early December, and in early February, oil products shipments will also stop. Now the EU buys around 1 mln barrels a day of oil products and 1.3 mln barrels of crude. Russia boosted output in recent months, to around 10.8 mln barrels a day. The IEA estimates that in June, the PRC overtook the EU to become the top market for Russia's seaborne crude (2.1 mln bpd vs. 1.8 mln bpd). Separately, the IEA lifted its estimate of world consumption by about 380k barrels a day from its previous forecast, concentrated in the Middle East and Europe. The unusually hot weather in the Middle East, where oil is burned for electricity, has seen stronger demand. In Europe, there has been more switched from gas to oil. The euro surged to almost $1.0370 yesterday on the back of the softer than expected US CPI. It settled near $1.03. It is trading firmly in the upper end of that range today. It held above $1.0275, just below the previous high for the month (~$1.0295). Today's high, was set in the European morning, near $1.0340. There is a trendline from the February, March, and June highs found near $1.04 today. It is falling by a little less than half a cent a week. Sterling's rally yesterday stalled in front of this month's high set on August 1 slightly shy of $1.2295. It is straddling the area where it settled yesterday (~$1.2220). We suspect the market may test the lows near $1.2180, and a break could see another half-cent loss ahead of tomorrow's Q2 GDP. The median forecast in Bloomberg's survey is for a 0.2% contraction after a 0.8% expansion in Q1.  America What the jobs data did for expectations for the Fed at next month's meeting were largely reversed by slower the expected CPI readings. On the eve of the employment data, the market was discounting a little better than a 35% chance of another 75 bp hike. It jumped to over a 75% chance after employment report but settled yesterday around a 45% chance. It is still in its early days, and the Fed will see another employment and CPI report before it has to decide. Although the market has downgraded the chances of a 75 bp hike at next month's meeting, it still has the Fed lifting rates 115 bp between now and the end of year. The market recognizes that that Fed is not done tightening no matter what trope is dragged out to use as a strawman. The truth is the market is pushing against some Fed views. Chicago Fed's Evans, who many regard as a dove from earlier cycles, said that Fed funds could finish next year in the 3.75%-4.00% area, which opined would be the terminal rate. The swaps market says that the Fed funds terminal rate is closer to 3.50% and in the next six months. More than that, the Fed funds futures are pricing in a cut late next year. At least a 25 bp cut has been discounted since the end of June. It was the Minneapolis Fed President Kashkari that surprised many with his hawkishness. Many see him as a dove because five years ago, he dissented against rate increases in 2017. However, he has been sounding more hawkish in this context and revealed yesterday that it was his "dot" in June at 3.90% this year and 4.4% next year. These were the most extreme forecasts. Perhaps it is not that he is more dovish or hawkish, labels that seemingly take a life on of their own but more activity. While neither Evans nor Kashkari vote on the FOMC this year, they do next year. San Francisco Fed President Daly seemed more willing to consider moderating the pace of tightening but still sees more work to be done. She does not vote this year or next.  Headline CPI was unchanged last month and the 0.3% rise in the core rate was less than expected. At 8.5%, the headline is rate is still too high for comfort, and the unchanged 5.9% core rate warns significant progress may be slow. Shelter is about a third of the CPI basket and it is rising about 0.5% a month. It is up 5.7% year-over-year. If everything else was unchanged, this would lift CPI to 2%. The US reports July Producer Prices. Both the core and headline readings are expected to have slowed. The headline peaked in March, 11.6% above year ago levels. It was 11.3% in June and is expected to have fallen to 10.4%. The core rate is likely to post its fourth consecutive decline. It peaked at 9.6% in March and fell to 8.2% in June. The median forecast (Bloomberg's survey) is for a 7.7% year-over-year pace, which would be the lowest since last October.  Late in the North American session, Mexico's central bank is expected to deliver its second consecutive 75 bp rate hike. It will lift the overnight target rate to 8.5%. The July CPI reported Tuesday stood at 8.15% and the core 7.65%. The swaps market has a terminal rate near 9.5% in the next six months. The subdued US CPI reading, helped spur a 0.85% rally in the JP Morgan Emerging Market Currency Index yesterday, its largest gain in almost four weeks. The peso, often a liquid and accessible proxy, rose around 1.1%. The greenback briefly traded below MXN20.00 for the first time since late June. The move was so sharp that closed below its lower Bollinger Band (~MXN20.08) for the first time in six months. The US dollar slumped to almost CAD1.2750 yesterday to hold above the 200-day moving average (~CAD1.2745). It is the lowest level in nearly two months, and it has not traded below the 200-day moving average since June 9. Like the other pairs, it is consolidating today near the lower end of yesterday's greenback range. The swaps market downgraded the likelihood that the Bank of Canada follows last month's 100 bp hike with a 75 bp move when it meets on September 7. It is now seen as a 30% chance, less than half of what was projected at the end of last week. We suspect that the US dollar can recover into the CAD1.2800-20 area today.     Disclaimer   Source: US Dollar Soft while Consolidating Yesterday's Drop

August 10, 2022  $USD, China, CPI, Currency Movement, Inflation, Italy, UK Overview: The US dollar is trading with a heavier bias ahead of the July CPI report. The intraday momentum indicators are overextended, and this could set the stage for the dollar to recover in North America. Outside of a handful of emerging market currencies, which include the Mexican peso and Hong Kong dollar, most are trading lower. Losses in US equities yesterday and poor news from another chip maker (Micron) weighed on Asia Pacific equities. Europe’s Stoxx 600 is steady and US futures are a little higher. The US 10-year yield is going into the CPI report softly around 2.76%. The US Treasury sells 10-year notes today as the second leg of the quarterly refunding. European benchmark yields are 2-3 bp lower. Gold continues to press against the $1800 cap. It has not closed above it for over a month. September WTI is hovering around $90. It appears stuck for the time being in an $87-$93 range. US natgas is about 1.1% higher after rising 3.2% yesterday. Europe’s benchmark is up 3%. It rose 1.5% yesterday. Iron ore is flat, while September copper is about 0.5% stronger after a small loss yesterday snapped a three-day advance. September wheat is up 1%, as it extends this week’s rise. If sustained, it would be the third consecutive gain, which matches the longest rally since March.   Asia Pacific China's July inflation readings underscore scope for easier monetary policy, but officials have shown a reluctance to use this policy lever. The key one-year medium term lending rate will be set in the coming days, but it is unlikely to be reduced from the 2.85% rate since January. July CPI rose to 2.7% from 2.5%, its highest level in two years, but shy of the 2.9% median forecast in Bloomberg's survey. Food prices were up 6.3% from a year ago, driven by a 20.2% jump in pork prices, the first rise since September 2020. Fresh food prices rose 16.9% and vegetable prices rose almost 13%. However, this seems to be a function of supply, while demand still seems soft. Service prices pressures slowed to 0.7% from June's 1.0% increase. The core rate eased to 0.8%. Meanwhile, producer price increases slowed to 4.2% from 6.1%. The median forecast (Bloomberg's survey) was for a 4.9% increase. Chinese producer prices have slowed for nine consecutive months. It peaked at 13.5% last October. Japan's well-telegraphed cabinet reshuffle was not about policy. Key ministers kept their posts, including the finance minister and chief cabinet secretary. Former Prime Minister Abe's brother, Defense Minister Kishi was replaced by Hamada, but he will stay on as a national security adviser. Trade Minister Hagiuda, an Abe acolyte was replaced by Nishimura, also for the Abe faction, but will become party policy chief. Prime Minister Kishida named his one-time rival Takaichi as minister of economic security. The reshuffle seemed to be about re-balancing power among the key factions and solidifying the government whose support has waned. The next economic policy focus may be on the drafting of a supplemental budget. In terms of monetary policy, BOJ Kuroda's term ends next April, while the term of his two deputies ends in March. The dollar is in narrow range of less than half a yen today, hovering around JPY135.00. It did edge above yesterday's JPY135.20 high but held below Monday's high slightly below JPY135.60. The exchange rate will likely take its cues from the reaction of the US Treasury market to today's CPI report. The US 10-year yield remains within the range set at the end of last week with the stronger than expected employment report (~2.67%-2.87%). The Australian dollar held support near $0.6945 but has stalled near $0.6975 in the European morning, where this week's hourly trendline is found. Intraday momentum indicators are stretched, suggesting that even if there is some penetration, follow-through buying may be capped. There are options for A$400 mln at $0.6985 that expire today. The greenback edged a little higher against the Chinese yuan, but it remains subdued. It is well within recent ranges. The dollar's reference rate was set at CNY6.7612, slightly above expectations (median in Bloomberg's survey) for CNY6.7606. Europe The more potent risk is not that the center-right wins next month's Italian election. That is increasing looking like a foregone conclusion. It is hard difficult to tell how much this reflects the judgment of voters and how much reflects the ineptitude of the center-left parties. The risk is that the center-right secures a two-thirds majority in both chambers, which would make constitutional changes possible. A poll published yesterday by Istituto Cattaneo shows the center-right drawing 46% of the vote and securing 61% of the deputies and 64% of the Senators. Analysis by Istituto Cattaneo suggested that even if the center-right saw its share of the votes go up, it might not be able to increase the number of deputies or senators. Italy's 10-year premium over German has fallen in eight of the past ten sessions, including today. It is around 2.10% today, slightly more than 25 bp off its recent peak, and a little below its 20-day moving average. Italy's 2-year premium fell to 0.73% yesterday, the lowest since mid-July. It peaked above 1.30% in late July.  Ironically as it may sound, but it is not Italy's center-right that is attacking the Bank of Italy or the European Central Bank. It is Truss who is leading Sunak to become the next leader of the Conservatives and Prime Minister. BOE Governor Bailey warned that UK was about to go into a five-quarter contraction (that does not even count the 0.2% contraction that economists expect the UK will announce for Q2 ahead of the weekend). Truss quickly responded that her GBP39 bln tax cuts (~$$7 bln) could avert that scenario. Sunak hiked the payroll tax this past April. She would unwind it. Truss would suspend the green levy on household energy bills and nix Sunak's corporate tax increase that was to be implemented next year. The swaps market is 85% confident of a 50 bp hike at the mid-September MPC meeting, less than a fortnight after the new Tory leaders is chosen. In the last two meetings of the year, the swaps market is pricing another 75 bp in hikes.  The euro is first firm holding above $1.02 so far today, the first time since August 1. However, it remains within last Friday's range (~$1.0140-$1.0250). The 1.2 bln euro options at $1.0210 that expire today likely have been neutralized ahead of today's US CPI report. The session high, slightly above $1.0225 was set in the European morning. This stretched the intraday momentum indicator, and we suspect it will probe lower now. Initial support below $1.02 is seen in the $1.0170-80 area. Sterling is in the same boat. It too is consolidating within the range seen before the weekend (~$1.2000-$1.2170). The push to session highs, a little above $1.21, in Europe has stretched the intraday momentum indicators. The risk is for a return to the $1.2050-60 area. America Today's CPI report is interesting but at the risk of exaggerating, it does not mean much. First, the strength of the employment data, even if flattered by seasonal adjustments or is incongruous with other labor market readings, suggests the labor market slowdown that the Fed wants to see is still in the very early stages. Second, as we have noted, financial conditions have eased recently, and the Fed has pushed back against this. Third, before the FOMC meets again, it will have the August CPI in hand. Fourth, no matter what the data shows today, it will not and cannot meet the Fed's definition of a sustained move toward the 2% target. The median in Bloomberg's survey has converged with the Cleveland Fed's Inflation Nowcast. The median in the survey is for an 8.7% headline rate (down from 9.1%) and a 6.1% core rate (up from 5.9%). The Cleveland's Fed Nowcast has it at 8.8% and 6.1%, respectively. The Fed funds futures market has about an 80% chance of a 75 bp hike next month discounted. It may not change very much after the CPI report.  The US Treasury sold $34 bln 1-year bills yesterday at 3.20%. That represents a 24 bp increase in yield. The bid-cover dipped but was still three-times oversubscribed and the indirect bidders took down almost 63%, a sharp rise from a little less than 51% last time. The US also sold $42 bln 3-year notes, also at 3.20%. This was an 11-bp increase in yield. The bid-cover edged up to 2.5% and the indirect participants took 63.1% of the issue, up from 60.4% previously. Today, Treasury goes back to the well with $30 bln 119-day cash management bill and $35 bln 10-year notes. At the last auction, the 10-year was sold at 2.96%. In the when-issued market, the 10-year yield is about 2.79%. The US dollar traded between around CAD1.2845 and CAD1.2900 yesterday and remains in that range today. There are options for almost 1.15 bln at CAD1.29 that expire today. The greenback slipped to session lows in Europe but as in the other pairs, we look it to recover. A move above the CAD1.2910 area could spur a move toward CAD1.2950. Mexico reported slightly higher than expected inflation yesterday. It underscored expectations for a 75 bp hike by Banxico tomorrow. The US dollar is offered against the peso today and it is pressed near yesterday's low around MXN20.20. The top side is blocked around MXN20.27-MXN20.30. Options for around $765 mln at MXN20.30 expire today. A convincing break of the MXN20.20 area could target the MXN20.05 area    Disclaimer

July 26, 2022  $USD, Brazil, CFTC, China, Currency Movement, Japan, Nord Stream, Russia Overview: With the exception of Japan, Taiwan, and India, the large equity markets in the Asia Pacific region traded higher today. The Hang Seng led the move (1.65%) amid reports that Alibaba will seek its primary listing there. Europe’s Stoxx 600 is edging higher today. If it can hold on to the gains, it will be the fourth consecutive rise, the longest advance since May. US futures are slightly under water. Benchmark 10-year yields are mostly lower, with the US off a couple of basis points to 2.77%. European yields are mostly 4-7 bp lower, but Italy’s 10-year is off only one basis point. The US dollar is mostly firmer. Among the majors, the yen is the exception, and it is flat to slightly higher. The pressure on the euro is dragging the central European currencies lower. The Philippine peso has jumped more than 1%, a huge move for the currency after the central bank governor confirmed a 25 bp or 50 bp hike next month. Gold is flat around $1720. September WTI is up another 1.8% (~$98.45) after rallying 2.1% yesterday to snap a three-day drop. US natgas is 2% higher and is at its highest level since mid-June. Europe’s benchmark has jumped 11% after rising nearly 10% yesterday. It has risen by around 27% over the past five days through today. Iron ore prices jumped 5.5% today, its third consecutive increase, over which time it has risen by around 13%. Copper is also rebounding. It is nearly 3% higher today after rising by about 1.7% over the past two sessions. September wheat is 2.3% higher. It gained 1.45% yesterday after falling more than 15% over the previous two weeks.  Asia Pacific There are three Chinese developments to note. First, Alibaba announced plans to have its primary listing in Hong Kong. This helped lift Chinese and Hong Kong markets today, but it also seems to be consistent with preparation to be de-listed in the US as some juncture. Second, China's zero-Covid tactics may be changing to try to be less disruptive. Reports claims that 100 of the largest businesses in Shenzhen are being told by local authorities to restrict operations to employees living in a closed loop, with little contact with people beyond their plant or offices. Even within companies, officials want limited contact between the non-manufacturing staff and the factory floors. Supply chain disruptions are still possible. Third, some reports are drawing attention to the Politburo meeting before the end of the month for new initiatives, and possibly recognizing economic risks in H2 after a disappointing H1. Two new members joined the Bank of Japan over the weekend as Kataoka and Suzuki's five-year terms ended. It will be difficult for Takata (economist) to be as dovish as Kataoka, who was among the most ardent defenders of ultra-easy policy. Takata recognizes that this is not the time to exit the current stance, he argues the BOJ needs to be keeping an exit in mind. Previously, he thought that when the ECB began tightening that pressure on the BOJ would increase. Tamura (banker) seems to be somewhat more skeptical that negative rates have given the economy much support. Some accounts suggest that the new appointments could mean that the yield-curve-control is modified. Yet, this would seem to be only another possible "sub-variant" of the current policy and shows the challenge to those who argue that Governor Kuroda is key to the BOJ's stance, and that it will not change until he leaves next April, and Deputy Governor Wakatabe's term ends next March.  Elsewhere in the region, note that South Korea's Q2 GDP was stronger than expected, rising 0.7% (quarter-over-quarter) after a 0.6% expansion in Q1. The median forecast (Bloomberg survey) was for a 0.4% increase in output. Domestic consumption and government spending offset the drag from trade. The Chinese lockdowns earlier this year have disrupted output from other countries. In May, for example, Japan's industrial output collapsed by 7.5% (month-over-month). The June figures is out later this week and is expected to have bounced back (~4.2%). Earlier today, Singapore reported its June industrial output plummeted 8.5% on the month. The median (Bloomberg survey) called for a 6.8% decline. The May surge of 10.9% was revised to a still heady 9.2% increase. The dollar did not close below its 20-day moving average against the yen from late May through most of last week and finally did so before the weekend. It closed yesterday below it too, and today, has remained below it (~JPY136.85). The five-day moving average is set to slip below the 20-day moving average tomorrow (if not today). It would be the first time since early June, and illustrates the loss of the dollar's momentum, arguably encouraged by the pullback in the 10-year US yield nearly 75 bp from its high in mid-June. The greenback is in a narrow range, not quite a quarter of a yen on either side of JPY136.50. The Australian dollar is threatening the downtrend drawn off the early April and early June highs that also caught last week's and yesterday's highs. It comes in near $0.6955 today and the Aussie reached almost $0.6985 in early Asia Pacific activity. Although the upside momentum faded, the breakout is holding. Below it, support is seen around $0.6940. The Chinese yuan remains in narrow ranges showing little enthusiasm for either direction. Although it has frayed a little, the range set on July 14 (~CNY6.7235-CNY6.7685) has mostly confined the recent price action. For the first time in several sessions, the PBOC set the dollar's reference rate a little below expectations (CNY6.7483 vs. CNY6.7493). Europe Ahead of last week's ECB meeting, the bears where piling into shorts in futures market. The gross short position jumped from 200k as of the last Tuesday in June to 238.6k as of last Tuesday, July 19. It is the largest since the early days of Covid (record gross short position ~272k). The bulls had been culling their longs, five weeks in a row through the end of June, (~47.5k contracts). They were trying to pick a bottom in the first couple of weeks in July, increasing their long position by 7.8k contracts. However, it looks like some got stung by the break of parity and almost 1.4k contracts were cut in the week through July 19. Russia's has reduced Nord Stream 1 to about half of what it was, which itself was 40% of capacity. Moscow blames the lack of turbines to pump the gas. Normally, Gazprom says there are six turbines, but now there is only one fully functioning. One turbine has been caught up in sanction red tape, first in Canada and now in Germany. Other turbines that need maintenance need to go to Canada, according to reports. Others argue this is simply another diversionary tactic by Putin. Still, natural gas prices are rising sharply and there continues to be concern about a complete shutdown. The EU holds an emergency energy meeting today after last week's plans for a 15% voluntary cut in consumption ran into a wall of opposition from several peripheral and central European countries. The euro's recent peak was when the ECB met last week and surprised many with a 50 bp hike. It almost reached $1.0280. In the following three sessions, including today, the euro has not been above $1.0260. The downside has also been limited. The low of the past five sessions took place before the weekend near $1.0130. We still suspect there is scope for the euro push lower ahead of the tomorrow's outcome of the FOMC meeting. Sterling managed to edge slightly higher, reaching $1.2090 earlier today, its best level since July 5. However, the momentum is faltering, and sterling has come back offered. It is testing the $1.20 area near midday in Europe. However, given the intraday momentum indicators are stretched, it may be difficult to extend the loss significantly in early North American activity. Initial surveys suggest Truss won the first head-to-head debate with Sunak, but the market does not seem very interest. Lastly, note that Hungary is expected to hike its base rate 100 bp to 10.75%, which in turn would signal a simply hike in the one-week deposit rate later in a couple of days.  America Between bills and the two-year note auctions, the US Treasury raised around $141 bln yesterday. Today, $46 bln five-year notes will be sold. Still to come this week, is a two-year floating rate note and a seven-year note not to mention four- and eight-week bills. The macroeconomic data is expected to be soft. S&P CoreLogic Case-Shiller measure of house prices may have eased for the second consecutive month. The recent regional Fed surveys have mostly disappointed and no reason to expect the Richmond Fed manufacturing survey to be different. New homes sales in June are expected to pullback after the outsized 10.7% jump in May. The Conference Board's measure of consumer confidence likely deteriorated. The earnings seasons gets under way dramatically several household names reporting today, including Google, GE, GM, McDonalds, Texas Instruments, UPS, Raytheon, and Kimberly Clark. Walmart's cut in its forward guidance ahead of its earnings in a couple of weeks, weighs on sentiment. In August 2019, many were worried that the US slowdown was morphing into a recession. The entire yield curve, three-month bill against the 30-year bonds was briefly and slightly negative. It ended the year a little above 75 bp and steepened to nearly 250 bp in March 2021. It retested it this past May, but has flattened dramatically to below 58 bp yesterday, the flattest since February 2020. The three-month bill yield was above the 10-year note yield for most of the May through October 2019 period. It finished the year near 35 bp and reached 125 bp in the early days of Covid. After backing off to around 45 bp in August 2020 it has trended higher to reach 230 bp in early May. It has crashed and now fell below 35 bp yesterday, back to where it was in late 2019. Brazil reports its July IPCA inflation measure, and the year-over-year pace is expected to have moderated for the second month. It peaked at 12.2% in May and slipped to 12.04% in June. The median forecast (Bloomberg's survey) sees it at 11.41%. Brazil's central bank meets next week (August 3), and the market expects a 50 bp hike (to 13.75%), the same that was delivered in June. The market suspects after next week's move, the Selic rate is within 50 bp of its peak.    As risk appetites wane, the US dollar is bouncing higher against the Canadian dollar. It set a new low for month today in late Asia/early European activity near CAD1.2815. However, it has jumped back and recorded new session highs near CAD1.2670. Nearby resistance is seen in the CAD1.2880-CAD1.2900 band. Meanwhile, the greenback is consolidating quietly in a narrow range against the Mexican peso (~MXN20.4110-MXN20.4825). A move above the MXN20.53 area would warn that a low may be in place. The Brazilian real soared 2.6% yesterday. It appears to be the biggest move since January 2021. Rising commodity prices and inflows into the equity market were cited. The greenback settled below its 20-day moving average (~BRL5.3750) for the first time since June 7. The next support area is seen near this month's low, which also corresponds to the 200-day moving average around BRL5.25.      Disclaimer

July 19, 2022  $USD, China, Currency Movement, ECB, Italy, Japan, RBA, UK Overview: The dollar’s downside correction continues today, helped by hawkish signals from the Reserve Bank of Australia and unnamed sources who have played up the chances of a 50 bp hike by the European Central Bank on Thursday. Asia Pacific equities were mixed, and mostly lower after the losses in the US yesterday. The prospect of a more aggressive ECB is weighing on European equities. The Stoxx 600 is slightly lower after rallying 2.7% in the past two sessions. US futures are higher. Key levels to watch are Friday’s high for the S&P 500 and NASDAQ (~3796 and 11280, Friday’s high and the bottom of the open gaps, respectively). The 10-year US Treasury is flattish near 2.98%. European benchmarks are narrowly mixed, but the peripheral premiums have narrowed slightly. The Scandis are leading the move against the dollar, gaining around 1.5% today. The Antipodeans are up about 1.25%. The Canadian dollar is posting the smallest gain among the majors and is up about 0.3%. Emerging market currencies are all higher, led by central European currencies, except the Turkish lira, which is off about 0.6%. The dollar’s pullback may be helping gold steady. It has been off for the past five weeks. It is up around $5 near $1714.50. September WTI rallied 5.1% yesterday, the most two months and is slightly lower today. US natgas is edging higher after rallying almost 13% in the past two sessions. The heatwave has spurred talk that the US may declare a weather emergency this week. Europe’s natgas benchmark is up about 2.5% after firming a little yesterday. China’s Covid flareup took the steam from iron ore prices. After rallying nearly 4.4% yesterday, it is off almost 4% today. Copper is also seeing yesterday’s gains pared. September copper is off 1.25% after a 3.5% rally yesterday. September wheat snapped a five-day drop yesterday, rising 4.6%. It is offered today and is down about 0.4%.  Asia Pacific Japan reports its June trade figures first thing tomorrow. In addition to the divergence in monetary policy, as the BOJ stands pat, Japan is also experiencing a marked deterioration its terms of trade. Energy and food prices have soared and given that they are priced in dollars for the most part, the weakness of the yen exacerbates the challenge. Consider this:  Japan ran a JPY1.67 trillion deficit in 2021. Through the first five months of this year, Japan has reported a trade shortfall of JPY6.5 trillion. The May deficit alone (JPY2.39 trillion) was bigger than the deficit for all of 2021. Japan recorded a small trade surplus in 2020, but in 2019 its deficit was on par with last year's shortfall. In 2018, the deficit was a little smaller around JPY1.22 trillion. Minutes from Australia’s central bank meeting earlier this month coupled with comments from Deputy Governor Bullock spurred speculation of a more aggressive rate hike cycle. The adjustment was not Q3, where the implied yield of cash rate futures edged up a couple basis points to a little more than 1.05%, but in Q4, where the implied yield of the December 2022 contract jumped more than 25 bp over 2.05%. The Australian dollar fell to a two-year low near $0.6680 last week, and to reached almost $0.6900. The month's high set on July 1 was slightly higher (~$0.6905). Chinese officials appear to recognize the challenge to households as it bolsters infrastructure spending. Two broad steps are being taken. First, yesterday, Beijing became the latest large city to offer its residents coupons to bolster spending. An estimated CNY100 mln (almost $15 mln) for restaurants (dine-in and takeout) will be issued. Beijing also made special coupons available for the elderly and disabled. At least two dozen provincial-level governments have issued coupons in recent months. Second, the government may give temporary relief to borrowers who have protested making payments for unfinished homes without incurring penalty. Some CNY2 trillion (~$300 bln) of construction has been stalled. China's property sector seemed to be large proportionately than the US was at the peak in 2008. The US dollar is lower against the Japanese yen for the third consecutive session. If sustained, it would be the greenback's longest losing streak since March. That said, the dollar is still in last Thursday's trading range (~JPY137.30-JPY139.40). Support was found in the European morning ahead of JPY137.60. Goosed by the hawkish minutes and comments, the Australian dollar jumped to almost $0.6900. It has not closed above the 20-day moving average since June 8, and it found today slightly above $0.6840. The (38.2%) retracement of the Aussie's slide since the $0.7280 high in early June is found a touch above $0.6910. However, the earlier surge has left the intraday momentum indicators extremely stretched. The greenback slipped a little against the Chinese yuan, but the real takeaway is consolidation in the narrowest range in a week (~CNY6.7396-CNY6.7534). The exchange rate remains in yesterday's range, which is also, like the yen, inside last Thursday's range (~CNY6.7235-CNY6.7685). The PBOC set the dollar's reference rate at CNY6.7451 today. The average estimate in Bloomberg's survey was for CNY6.7472. The gap represents the strongest yuan is since July 1. Europe An unattributed newswire story claims that a 50 bp move on Thursday is still being debated by ECB. That inflation has surged is not new news, and the "leak" during a quiet period ahead of the meeting has been embraced at face-value. When facing such "leaks," which are not uncommon, one must always ask the purpose of the leak, and "false flags" also occur. Perhaps in exchange for a better Transmission Protection Mechanism, a 50 bp hike is being discussed.  The swaps market has increased the odds of a 50 bp move to almost 50/50, which is a new peak. The euro, which had fallen to $0.9950 last week, and spurred last rites type of commentary, briefly pushed above $1.0250, almost a two-week high. The political jockeying for position is threatening to fragment the Five-Star Movement, which arose during the Great Financial Crisis and is now the large party in parliament. Di Maio, who is the Foreign Minister defected from the M5S last month to form his own group. A group of deputies, estimated to be between 30 and 50 are reportedly negotiating to break from Conte. However, Conte had stressed over the weekend that he was not leaving the coalition. The League (Salvini) and Berlusconi (Forza Italia) appear not to be breaking with Draghi as much as with Conte. Newswires have both officials saying they do not want to be in a government with Conte. Draghi is scheduled to address parliament tomorrow and both houses reportedly will hold a confidence vote afterward. Meanwhile, Italy needs to pass reforms that would free up 200 bln euros in aid from the EU. Receiving such a largess from the EU may also help sap the anti-EU efforts sometimes seen from some political groups. There are two developments in the UK to note, outside of punishing heatwave. First, the labor report showed jobs growth accelerated. In the three months through May, the UK created 296k jobs, a marked acceleration from the 177k in the three months through April. The jobless claims fell 20k in June after a revised 34.7k in the May (initially -19.7k). The unemployment rate was steady at 3.8%. Average weekly earnings (three-month/three-month) slowed to 6.2% from 6.8%, which is the slowest since February. Excluding bonus payments, the weekly earnings edged up, as expected, to 4.3% from 4.2%. Tomorrow, the UK reports June inflation. The headline rate is expected to have accelerated to 9.3% from 9.1%. Second, another round of voting for the head of the Conservatives will be held later today. In yesterday's round, Tugendhat was eliminated. Some of his 38 votes may go to Sunak in today's round, which likely lift the former Chancellor above the 120 votes needs to ensure he is in the face-off. Badenoch received the next to least votes (58) and could be eliminated in today's round. This suggests a more intense battle between Truss and Mordaunt. The recent exchanges have been so personally vicious, giving the opposition plenty of fodder that Sunak and Truss pulled out of today's debate, leading to it being canceled. A short-covering rally in the euro extended the single currencies recovery. It was bid above $1.0250. It met the (38.2%) retracement objective of the loss since the late June high near $1.0615. That retracement came in a little above $1.02. The next retracement (50%) and the 20-day moving average are found in the $1.0285-$1.0295 area. The intraday momentum indicators are over-extended. Initial support is seen around $1.02, yesterday's high. Sterling has not made it yet above yesterday's high (~$1.2035). The 20-day moving average, which it has not traded above since June 10 is closer to $1.2050. Still, intraday momentum indicators are stretched and a break of $1.1980 could confirm a high is in place. America Apple seemed set to join an increasing number of companies that have announced plans to cut investment and slow hiring, according to reports. Microsoft, Telsa, and Meta have announced job cuts. Apple's earnings are due next week (July 28). In April, Apple announced it was slowing hiring in some of its retail outlets. Meanwhile, TSMC (Taiwan Semiconductor Manufacturing Company), the largest and most valuable semiconductor company in the world, announced last week that it was cutting back on its investment plans. Samsung recently reported that its profits were stalling and is considering cutting prices later this year. Last month, Micron's projection of Q3 sales was 20% lower than expected. Some industry analysis suggest memory chips may fall by 10% over the next few months. Other reports estimate that graphic chips prices have been halved since the end of last year. Yesterday's three-and six-month bill auctions were better received than last week's, which had produced a tail (difference between the yield in the when-issued market and the high yield of the auction). Last week's Fed data showed that US bank holdings of Treasury and Agency paper, as a share of overall assets fell to their lowest of the year at 20.23%. At the start of the year, the ratio was a little more than 51%. Commercial and industry loans have been rising for nearly six months and now account for almost 2/3 of deposits. Meanwhile, the 10-year US breakeven rose to a new high for the month just shy of 2.42%. The low since last August was set on July 12 near 2.27%. Treasury will be selling 10-year TIPS on Thursday. June housing starts on tap today. They have been in a sawtooth pattern, alternating monthly between increases and declines this year. Starts fall by 14.4% in May, the most since Covid stuck. However, May's 1.549 mln (seasonally adjusted annual rate) space seen in May is still above levels seen between 2007 and 2019. It fell below the 12-month moving average in May for the first time since last September/October, which itself was the first time since June 2020. Rather than be undesirable or threatening a recession, the slowing in starts is a sign that tightening of financial conditions is producing some effect. Canada's June housing starts were reported yesterday, and they fell 8.3% to 273.8k (saar). This is the second highest pace this year and it remains above the 12-month average (~260k). The US dollar is consolidating its three-day swoon against the Canadian dollar, which has seen it drop from nearly CAD1.3225 to CAD1.2900 yesterday. The reversal of the risk appetites as US equities gave up their initial gains (second consecutive gap higher opening) saw the Canadian dollar gains pared quickly and the greenback returned to almost CAD1.30. So far today, it is in about a 25-30 tick range on either side of CAD1.2960. Equities may offer the best directional cue. The dollar has pulled back against the Mexican peso. It was above MXN21.00 last Thursday and yesterday, traded down to around MXN20.3315. It is fraying the 20-day moving average in the European morning (~MXN20.37). A break of MXN20.29 could spur a move into the support band seen between MXN20.10 and MXN20.20.    Disclaimer

July 11, 2022  $USD, China, Currency Movement, ECB, Energy, Japan, Recession, UK Overview:  The US dollar is bid against most currencies today, encouraged not just by good news in the US and poor news out of China, where Covid is flaring up and new social restrictions are fared, while Macau has been lockdown for a week. The energy crisis in Europe is fanning fears of a recession before the ECB lift rates above zero. Japanese markets bucked the global move and advanced, which it often does after the government wins an upper house election. The Hang Seng, where many Chinese tech companies are listed fell nearly 2.8% to lead the losses. Europe’s Stoxx 600 is snapping a three-day advance and is off almost 0.5% near midday. The S&P 500 futures are off about 0.6%, while the NASDAQ futures warn that the four-day rally is at risk. It is off around 0.75%. The US 10-year yield is a little softer at 3.06%, while European benchmarks are 2-5 bp lower and peripheral premiums are edging wider. Gold is near last week’s low (~$1732). The next chart support may be nearer $1720. August WTI met sellers around $105. A break of the $10150 area could signal a test on last week’s lows by $95. US natgas has recouped the pre-weekend loss of about 4.2%. A heatwave is spreading across much of the west and Midwest. Europe’s benchmark is 1% lower but appears to be consolidating after rising 15.3% last week. Iron ore is off 2.7% after falling 1.5% last week. September copper has fallen for the past five weeks and is off another 1.8% today. September wheat rallied more than 10% in the past two session and is extending its gains another 1.7% today.  Asia Pacific Japan's governing alliance increased its majority in the upper house of the Diet. Of the 125 seats that were at stake, the LDP and Komeito Party took 76 seats. They had 69 of these seats previously. Voter turnout was slightly higher than the last upper house election three years ago (~51.6% v 48.8%). Prime Minister Kishida, a protege of Abe, will stick with the traditional LDP policy thrust of easy monetary and fiscal policy. Kishida's contribution is recognizing the importance of distributional issues. He will also push ahead with a more activist defense policy, and military spending will rise. LDP leaders have long advocated changing the pacifist constitution but also moved cautiously. The rise of China is giving more impetus to it now.  China's inflation report over the weekend had a little bit of everything. The CPI accelerated to 2.5% in June from 2.1% in May. It was slightly above the median forecast in Reuters and Dow Jones surveys. Month-over-month, China's CPI was flat after having fallen by 0.2% previously. Food and energy are the main drivers; without them, China's CPI was 1% year-over-year. Gasoline and vehicle fuel prices were up nearly 33% over the past year. Food prices rose 2.9% (from 2.1%), and the risk is on the upside as pork prices are rebounding. On the other hand, producer price inflation slowed to 6.1% from 6.4% in May. It was the eighth consecutive monthly deceleration and is at its slowest pace in 15 months.  China's inflation news was overshadowed by other developments. Alibaba and Tencent were hit with regulatory fines. Bondholders in Evergrande's onshore entity (Hengda Real Estate) rejected a proposal for another extension of its debt payment. Also, a flare up of Covid has led to a weeklong shut down of Macau and Shanghai reported the most cases since late May. The CSI 300 snapped a five-week 11.5% rally last week with 0.85% loss. It fell by about 1.65% today, its largest loss in almost two months. Separately, after the mainland markets closed, China reported stronger than expected June lending figures. Aggregate financing jumped to CNY5.17 trillion in June, up from CNY2.79 trillion in May. The record was set in January (~CNY6.18 trillion) The dollar rose to new 22-year highs against the Japanese yen, slightly above JPY137.25. Initial support now is in the JPY136.50-JPY136.70 area. It had been consolidating this month after reaching JPY137.00 on June 29. The yen's weakness is in line with the euro and sterling today, where the cross rates are little changed. The Australian dollar gained around 1.1% over the past two sessions but is giving a chunk of it back today (~-0.7%). The roughly A$420 mln expiring option at $0.6825 may be back in play. The Aussie is holding just inside the pre-weekend range when a low of almost $0.6790 was recorded. It looks to be finding support in the European morning but needs to resurface above $0.6725 to stabilize the tone. The greenback edged higher against the Chinese yuan, but for the fourth-consecutive session it remained within the range set on July 5 (~CNY6.6845-CNY6.7235). Today's dollar fix was tight to expectations (CNY6.6960 vs. CNY6.6965). Europe Greece's central bank governor is on to something. In a weekend interview, Stournaras recognized that the need for a new tool to combat fragmentation grows out of the absence of EU reforms, with an incomplete economic and monetary union. Indeed, the current debate over the "Transmission Protection Mechanism" seems to offer more proof that the common EU bonds during the pandemic were the game-changer that some argued. They could ultimately prove to be scaffolding for a new fiscal framework, but they could also prove to be a Potemkin exercise. There seems to be two other talking points today in addition to next week's ECB meeting. First, the contest to replace Johnson as UK Prime Minister has intensified with nearly a dozen candidates declaring. The timetable for the leadership context is expected to be announced later today. The ostensible goal it to get it down to two candidates before Parliament's summer recess in ten days. Second, is the energy crisis in Europe. A key pipeline (Nord Stream) for Russian gas to Europe is down for regular maintenance for ten days starting today. This is on top of the 30-day stoppage orders by Russian courts last week of a key conduit at a Black Sea port for Kazakhstan oil. Separately, but related, power prices in German surged today to the highest level in four months as weak winds made for weak power generation. Canada's announcement that it would return a turbine for the Nord Stream pipeline, a source of tension with Moscow, helped ease natural gas prices. The heatwave in parts of Europe, including Germany and Italy is boosting the demand for electricity. Some rationing is being reported. After recording new 20-year lows near $1.0070 ahead of the weekend, the euro recovered and traded to almost $1.02. It has come back offered today and fell to almost $1.01. The risk of a recession, while such fears in the US may have eased a little after the composite PMI was revised higher and the jobs report before the weekend was stronger than expected. Initial resistance is now seen near $1.0140. Many have their sights set on parity. Sterling is also trading heavily within the pre-weekend range (~$1.1920-$1.2055). A two-year low was recorded last week near $1.1875. A close above $1.20 would be constructive. America The US quarterly refunding kicks off today with the sale of $43 bln three-year notes. Tomorrow, Treasury will sell $33 bln 10-year notes, followed by $19 bln of 30-year bonds on Wednesday. Under its balance sheet roll-off operations, the Federal Reserve will allow $30 bln of Treasuries to drop off this month and next before increasing to $60 bln starting in September. Some estimate that the Fed may buy $5-$6 bln of the three-year note. A late-June poll by CivicScience cited by Bloomberg found that 35% of Americans thought the US was already in recession, and another 36% thought it would be by the end of the year. An Economist/YouGov poll in the middle of June found that 56% believe the US is in a recession and another 22% are unsure. That left 22% who did not think a recession had begun. Partisanship is an important consideration. The poll found that 70% of those identified as Republicans believed the US has entered a recession compared with 45% of Democrats. Although Canada's employment report before the weekend was disappointing, the market continues to expect the Bank of Canada to deliver a 75 bp hike when it meets on Wednesday. Canada job growth in the past two months is negligible, but what is happening is that part-time jobs are being replaced with fulltime positions. The former has fallen by 135k while the latter increased by 131k. The swaps market has 75 bp fully discounted for this week and is nearly evenly divided between 50 bp and 75 bp for the next meeting on September 7. The two-day recovery in the Canadian dollar is being challenged today amid the risk-off mood. The US dollar's pullback found support ahead of the weekend and earlier today near the 20-day moving average (~CAD1.2940) and the (61.8%) retracement of the leg up that began on July 4 near CAD1.2840. Between tomorrow and Wednesday, there are options for $1.7 bln at CAD1.30. Last week's CAD1.3085 was the highest the greenback has been since November 2020. The US dollar is bid against the Mexican peso and briefly edged above the pre-weekend high near MXN20.5880. Last week's high was near MXN20.7860, its highest level in almost four months. Initial support is seen around MXN20.45.   Disclaimer

July 10, 2022  $USD High political drama in recent days included the assassination of former Japanese Prime Minister Abe and the resignation of UK Prime Minister Johnson. Yet, the capital markets in general, and the currency market in particular, were not roiled. This is because investors have their sights elsewhere.   The dollar surged. It is partly a function of bad news elsewhere. Japan's easy monetary policy stance sticks out like a sore thumb, and the May data showed the economic recovery from the contraction in Q1 is faltering. Industrial output slumped by a stunning 7.2% in the month, and household spending unexpectedly fell. The euro has been driven to new 20-year lows as short-term interest rate differentials move against it. The energy shock is intensifying. Arguably, unreasonable expectations about a new ECB tool to minimize the divergence of interest rates have been deflated. The US economic news stream was somewhat better, with the flash PMI composite revised higher and the increase of nonfarm payrolls stronger than expected.  Still, economists cut US Q2 GDP forecasts, and the Atlanta Fed GDPNow tracker stands at -1.2%. The market continues to price in not only a 75 bp hike at the FOMC meeting later this month but another 100 bp in the last three meetings of the year. The employment report showed the labor market remains strong, even if not quite as strong as before. The next series of data will also push the pendulum of market sentiment away from recession talk: headline consumer prices are expected to have accelerated, retail sales likely snapped back after falling 0.3% in May, and industrial output is expected to have edged a little higher. The leading hawks at the Fed may have preferred a different path (though there has been only one dissent for a larger hike), but the year-end rate of 3.25%-3.50% in the Fed funds futures is very much in line with what they advocate. The asymmetry of the Fed's path is evident in its unconditional commitment to restore price stability while hoping not too much economic harm is done in the process.   Dollar Index:  A new 20-year high (~107.80) was set ahead of the weekend and before the US jobs report. Since the end of the first quarter, the Dollar Index has fallen in only three weeks and only once in the past six weeks. The next important technical area is seen in the 109.25-110.00 range. The MACD and Slow Stochastics are still increasing, but the rapid rise, almost 3% over the past two weeks, lifted DXY above its upper Bollinger Band (~107.15) over the past four sessions, though it finished last week inside it. A pullback into the 105.85-106.20 area may be a better opportunity for bulls.   Euro: The selling has been intense. The immediate pressure subsided after it could not make new lows following the US jobs report. A bout of short-covering lifted it a little more than a cent off its lows. It had slid from the July 4 high near $1.0465 to almost $1.0070 ahead of the weekend.   Initial resistance is now seen in the $1.0200-$1.0220 area. The precipitous decline takes more than a small bounce to turn the momentum indicators, which are still headed lower even if stretched. It has spent most of the last three sessions below the lower Bollinger Band, which will begin the new week slightly above $1.0170. Another indication of the near-term over-extended condition is the euro's distance from the downtrend line connecting the February, March, and June highs. It is found slightly below $1.06 at the start of the new week. In this year's downtrend, the euro rarely trades more than five or six cents below the trend.   Japanese Yen: Despite intense volatility in the US bond market, the dollar-yen exchange rate traded relatively narrowly in the past week (~JPY134.80-JPY136.60). In fact, the dollar has settled in between JPY135.85 and JPY136.05 for the past four sessions. The greenback has frayed the 20-day moving average (~JPY135.40) on an intraday basis but has not settled below it since late May. The sideways price action is seeing the momentum indicators gently drift lower. If the US 10-year yield continues to move higher after pulling back around 75 bp from mid-June's FOMC meeting, the dollar could be bid to new highs against the yen.   British Pound: Sterling recorded a new two-year low in the middle of last week, near $1.1875. It recovered to set a three-day high ahead of the weekend by $1.2055. The stalling of its downside momentum is seen in the fact that higher lows and higher highs have been recorded for the past two sessions. The MACD has flatlined, while the decline in the Slow Stochastic has begun leveling off. There may be initial scope toward $1.2100, but it requires a move above the $1.2150-60 area that houses retracement objectives and the 20-day moving average to signal anything of note. Despite the UK political drama, the euro fell to almost GBP0.8440, its lowest level in about five weeks. It frayed the 200-day moving average by a handful of ticks ahead of the weekend. Although the euro bounced a little, it could not re-enter the Bollinger Band (~GBP08480).   Canadian Dollar:  As part of the broad US dollar rally, the drop in WTI below $100 a barrel, and softer commodity prices in general, the Canadian dollar made marginal new lows for the year on July 5 (~CAD1.3085) before recovering. The takeaway from the Canadian employment report was that there has been little net new job creation in the past two months, but full-time employment increased (~131k) as much as part-time work fell (~135k). While US average hourly earnings slowed for the third consecutive month, Canada's hourly wage rate for permanent workers continued to accelerate. Investors became more aggressive last week. The swaps shifted from a 60% chance of a 75 bp hike at the July 13 central to entirely discounting it. The US dollar found support ahead of the weekend near CAD1.2935, a (61.8%) retracement of the week's rally and the 20-day moving average. A break of that area could signal a return to the CAD1.2840-60 area.   Australian Dollar: All last week, the Australian dollar traded in the July 1 range (~$0.6765-$0.6905). Still, last week, it was the only major currency to rise against the greenback. The momentum indicators have flatlined in their troughs. The 20-day moving average is near the upper end of the range and has closed above it in a month. A convincing move above this area would lift the technical tone. We have highlighted the technical significance of the lower end of the range: It is the halfway point of the Aussie's rally from the pandemic panic low near $0.5500. The next retracement (61.8%) is around $0.6465. Australia reports June employment data on July 14. Full-time job growth has averaged nearly 61.5k a month this year through May, which is about a third higher than in the same period last year. The unemployment rate is at a record low of 3.9% but may have slipped lower. The market is pricing around a 60% chance of another 50 bp hike when the central bank meets again on August 2.  Mexican Peso: The greenback rose to almost four-month highs in the middle of last week near MXN20.7860. It pulled back in the subsequent two sessions, reaching MXN20.3650 before the weekend. The momentum indicators are giving contradictory signals. The MACD may turn lower from overbought territory, while the Slow Stochastic is headed higher. Provided that the MXN20.19 area holds, the bias may be to a higher dollar. That said, the dollar has not closed above the MXN20.68 area, which is the (61.8%) retracement of the decline from the year's high set in March near MXN21.4675. The JP Morgan Emerging Market Currency Index fell by almost 2.7% last week after a 1.3% decline in the prior week. Over the past two weeks, the peso has fallen by nearly 2.8%. Brazil has performed the best in the region, with BRL gaining about 1%. The Colombian peso has depreciated by 6.4%, the most in the region, and among emerging markets, only the South African rand (-6.5%) and the Russian rouble (-16.1%) have done worse.   Chinese Yuan: Last week, the dollar was little changed against the Chinese yuan, slipping by 0.1%. The week before, it rose slightly more than 0.15%. For the better part of the past two months, the dollar has been forming a large wedge/triangle pattern. However, it is getting too close to the apex to be meaningful technically. Still, the takeaway is that the exchange rate is trending sideways, not up or down. The momentum indicators are not generating strong signals, and continued range trading may be the most likely scenario, perhaps between CNY6.6750 and CNY6.7250. By so tightly shadowing the dollar, Chinese officials are accepting a marked appreciation of the yuan against the euro, yen, and most other currencies.   . Disclaimer

July 08, 2022  $Euro, $USD, Canada, China, Federal Reserve, Japan, jobs, UK Overview: News that former Prime Minister Abe was assassinated while campaigning in Japan ahead of the weekend election shocked the nation and world. The immediate market impact looks minimal. Asia Pacific equities mostly advanced. Chinese stocks were the main exception and generally underperformed the other large regional markets this week. After rising by about 3.5% over the past two sessions, Europe’s Stoxx 600 is off by around 0.3% near midday in Europe. US futures are also softer ahead of the jobs report. Bonds are firm, with the US 10-year yield almost two basis points lower (~2.98%), while Europe’s benchmark yields are 5-7 bp lower. The US dollar is firm against all the majors but is straddling unchanged levels against the Japanese yen. Emerging market currencies are also mostly lower, led by central Europe and the South African rand. Gold is consolidating near its lows, having fallen by more than 4% this week, its fourth consecutive weekly drop and the most in a year. After closing below $100 a barrel on Tuesday and Wednesday, August WTI rebounded to almost $104.50 yesterday and is consolidating in a narrow range between $101.50 and $103.80 today. US natgas is off 2% to pare this week’s gain to about 7.4%, to recoup last week’s decline. Europe’s benchmark is off 4.7% but still up over 20% on the week. Iron ore is a little heavy and is off about 1.5% this week. September copper is off nearly 2.2% to give back nearly half of yesterday’s gain. It is off 3% this week, the fifth weekly loss, and off nearly a quarter over this stretch. September wheat snapped a five-day drop yesterday, rising by about 4.0% and is up another 2.5% today.  Asia Pacific Japan’s economic data pales in importance to the murder of Abe. The chief take away is that household spending was considerably weaker than expected in May, falling 1.9% month-over-month, and suggesting the recovery in Q2 (from -0.5% annualized contraction in Q1) is lackluster. More aid to households, such as extending the fuel subsidy and perhaps introducing a new program for wheat, may be introduced after the election. Separately, Japan reported a smaller than expected current account surplus as the trade deficit on the balance-of-payments basis nearly tripled to JPY1.95 trillion amid rising import prices. The report also showed that Japanese investors continue to liquidate foreign bond holdings. It owns mostly US Treasuries and it sold them for the seventh consecutive month (~$2.4 bln). Japanese investors sold an amount of Canadian bonds. They sold the most Australian bonds since last June and the most German Bunds since last July. Small amounts of UK and Danish bonds were bought. Japan holds elections for the upper house on Sunday. It is usually not said in polite circles, but Japan remains a one-party state under the LDP for all practical purposes. Its preference to rule with a coalition partner (Komeito) for the past decade does not really change the fact. The coalition is expected to keep its majority in the upper house. After the election, we expected Prime Minister Kishida will be strong enough to push for more defense spending and facilitate greater reliance on nuclear power. Sometimes it helps to reason backward. We begin with the idea that ahead of the 20th People's Congress later this year in China, which is expected to see Xi coronated for a third term, ideally, the economy would not threaten to tarnish the moment. To that end, we have expected that Beijing will take more stimulative measures. However, monetary policy is not the lever of choice and may be too blunt of an instrument for economic planners. Reportedly under consideration is to permit local governments to begin tapping into next year's debt quota. The idea is to allow the issuance of as much as CNY1.5 trillion (~$220 bln) of special bonds in H2 22 to accelerate infrastructure projects. Separately, CNY1.1 trillion of new infrastructure support was announced at the of beginning last month. China reports CPI and PPI figures over the weekend and Q2 GDP next week (July 14). A contraction is widely expected and sufficient to offset the 1.3% expansion recorded in Q1. The dollar again found support near the 20-day moving average against the Japanese yen, found near JPY135.35 today. It has not closed below it since the end of May. The week's low is around JPY134.80. Japanese officials have complained about the volatility and benchmark three-month implied vol settled below 12% yesterday for the first time in nearly a month. It peaked near 14% in the middle of June after settling May a little above 9%. The Australian dollar extended yesterday's gains to reach $0.6860 earlier today, before drawing in sellers who drove it back toward $0.6800. A move above $0.6900, this week's high and the 20-day moving average to improve the technical tone. The Chinese yuan is broadly steady. The greenback remains in Tuesday's range (~CNY6.6845-CNY6.7235 range). Three-month implied yield has eased to almost 5%, its lowest level since late April. The PBOC set the dollar's reference rate at CNY6.7098 today, slightly firmer than the CNY6.7093 expected by the median projection in Bloomberg's survey.  Europe The euro is struggling to sustain even the most modest of upticks. It is off about 2.9% this week, the most since March and the second-largest weekly loss since March 2020. We see it being dragged lower by three considerations. First, on the interest rate channel, the US premium over Germany, which recorded a four-month low in mid-June, slightly below 2.0%, jumped to a new three-year high this week of almost 265 bp. In part, this reflects the more aggressive path of the Fed vs. ECB. Second, the idea of a robust anti-fragmentation tool seemed to have helped keep the euro bears at bay. The Bundesbank president cast aspersions over the talk. The record of last month's ECB meeting also showed the hawks had moved into ascendancy in the face of soaring inflation. Third, the eurozone is experiencing an energy shock of historic proportions. Even the end of the Norwegian strike failed to remove the pressure on European natural gas prices. The Dutch benchmark rose by more than 20% this week, its fourth weekly advance, and over this run, it has surged from 82.85 euros to 177 euros currently. The surge in energy prices strengthens both element of stagflation. The high drama of UK politics reached a tipping point this week. Prime Minister Johnson resigned but hoped to stay on through the Conservative Party conference in October. However, this is unrealistic and more of Johnson's preference. Instead, the party officials want to reduce the time and have the field down to two candidates by July 21 when Parliament's summer recess begins. However, it would still not be until September before a new Tory Prime Minister is in place. Given the state of foreign affairs and the domestic economy, it seems an awkward time to have the vacuum of leadership. There still may be an attempt to have an acting premier. The euro drew closer to parity, slipping below $1.0075 in late Asian turnover. It steadied a touch in the European morning but has been unable move above $1.0120. Recall, yesterday's low was $1.0150. The single currency settled last week near $1.0415. It is off for the fourth consecutive session and the fifth week in the past six. Three-month implied volatility reached 11% this week, its highest since March 2020, and is near 10.5% now. Thus far, official comments about the exchange rate are notable for their absence. Sterling has mostly shrugged off the local political drama. It rose to a three-day high today near $1.2055 before sellers reemerged and pushed it to new session lows by $1.1920. The euro fell by about 1% against sterling yesterday. and edged lower today to briefly trade below the 200-day moving average (~GBP0.8445) before finding a bid that lifted it to almost $0.8480 where it was greeted by fresh sellers. Its roughly 1.8% decline this week, if sustained, will be one of the largest weekly losses for cross since March 2020. America In the monthly cycle of high-frequency US economic releases, the monthly jobs report has typically held a special place. In Volcker's day, the money supply figures were tracked closely and released while markets were open. Later, the trade figures were the focus. With an advanced merchandise report, the trade balance has lost its sting. The labor market and the nonfarm payroll report had moved to top billing. However, with the Fed's hawkish pivot, the CPI, through the central bank targets the headline PCE deflator, and inflation expectations, both explicitly cited by Fed Chair Powell, have become the most salient. Moreover, the Fed seems more determined to get inflation back toward its target even if it means deterioration of the labor market and possibly a recession. The recent FOMC minutes, according to some calculations, cited "inflation" around 90 times but did not mention recession at all. By definition, surprises often come from where one is not looking. The June jobs report poses headline risk but is unlikely to alter the market views on the trajectory of Fed policy. In the middle of next week, the US reports the June CPI, and it is likely to have accelerated and moved closer to 9.0% from 8.6% in May, even though the core rate is expected to have slowed for the third consecutive month. The Fed funds futures imply almost an 85% chance of a 75 bp hike later this month. The median forecast for nonfarm payrolls has slipped a bit in recent days to stand at 265k. If accurate, it would be the lowest since April 2021. So what? From the Fed's vantage point, the labor market is still strong (Powell has said "too strong"). If the median estimate is correct, leaving aside revisions, the six-month average would be about 450k, which is a robust number even if less than the 536k average in H1 21. Consider that it means that the US would have created more jobs in H1 22 (~2.7 mln) than in all of 2019 (~1.97 mln). The unemployment rate is in its trough of 3.6%. It has been steady there since the March report. Sahm's rule (heuristic device) says that when the three-month average of unemployment rises 0.5% above the 12-month low, the US is either in a recession or soon to be in one. The weekly jobless and continuing claims and the PMI and ISM show some weakening of the labor market, but the JOLTS report, which Powell has also cited, surprised on the upside. The idea that higher wages would draw people back into the labor force might be happening but at glacial speeds. The participation rate is expected to tick up to 62.4%, last seen in March. On the eve of the pandemic, it was at 63.3%, never having fully recovered to the pre-financial crisis levels of 66%. And wage growth appears to have crested. Consistent with core CPI and core PCE turning lower, we note that the year-over-year pace of average hourly earnings is also expected to slow for the third consecutive month. Lastly, the Fed's leading hawks, St. Louis President Bullard and Governor Waller talk a good game but their views, a 75 bp hike this month, 50 bp in September and a year-end rate around 3.5% is already fully reflected in the Fed funds futures strip. Canada also reports June jobs data today. Canada created 135.4k full-time positions in May, which is unlikely to have been repeated last month. An average of 47k full-time jobs have been created this year. Depending on which measure one uses, Canada is around 10%-11% the size of the US. Canada's participation rate stood at 65.3% in May. It was 65.5% on the eve of the pandemic. The Bank of Canada meets next week (July 13), and a 75 bp hike is nearly fully discounted in the swaps market. Only four of the 16 forecasts in the Bloomberg survey have been updated since mid-June. Three look for a 75 bp, and one expects a half-point move. The US dollar rallied Monday from around CAD1.2840 to about CAD1.3085 on Tuesday a marginal new high for the year. With the pullback yesterday and earlier today, it saw half of the gains pared (~CAD1.2960). It has bounced back toward CAD1.3025. The recent price action looks corrective (flag or pennant) and warns of the risk of another attempt higher. The next interesting chart area is in the CAD1.3180-CAD1.3200 area. That said a break of CAD1.2900-CAD1.2930 would negate bullish technical tone for the greenback. The price action still looks constructive, and the greenback could retest the four-month high set in the middle of the week near MXN20.7860. A break, and ideally a close below MXN20.4285 would weaken the dollar's technical tone going into next week. Coming into today, the Brazilian real is the best performing Latam currency this week, off about 0.2%. The Colombian peso is the worst, off 4.5%.   Disclaimer

July 04, 2022  $AUD, $CAD, $JPY, $USD, ECB, Federal Reserve, Germany, jobs, RBA, yields The most important thing to appreciate is that the market has moved to price not one but two cFed cuts next year.The first is priced into the September Fed funds futures and the second is in the Dec Fed funds futures.  This I in response to weaker than expected data that have elevated recession fears.  The Atlanta Fed GDPNow puts Q2 growth at -2.1%.  Banks have revised down their forecasts, but none of the 59 economists in the Bloomberg survey have forecast a negative number.  The June employment report is the data highlight and the median forecast in Bloomberg’s survey is at 273k.  The year-over-year pace of average weekly earnings is expected to have slowed for the third consecutive month.    The euro fell to almost $1.0365 ahead of the weekend but remained above $1.04 on Monday.  The ECB meets July 21. Most expect a 25 bp hike, but the focus is on the tool/efforts to prevent divergence of European interest rates, which the ECB argues disrupts its transmission mechanism of monetary policy.  Meanwhile, on another front, Germany reported its first monthly trade deficit in 21 years in May as exports fell (0.5%) and imports rose (2.7%).  A trade shortfall of 1 bln euros was recorded instead of a 1.6 bln euro surplus that was expected.  Some have blamed the Germany trade surplus for a number of world ills, including the US trade deficit.  Ironically, the German trade deficit is a reflection of problems (higher energy prices, weaker demand abroad).   The US 10-year yield fell 25 bp last week, the most since March 2020. The yen was the only major currency to gain (albeit slightly) against the dollar.  The CFTC data showed that for the seventh consecutive week, the net short yen position was reduced.  It now stands at the lowest of the year at a still substantial 52.6k contracts (less than half of the mid-May peak).  It is the longest bout of short covering since 2019.  The dollar toyed with its 20-day moving average on Monday (slightly below JPY135) for the second consecutive session.  It has not closed below this moving average since the end of May.  Japan has Upper House elections on Sunday, July 10.  A Yomiuri newspaper polls projects the LDP and its partner, Komeito Party will secure 65-80 of the 125 seats in contention.    The US dollar peaked ahead of the weekend near CAD1.2965 before pulling back. It continued to unwind its gains on Monday, and at one point, dipped briefly below CAD1.2840.  The Bank of Canada’s quarterly survey, released on Monday, found business and executive inflation expectations are still rising.  The market has 75 bp hike nearly fully discounted for the July 13 central bank meeting.  That said, the BA futures have 33 bp cut discounted in Q4 2023, but the chances of a Q3 2023 move as in the US, is seen at a little better than 70%.  The highlight of the week is the jobs report on Friday.  In May, Canada reported blowout numbers, creating !135k full-time jobs.  The unemployment rate stands at 5.1%, the lowest since the mid-1970s when the time series began. The US dollar has not settled below its 20-day moving average (~CAD1.2865) since June 9. The CAD1.2800 area is important technical support, and a break could see CAD1.2680-CAD1.2730.  At the end of last week, the Australian dollar fell to new two-year lows (~$0.6765). It recovered to closed around $0.6815, and to almost $0.6890 on Monday.  Early tomorrow, the Reserve Bank of Australia will hike the policy rate (cash rate).  The market has 40 bp of tightening discounted.  That implies 100% confidence of a 25 bp move and a 60% chance of a 50 bp hike instead of 25 bp.  The final composite (and services PMI) will be reported shortly before the central bank’s decision.  The composite PMI downshifted in May to 52.9 from 55.9.  The preliminary estimate was at 52.6.        Disclaimer

July 02, 2022  - Federal Reserve, $USD, China, Japan, jobs, labor, Macro, RBA (Combining the weekend macro commentary and price action review in one note.  Check out the July monthly.)  Three economic reports highlight the week ahead:  Japan's labor cash earnings at the start of the week and the US employment report and China's CPI at the end of the week. In addition, the Reserve Bank of Australia meets early on July 5. The Bank of Japan's insistence that inflation, which is running slightly above target is not sustainable is that it is a function of higher fresh food and energy prices and the statistical impact of last year's cut in cell phone charges dropping out of the 12-month comparisons. What is missing, the BOJ says is wage growth. Over the last decade, monthly cash earnings have risen by more than 2% year-over exactly twice: once in 2018 and once in 2014. In the first four month of the year, labor cash earnings averaged 1.4% year-over-year pace. The average rate last year was 0.4%. We also note that the initial estimate is subject to statistically significant revisions. Consider that April's 1.7% increase first reported was revised to 1.3%. The revision in March went the other way. The 1.2% rise originally reported was revised to 2.0%. Still, knowing wage growth does not help much in forecasting consumption (household spending). This is especially true given the pandemic. April was the first full month without Covid curbs. When adjusted for inflation, real cash wages fell to 16-month lows in April (1.7% year-over-year, initially -1.2%). In stark contrast to the UK, where Bank of England Governor Bailey urged workers to show restraint in wage negotiations, the BOJ and the government have called on Japanese companies to boost wages. Price pressures may not have persuaded the BOJ to hike rates, but Prime Minister Kishida moved to help the cost-of-living squeeze by offering a package of government spending and some tax breaks and subsidies for gasoline. A robust labor market, strong consumption, and a positive terms-of-trade shock, and elevated inflation expectations has pushed the Reserve Bank of Australia on to an aggressive tightening course. At the end of last year, the cash rate futures implied a year-end target rate of about 0.8%. Six-month later, the cash target rate is at 0.85% and the market is pricing in a year-end rate of 3.20%. This is a pullback from almost 4% reached in mid-June. RBA Governor Lowe pushed against speculation of a 75 bp move by saying the discussion will be between a 25 bp and 50 bp move at the July 5 meeting. The market’s confidence of a 50 bp move has waned. Ahead of the weekend, the futures market's slight bias in favor of a half-point move is the least in three weeks. The Federal Reserve's assessment that the US economy can withstand tighter financial conditions without falling in a recession seems largely based on the strength of the labor market. Cracks are beginning to appear. We have noted that the four-week moving average of weekly jobless claims, used to smooth some of the noise in this high-frequency has bottomed three months ago and has risen by 30%. The labor market is down shifting. Non-farm payrolls have grown by an average of 488k a month this year. The median forecast in Bloomberg's survey forecasts a 250k increase in June, which would the lowest since the end of 2020. The Federal Reserve, like other central banks, sees the tightness of the labor market fueling wage increases that in turn is thought to drive prices. The cracks in the "robust labor market" narrative are also seen in average hourly earnings. It is expected to have slipped to 5.1% in June. If borne out in the report, it would have slowed every month in Q2. The monthly change also is stabilizing between 0.3% and 0.4%. The cumulative gain in the second quarter could be the lowest since Q1 21. Jobs are income, and income funds consumption. Fewer new workers and average earnings slowing could be expected to translate into slower consumption. However, Americans have been borrowing from the past as in drawing down savings and monetizing the increase in equity in their homes, and from the future in terms of credit. May's consumer credit will be reported a few hours after the jobs data. Total consumer credit jumped by almost $85.5 bln in March and April. It was nearly evenly divided by revolving (e.g., credit cards) and non-revolving (e.g., auto loans and school loans) credit. With consumption (in Q1 GDP and April PCE) being revised lower, and the softer than expected May PCE estimate (0.2% vs. 0.4%) credit fueled a larger share than it previously appeared.  At the end of the week, literally, Saturday morning (July 9) in Beijing, China is expected to announce the June CPI. The re-opening of the economy is expected to have lifted prices, though they softened (-0.4%) in May. The median forecast is for an increase in the year-over-year rate to 2.5% from 2.1%. That would be the highest since July 2020. What makes China's CPI particularly difficult to forecast is that officials have not revealed composition after last year's adjustment. For example, middle income countries tend to give more weight to food and clothes, while high income countries typically put more weight on transportation and shelter, which have been more central to the inflation story. Chinese officials seem confident that inflation will remain below 3%. Food prices, which fell 1.3%, were behind the month-over-month CPI decline in May. The re-opening and logistics stabilized, and fresh vegetable prices tumbled by 15%. The price of pork, a key component in the food basket, fell by more than a fifth in May. Many accounts express concern that pork prices have bottomed. The re-opening means consumption will likely rebound. Supply seems constrained as live hog futures in Dalian are the strongest in a year and wholesale prices are at six-month highs. Let us turn to the assessment of the price action. Dollar Index: Heightened concerns of a recession, the drop in US yields, and increased confidence that the Fed will cut rates late next year had little impact on the US dollar. The Dollar Index, which began the last week with A dip below 104.00, finished at its best level in a couple of weeks. Indeed, it approached the 20-year high set in mid-June near 105.80. The momentum indicators appear to be turning up after pullback to the middle of the range. The next important technical area is not until the 108.75-109.25 area, which was last seen August-October 2002. Initial support is now seen around 104.70. Note that the Fed funds futures are pricing in a quarter point cut in Q3 23 and another in Q4 23.  The Altanta Fed's GDPNow tracker warns of a 2.1% contraction, yet none of the 58 economists in Bloomberg's survey are forecasting a contraction (of course they can change their minds and we'll be tracking it).   Euro: The single currency's recovery faltered at $1.0615 last Monday, a key retracement objective of the sell-off that began with the ECB meeting on June 9. It did not look back and finished the week below $1.04. The June low was about $1.0360, and the May low was around $1.0350. The MACD and Slow Stochastic are turning back down after recovering since the middle of June. A break would renew speculation of a move to parity. The euro traded on both sides of the previous week's range and settled below its low. The outside down week underscores the fact that the bears are still in control. Japanese Yen:  The yen was the only major currency to post a gain against the greenback, though it is less than 0.2%. The key consideration was that the US 10-year yield fell more than 25 bp, the largest weekly drop since March 2020. Ahead of the weekend, the dollar briefly traded below the 20-day moving average (~JPY134.80) for the first time since June 1 and bounced back settling near JPY135.00. Signals from the momentum indicators are diverging. The MACD is trending lower, while the Slow Stochastic has flatlined at elevated levels. The dollar was more resilient than one might have expected. Nevertheless, the pullback in US rates should encourage a deeper dollar correction. On the current setup, a move toward JPY133 seems reasonable, with potential extending to around JPY130.50. Even if the dollar moves sideways in the coming days, the five-day moving average looks likely to fall below the 20-day moving average for the first time in a month.  British Pound: Sterling began last week edging above the previous week's high but was turned back from the $1.2230 area and was subsequently sold off. It dipped below $1.20 before the weekend to cap its biggest weekly loss (~2.2%) since September 2020. The lower Bollinger Band begins the new week near $1.1950 and the two-year low set last month was near $1.1935. The momentum indicators allow for further losses before becoming stretch. There seems little chart support ahead of the $1.1400-$1.1500 area. The swaps market remains nearly certain that the Bank of England will hike by 50 bp at their next meeting in early August. Canadian Dollar:  After the yen, the Canadian dollar was the best performer among the major currencies, falling only around 0.3% against the US dollar. The greenback initially extended its retreat from its best level since November 2020 (~CAD1.3080), falling to CAD1.2820. However, the risk-off meme saw the US dollar recover CAD1.2965 ahead of the weekend. The MACD appears to be poised to curl higher while the Slow Stochastic is still trending lower. While the market has downgraded the likelihood that the Fed hikes by 75 bp at this month's meeting to about 60%, the least since the FOMC meeting, the risk of the 75 bp move by the Bank of Canada is near 80%. The greenback faces nearby resistance in the CAD1.2980-CAD1.3020 band and beyond that is the old nemesis in the CAD1.3080 area. Australian Dollar: Concerns about global growth and the broad US dollar strength saw the Australian dollar tumble to new two-year lows before the weekend near $0.6765. We previously noted that this area corresponds to the (50%) retracement of the Aussie's rally from the pandemic panic low around $0.5500. The next retracement (61.8%) is about $0.6465. However, a more bearish technical case can be made if the Aussie has carved out a head and shoulders topping pattern with the neckline around $0.7000. It projects to $0.6000. The lower Bollinger Band is near $0.6750. The MACD is falling and the Slow Stochastic has been chopping along the trough. A move above $0.6900-$0.6920 is needed to improve the technical tone. The futures market is pricing in almost a 60% chance of a 50 bp rate hike instead of a 25 bp move at the July 5 central bank meeting. Over the six meetings in H2, the RBA is expected to hike another 225 bp. This implies three half-point moves and three quarter-point moves. Mexican Peso:  The dollar formed a little bit of a shelf in the second half of last week in the MXN20.06-MXN20.08 range, off which it pushed higher and hit MXN20.4660 before the weekend. This seemed clearly part of risk-off move. The peso fell by around 0.9% at the end of last week even though the manufacturing PMI rose to 52.2 (from 50.6), its highest level since well before the pandemic. It was the fifth consecutive advance. The manufacturing PMI fell in most countries in June. Worker remittances in May soared to a new record high of $5.17 bln, almost $2.5 bln more than expected, and more than enough to cover the $330 mln deterioration of the trade balance. There were eight sessions in Q2 22 that the dollar traded above MXN20.50, but it closed above it once. Another push above there could spur gains towardMXN20.65-MXN20.70. The data highlight in the coming days is CPI report on July 7. An acceleration, which looks likely, may help solidify expectations for a 75 bp hike at its next meeting on August 11 meeting.   Chinese Yuan:  The dollar spent last week trading quietly inside the previous week's range (~CNY6.6735-CNY6.7260). It settled near CNY6.7015, up about 0.15% on the week. Recall that the greenback surged in April and into the first half of May. It has been moving broadly sideways for the past month-and-a-half. Chinese officials seem content, but by shadowing the dollar, the yuan is strengthening against most other currencies. If part of the earlier pressure on the yuan was coming from portfolio flows, the outlook is brighter. As the Chinese economy recovers from the lockdowns, Chinese stocks have begun outperforming. And, at the same time, the pullback in US Treasury yields means that China's discount to the US has fallen from around 65 bp to less than 10 bp at the end of last week. The data highlights next week include the foreign exchange reserves, which probably fell on valuation grounds given the dollar's strength. Also, on tap is the May CPI (likely accelerated as the economy re-opened) and PPI, which is expected to have declined for the eighth consecutive month.    Disclaimer

June 30, 2022  $USD, Canada, China, Currency Movement, Federal Reserve, Inflation, Japan, Riksbank Overview: Central banks are committed to combatting inflation even as the economies weaken. This is taking a toll on investor sentiment and is dragging down equities. Outside of China, where the PMI confirms a recovery, and India, where most large bourses in the region were off 1-2%. Europe’s Stoxx 600 snapped a three-day rally yesterday with a 0.65% decline. Near midday, its loss today is approaching 2%. US futures are 1.5%-2.0% lower. Bond yields are falling. The US 10-year is around 3.05%, off 20 bp between yesterday and today. European bond benchmark yields are 4-9 bp lower. The US dollar is mixed, with the yen, Antipodeans, and sterling edging higher, while the Swiss franc, and Scandi are off 0.2%-0.3%, even the Swedish krona, where the central bank delivered a 50 bp hike. A few Asian currencies, including the Chinese yuan, are showing some resilience among emerging market currencies. The Russian rouble is off nearly 4% and the Hungarian forint and Polish zloty are off 0.5%-1.0% to lead the emerging market complex lower. Gold is bleeding lower and near $1812 is at its lowest level since mid-month. August WTI reversed lower yesterday and is slightly lower today ahead of the OPEC+ decision to ostensibly allow more output but capacity constraints limit the actual output. US natgas is steady while the European benchmark is rising for the third consecutive session. It is up nearly 5% after yesterday’s 6.4% gain. A surplus of Chinese steel is said to be weighing on iron ore prices. It is off 3.25% today after falling 1.25% yesterday. September copper is ending a three-day rally (~1%) and is giving it all back today with a 1.35% pullback. September wheat is soft after slipping 0.65% yesterday.  Asia Pacific China's economy is on the mend. The June manufacturing PMI rose to 50.2, the first time it is above the 50 boom/bust level since February. The non-manufacturing PMI surged to 54.7, the highest level since May last year. It had bottomed in April at 41.9. The combination lifted the composite PMI to 54.1 from 48.4. It is also the best in a year. The news helped lift Chinese stocks and the yuan. A stark contrast is suggested between the rising recession fears in the US and Europe and bounce back in China after a tough couple of quarters as the zero-Covid policy took a toll. That toll extended beyond China. Japan reported a stunning 7.2% drop in industrial output in May. The median forecast in Bloomberg's survey called for a 0.3% decline after a 1.5% fall in April. Accounts are linking the unexpected steep contraction to China's lockdowns. The sharpest declines were in the production of electric machinery (-11%) and autos (-8%). Securing products and parts proved difficult but Japanese producers expected output to recover 12% this month and 2.5% in July. Separately, Japan reported that housing starts in May fell 4.3% year-over-year. Economists expected a 1.6% increase. Forecasts for Q2 GDP will have to be scaled back from the near 4% (median in Bloomberg's survey) after a 0.5% quarter-over-quarter contraction in Q1. Lastly, we note that the BOJ left its government bond buying at the same pace and amounts in Q3 as in Q2. The dollar reached a new 22-year high against the yen to JPY137.00 yesterday and is consolidating in a yen range below it today. The US 10-year yield is at the lows for the week near 3.05%, having peaked Tuesday a little above 3.25%. The intraday momentum indicators suggest that North American operators may try taking the dollar higher again. The JPY136.50-JPY136.60 may offer initial resistance. The Australian dollar tested the month's low near $0.6850. It held and the Aussie recovered to $0.6900. Sustaining gains above $0.6920 would help stabilize the tone. The Chinese yuan has been confined to yesterday's range, which itself was within Tuesday's range. The dollar is recording lower highs and higher lows. It peaked on Tuesday near CNY6.7125 and the week's low has been about CNY6.6750. The greenback settled last week slightly below CNY6.69. The dollar's fix was at CNY6.7114, a little firmer again than expected (CNY6.7104 median projection in Bloomberg's survey). Europe News that Spain's CPI accelerated to 10% grabbed attention early yesterday, but the unexpected decline in German CPI was more on point. It fell to 8.2% from 8.7%. Knowing Spain's numbers alone would make the dramatic European bond rally inexplicable. The 10-year Bund yield fell almost 11 bp. The Spanish 10-year yield tumbled 13 bp. As is often the case, the peripheral premium narrowed as interest rates fell. France reported its preliminary CPI earlier today. It was in line with expectations. The harmonized measure rose 0.8% on the month for a 6.5% year-over-year rate. France's CPI had risen 5.8% year-over-year in May. European yields are lower today, led by the core not the periphery. Germany, and others, are using fiscal policy to do what monetary policy is having a difficulty doing: easing the burden of the cost-of-living squeeze. Germany lowered fuel taxes and discounted public transportation, and next month will abolish the renewable charges on electricity. Other countries have cut taxes on gasoline and/or introduced subsidies. This also has the effect of lowering measured inflation. The purists worry that it just delays the pain. Maybe, but it is playing for time; time for the supply challenges to be addressed.  As widely anticipated, Sweden's Riksbank lifted its repo rate for the second time this year and doubled the pace to 50 bp. The repo rate now stands at 0.75%. Officials signaled that by the start of next year, it will be at 2.0%. Still, the central bank is less optimistic about the economic outlook and cut this year's growth projection to 1.8% from 2.8% two months ago. At the same time, it cautioned that inflation may remain above 7% for the remainder of the year. The Riksbank's move did not prevent the krona from weakening against the euro and extending its decline for the third consecutive session.  The euro itself is struggling to sustain even modest upticks against the dollar for the third session. After its attempt to sustain gains above $1.06 were rebuffed on Monday, the euro has fallen steadily to reach $1.0430 today. The month's low was set on June 15 near $1.0360. May's multiyear low was a little lower at $1.0350. Sterling is faring a bit better. Today's final look at Q1 GDP was in line with earlier estimates but the current account deficit (~GBP51.7 bln) was larger than expected (~GBP40 bln). Sterling is holding above yesterday's low (~$1.2105), albeit barely, and the North American market may give it another go. The mid-June low was more than two-cents lower near $1.1935. America Third revisions to US quarterly GDP are not the stuff that captures the imagination, but, yes, this time was different. The GDP estimate itself hardly changed (-1.6% vs. -1.5%) but the composition changed in an undesirable direction. What earlier estimates had as consumption turned out into inventories. Rather than accelerate after a 2.0% increase in Q3 21 and 2.5% increase in Q4 21 to 3.1%, it slowed to 1.8%. Inventories rose by $189 bln not $150 bln. The takeaway is that consumption was weaker than expected before the Fed hiked in March. Today, the US reports May personal income and consumption figures. The risk is that Q1 PCE, which averaged a 1.3% increase a month is revised lower and that consumption in Q2 may not have improved. Recall that May retail sales (~40% of overall consumption) disappointed and the April series was revised lower. Without the fiscal support, personal income is less volatile. Through April, it has averaged a 0.4% increase a month this year. That was the average in 2017 and 2018 before slowing to a 0.2% average in 2019. The Fed targets the PCE headline deflator, but cited the CPI to justify the 75 bp hike instead of 50 bp. Recall, Powell also cited the University of Michigan's 5–10-year consumer inflation expectation. It had appeared to jump to 3.3% from 3.0%. But, before last weekend, the final reading revised it to a less alarming 3.1% to match the high watermark set in January. Nevertheless, the point is that if the Fed is going to take its cues from the CPI, the PCE deflator loses some of its significance. For the record, the median forecast in Bloomberg's survey sees a 0.7% increase, which would lift the year-over-year rate to 6.4% from 6.3%. The core PCE deflator is expected to slow for the third consecutive month. The year-over-year rate peaked in February at 5.3% and stood at 4.9% in April. Remember the argument that Powell endorsed too; headline inflation converges with core inflation and not the other way around. A case can therefore still be made that inflation is peaking. The idea that the labor market is strong and strong enough to withstand tightening without much disruption will increasingly be challenged. We note that the four-week moving average of weekly jobless claims has risen by 30% in the last two months. Danielle DiMartino Booth's team at Quill Intelligence found that a 50% increase in weekly jobless claims from their low has signaled a recession. Jobless claims have risen almost 40% from the March low. The early forecasts for June nonfarm payrolls are coming in around 250k, which would the least since the end of 2020. It would bring the three-month moving average to a little below 360k, the lowest since Q1 2021. Canada's April GDP is expected to shift lower after expanding by an average of 0.8% in February and March. We also know for the first time since last June, Canada lost full-time positions (31.6k) in April. However, the data is too old to really matter, and for example, Canada reported a 135k increase in full-time jobs in May. The Bank of Canada meets on July 13. The market is more confident that the Bank of Canada hikes 75 bp than the Fed does next month. The swaps market sees the terminal rate in the US and Canada around 3.5%. The Fed funds futures strip had about 22 of an ostensible 25 bp cut discounted in Q4 23 at the close yesterday. In the Canadian Banker Acceptance futures, the implied yield of the December 2023 contract is about 20 bp below the implied yield of the December 2022 contract. The risk-off push is taking a toll on the Canadian dollar. It is trading at four-day lows. The greenback bounced off Tuesday's two-and-a-half week low near CAD1.2820 and is above CAD1.29 now. It is holding just below the band of resistance seen in the CAD1.2920-CAD1.2940 band. Take your cue from the S&P 500. The US dollar bottomed against the Mexican peso at the end of last week and the start of this week near MXN19.82. It reached a six-day high today slightly below MXN20.24. The next target is seen closer to MXN20.3650 as the losses over the past couple of weeks are retraced.      Disclaimer

June 28, 2022  $USD, BOJ, China, Currency Movement, ECB, Fed, fragmentation, NATO, UK, US Overview: The global capital markets are calm today. Most of the large bourses in the Asia Pacific extended yesterday’s gain. Europe’s Stoxx 600 is advancing for the third consecutive session and is near two-and-a-half week highs. US futures are around 0.5% higher. Benchmark 10-year yields are rising, with German and French rates 9-10 bp higher. Peripheral yields are also higher, but the spreads have narrowed a few basis points. The US 10-year yield is three basis points higher after rising seven yesterday. The Canadian and Australian dollars are leading the majors higher, while the yen, New Zealand dollar, and sterling are struggling. Emerging market currencies are mixed. The Hungarian forint has joined a handful of Asian currencies in gaining against the dollar today. The Hungarian central bank is expected to hike its deposit rate today. The JP Morgan Emerging Market Currency Index is off about 0.15% today after gaining 0.2% yesterday. Gold was turned back from the $1840 area yesterday and fell to around $1820. It is consolidating below $1830 today. Amid concerns that political problems may cut into Libyan and Ecuadorian oil production and exports is helping keep August WTI firm. It is trading near a six-day high just below $112. The charts look bullish, suggesting another run at $120. US natgas is edging higher after rallying 4.25% yesterday. Europe’s natgas benchmark is off 1% for the third consecutive decline. Iron ore rallied 5% yesterday and is up another 3.2% today amid growing optimism that China’s economy is turning the corner. September copper is up nearly 2% after a 0.5% gain yesterday. If sustained, it would be the biggest gain in three-and-a-half weeks. September wheat is recouping yesterday’s 2% drop, plus a little more.  Asia Pacific According to the local press reports, the BOJ's holdings of Japanese government bonds surpassed the 50%-mark for the first time. As of June 20, the BOJ owned JPY514.9 trillion of the JPY1,021.1 trillion outstanding. It does not appear to be a point of discussion in anticipation of it at the last BOJ meeting. Some speculators think that the BOJ's policy is untenable, and it will be forced to change. Governor Kuroda and the BOJ stood fast earlier this month defying, but not defeating such expectations. A change in policy would be easier if the markets were not forcing it. Arguably the BOJ is playing for time. If recession fears help cap European and US yields pressure on the yen may subside a bit and give the BOJ more breathing space from the self-imposed 0.25% cap on the 10-year yield.  The US is determined to send unequivocal signals to China that it is not distracted by Russia's invasion of Ukraine. Several Asia Pacific allies (South Korea, Japan, Australia, and New Zealand) are attending the NATO meeting. From the G7 meeting comes the resurrection of the US-led proposed alternative to China's Belt-Road Initiative, launched in 2013. It is a $600 bln five-year public-private initiative. The target is lower- and middle-income countries. The focus is climate change, health, gender equality, and digital integration. Separately, NATO will reportedly recognize China as a "systemic challenge."  The dollar pushed higher against the yen, reaching a three-day high near JPY135.80 in early European turnover. Intraday momentum indicators are stretched, but a further advance could test last Thursday's high by JPY136.30. The lower end of what may be a new range is around JPY134.25. About JPY137.50 bln of 5-10-year government bonds were sold to the BOJ today after no take up yesterday. The Australian dollar is firm but remains below the $0.6975-$0.7000 cap. Initial support may be found around $0.6940 now. China will cut the quarantine time in half to about 10 days for inbound travelers. The press reported this as the biggest shift in zero-Covid policy to date. Chinese stocks extended their rally and Chinese bond yields edged higher and is approaching a three-month high (~2.84%). The dollar traded in a wider range than Monday but is little changed on the day, around CNY6.6870. The PBOC set the dollar's reference rate at CNY6.6930, a little above expectation (CNY6.6925, median projection in Bloomberg's survey). Still to come this week is China's June PMI where the composite may have returned above the 50 boom/bust level for the first time since February.  Europe UK Prime Minister Johnson hinted at the possibility of another gasoline tax break. The cost-of-living crisis is among the many pressures the government must feel, having survived a vote of confidence but still wounded. At the end of the first quarter Chancellor of the Exchequer Sunak announced a five pence liter cut in the fuel tax, and of course, prices have only gone higher. The government's revision to the Northern Ireland Protocol survived the initial challenge in the House of Commons yesterday. Next is the committee stage where amendments can be considered. There is speculation in the press that a few Tory MPs may switch to Labour. Meanwhile, the market has a 50 bp BOE rate hike practically fully discounted for the next meeting on August 4. The swaps market anticipates 165 bp of tightening over the course of four meetings in H2. The peak rate was seen slightly below 3.80% on June 16, fell to about 3.10% at the end of last week and is near 3.20% now. Sterling has gone nowhere recently. It has been stuck in the same, albeit, wide range, set on June 16 (~$1.2040-$1.2400). The market is still mulling the ECB's new fragmentation tool. Ironically, many of the objections or pushback by economists and other observers were not addressed to the Outright Market Transactions (OMT) that then ECB President Draghi unveiled a decade ago next month. It was part of the teeth in Draghi's pledge to do "whatever it takes" to preserve the euro. It called for purchases of short-term bonds that would be neutralized/sterilized to draw a distinction between it and QE. OMT would be triggered by the country under pressure, and they would have to sign on to odorous conditionality that deterred it from being used. Now, it seems that the ECB would trigger the new tool because the fragmentation would interfere with its ability to pursue an effective monetary policy. There is a push for lighter conditionality.  The euro is trading at the upper end of its two-week trading range. Yesterday, it tested $1.0615, which is the (61.8%) retracement of the euro's decline since the high on June 9 (~$1.0775) when it reversed lower after the ECB meeting. Some of the buying yesterday may have been related to the 970 mln euro option that expires today at $1.06. Support is seen in the $1.0560-$1.0570 area. Separately, yesterday, the euro rose to a new record high against the Hungarian forint (~HUF404.75). It has come back lower ahead of the Hungarian central bank meeting, which is expected to hike the deposit rate today by at least 50 bp. We suspect the move may be larger. Before last month's 50 bp increase, the central bank had hiked by 100 bp in both March and April. Inflation has accelerated and the one-week deposit rate has been lifted by 80 bp since the deposit rate's last increase. Sterling has been confined to less than half of a cent range today above $1.2250. The intraday momentum studies favor continued narrow range trading today.  America The Atlanta Fed's GDPNow ticked up to 0.3% for the quarter that is ending. That is an annualized rate, which means for practically purposes the economy stagnated. It also remains at the low end of forecasts. In Bloomberg's survey with 58 responses, only three look for sub-1%. The recent string of worse than expected data has been snapped beginning at the end of last week with the 10.7% jump in new home sales. Economists were looking for a slight decline. The April data were revised to show a smaller fall. Yesterday's core orders and shipments were stronger than expected. Pending home sales rose 0.7% instead of drop by 4% as economists forecast. Still, as last week's flash PMI reported suggested, the survey and sentiment measures seem to be deteriorating faster than the real sector. The Dallas Fed's June manufacturing survey fell to a two-year low of -17.7. Economists in Bloomberg's survey looked for a little improvement from May's -7.3. There is another slew of data today. The May trade and inventory data are the most important for GDP calculations. April house prices are unlikely to spark to allocations and the Conference Board's consumer confidence thunder has been stolen by the University of Michigan's reading, which is at levels usually associated with recessions. The Conference Board's measure has held up better. Yesterday, the US Treasury raised $93 bln in two- and five-year note sales. Both generated a tail (the difference between the high yield at the auction and where it was in the when-issued market. Today, they go back to the well with $40 bln seven-year notes. That will be the last coupon sale until a three-year note auction on July 11. NY Fed President Williams will appear on CNBC. He rarely is off message these days and can be expected to reiterate much of what Chair Powell has already indicated. The San Francisco's Daly is also speaking. She concurred that the discussion is between 50 and 75 bp in July. The market is still giving the Fed a greenlight for another 75 bp rate hike, though there is much data before the meeting.   The Canadian dollar is extending its recovery against the greenback today. The US dollar finished last week below CAD1.29 support. Follow-through selling yesterday tested the CAD1.2860 area, the neckline of a possible head and shoulder topping pattern we have been monitoring. It pushed through the neckline today to a 12-day low near CAD1.2820. The measuring objective of the topping pattern is around CAD1.2660, which is slightly beyond the 200-day moving average (~CAD1.2675). The intraday momentum studies warn that additional greenback losses early in the North American session may be hard to come by. The CAD1.2860-CAD1.2870 may now serve as resistance. The Mexican peso rose by nearly 2.4% against the US dollar last week, the most in three months, and is consolidating those gains yesterday and so far today. The dollar could firm toward MXN20.00. A move above MXN20.08-MXN20.10 would improve the greenback's technical tone. Yesterday's May trade shortfall was about $330 mln larger than April. On Friday, Mexico reports May remittances. The projected increase likely covered the bulk of the trade deterioration.    Disclaimer

June 23, 2022  $USD, Currency Movement, Fed, Intervention, Mexico, Norges Bank, PMI, Sweden Overview: Asia Pacific equities were mixed. Gains were recorded in China, Hong Kong, Australia, and India, among the large markets, while Japan was mostly flat and South Korea and Taiwan shares fell. Europe's Stoxx 600 is off about 0.7%, the same as yesterday. US futures are slightly firmer. The rally in bonds continues. After falling nearly a dozen basis points yesterday, the US 10-year yield is off another 5 bp today around 3.10% it is near two-and-a-half week lows. European yields are down 14-19 bp. The 10-year Italian yield that had poked above 4% earlier this month is now near 3.40%. It is the sixth session in the past seven that yields have fallen. The dollar is trading with a firmer bias except against the yen, where the threat of verbal intervention and falling US rates helps the yen recovery. Despite Norway's larger than expected 50 bp move, the krone and the Swedish krona are the weakest of the G10 currencies. Emerging market currencies are mostly lower, led by central Europe. Gold is consolidating in a narrow range around $1835. August WTI fell over 3% yesterday and today it is pinned in the lower end of yesterday’s range but looks poised to recover more in North America. US natgas is off 2%, but the shock in Europe continues. Its benchmark is up for the ninth consecutive session and today’s 7.5% surge is the most since the middle of last week. The Singapore iron ore futures we track, jumped nearly 8% today, the most in three months. However, copper is not getting such a reprieve. It is off 2% after a similar decline yesterday. September wheat is also down about 2% today and is at its lowest level since March.  Asia Pacific Japan's composite PMI rose for the fourth consecutive month, and at 53.2 it stands just below the cyclical high set last November. It contrasts with most others who have reported a decline in the June flash PMI composite. However, that is arguably not the most important development today as Japan's recovery has already been in tow. Instead, there are two other developments to note. First, last week, when the BOJ bought around $80 bln of bonds, foreign investors sold a record amount (~$35.5 bln) and liquidated almost JPY945 bln Japanese equities. Second, into the fray waded former Ministry of Finance head of fx, Nikao, who raised the specter of unilateral intervention. This threat marks another step-up the intervention escalation ladder. Just because he says it is so, does not make is so, and we hasten to point out that the sometimes failed intervention is worse than no intervention. In an intervention operation, Japan would be isolated, and the action would not signal a change in monetary policy. Australia's preliminary manufacturing PMI ticked up to 55.8 from 55.7 but was not sufficient to offset the erosion of the service PMI to 52.6 from 53.2. The composite slipped to 52.6 from 52.9. It was the first back-to-back decline since July and August (which was part of a four-month fall). It is the lowest since January. The market is gradually moving away pricing in a 50 bp hike on July 5. The futures market has a 39 bp increase discounted, down from 56 bp in the middle of last week. Central bank Governor Lowe pushed against a 75 bp hike. It is near a two-week low today. A combination of lower US yields and the threat of unilateral intervention has knocked the greenback down against the yen for a second session. It set a high yesterday near JPY136.70 and has been sold to around JPY135.25 today. A break of JPY135 would likely spur a test on the week's low set Monday near JPY134.55. The Australian dollar is also pushing lower for the second consecutive session. It is near a six-day low by $0.6865. Last week's low was closer to $0.6850, and last month's low was near $0.6830. The Aussie appears to be trying to stabilize in the European morning. The Chinese yuan is trading in a narrow range today, roughly CNY6.70 to CNY6.7150, and remains within yesterday's range. The PBOC set the dollar's reference rate at CNY6.7079, a little lower than the median projection of CNY6.7084 from the Bloomberg survey. Separately, note that the Philippine central bank hiked by 25 bp as expected (to 2.50%), while Indonesia stood pat at 3.50%. Europe The preliminary PMI in the eurozone was weaker than expected. The manufacturing PMI ticked down to 52.0 from 54.6. The German reading fell to 52.0 from 54.8 and the French reading fell to 51 from 54.6. The aggregate service PMI dropped to 52.8 from 56.1. Germany's stands at 52.4, off from 55.0. France's is at 54.4, down from 58.3. The composite reading for the region stands at 51.9 compared with 54.8 in May. Germany's composite fell for the fourth consecutive month and stands at 51.3 (from 53.3). France's composite fell for the second consecutive month to 52.8 from 57.0. By the time the ECB meets in September, where a 50 bp move may be on the table, is it unreasonable to suspect the PMI will be below the 50 boom/bust level?  The UK flash PMI was mixed. The manufacturing PMI fell to 53.4 from 54.6. However, the services PMI was steady at 53.4. The market had looked for a small decline. The result was that the composite was also unchanged at 53.1. Meanwhile, two byelections are being held today and polls warn that the Tories could lose both. If so, the results will further tarnish the Prime Minister, whose ability to lead the Tories into victory in the next election will be questioned. Norway surprised many with a 50 bp hike today. The majority of those surveyed by Reuters and Bloomberg anticipated a quarter-point move, which the central bank had previously indicated. The deposit rate stands at 1.25% now and Norges Bank said a 25 bp hike in August was likely. It now sees the key rate at 3% in the middle of next year, up from 2.50% it had previously projected for the end of 2023. It cut its GDP forecast and raised its inflation forecast. The focus turns to Sweden's Riksbank that meets next week. It has only hiked rates once and at 0.25% it seems out of line with the 7.3% headline inflation and the 5.4% pace of the underlying rate excluding energy. The euro is trading heavily but within yesterday's broad range (~$1.0470-$1.0605). There are options for 1.8 bln euros at $1.05 and around 1.4 bln euros at $1.0455. After trading up to $1.0580 in Asia and early Europe, the single currency sold off after the PMI report. It stabilized but is now likely to find the $1.0540 area as the nearby cap. The price action also underscores the more formidable cap at $1.06. Sterling is also trading lower and is within yesterday's range (~$1.2160-$1.2315). But this does not do justice to the large consolidation. For the fifth session, sterling remains within last Thursday's range (~$1.2040-$1.2405). Immediate resistance is seen in the $1.2240-$1.2260 area in North America. America Some argue that in his testimony before Congress, Powell represents the Federal Reserve not just his opinion. Fair enough, but surely at the press conference after the FOMC meeting he is explaining what the FOMC decided and talks about its median projection. Maybe it is too fine of a distinction, but in any event, Powell's remarks in an answer to the Senator's questions seemed somewhat more dovish and more cognizant that the effects of the tighter financial conditions are beginning to have the desired impact. The Fed Chair seemed to play down supply chain bottlenecks and sharpened his focus on demand, which lends support to some political arguments that the American Rescue Act is responsible for the inflation. At the press conference following the FOMC meeting, Powell seemed to acknowledge that among large countries, the US inflation was in the middle of the pack, and that fiscal stimulus could not explain the relatively modest inflation differentials. Yet, what may be more relevant for the foreign exchange market was Powell's answer to a question from Senator Warren. Powell explained that the Fed's goal of weakening demand is being pursued over three channels. The first is reducing the demand for interest-rate sensitive spending. Housing, autos, and other durable goods come to mind. The Fed wants to see a weaker sale. The second weakening asset prices to curb the wealth effect and reduce the wherewithal to spend. This means weaker stocks (so much for the Fed put), higher interest rates, and lower house prices. It was the third channel that is arguable most notable, a strengthening dollar. He recognized that the changes in the exchange rate influenced import and export prices. By suggesting that the strong dollar was part of the fight against inflation Powell seemed to reduce the likelihood, which was not particularly high in the first place of intervention to check the dollar's rise. To say it somewhat differently, US participation or support of intervention to weaken the dollar is unlikely as long as the Fed is tightening financial conditions. It also means that the strong dollar policy is alive and well. That makes a good segue into today's release of the US Q1 current account balance. It is going to a blowout deficit. The median forecast in Bloomberg's survey is for a whopping $275 bln deficit. Last year it averaged $205.4 bln a quarter. In 2018, the current account deficit averaged slightly less than $110 bln a quarter and in 2019, the average was about $118 bln. As we have noted before, according to the OECD's purchasing power parity model, the euro, yen, and sterling are most under-valued in at least 30 years. Few talk about the current account deficit that is approaching 4% of GDP. When the dollar is strong, the narrative is about interest rate and/or growth differentials. When the dollar falls the twin deficits are often part of the narrative. We imagine the dollar's bottom will be a process that takes some time to form and that the markets will anticipate the peak in inflation and rate. Interest rate differentials often turn before the dollar. If the key to the Fed's decision to hike by 75 bp instead of 50 bp was based on the CPI and preliminary University of Michigan's June consumer inflation expectations, then the significance of other high frequency data points is somewhat less important. That includes today's preliminary PMI, where the composite is expected to have fallen for the third consecutive month. The decline will likely put it at its lowest level since January, which itself was the lowest since July 2020.   Canada's strong jobs report earlier this month and strong retail sales and firmer than expected inflation have not helped the Canadian dollar very much. Its sensitivity to the general risk environment has weighed on it, and although rising oil price did not seem to help it either, some are attributing the heaviness now to the drop in crude prices. The swaps market has a 75 bp hike early next month nearly fully discounted. The US dollar is chopping between CAD1.29 and CAD1.30. It had reached almost CAD1.3080 last week. While some observers point to a double top in place, the problem is that it will not be confirmed until CAD1.25 goes. Meanwhile, it is a big day for Mexico. The biweekly CPI through mid-June followed by April retail sales will be released today. But the big event is Banxico's meeting, and regardless of today's data, a 75 bp hike is expected. The central bank may also signal its intent for a similar move when it meets next on August 11. The US dollar fell to a seven-day low near MXN20.00 yesterday. It has recovered to almost MXN20.1425 today. Yesterday's high was near MXN20.25. A break of MXN20.00 could spur losses toward MXN19.90.    Disclaimer

June 20, 2022  $USD, BOJ, China, Colombia, Currency Movement, Federal Reserve, France, UK Overview: Most equity markets in the Asia Pacific region lost ground today. China’s Shenzhen, Hong Kong, and India were notable exceptions. The MSCI Asia Pacific Index is at its lowest level since June 2020. Europe’s Stoxx 600 is forging a base ahead of 4000 and is trading quietly with a small upside bias. The French stock market lagging after Macron lost his parliamentary majority, is raising questions about his reform agenda. US equity futures are firm, but the cash market is closed today. European bond yields are narrowly mixed, though French bonds are underperforming, and the 10-year yield is around three basis points higher. The US dollar is trading with a lower bias against all the major currencies. Sterling is the weakest and is practically flat. The Norwegian krone’s 1.2% gain leads the majors followed by the Australian and New Zealand dollars. Most emerging market currencies are also firmer, led by central Europe. Gold is consolidating quietly around $1840. August WTI is in a narrow range below $110. US natgas is extending last week's 21.5% collapse. It is off another 2.3% today. Europe’s natgas benchmark exploded almost 48% last week and is up another 3.5% today. Iron ore's precipitous drop is also extending. It fell 14% last week and is off another 7.6% today, its eighth consecutive losing session. July copper is off for a third session. It is down about 1% today after falling nearly 10.5% over the past two weeks. Asia Pacific As widely expected, China's loan prime rates were held steady at 3.70% and 4.45% for the one-year and five-year rates, respectively. Meanwhile, China's recovery from the Covid lockdowns is spotty, but sufficient to embolden investors and helping Chinese stocks outperform lately. However, the first reported Covid cases in Macau in several months weighed on casino shares. Separately, reports suggest that around a third of China's oil refining capacity is off-line due to Covid restrictions. That said, some reports suggest a rebound in car sales, higher oil refinery run rates, and a rising in trucking transport suggest the nascent recovery remains intact.  The Bank of Japan bought a massive amount of Japanese government bonds last week to defend its 0.25% cap on the 10-year. The BOJ added almost $81 bln of bonds to its balance sheet. It disrupted both the cash and futures market last week. Reports suggest that a personnel shift has also bolstered its efforts and market contacts. For dollar-based investors, the paltry 10-year JGB yield of 0.24% can earn closer to 2.65% if the yen is hedged back into dollars. Still, foreigners have been sellers and year-to-date (through June 10) have sold about JPY2 trillion (~$14.8 bln) of Japanese bonds. The economic highlight of the week is the May CPI figures due first thing Friday in Tokyo. The Bloomberg survey shows a median forecast of no change, leaving the year-over-year rate at 2.5% and the core measure, excluding fresh food at 2.1%. Excluding fresh food and energy, a 0.8% gain is expected. April saw the first reading above zero since July 2020 as last year's cut in cell phone charges dropped out of the 12-month comparison. The dollar held below last week's high against the yen, seen around JPY135.60. It is in a tighter range than has been seen in recent sessions. It found support near JPY134.55. The consolidative tone may not persist as the divergence of monetary policy will likely intensify further next month. The Australian dollar is also consolidating. It is trading within the pre-weekend range (~$0.6900-$0.7050). It is firm but with the US holiday, the gains may be limited. The Chinese yuan reached seven-day's high today, extending its recovery that began last week. The dollar reached a high last week near CNY6.7610 and recorded a low today around CNY6.6735. The dollar's reference rate was set at CNY6.7120 compared with expectations (median from Bloomberg's survey) of CNY6.7126.  Europe French President Macron appears to have been denied a parliamentary majority in yesterday's election. It did not do the euro any favors initially, but the immediate policy implication is not clear. The center did not hold as the alliance on the left of Macron, Nupes, and the far-right National Rally gained ground. The left-green coalition may be the main opposition party, but Le Pen (National Right) is the big winner with around a 10-fold increase in the number of seats than five years ago. There is much speculation that Macron may reach out to the center-right Republicans and their allies, who appear to have secured around 80 seats. Alternatively, Macron could seek to govern as a minority government, cobbling together coalitions on an issue-by-issue basis (e.g., raising the retirement age. Still, it seems reasonable to expect the election results to be recognized with a cabinet reshuffle that may include a new prime minister. France's strong presidential system may not weaken Macron at the European summit on June 23-24 or the G7 meeting June 26-28.  Rightmove reported that UK house prices rose to a new record this month for the fifth consecutive month. Its index is 9.3% above year ago levels. Some find a glimmer of hope in the fact that the index rose by only 0.3% this month, matching the slowest pace of the year. Supply has also increased. Separately, the UK rail workers will strike tomorrow, Thursday, and Saturday as negotiations over pay and jobs faltered over the weekend. Separately, the workers in the underground subway will strike tomorrow too in a separate dispute. The euro recouped its early losses that pushed it a little through $1.0465 and it recorded session highs in the European morning around $1.0545. It is inside Friday's range (~$1.0445-$1.0560), which was inside Thursday's range (~$1.0380-$1.0600). Ultimately, a move above $1.0620 is needed to lift the technical tone. Sterling is also trading inside the pre-weekend range (~$1.2175-$1.2365), which was also inside last Thursday's range (~$1.2040-$1.2405). Today it found support near $1.2200. The session highs have been made late in the European morning slightly above $1.2260. On Wednesday, the UK reports May CPI figures. The headline rates are expected to be steady to slightly higher, while the core rate may ease to 6.0% from 6.2%. America What the Fed means when it says it will hike rates expeditiously is clearer. It means that the central bank will raise rates as quickly. That speed limit is a function of market expectations, which it seeks to shape through the communications channel and the economic data. Just as Volcker used money supply to justify what he wanted to do in the first place, the Powell Fed used the uptick in an inflation gauge it does not target and the increase in inflation expectations that spurred speculation of a 75 bp hike to raise rates faster than it had previously intended. Moreover, after cautioning that the large move was unusual, Powell explicitly allowed for a move of a similar magnitude next month. Governor Waller, a leading hawkish voice, indicated over the weekend that another 3/4-point move was his base case. He will support such a move if the economic data comes out as he anticipates.  Waller, like Powell, played down the fears of a recession, saying they were "a bit overblown."  Powell said he saw "no sign" of a broad slowdown. Cleveland Fed's Mester took a slightly softer line. On "Face the Nation" she said that while she was not forecasting a recession, the risks were rising "partly because monetary policy could have pivoted a little bit earlier than it did."  Both Powell and Waller have argued that the Fed's pivot came six months before the first rate hike in March. The two-year note yield climbed 100 bp between its pivot and the hike. Financial conditions were tightening before the Fed formally began its tightening cycle. Mester acknowledged that growth was slowing to a little below trend. The Federal Reserve estimates trend growth, i.e., the non-inflationary pace, at 1.8%. The median forecast of Fed officials is for growth to be at 1.7% this year and next (down from 2.8% and 2.2% in March, respectively). That seems like a broad slowdown compared with what the Fed saw three months ago. For what it is worth, a couple of economic models are considerably more pessimistic. The NY Fed runs an economic model that was updated before the weekend. It puts the probability of a soft-landing, which it defines as four-quarter GDP straying positive over the next 2.5 years, around 10%. The odds of a hard land, which it defines as at least one-quarter of growth in the next 10, which four-quarter GDP growth falls more than -1% (similar to the 1990 recession) is seen at about an 80% chance. It clearly states that this is not its forecast but an input into the research staff’s “overall forecasting process." Bloomberg's model also sees a heightened risk of a recession by 2024. It puts the probability at 72%. The US dollar rose to a marginal new high for the year against the Canadian dollar ahead of the weekend (~CAD1.3080). The main drag on the Canadian dollar seemed to come from the risk-off impulses but we also note the narrowing of Canada's interest rate premium over the US. The greenback has come back better offered today and is below CAD1.30. The pre-weekend low was near CAD1.2945 and this needs to be taken out to improve the Loonie's technical tone. Canada is expected to report a 0.8% increase in April retail sales tomorrow, followed by a jump in May consumer prices on Wednesday. The US dollar peaked last week near MXN20.70, the highest level in three months. A possible shelf is seen around MXN20.2150. A break of it could see MXN20.12. The highlight of the week is the bi-weekly CPI figures Thursday morning ahead of the Banxico meeting that is expected to result in a 75 bp rate increase (to 7.75%). Separately, Petro won the run-off election in Colombia to become the next president. He is advocating a major change in the thrust of policy, including taxing large landowners and stopping awarding oil exploration licenses. He will take office in early August. Over the past month, the Colombian peso has been the strongest currency in Latam, rising almost 1.8%. Year-to-date, the peso has appreciated by nearly 5.6%. Investors will not like the leftist-turn and the peso looks vulnerable.   Disclaimer

June 17, 2022  $USD, Australia, BOE, BOJ, Bonds, Currency Movement, ECB, Federal Reserve, Japan Overview:  The large bourses in the Asia Pacific fell today after sharp losses in the US yesterday. China and Hong Kong were exception, posting more than 1% gains. The mainland markets closed higher on the week. Europe’s Stoxx 600 made a new low for the year before recovering. It is up a little more than 1% around midday. US futures are around 0.75% higher. The US 10-year yield is firm near 3.20%, while the rally in European bonds and narrowing peripheral-core spreads continues. Italian, Spanish, and Portuguese benchmark yields are 18-20 bp lower, while German, French, and Dutch yields are 7-9 bp lower. The greenback is trading with a firmer bias, with the yen being tagged for around 2% after the BOJ showed no intention of addressing the yawning divergence of monetary policy. The Norwegian krone and Swiss franc are the most resilient. Among emerging market currencies, the freely accessible ones are the most resilient today, including the South African rand, the Polish zloty, and the Mexican peso. Gold has risen by almost $50 an ounce over the past two sessions but has come back offered today and is hovering around $1850. July WTI continues to recover from its 4.4% slide in the first few sessions this week. It gained almost 2% yesterday and is up another 1% today and is near $119. US natgas is edging higher and is near $7.50 having finished last week near $8.85. Europe’s benchmark has surged 55% this week as US and Russian supplies have been disrupted. Iron ore extended its sell-off for the seventh consecutive session. It is off about 18% in this run. Copper is faring a bit better, but it has fallen in five of the past six sessions coming into today and is off another 0.5% today. It has fallen a little more than 8% during this downdraft. July wheat rose 2.7% yesterday and is little changed so far today.  Asia Pacific The Bank of Japan stood pat, recommitted to its yield-curve control and daily bond purchases, driving the yen sharply lower. Governor Kuroda appeared to have made one seemingly minor concession. The BOJ's statement included a reference to the markets, saying that the impact on foreign exchange market and financial markets would be watched. This did not deter market participants from selling off the yen as the divergence of monetary policy is maintained. The dollar recovered from yesterday's low around JPY131.50 to almost JPY134.65. In this context, intervention, which has not seemed particularly likely seems even more remote now. A statement from the G7 (June 26-28) may not deviate from the boilerplate references that foreign exchange rates are best set by the markets, but excessive volatility is undesirable. The combination of a larger than expected RBA rate hike last week, a bigger than expected rise in the minimum wage, and hawkish comments from central bank Governor Lowe has sparked a dramatic adjustment in Australian rate expectations. The implied year-end rate of about 3.85%, is up 70 bp this week after the 80 bp rise last week. The 10-year yield has risen for the third consecutive week for a cumulative increase of almost 90 bp to above 4.10%. The dollar peaked on Wednesday at a 22-year high around JPY135.60 before reversing lower. It posted a key reversal by making new highs for the move and then settling below the previous session's low. There was follow-through dollar selling yesterday to JPY131.50. In the aftermath of the BOJ meeting, the dollar has jumped back and approached yesterday's high that was just shy of JPY134.70. There is an option for almost $700 mln at JPY135 that expires today. The greenback was around JPY134.40 at the end of last week. The two-day rally that lifted the Australian dollar about 2.5% stalled near $0.7070 yesterday. It is straddling the $0.7000 level in late morning dealings in Europe. At $0.6960, it would have given up half of the gains since the June 14 low (~$0.6850). The option for almost A$500 mln at $0.7000 that expires today appears to have been neutralized. The Aussie settled last week near $0.7060. The greenback traded quietly against the Chinese yuan and was confined to the smallest range of the week, trading between roughly CNY6.6915 and CNY6.7060. The PBOC set the dollar's reference rate at CNY6.6923, a little lower than the median in the Bloomberg survey of CNY6.6944. The fixings have alternated this week between a stronger and weaker than projected yuan. The dollar is a little lower on the week, having closed near CNY6.7090 last week.  Europe The Bank of England hiked the base rate by 25 bp. It warned that rather than expand by 0.1% this quarter, the economy was likely to contract by 0.3%, and inflation would peak closer to 11% than 10% as it suggested previously. Three members dissented in favor of a 50 bp increase. The statement said the central bank is prepared to act more forcefully if necessary. The year-end rate implied in the swaps market jumped 16 bp to 3.0% yesterday and is edging a little higher today. It is pricing in about 185 bp of hikes in the four remaining meetings of the year. That is more than a 50 bp hike that are fully discounted for the next three meetings, plus a little more. The ECB built market expectations earlier this week when it needlessly announced an emergency meeting to discuss the market. Nothing new came of it but instructions for others to have another meeting and devise a tool that can be used to fight the divergence of interest rates, which ECB President Lagarde says can interfere with its price stability mandate. Lagarde appears to have briefed the eurozone finance ministers that the ECB intends to put limits on bond spreads. Details are still lacking, but ostensibly the purpose is to curb sharp moves in short-time periods, and address what Lagarde called "irrational" moves. The tool sounds a lot like the Outright Market Transactions, which focused on the short end of the coupon curve, the purchases were to be neutralized, ostensibly by the sales of another asset, and required the beneficiary country to request it. Conditions were to be attached. If it is the ECB's tool and it is used under it discretion, won't that dilute conditionality?  Selling German Bunds might make sense if the ECB thought that a shortage of them was an important factor driving the spread. However, determining what is an irrational move can be an expensive exercise. The euro traded a little above $1.06 yesterday, its best level of the week amid what appeared to be a short squeeze. Earlier in the session it traded below $1.04. The narrowing of intra-EMU bond spreads seemed to encourage the move. The US 2-year premium over Germany fell from 213 bp to 194 bp yesterday, its least in four months. The euro is consolidating today after advancing for the past three sessions, the longest advance this month. It briefly traded below $1.05 in late Asian turnover, where options for 1.2 bln euros expire today. It settled last week near $1.0520. Sterling rallied by nearly 3% over the past two sessions, its biggest two-day rally this year. It poked above $1.24 yesterday but was unable to sustain the strong upside momentum. Sterling has been capped today around $1.2365 as a consolidative tone is seen ahead of the weekend. Initial support is seen around $1.2250, and a break could spur another half cent decline. Sterling settled near $1.2315 last week. America Although Fed Chair Powell pushed back against any suggestion that the economy is fragile, the latest string of May and June data have disappointed. It actually began with the June Empire State manufacturing survey (-1.2 vs. 2.3 median forecast in Bloomberg survey), and carried through May retail sales, and yesterday's news of a 14.4% drop in housing starts (which partly was blunted by a revision to the April series to 5.5% from -0.2%). The Philadelphia June survey unexpectedly fell to -3.3 from 2.6. The six-month outlook for orders, ostensibly a lead indicator, fell sharply to levels associated with economic contractions. Weekly initial jobless claims were a little higher than expected and have averaged 230k over the last couple of weeks, the most in five months. On tap today are the May industrial production and Leading Indicators Index. Industrial output likely slowed after the heady 1.1% gain in April. Economists expect a modest gain (0.4%) with manufacturing output growth slowing to 0.3% (from 0.8%). The manufacturing sector added 18k jobs in May, according to the recent employment report, the least since April 2021. Given the recent track record of not appreciating the economic softness, the risk is on the downside. The components of the LEI are largely known, and the index is expected to have fallen for the second consecutive month for the first time since Covid struck. Powell makes opening remarks at a conference between the equity market today, and Governor Waller discusses monetary policy tomorrow at a Dallas Fed gathering. Canada reports May industrial prices and April securities transactions, neither are typical drivers of the Canadian dollar. The swaps market is strongly leaning toward a 75 bp hike at the July 13 Bank of Canada meeting. Several Canadian banks have switched and now look for a 75 bp move. The market has 200 bp of tightening priced in the next four meetings. It looks like a 75 bp move, two 50 bp moves and a 25 bp in December. However, the broader risk appetite seems more important for the day-to-day movements. Since it almost reached CAD1.30 in the middle of the week, the US dollar has consolidated. The Canadian dollar did not take part in yesterday's wider move against the greenback. A break above CAD1.30 targets last month's high near CAD1.3075. Important support has developed around CAD1.2860. The Canadian dollar is one of the weakest of the major currencies this week, falling about 1.5% against the US dollar. So far today, the dollar trading between MXN20.30 and MXN20.50. It settled near MXN19.96 last week. Mexico's central bank meets on June 23. A 75 bp hike is expected after four 50 bp hikes and the Fed's large move. A 100 bp hike seems more likely than a 50 bp move.    Disclaimer

June 15, 2022  $USD, Australia, Brazil, China, Currency Movement, ECB, Federal Reserve, HKMA Overview: Better than expected Chinese data and an unscheduled ECB meeting are the highlights ahead of the North American session that features the May US retail sales report and other high frequency data before the outcome of the FOMC meeting. Asia Pacific equities outside of Hong Kong and China fell. Europe’s Stoxx 600 is up almost 1% as it tries to snap a six-day slide. US futures are posting modest gains. Bond markets in Europe and the US are rallying. The ECB meeting has spurred a dramatic narrowing of the peripheral premium. The 10-year US yield is off 8 bp to about 3.4%. The dollar is weaker against all the major currencies. The Australian dollar leads with almost a 1% gain. Most emerging market currencies are also firmer. The Hong Kong Monetary Authority intervened selling about $1.2 bln to defend the HKD peg. Gold found support ahead of $1800 yesterday and is near $1825 in Europe. July WTI peaked yesterday near $123.70 and is offered below $117.50 now. US natgas has stabilized after falling 16.5% yesterday. Europe’s benchmark is up almost 2.6% to extend yesterday’s 15.5% surge. Better than expected Chinese industrial output figures failed to provide much support of iron ore prices, which fell around 2.8% to extend the losing streak to the fifth consecutive session. Copper is slightly higher for the first time in five sessions. July wheat is off about 0.5% after a 2% fall yesterday.   Asia Pacific Today's data dump showed that the Chinese economy began recovering last month from the disruption caused by the zero-Covid policy. Industrial output rose 0.7% year-over-year rather than contract by 0.9% as economists (median forecast in Bloomberg' survey) expected. In April, it had fallen by 2.9%. Retail sales were off 6.7% year-over-year in May after dropping 11.1% in April. This was also better than expected. Surveyed unemployment eased to 5.9% from 6.1%. Economists had expected an unchanged report. Fixed asset investment and property investment disappointed. Fixed asset investment rose 6.2% this year through May compared to a year ago, slowing from the 6.8% rise in April. Property investment was off 4% in May after falling 2.7% in the first four months. China also left its one-year medium-term lending facility at 2.85%, where it has stood since the 10 bp cut in January. Some observers looked for a small cut on ideas that consumer price pressure is low and producer prices have continued to ease, while the economy looks off course to reach 5.5% growth target. Still, the PBOC has been reluctant to use monetary policy much so far preferring instead to use regulatory power, fiscal incentives, guidance, and suasion. The PBOC also rolled over in full CNY200 bln (~$30 bln) in maturing loans. Australia's 10-year bond yield soared 24.5 bp today to almost 4.2%. The new government made good on its campaign promise to hike the minimum wage. During the campaign, Prime Minister Albanese advocated matching the 5.1% increase in consumer prices in the first quarter. The President of the Fair Work Commission announced a 5.2% increase starting next month. The minimum wage will increase by A$40 to A$812.6 a week. The new hourly rate is A$21.38. The 5.2% rise is twice the annual wage price index of Q1 (2.4%). The decision came after a hawkish speech by RBA Governor Lowe, who warned that inflation could hit 7% this year. Lowe said it was "reasonable" to expect rates will rise to 2.5% from 0.85% now. The cash rate futures see it reaching that in three meetings (July, August, and September). The futures market has 56 bp hike next month (July 5), while the swaps market is closer to 75 bp. The dollar edged up to a new multi-year high late yesterday to reach almost JPY135.50. The upticks were extended marginally to JPY135.60 in early Asia turnover before sellers emerged. The greenback was driven to nearly JPY134.50 where is stabilized. Yesterday's low was slightly below JPY133.90. The dollar has not taken out the previous day's lows since May 26. The Australian dollar is recovered from the $0.6850 area approached yesterday. Recall that the two-year low set in mid-May was near $0.6830. The session highs ae being recorded in the European morning near $0.6940. Yesterday's higher was around $0.6970. A move above $0.7000 would stabilize the technical tone. The greenback slipped to a three-day low against the Chinese yuan by CNY6.7115. It peaked yesterday closer to CNY6.7610. The dollar's reference rate was set at CNY6.7518. The median projection in Bloomberg's survey was CNY6.7524. In four of the past five sessions, the dollar's reference rate was below the survey median. Europe The ECB is holding an unscheduled meeting to ostensibly talk about market developments. The key market development was not the euro's dip below $1.04 yesterday, but the dramatic increase in rates, and more importantly the widening of the peripheral spreads over the Germany. The "fragmentation" dilutes the effectiveness of the ECB's monetary policy. While the ECB ostensibly has a single mandate, to achieve it the ECB recognizes it must contain the divergence of interest rates among its members. The Italian premium over Germany widened to a two-year high near 225 bp yesterday, but to be sure, it is not just Italy. Spain's premium rose to 136 bp yesterday, also its highest level since the chaos when the pandemic struck. It is not clear what the ECB can do. We noted that as a compromise last year when some advocated a new mechanism to contain the "fragmentation." It was to give the ECB greater flexibility to reinvest maturing proceeds. We have also argued that a tool already exists (European Stabilization Mechanism) but it the support is tied to conditionality. Market talk suggest a more formal agreement on reinvestment of the maturing issues under the Pandemic Emergency Purchase Program can be forthcoming. However, if that is all it is, the markets will likely be disappointed and unwind the euro and bond market gains. ECB's Schnabel, who oversees the central bank's market operations says commitment to resist fragmentation has no limits. A disappointed market may be tempted test the resolve. There are a few other developments to note. First, the EMU aggregate April industrial production figures were in line with expectations. The 0.4% rise follows an upward revision to the March series to show a 1.4% contraction rather than loss of 1.8%. Second, the eurozone reported a record trade deficit of 31.7 bln euros in April, more than twice what economists (median, Bloomberg survey) anticipated. Rising energy prices seemed like the major driver. Third, much to the chagrin of the UK government, the European Court of Human Rights blocked the first flight that was going to deport refugees to Rwanda. News of the emergency ECB meeting helped lift the euro, which for the third session found bids near $1.04. The euro traded above $1.05 in the European morning, though was unable to take out the week's high set on Monday slightly shy of $1.0525. The (38.2%) retracement of the euro's decline since the US CPI figures is closer to $1.0540. There are options for almost 610 mln euro that expire today at $1.05. We suspect that if the high is not in place on the ECB news it is close, and we are concerned that the market's may be disappointed with the results. Sterling closed below $1.20 for the first time since March 2020. It is firmer today and did not take out yesterday's low (~$1.1935). It rose to almost $1.21 but this too looks like the extent of the move of nearly so. The Bank of England meets tomorrow, and swaps market has a little less than a 1-in-3 chance of a 50 bp move discounted.  America The market's reaction to a 0.3% miss on the headline CPI (vs. Bloomberg survey median forecast) and 0.1% on the core rate (which still eased by 0.2% to 6.0%) was violent, triggering dislocations throughout the credit market. The implied yield of the December Fed funds futures was around 2.75% before the CPI report. The implied yield has risen 77 bp in the past three sessions and settled yesterday at about 3.55%. The increase expectation for the overnight rate can account for the 45 bp increase in the 10-year yield. Doesn't this seem a bit much?  The core rate did ease for the second consecutive month, and reason the core is discussed is not simply because it excludes volatile components, or that it is widely recognized that monetary policy has little impact on food or energy prices, but because over time, headline inflation converges to core inflation, not the other way around. Before entering the quiet period ahead of this week's FOMC meeting, a solid consensus appeared to emerge for a 50 bp hike in June and July, with the usual caveats the preserved ultimate flexibility. The Fed funds futures market has nearly fully discounted a 75 bp hike today and in July before another 50 bp move in September. The swaps market has the terminal Fed funds rate at 4.17% now, up nearly 70 bp since the CPI report. Monetary policy impacts come with the famous variable lags and leads. Should we really be convinced from one high frequency measure of inflation that it does not target would so dramatically change the course of monetary policy?  Arguably a 75 bp hike that the market has discounted risks injecting more volatility into the disrupted Treasury market may altering is reaction function. Mr. Market is trying to deliver a fait accompli to the central bank, which there seems to be universal recognition that it is behind the inflation curve. It has hiked market rates sharply and the precipitous drop in equities points to the tightening of financial conditions, as if the Fed has already tightened. If the Fed were to hike by only 50 today, would the financial conditions ease. A 50 bp cut could almost seem dovish especially for a market that tends to see Powell as dovish even though between the rate hikes and the balance sheet, the Fed has launched the most aggressive tightening cycle in a generation. Many observers begin with an unspoken premise that the Fed has lost its anti-inflation credibility, but maybe this is a prejudice. The jump in rates is expecting what the Fed will do, and that is to stabilize prices even if it boosts the chances of a recession. Is this anti-inflation cred? The FOMC statement, the up-dated economic projections (the dot plot), and press conference offer many channels through which the Fed could underscore its commitment to its stable price mandate, We say that that Fed will tighten policy until something breaks. The University of Michigan's preliminary June results showed a rise in inflations but also sentiment readings that have been associated with a recession in the past. With 30-year mortgage rates rising about 6%, it is reasonable to expect some slowing in the housing market. Before the FOMC meeting concludes, investors and policy makers will see the weekly mortgage market activity index, which has fallen for the past four week. The NAHB Housing Market Index, the Empire State manufacturing survey, and import/export prices may draw some interest, but the real focus is elsewhere. May retail sales will have been held back by disappointing auto sales, though a broad slowing is expected. The components which GDP models picked up from different time series, like auto sales, gasoline, food services, and building materials, can be excluded. The remaining "core" retail sales measure rose 1.1% in March and 1.0% in April. It is expected (median Bloomberg survey) seen at 0.3% last month. Remember retail sales is reported in nominal terms, which means that rising prices inflate the numbers.   Over the last five sessions, the US dollar jumped about a little more than 3.6% against the Canadian dollar to reached CAD1.2975 yesterday. It was the highest level in a month. Today is the first session in five that the greenback may not take out the previous day's high, but do not bet on it. The flattish consolidation is not inspiring,  and the Loonie is the poorest performing major currency through the European morning with a gain of less than 0.05%. The general risk environment is the most important near-term driver, so watch the S&P 500. The Canadian two-year premium, which fell from 30 bp last week to less than 3 bp yesterday has widened back to around 12 bp today. In the four sessions through yesterday, the greenback rose almost 6% against the Mexican peso to reach MXN20.69. It too is consolidating today in a narrow range mostly above MXN20.53. The central bank is seen hiking 75 bp next week, but there is a risk of a 100 bp move. Brazil's central bank is expected to hike the Selic rate 50 bp to 13.25% later today. The central bank is getting close to the peak, but the swaps market sees the risk of another 100 bp before it is over. The next meeting is August 3. Year-to-date, the Brazilian real has appreciated almost 9% against the US dollar, the best performing EM currency (excluding Russia). However, so far in June, the real has been the worst performer, falling about 7.5%.    Disclaimer

June 14, 2022  $USD, BOJ, Currency Movement, Federal Reserve, Japan, UK Overview: The markets' evolving expectations of a more aggressive monetary policy is not limited to the Federal Reserve, where the terminal rate is now straddling the 4% area, around 100 bp above late May levels. Consider that on May 31, the swaps market saw the key rate in the eurozone finishing the year at 60 bp. It has risen by more than 40 bp in the past four sessions. The UK expectedly reported the second consecutive monthly contraction in GDP, and still there was an 11 bp rise in the expected year-end rate to bring the five-day surge to more than 50 bp. This has seen equities plummet. The S&P 500 and NASDAQ gapped lower to new lows for the year. It was the second consecutive gap and lower opening, but there does not look to be a third. Equities were still heavy in the Asia Pacific region. Of the large markets, only China rose. Australia’s benchmark wilted by 3.5% to lead the drop. Europe’s Stoxx 600 is off around 0.5% near midday, falling for the sixth session. US futures, though, are pointing to a modestly higher open. The US Treasury market is better bid today and the 10-year yield is off five basis points to 3.30%. European yields are mostly 1-2 bp higher, though the yield on the 10-year Gilt comes off a little more than five basis points. The US and UK two-year yields are off 8-9 bp. The dollar is mixed. The euro, Swiss franc, and Japanese yen have advanced, while the dollar-bloc, sterling, and Norway are weaker. Among emerging markets, most currencies are firmer but a handful of East Asian currencies and the Mexican peso. Gold extended its sell-off to $1810 today after a big outside down day yesterday that peaked above $1878. It has steadied around $1823 now. July WTI is firm, holding above $120 and trading near $122. US natgas is up about 0.75% today after falling by about 4% over the past two sessions. Europe’s natgas benchmark is up 4.4% after a 1.4% gain yesterday. The new Covid restrictions in China continue to weigh on iron ore prices. They fell 1.1%, the fourth consecutive decline after a 3.65% drop yesterday. July copper is also off for the fourth session. July wheat is trading near the lows for the month, slipping 1.4% today after a steady session yesterday.  Asia Pacific The dramatic rise in US and European rates is encouraging market participants to challenge the Bank of Japan's commitment to the 0.25% cap on the 10-year yield. The challenge in April was turned back with the help of the 50 bp pullback in the US 10-year yield (from 3.20% on May 9 to almost 2.70% on May 26). BOJ Governor Kuroda is in a delicate position. Altering courses when under pressure carries added risks. Even if he wanted to raise the cap or abandon it altogether, it risks destabilizing the situation even further and adding to the volatility rather than reducing it. Many observers think the yen would be stronger if Japan's 10-year were to be allowed to rise. However, a decision to allow the yield to rise may not be decisive. The 30-year yield is set in the market. The yield is a little less than 1.2%. If the cap were abandoned the yield would rise and could squeeze some positions. A 50-75 bp rise in the 10-year yield would bring the spread with the US back to levels seen in late May. The funding role for the yen would likely be reset.  Rising global rates not only challenge the BOJ's efforts to cap the 10-year yield, but it is also weighing on the yen. To combat the former, the BOJ is buying an increased amount of bonds, i.e., expand its balance sheets, which adds to the divergence that is driving the markets in the first instance. Earlier today, the BOJ bought JPY2.2 trillion of government bonds through its fixed-rate operation, a record amount in in six-year-old facility, and it bought JPY800 bln (instead of previously announced JPY500 bln of 5–10-year bonds under it outright purchases. For tomorrow, it has expanded it outright with JGB buying across five different buckets of maturities. This includes buying of the long end of the curve, which has come under more pressure too. In turn, this underscores a major argument against material invention. It is contrary to the thrust of policy. Intervention is an escalation ladder. The verbal intervention is working. There is no immediate need to take climb another step. Consider that over six sessions counting today, in the face of a broad-based dollar rally, the yen has fallen the least of the majors. It was fallen by about 1.7%. Japanese officials have expressed concern about the pace of the yen's descent. Consider that the settlements over the last four sessions. It has been confined to JPY134.25-JPY134.45 range. The point is that the dollar is consolidating, and the lower end of the congestion is around JPY133.20. The dollar has been confined to yesterday's range (~JPY133.60-JPY135.20) but has not been above JPY135.00. The Australian dollar plunged to almost $0.6910 yesterday, its lowest level in nearly a month. It has stabilized today but the upticks were limited to the $0.6970 area. A move above $0.7000, and probably $0.7040 is needed to stabilize the technical tone. The low seen last month was closer to $0.6830, and a retest still must be favored. The US dollar closed yesterday's downside gap against the Chinese yuan by pulling back to last Friday's high (~CNY6.7170). It found support near CNY6.7135 before returning to almost CNY6.74. The dollar's reference rate was set at CNY6.7482, a pip above the median projection (Bloomberg survey). The greenback is slipping against the yuan today after a five-day advance. Separately, the PBOC announced that the foreign exchange on its balance sheet fell by CNY9 bln after falling CNY16.6 bln in April. In Q1, its fx holdings rose by about CNY63 bln. Europe Amidst the heightened economic turmoil, and the desire to show as united a front as possible in the face of Russian aggression, the EU-UK spat is set to intensify. The UK carried through with its threat to override parts of the treaty with the EU about not just Northern Ireland but also looking to diminish the role of the European Court of Justice. The EU has had several weeks to prepare a robust response. The EU's legal recourse was put on hold last September as a sign of good faith, and it is bound to resume these efforts. The eventual outcome could be fines. Assuming the bill passes, the UK government could override the 2019 agreement and impose its will on customs checks, tax, and arbitration. The euro is probing the upper end of its 12-month trading range against sterling near GBP0.8600. There was some intraday penetration last month, but euro has not closed above there since last September. It also is a (38.2%) retracement of the euro's decline from December 2020 (~GBP0.9230) to the March 2022 low (~GBP0.8200). The next retracement (50%) is around GBP0.8715, which correspond to the highs from April-May 2021.  The UK jobs data failed to impress the market and the odds of a 50 bp hike later this week edged up slightly. The swaps market had 30 bp hike (a quarter-point move plus about 20% chance of a 50 bp move) at the start of last week. Yesterday, it edged up to 33 bp and now 35 bp. The employment report was mixed but still leaves the impression of overall strength. The number of people on company payrolls rose by 90k, better than expected, though the April gain was revised to 107k from 121k. Those claiming jobless benefits fell by 19.7k after falling by a revised 65.5k in April (initially reported as a 57k decline). Average earnings for the three months that ended in April slowed to 6.8% from 7.0%, while excluding bonuses, average weekly earnings rose at an unchanged pace of 4.2%. The ILO measure of unemployment unexpectedly ticked up (on an increase in the participation rate) to 3.8% from 3.7%. Vacancies reached a new record of 1.3 mln. Fissures are appearing in the European bond market. As the yield rise quickens, the large sovereign debtors (periphery) are at a disadvantage. Premiums widen. The ECB net new bond buying will come to an end in a few weeks. The ECB has large discretion over the reinvestment of maturing proceeds, but the market is not persuaded this will be sufficient to prevent fragmentation. Indeed, monetary conditions are tightening faster in the periphery. Consider that in over the past week, the Italy's two-year yield has jumped 93 bp (Spain 72 bp and Portugal 61 bp) compared with 51 bp in Germany and 52 bp in France. Still, the German two-year yield rose above 1.0% yesterday for the first time since 2011 and is now slightly above 1.15%. The day before last week's ECB meeting (and two days before the US CPI), Italy's premium over Germany on 10-year bonds was hovering around 200 bp. It has surged to reach 240 bp yesterday the most in two years and is slightly above there now. The euro has stabilized before the German ZEW investor survey. It ticked up from May, but the assessment of the current situation (-27.6 vs. -36.5) and the expectations component (-28.5 vs. -34.3) remain poor. The euro held $1.04 yesterday and dipped slightly below there in Asia before rebounding to $1.0485. Previous support around $1.05 now acts as resistance. The multi-year low set last month was $1.0350. We suspect that some of the pressure selling pressure on the euro stemmed from neutralizing the 3.3 bln euro of maturing options today struck at $1.0413 and $1.0425. Sterling fell to a two-year low yesterday just ahead of $1.21. It recovered to almost $1.2210 by late Asia but drifted lower in the European morning. Some bids emerged near $1.2145. The key today may be the dollar's overall direction rather than a UK-specific development. America There seems to be two ways to read yesterday's surge in US rates, and in particular the shift in expectations toward a 75 bp hike tomorrow. The first seems to be the most popular explanation. It is not coincidental, they say, that leading financial news sources came out with stories showing that despite what seems like a commitment to lift the target rate by 50 bp, there was ample wiggle room to allow for a 75 bp move. Fed officials may have reached out to media sources and perhaps without violating the quiet period ahead of tomorrow's meeting, reminded that central bank has the flexibility to ratchet up the size of the move. The second is that the market did it by itself, trying to anticipate the FOMC's reaction function after the stronger than expected CPI print and increase in inflation expectations (University of Michigan survey and the NY Fed's consumer survey). The Fed funds futures has a 75 bp hike practically fully discounted. In this narrative, the market has given the Federal Reserve a free option to hike by 75 bp. If the Federal Reserve does not want to add to the market turmoil, the question is what is more destabilizing at this point a 50 bp or 75 bp move?  The market is saying a 75 bp move may be less disruptive. We suspect that the sharp rise in the volatility in the Treasury market, and other signs of dislocations, including the three-month bill auction that generated a nine-basis point tail, the largest since Lehman's failure in September 2008, draw the official attention it deserves. Today's PPI report is less important than last week's CPI. However, while the year-over-year rates may ease slightly, the acceleration of the month-over-month gains underscore the continued pressure. Last Wednesday, the US dollar recorded a low near CAD1.2520. It was the lowest level since April 21. The greenback has soared and reached CAD1.2900 yesterday and has extended those gains to almost CAD1.2925. There may be potential toward CAD1.2945 today, but the market is stretched. However, the Canadian dollar may need two developments to stabilize. First, it continues to be highly sensitive to risk appetites (S&P 500 proxy) so a better tone in US equities may help. Second, Canada's two-year premium over the US had widened to almost 35 bp in the middle of last week. It fell to less than five basis points yesterday, the smallest in over a month. A break below CAD1.2850 would help stabilize the tone. Similarly, the greenback is extending its recent gains against the Mexican peso. Recall that the dollar has fallen to two-year lows against the peso in late May (~MXN19.4135), and yesterday poked above MXN20.50 for the first time since end of April. It briefly traded above MXN20.57 today. The next upside target is that late April high (~MXN20.6380) and the MXN20.68 area, which corresponds to the (61.8%) retracement of the greenback's slide from the March high (~MXN21.4675). Banxico meets next week and the risk of a 75 bp hike has increased.     Disclaimer

June 13, 2022  $USD, BOJ, Brazil, China, Currency Movement, Federal Reserve, France, Germany, Intervention, UK Overview: The prospect of a more aggressive Federal Reserve policy has spurred a sharp sell-off in global equities and bonds and sent the dollar sharply higher. The large Asia Pacific bourses were off mostly 2%-4%. Europe’s Stoxx 600 is off 2.2%, its fifth consecutive losing session. US futures are off also. The NASDAQ was down 3.5% before the weekend and the S&P 500 fell 2.9%. The dollar rocks. The Scandis and Antipodean currencies are bearing the brunt and are off 1.0%-1.3%. Bond yields are jumping. The 10-year US Treasury yield is up seven basis points at 3.23%, while European yield are 6-13 bp higher, with the peripheral premiums widening sharply. The dollar briefly rose above JPY135 but shed some of those gains and is now up less than 0.2% against the yen. Emerging market currencies are also being beaten up. The Mexican peso, which often acts as a proxy for EM FX is off 2.2%. The South African rand’s 1.4% loss is the second largest today. Gold is reversing lower after rising briefly above $1878. It is offered now near $1855. July WTI is off $2 to around $118.55. US natgas is off 1.2%, matching the pre-weekend loss. Europe’s benchmark is around 1% firmer. With China’s re-opening stalling, iron ore dropped 3.6% today, equaling the decline over the past two sessions. July copper is down 2.1% after losing 3.6% in the past couple of sessions. July wheat is about 0.7% firmer, recouping the losses in full seen in the second half of last week. Asia Pacific The dollar briefly traded above the 2002 high near JPY135.15 in early turnover today. It brought the strongest objection from BOJ Governor Kuroda, who said that the recent rapid fall in the yen was undesirable and was negative for the economy by boosting uncertainty and making it difficult for businesses to plan. At the same time, the BOJ stepped up its defense of the Yield Curve Control strategy. The 10-year yield poked above the 0.25% cap. The central bank purchased about JPY1.5 trillion (~$11 bln) of bonds in its fixed-rate operation, the second largest amount since this facility began in 2016. Tomorrow, it will buy an additional JPY500 bln of 5-10-year bonds. Yields on the 30- and 40-year bonds jumped 10 bp while the 10-year yield edged up by about half of a basis point. Still, the risk of actual, material intervention still seems modest. The LDP policy chief noted that this was not the time to intervene. Also, the US Treasury report before the weekend, which did not cite any currency manipulators, cautioned that intervention should be for exceptional circumstances only and with prior consultation. The divergence of monetary policy is understood to be the key driver. The BOJ is not ready to change its monetary policy, while US policy may turn more aggressive. China's efforts to re-open have been set back. New Covid cases have led to a delay in the re-opening of Beijing schools that had been planned for today. In Shanghai, some restrictions have been re-introduced, including dine-in services. Separately, the divergence of monetary policy between the US and China has seen Beijing's discount on 10-year yields widen to its largest in more than a decade (more than 40 bp) and the 12-month forward points on the offshore yuan (CNH) is near -55 points, the lowest in 3 1/2 years. The intra-session high was set near JPY135.20 before the US dollar came under selling pressure and by late morning activity in Europe was off a full yen. The yen had been sold against a wide swathe of other currencies and assets, and as those currencies and assets are sold off, the funding currency, the yen, is bought back, showing shades of its so-called safe-haven appeal. With the intraday momentum indicators stretched, look for the dollar to find better bids in North America. The low in North America ahead of the weekend was near JPY133.50. The Australian dollar has been sold through $0.7000, the (61.8%) retracement of its bounce since mid-May. There is little chart support ahead of $0.6950. The $0.7000 area may now offer resistance. The data highlight of the week is the May jobs report first thing Thursday. The market is already pricing in a strong chance of another 50 bp hike when the RBA meets on July 5. The greenback jumped to CNY6.7525, its highest level since May 19. Although it came off, it remained above the range of the last session. The pre-weekend high was about CNY6.7170. Today's low was near CNY6.7260. The PBOC set the dollar's reference rate at CNY6.7282. The median projection (Bloomberg's survey) was CNY6.7207. It was the third consecutive session the fixing was for a weaker than expected dollar. Europe French President Macron acknowledged that his victory in April was partly owed to votes against LePen rather than for him. That point was on display in the first round of the parliamentary elections. It appears that Macron's parliamentary majority may disappear in second round of voting on June 19. Macron's candidates appear to have secured about 25.75% of the vote and a left coalition got a fraction less (~25.65%). Le Pen secured almost 18.7%, while the conservative coalition around the Republicans, drew around 10.4%. Speculation is that if Macron loses his majority by more than a few seats he will most likely seek alliance with the Republicans. Germany's IG Metall called for more warning strikes by steel workers beginning today. There has been no agreement after three rounds of talks. The fourth is tomorrow. The union seeks an 8.2% pay increase. The employers have offered a 4.7% increase. IG Metall is preparing for the negotiations for the two million industrial workers in Germany. IG Metall says it will seek at least a 7% pay hike over two years. If the ECB's 2% inflation target is met and labor was compensated 1.0% for productivity gains a year, that would account for 6% increase. But the ECB itself does not expect to see its inflation target met until after 2024. The UK economy unexpectedly contracted by 0.3% in April. It was the second consecutive monthly contraction. The median forecast in Bloomberg's survey projected a 0.1% expansion after a 0.1% decline in output in March. None of the main sectors grew in April. Services output fell by 0.3%, weighed down by the unwinding of Covid medical services. Industrial output fell by 0.6%. Economists had expected a 0.3% expansion. Manufacturing tumbled 1%, amid higher energy prices. Construction output fell by 0.4%, which was slightly better than the 0.5% decline projected. Trade was less of a drag than it had been in March. The news stream is expected to improve tomorrow with the employment data. The UK labor market is one of the economic bright spots. Meanwhile, Prime Minister Johnson is pressing forward with legislation that will allow the government to override the Brexit deal regarding Northern Ireland. The EU will not take kindly to this and will strike back and like impose trade penalties or fines. The government's measures were expected last week. The press attributed the delay to concerns that there were some concerns that it would violate international law, which in a backhanded way acknowledges the thin ice it is skating upon. Moreover, the effort to exclude the European Court of Justice, a perennial issue for the hard Brexit camp, has little to do with the mental gymnastics Johnson has insisted on that leaves Northern Ireland in the EU. The euro looks ugly. It is the third session of a headlong plunge that began with the initial upticks in response to the ECB meeting that stalled near $1.0775. The low so far today is almost $1.0455. It has stabilized in the last few hours but has been unable to resurface above $1.05. It will be difficult to pick a bottom until at least after the FOMC meeting. Sterling stalled near $1.26 last week and finished around $1.2315 before the weekend. It has dropped another cent today to reach $1.2210. The low has been recorded in the European morning. The $1.2250 area may now offer initial resistance. The low set in the middle of last month was near $1.2155. The BOE meets Thursday, and the swaps market has about a 40% chance of a 50 bp move discounted. America The pre-weekend combination of strong inflation, inflation expectations, and recessionary levels of consumer sentiment did not spur a dollar sell-off because contrary to the critics, including former Treasury Secretary Summers, the Fed has not lost credibility. That is to say the market expects the Fed to become more aggressive. It sees the 75 bp rate hike that Powell confirmed last month was not under serious discussion as becoming more likely, with a slightly better than 50% chance priced at next month's meeting and a little less than a 1-in-3 chance of 75 bp move this week. The Fed funds futures have 175 bp of tightening discounted in the next three meetings. The implies a 75 move. Moreover, it leans toward a 50 bp hike in November as well. The year-end rate is now seen at nearly 3.39%. It was 2.85% a week ago. At the same time as the average US gasoline prices pushes above $5 a gallon, the University of Michigan's survey showed inflation expectations rose to new highs of 5.4% in one-year and 3.3% in 5-10-years. The rise in the longer-term is understood as more important because while there may be short-run noise, the key is thought to be anchoring expectations. They risk becoming unhinged. The New York Fed conducts its own consumer survey, and the May results are due later today. In April, the one-year expectation slipped to 6.3% from 6.6%. The three-year outlook edged up to 3.9% from 3.7%. Of interest, the dispersion of opinion, measured by the difference between the 25th percentile and the 75th fell in the shorter period and rose in the longer. What promises to be a busy week begins slowly. The US nor Canada, or Mexico have economic reports of note today. Brazil reports May trade figures, but is not typically a market mover, and this may be especially true today given the focus on Fed policy. Brazil's central bank meeting, like the Fed's concludes on Wednesday and a 50 bp hike in the Selic rate is expected to 13.25%. The central bank is gradually slowing the pace of hikes. Three 150 bp move has been followed by two 100 bp hikes. The swaps market sees a peak near 13.50%.   The US dollar is extending its surge against the Canadian dollar. In the middle of last week, the US dollar recorded a six-week low near CAD1.2520. In Europe today, it is pushing on CAD1.2850. We see the risk-off mood, illustrated by the precipitous drop in the S&P 500 as the main culprit. However, the Canadian premium on two-year money narrowed to less than five basis points today from near 35 bp in the middle of last week. Canadian rates have been above the US since May 6. The next important chart point is around CAD1.2865, the (61.8%) retracement objective of the greenback's slide since the May 12 high (~CAD1.3075). A move above CAD1.2900 could signal a test on last month's high. Similarly, the US dollar is surging against the Mexican peso. Last Monday, the greenback dripped below MXN19.50. Today, it reached MXN20.3670, its highest level since May 12. The dollar is above its upper Bollinger Band (~MXN20.18) for the first time since late April. The 200-day moving average is found around MXN20.4125. The high from the first half in May was set in front of MXN20.50 while the April high was closer to MXN20.6380.    Disclaimer

June 11, 2022  Bank of England, Bank of Japan, Federal Reserve, Inflation, Interest Rates Three G7 central banks meet in the coming days, and they dominate the macro stage. The Federal Reserve's meeting concludes on Wednesday, the Bank of England on Thursday, and the Bank of Japan on Friday. The market recognizes a strong consensus has emerged at the FOMC for 50 bp hikes in June, but the unexpectedly strong CPI report before the weekend saw the market price in about a 50% chance of a 75 bp hike in July. Some Fed officials have been understandably reluctant to venture much of an opinion about the September meeting. After the CPI print, the market expects 50 bp move in September and November. The Fed governor and regional president that are seen as the most hawkish are Governor Waller and St. Louis Fed President Bullard. Their hawkishness needs to be understood within the context of the market. Their "beef", as it were, is not with the market, who they say their views are aligned with, but with their colleagues. In March, the median dot was for the Fed funds range to be 1.75%-2.0% at the end of the year.  The Fed funds futures market is closer to 3.15%. In March, there was only one forecast around the current market expectation. The median dot for the end of 2023 was 2.75%. The market is now at 3.50%. We suspect the two new governors' dots will be consistent with the Fed's leadership. The median forecast for this year's GDP may be reduced from 2.8% to closer to 2.5%. If the median forecast for the PCE deflator (4.3% 2022 and 2.7% 2023) is raised, it would add to a hawkish message. The median forecast was for the unemployment rate to remain at 3.5%, in the face of the tightening and be at 3.6% at the end of 2024. Some of the Fed's critics poked at this and it will be interesting to see if it changes. The University of Michigan's consumer index has tanked to levels not seen during past recessions, the tech bubble, the Great Financial Crisis, or the start of the pandemic. Some economists are claiming that the US is already in a recession. The Fed cannot be happy with the new increase in consumer inflation expectations the survey picked up. In May, the FOMC statement acknowledged the contraction in Q1 GDP but noted that household spending and business investment (final sales to domestic purchasers) remained strong. This still seems to be a fair characterization of the economy. It said jobs gains were robust. Nonfarm payrolls rose by an average of 539k in Q1 22 and have averaged 413k in the first two months of Q2. Will the Fed recognize the moderation, or is it too early considering that in April and May 2021, the job growth averaged 355k a month?  Besides technical adjustments, most of the rest of the statement is likely to be little changed.  This includes the likelihood that despite variance of views, there is an agreement about the 50 bp rate hike and no dissents are likely. When the Fed's rhetoric began changing last September, the December 22 Fed funds futures were implying a 0.35% 2022 year-end rate. It finished last year slightly above 0.80%. On the eve of the Fed's hike on March 16, the Dec contract implied about a 1.95% year-end rate. By the eve of the May 4 hike, the implied yield was closer to 2.75%. It finished last week a little above 3%. The swaps market has a terminal rate of about 3.75%. The Bank of England is expected to hike its base rate by 25 bp on June 16 to 1.25%. It would be the fifth hike in the cycle that began last December with a 15 bp move. The swaps market is pricing in about a one in three chance of a 50 bp increase. There are five meetings left this year and the market has 180 bp of tightening discounted. This seems particularly aggressive given that it is consistent with two 50 bp hikes and three quarter-point moves. The tightening of US monetary policy beginning in the late 1970s when Paul Volcker become the Federal Reserve Chair is the stuff legends are made off. Using the cover of money supply growth, Volcker led the Fed into hiking rates even as unemployment was climbing. Volcker, appointed by Carter, a Democrat, helped facilitate the Reagan-era capital offensive that liberated capital mobility, spurred financial innovation, but also generated a dramatic divergence of wealth and income that some argue is a bigger threat to the US economy (and political life) than inflation. Although, there was a hope in some quarters that Powell would take up the mantle, it seems BOE governor is channeling Volcker. The Fed has begun an aggressive tightening course, but it sees the economy as strong and plays down recession worries. US unemployment is around half the pace it was when the Fed under Volcker began hiking. As we noted, it claims that it can raise interest rates sharply and shrink the balance sheet twice as fast as it did previously with no meaningful deterioration of the labor market. The Bank of England is a different kettle of fish. In May it warned that the economy is likely to contract next year and expand by a miniscule 0.3% in 2024. It envisions unemployment rising from 3.5% this year to 4.3% next and 5.0% in 2024. The three-month year-over-year rate calculated by the ILO stood at 3.7% in March. The April estimate is due June 14. UK CPI was 9% above year ago levels in April. Last month, the BOE estimated that 80% of the overshoot in inflation is a function of the surge in energy prices and tradeable goods. Gas and electricity regulated prices jumped by nearly 55% in April and are expected to rise a little more than 40% in October. Consider that gasoline costs about GBP2 per liter, which converts to more than $11 a gallon. Between higher energy and food prices, and tax increases, the UK is experiencing a once-in-a-generation cost-of-living squeeze. Just like Volcker-led hikes helped shape the American political discourse, BOE Governor Bailey's hikes could also impact the UK's politics. Prime Minister Johnson survived a vote of confidence over the objection of 41% of the Tory members of Parliament. Ultimately, Johnson's value to the party is that he led them into victory and regained the Conservative majority. However, this claim to fame has weakened. The Tories look set to lose two special elections on June 23 that were forced as the Tory MPs were forced to resign in separate sex scandals. Although, they do not reflect on Johnson, his government has been lambasted for the "sleaze factor."   The latest YouGov poll gives Labour an eight-percentage point advantage (39%-31%). A full third of those survey said that Labour leader Starmer, who also, incidentally, faces his own possible "partygate" would be a better prime minister than Johnson. A quarter favored Johnson. After the special elections, the next big hurdle for Johnson will be the Conservative Party Conference in October. The Federal Reserve has all but committed to a 50 bp rate hike next week. The Bank of England will likely move by 25 bp. The Bank of Japan, the third G5 central bank that meets in the week ahead, will stand pat. BOJ Governor Kuroda has been explicit. The rise in the CPI, with the core (excluding fresh food) poking above the 2% target, is being driven by factors that are not sustainable, like the base effect from last year's cut in the cell phone charges, and higher energy prices. Excluding fresh food and energy, prices rose 0.8% from a year ago in April. It has not been above 1% for six years. The market appears to agree with Kuroda as the 10-year breakeven (the difference between the conventional 10-year yield and the inflation-linked security) is below 90 bp. Kuroda, whose term expires in April 2023, has renewed the BOJ's commitment to the capping the 10-year yield at 0.25%. This comes, of course, not just in the face of the rising inflation, but also while major bond yields in the US and Europe have risen sharply. As a result of the divergence of monetary policy the yen has weakened sharply. The correlation of the change in dollar-yen exchange rate and the US 10-year yield is a little above 0.5 over the last 60 sessions and a little below in the past 30. The euro is trading at eight-year highs against the Japanese yen. The change in the cross rate and the 10-year German Bund yield is stable around 0.60 for the past 30 and 60 days. Even if the divergence of interest rates is the key driver pushing the yen lower, there are also other considerations. For example, Japan is also experiencing a negative terms of trade shock. Consider that Japan had a current account surplus of JPY3.5 trillion in the first four months of this year, slightly more than half the surplus in the same period last year. Lenin once quipped that in battle, feel mush push; feel steel retreat, which also seems to apply to foreign exchange. That the yen's decline in being driven by economic fundamentals, and that Kuroda has no intention to alter the monetary course, and, if anything, still sees net advantages of a weak currency, the risk of intervention (steel) is low. Although some observers have talked about the risk of intervention, it mostly seen at higher dollar levels. Some reports cite interest one-year JPY150 calls. Japanese officials' verbal intervention stepped up at the end of last week, but the concern is still over the pace of the move and not levels. Moreover, the impact of the verbal intervention was quickly blunted by the stronger than expected rise in the US CPI. It seems that trades fall into three categories. The first is momentum or trend following. The second is mean reversion or going against the trend. The third is carry trade, which is a version of interest rate arbitrage. Sell a low yielding currency and buy a higher yielding currency. The profit or loss is derived from the different yields rather than spot movement. The short yen position now is a momentum or trend following trade and it can also be part of a carry trade. The challenge with carry trades is that a volatility of the currencies can overwhelm the interest rate differential. For example, imagine you can borrow yen for around six basis points annualized convert into dollars for a three-month time deposit and earn around 170 bp (annualized). With the three-month volatility of the dollar-yen exchange rate implied in the options market of over 11%, one can appreciate how movement in the spot market easily negate the yield pick-up. It is why some have characterized the carry trading in the foreign exchange market as picking up pennies in front of steam roller. If the rise in US 10-year yields is the key to understanding the depreciation of the yen against the dollar, to ask when the greenback peaks is to ask when US rates peak. That in turn depends to a great extent on the terminal rate for Fed funds. If the target rate peaks at 3.50%-3.75% as many think now and is priced into the swaps market, then arguably the 10-year yield has "value" as it approaches 3.20%.  The momentum indicators for dollar-yen corrected lower last month but have risen sharply over the past couple of weeks. The MACD is still accelerating higher but the Slow Stochastic is over-extended and can turn lower with a setback in spot. The dollar closed above its upper Bollinger Band (two standard deviations above the 20-day moving average) every session last week. Speculators in the futures market already have a substantial short yen position (short about 94.5k contracts, JPY12.5 mln per contract, or roughly $93k per contract, or about $8.8 bln overall). They have not been net long since March 2021. Market sentiment, with the talk of JPY150 calls, seems extreme.   The surge in US and German rates warns that the BOJ efforts to cap the 10-year bond yield at 0.25% will be challenged again in the coming days. It has been successful so far and it has not cost it much money. Defending the cap is has been negative for the yen as it drives home the point that monetary policy has not changed and is the heart of divergence that is driving the exchange rate.    Disclaimer

June 09, 2022  $USD, China, Currency Movement, ECB, South Korea Overview: Equity markets in Asia Pacific and Europe are weaker.  The main exception in Asia Pacific was India, where the market rose by about 0.75%.  Europe's Stoxx 600 is lower for the third consecutive session and is now down on the week.  US futures are up around 0.3%-0.4%.  The 10-year Treasury yield is hovering a little above 3%.  European peripheral yields are softer ahead of the ECB meeting.  New Zealand’s 10-year yield jumped eight basis points in response to the central bank’s announcement that it would begin selling bonds that it bought during the pandemic.  The dollar is mixed, and in an unusual turn of events, the beleaguered yen is the strongest of the majors, recovering about 0.5%.  The euro is flat near $1.0715 ahead of the ECB meeting outcome.  Among emerging market currencies, leaving aside the Russian rouble, the Chinese yuan’s nearly 0.25% gain leads the advancer.  The Turkish lira’s leg lower continues.  Gold is trading quietly, a few dollars on either side of $1850.  July WTI is trading quietly in a narrow range (~$121.35-$122.70) near yesterday’s highs.  US natgas is off 4.5% after falling 6.3% yesterday.  The explosion at the Freeport LNG export facility in Texas, source of around 70% of US natgas exports will be closed for three weeks according to estimates. Europe’s benchmark had been off four sessions coming into today and jumped by more than 8%.  Iron ore snapped an eight-day advance and fell 2.2% in Singapore today.  July copper is almost 1.5% lower to give back the gains recorded in the past two days plus some. July wheat is off about 1% and continues to pare a 5% gain registered on Monday.   Asia Pacific There are two developments from China to note. First, a 2.7 mln district in Shanghai is coming under new Covid restrictions.  The fact that the zero Covid policy has not be abandoned means that that there may still be rolling lockdowns, and this argues against a "V" recovery.  Second, and more optimistically, China reported stronger than expected trade figures.  Exports surged by nearly 17% year-over-year in May, more than twice the median forecast (Bloomberg survey) and follows an almost 4% gain in April.  Imports rose 4.1% year-over-year in May after a flat report in April.  The result was a $78.8 bln monthly trade surplus, up from $51.1 bln previously.  The average monthly trade surplus this year is $58.3 bln.  It averaged $38.6 bln a month in the Jan-May 2021 period.   A new threat to supply chains especially to petrochemicals, steel, and autos is coming from South Korea.  According to the union, the majority of the 25k members of the Cargo Truckers Solidarity, affiliated with the Korean Confederation of Trade Unions, and many un-unionized truck drivers are supporting the strike.  The government has played down the impact and estimates that only 8k drivers are struck initially.  The recently elected, President Yoon Suk Yeol has issued emergency transport measures that allows government truck fleet to operate at the logistic hubs. The industrial action is over jobs and wages.  An extension of the Safe Trucking Freight Rates System is being sought.  The 3-year program that sought to prevent dangerous driving and minimum care rates for truck drivers is set to expire at the end of this year. The union want to extend the program to all the cargo truckers. The expiring agreement covered only around 60% of the drivers. Reports suggest activity at several ports, including Busan, the world's seventh largest port, have been disrupted.  It handles nearly two million containers a month.  Separately, the Korean won is off 3.3% so far here in Q2 after depreciated by 1.9% in Q2. Some attribute the weight on the won coming from foreign investors who have sold around $5.9 bln of Korean equities after divesting $6.5 bln worth in Q1.  However, this is more than offset by foreign purchases of Korean bonds.  They bought about $16.3 bln in Q1 and have bought another $9.1 bln so far in Q2.   The dollar made a new marginal high against the yen earlier today near JPY134.55 before moving modestly lower.  The greenback was up seven of the past eight sessions. The high set in 2002 was around JPY135.15.  Above there, the previous high from 1998 was around JPY147.65.  Given the divergence of monetary policy, interest rate differentials, and the terms-of-trade shock, a persuasive argument can be made that the yen's decline is fundamentally driven.  Initial support is seen by JPY133.00 and then JPY132.50.   The Australian dollar tested the week's low near $0.7160 and it held.  There are options for about A$530 mln at $0.7165 that expire today and another at $0.7135 for A$475 mln that also roll off.  There may be some resistance around $0.7200, but a move above $0.7250 is needed to lift the technical tone.  The greenback initially pushed above CNY6.70 for the first time this week and found offers lurking.  Options for almost $2.4 bln struck there expire today.  It pushed slightly below CNY6.67 before stabilizing. The dollar's reference rate was set at CNY6.6811, a little lower than median projections (Bloomberg survey) of CNY6.6832.   Europe The market recognizes the hawkish pivot by the ECB.  Consider that at the end of last year, the swaps market priced in a 10 bp policy rate at the end 2022.  It rose to about 50 bp mid-February but retreated below 10 bp on the initial Russian invasion of Ukraine.  It recovered was near 60 bp in mid-April.  It surpassed 100 bp by mid-May and yesterday reached almost 1.34%.  Between the July and October meetings the market has a little more than 100 bp of tightening discounted.  That would imply at least one 50 bp move.  ECB President Lagarde has endorsed 25 bp hikes starting next month, but she is unlikely to push back hard against a 50 bp sometime in the futures.  If she were, one effect would be to weaken the euro.  The staff forecasts, as we have argued (here), the staff is likely to revise up inflation forecasts and shave growth forecasts.  These forecasts are part of the forward guidance that will underscore the likelihood of a hike at next month's meeting, even though there will be no new economic projections.  At the same time, it is hard not to argue that the risks to growth are still on the downside.  There is also a technical issue of the targeted long-term refinance operations (TLTRO), the three-year loans, which if specific lending targets are met, were secured at the incredible rate of minus 100 bp.  Although there is some talk of a new discretionary mechanism to combat fragmentation (strong divergence of interest rates), we have argued it is unlikely because, a facility currently exists and an attempt to have such a new facility faltered last year over conditionality, and the compromise struck gave the ECB added flexibility when reinvesting maturing proceeds.   This is the ECB's fourth meeting of the year.  Consider the price action around the previous three meetings.  The euro rallied in the four days before the February 3 meeting and surged 1.2% on the day. It lost about 1% the following week, which began a five-week decline.  The euro rallied 1.6% the day before the March 10 ECB meeting and gave nearly all of it back on the day of the meeting and the following day.  The following week it rose by about 1.25%.  The euro fell on April 14 by slightly more than 0.5%, to give back the gain it scored the previous day.  It lost roughly another 0.5% in the following two sessions.   The euro has traded roughly in a $1.0650-$1.0750 trading range this week.  It is hovering around the middle of the range ahead of the ECB meeting outcome.  There are options for 1.1 bln euros at $1.0755 that expire today.  After tomorrow's US CPI, 1.4 bln euros in options at $1.08 expire.  The euro's recovery from $1.0350 in the middle of last month stretched momentum indicators and we continue to look for the more impulsive move to the downside.  The MACD looks about to turn lower, and the Slow Stochastics have been gently trending lower this month.  Sterling posted a large outside up day on Tuesday.  There has been no follow through buying and sterling has remained within Tuesday's range (~$1.2430-$1.2600).  An option for GBP340 mln at the top of that range expires today.  A breakout seems unlikely today.   America The US reports weekly jobless claims and Q1 household net worth figures today ahead of tomorrow's May CPI.  Jobless claims are not going to change the view that the labor market remains robust and stronger than the Federal Reserve thinks is healthy.  Consider that through last month, nonfarm payrolls have risen by 2.44 mln this year.  In the same period last year, the US created 2.65 mln jobs.  Not only has the moderation been slight, but consider that in first five months of 2019, the US grew 890k jobs.  US household net worth rose by $5.3 trillion in Q4 21 and average $4.7 trillion a quarter last year.  It rose by an average of $3.6 trillion in 2020 and $3.1 trillion in 2019.  The markets do not seem to react much to this time series, which does not say anything about the critical distribution issue.   US oil inventories rose by about 2 mln barrels last week even though supplies at Cushing fell to a three-month low.  The more pressing issue is gasoline.  Inventories fell for the 10th consecutive week amid rising consumption (reached 9 mln barrels a day) and slipped below 220 mln barrels. The US high driving season is just beginning, warning of the risk of higher prices.  Separately, yesterday's $33 bln 10-year note sale saw a 1.2 tail and a little softer coverage.  Of note, direct bidders took down 19.4% of the issue, the most in three years.  Today, the government sells $19 bln of the 30-year bond.  The last auction generated a 3% yield and is currently yielding almost 3.15%.   Tomorrow Canada reports May jobs data.  Of the 27.5k increase expected, the median forecast in Bloomberg's survey sees full time positions accounting for the bulk of the new jobs.  Canada's economy appears to be continuing to outperform the US.  The swaps market is almost halfway toward pricing in a 75 bp hike next month rather than a 50 bp move.  The terminal rate expected in the swaps market dipped in late May below 3% and is now a little above 3.6%.     The US dollar recovered against the Canadian dollar yesterday after initially slipping through CAD1.2520.  It settled near its highs (~CAD1.2565) and reached CAD1.2580 in early European activity.  Nearby support is pegged around CAD1.2540.  There are options for around $750 mln at CAD1.25 that roll off today.  While a quiet session seems likely today, tomorrow may be a different story with US CPI and Canadian jobs.  The greenback has been consolidating in recent days against the Mexican peso.  This week's range so far has been roughly MXN19.47-MXN19.68.  There appears to be more speculation that Banxico may hike by 75 bp when it meets on June 23.  Today's CPI figures could sway the market one way or the other.  Brazil also report May CPI figures today.  It may slow for the first time this year. The central bank is expected to hike by 50 bp next week.  Peru is seen lifting its rate target by 50 bp today to 5.50%.    Disclaimer

June 08, 2022  $USD, Brexit, Chile, Currency Movement, ECB, EMU, EU, India, Trade Overview: After modest US equity gains yesterday, the weaker yen and Beijing’s approval of 60 new video games helped lift most of the large markets in the Asia Pacific region. South Korea and India were notable exceptions. Europe's Stoxx 600 is off for the second day as Monday's 0.9% advance continues to be pared. US futures are trading lower. The 10-year Treasury yield continues to hover around 3%, and European yields are up 3-5 bp today. The euro is little changed but that makes it the most resilient in the face of the greenback's upticks. The yen and Antipodean currencies are suffering most (~0.65%-0.80%). Among the emerging market currencies, central Europe is doing the best. The Turkish lira has dropped another 2.25% as capital strikes against the unorthodox policies. Gold is trading quietly around $1850. July WTI is making new highs above $121. US natgas is nearly 1% higher and is up a little more than 10% this week. Europe's natgas benchmark is off for the fourth consecutive session and is off about 5.25% in this run. Iron ore's rally extended into a sixth session as China's re-opening boosts sentiment. July copper is off about 0.5%. It was virtually flat yesterday after falling around 0.8% on Monday. July wheat is 0.5% lower, extending yesterday’s nearly 2% fall as Monday’s 5% gain is pared. Asia Pacific Japan revised away half of the Q1's 1.0% contraction with the help of stronger inventory and consumption figures that offset the larger decline in capex. Consumption rose by 0.1% instead of being flat as initially estimated. Business spending fell by 0.7%. Previously, it estimated a 0.5% gain. Inventories added half a percentage point to GDP rather than 0.2%. Net exports shaved Q1 GDP by 0.4%, the same as in Q4 21. That is a nice segue into the April current account figures that were also released today. There is a strong seasonal pattern for Japan's current account balance to deteriorate in April from March and the pattern held this year. Japan's current account surplus narrowed to JPY501 bln from JPY2.55 trillion in March. About a fifth of the deterioration was accounted for by the trade deficit, which grew to about JPY690 bln from a JPY166 deficit. With the current account figures, Japan breakdowns some of its portfolio flows. For the sixth consecutive month, Japan's figures show Japanese investors selling US Treasuries. It is the longest streak in four years. Japanese and US figures do not match very well. Consider that through March that US data is available, Japanese figures show a divestment of about $46 bln of US sovereign bonds. The TIC data shows Japanese investors were small net buyers of US Treasuries in the first two months of the year before selling about $74 bln in March. Japanese figures show divestment of Canadian bonds for the third consecutive month and the sales of German Bunds in March and April.  India raised its repo rate by 50 bp to 4.9%. The central bank signaled additional tightening will be forthcoming and lifted its inflation forecast to 6.7% from 5.7%. Many had expected a 40 bp increase. The RBI's tone shifted from recognizing that monetary policy remained accommodative to underscoring its commitment to withdraw accommodation. The swaps market is pricing in another 125 bp rate increase this year. The rate hike did not prevent rupee from weakening. The dollar edged slightly higher and is approaching last month's record high near INR77.7950. The market continues to push the dollar higher against the yen, encouraged by ideas that Japanese officials are welcoming an orderly adjustment and firm US yields. The dollar traded near JPY133.85, having settled last month around JPY128.65. The next important target is the JPY135 area. Reports suggest interest in one-year JPY150 dollar calls. The Australian dollar posted a bullish outside up day yesterday, but there no follow through buying materialized. It has been confined to yesterday's range (~$0.7165-$0.7245). A break of last week's low near $0.7140 weakens the technical outlook. The broad US dollar gains helped lift it to CNY6.6960. There are two nearby technical levels to note. First is the high from last week around CNY6.7060. The second is last month's downtrend line, coming in near CNY6.7150 tomorrow. Today's dollar reference rate was set very close to expectations (CNY6.6634 vs. CNY6.6631). Europe Forty percent of the Tory MPs no longer have confidence in the Prime Minister, but "bashing on" as Johnson called it will be pressing ahead with legislation that overrides a key agreement with the EU over Northern Ireland. The draft legislation, which also unilaterally ends the role for the European Court of Justice in resolving disputes, could be ready as early as tomorrow. The government has indicated a two-week window for the legislation. The longer into that period, the more some may read into it the consequences of the confidence vote. Reports suggest the government aims to have it approved by the House of Commons by the recess at the end of next month. Breaking an international agreement may find a greater objection in the House of Lords. The EU's chief negotiator Sefcovic refuses to renegotiate the deal but is open to specific modifications, though eschewing the European Court of Justice is not one of them. Meanwhile, Johnson may choose to wait until after the special elections in a fortnight, but a cabinet reshuffle is expected. Also, pressure is building for a significant tax cut in the fall to help address the record cost-of-living squeeze.  Last week, France reported that April industrial output fell by 0.1%. The median forecast (Bloomberg) was for a 0.2% increase. It had fallen by 0.4% in March (initially -0.5%). Manufacturing contracted by 0.4% in April after a 0.2% decline in the previous month (initially -0.3%). Yesterday, Spain surprised on the upside with a 2.1% surge in April's industrial production, recovering the 2.0% drop seen in March (initially it was -1.8%). Today was Germany's turn. A 0.7% gain was reported, not the 1.2% rise anticipated by the median forecast in Bloomberg's survey. Attention is on tomorrow's ECB meeting. With the elevated and rising inflation and the relative slowness to respond, the hawks press for a 50 bp hike. The leadership is likely to show an openness for such a move while deferring it until later in the year. Time is on their side. While the regional economy has been resilient to the price shocks (energy) and the war, and the disruption from China's lockdowns, confidence has plummeted, and the activity is slowing. If this is right, then shifting the debate from if a 50 bp hike is warranted to when it could be delivered could be the more likely play. The euro is trading quietly between roughly $1.0670 and $1.0710. Recall that it settled around $1.0720 last week. It the price action feels choppy it is because it is. Today could be the sixth session of a sawtooth pattern alternating between gains and losses. There is an option for 660 mln euro struck at $1.0650 that expires today. Tomorrow, shortly after the ECB meeting and press conference concludes, options for a little more than a billion euros at $1.0755 expires. Sterling posted a bullish outside up day yesterday, trading on both sides of Monday's range and settling above the high. However, it stalled at $1.26 and no follow through buying emerged so far today, leaving sterling heavier. Initial support is seen in the $1.2480-$1.2500 area.  Lastly, note that Poland is expected to deliver a 75 bp hike later today that would lift the base rate to 6.0%. The preliminary May CPI stood at almost 14%. America American consumers are shopping with the help of credit. We already know that household consumption (PCE) rose by 0.9% in April. We learned yesterday that it was helped by a nearly $18 bln rise in revolving credit (credit cards) after a revised $25.6 bln increase in March. Overall, consumer credit, which excludes mortgages, rose by a strong $38 bln after a revised $47.3 bln increase in March (initially $52.4 bln). The two-month increase is a record. Savings are also being drawn down and are at their lowest level, in aggregate since 2008. Separately, the US reported a drop in the US trade deficit. It was the result of a 3.5% rise in exports and a 3.4% decline in imports. Be careful about extrapolating from the report. A slowdown in imports is often a sign of weakness in domestic demand. This time, China's lockdowns disrupted trade and accounted for about $10 bln of $12.6 bln decline in US imports. What is important for GDP purposes are the price adjusted figures. Here too the improvement, while one-off, was substantial, the real goods deficit fell by slightly more than 14% to $116.2 bln. It averaged almost $122.4 bln in Q1 22. Canada reported a smaller trade surplus of C$1.5 bln down from a revised C$2.3 bln (initially C$2.5 bln). Canada's trade deficit with China fell by 20%, but the main culprit of the disappointing trade figures was the 14.3% decline in crude oil exports on a decline in volumes, which StatsCan says were largely offset by natgas and coal exports. In volume terms, exports were off 2.1% and imports slipped by less than 0.5%. The Atlanta Fed's GDPNow tracker stands at 0.9% (and will be updated later today), last month's Bloomberg survey put Canadian Q2 growth at an annualized pace of 3.8%. The swaps market now sees the terminal policy rate to be around 3.5%. The World Bank cut its world growth forecast this year to 2.9% from 3.2% in April and 4.1% in January, warning of several years of elevated inflation and weak growth. It cut its US forecast to 2.5% from 3.7%. It is still a little above the markets forecast (median Bloomberg) of 2.6%. It cut China's growth to 4.3% from 5.1 in January, which still seems a bit optimistic, though below the official 5.5% target. Eurozone growth was cut to 2.5% from 4.2%. The median in the Bloomberg survey is for 2.6%. The US dollar posted a bearish outside down day against the Canadian dollar, but as we have seen with the Australian dollar and sterling with similar one-day price action, US dollar selling has not carried over into today. The greenback did make a marginal new low for the move against the Canadian dollar near CAD1.2525. The CAD1.2500 area offers support. The CAD1.2585-CAD1.2625 should cap near-term upticks. A strong jobs report on Friday could encourage the market to look for a 75 bp hike. The swaps market shows it is almost halfway there for next month's meeting. The US dollar is trading at four-day highs against the Mexican peso, having approached MXN19.69. Support was found Monday, a little below MXN19.50. Last week's high was closer to MXN19.77, and that represents the next target. Lastly, Peru is expected to hike by 50 bp today. Chile delivered a 75 bp hike yesterday to bring the tightening to 850 bp since last July. It was the second consecutive month that the pace has been dialed back. The economy contracted in Q1. The government is taking measures to cushion the economic blow of higher prices. Recall that a referendum on constitutional reforms is scheduled for September 4.   Disclaimer

June 07, 2022  $USD, consumption, Currency Movement, ECB, Japan, RBA, Trade, UK Overview: The jump in US interest rates helped lift the greenback to new 20-year highs against the Japanese yen and pushed the euro back below $1.07. US equities saw initially strong gains pared and this set the tone for today’s activity. Most of the equity markets in the Asia Pacific region fell, but Japan and China. Europe’s Stoxx 600 is giving back more than half of yesterday’s 0.9% gain. US futures are off about 0.5%. The US 10-year yield is off a couple of basis points but still above the 3% threshold. European yields are lower and the peripheral premium over the core is narrowing today. The greenback is stronger against all the major currencies, including the Australian dollar, where the central bank delivered a larger than expected half-point hike. Emerging market currencies are also mostly lower. The South African rand and Mexican peso are the two notable exceptions. Gold slipped to $1837, a four-day low, but has recovered to approach $1850. July WTI is in a narrow range below $120. It is holding above the five-day moving average near $117.50. US natgas prices are at new highs near 9.50, while Europe’s benchmark is off for the third consecutive session and briefly traded at four-month lows. Iron ore extended its gains for the fourth consecutive session and reached its highest level since late April. On the other hand, copper is off for the third session as it extends the pullback that began at the end of last week. Lastly, July wheat has come back offered after yesterday’s 5.10% gain.   Asia Pacific The Reserve Bank of Australia surprised the market by delivering a 50 bp hike earlier today. It was the largest move in more than two decades. Saying that the central bank will "do what is necessary" to check inflation, Governor Lowe signaled additional rate hikes in the coming months. There are six meetings left this year and the swaps market has discounted nearly 235 bp of tightening. The economy is solid and new government is pushing for a 5.1% hike in the minimum wage (to be decided later this month) and new fiscal measures. Australia's two-year yield jumped 17 bp and at 2.84% is back to a small premium over the US, the most in nearly a month. The currency initially rallied through yesterday's high (~$0.7230) to reach almost $0.7250 before returning to little changed levels straddling the $0.7200 level. The key driver of the dollar-yen exchange rate is the 10-year US Treasury yield. On a purely directional basis, the correlation over the past 30 session is more than 0.8. On the basis of change, the correlation is a little above 0.55 and has not been above 0.6 since late March. Given the nearly 10 bp jump in the US 10-year yield, the dollar's push higher against the yen is understandable. BOJ Governor Kuroda's comment that a steadily depreciating yen would be positive for the Japanese economy seemed excessive, even though the Swiss franc declined by more than the yen yesterday. Many businesses have expressed concern about the yen's weakness. After all, corporate strategies had evolved in a strong yen environment, like the offshoring of production. The price of Brent has risen by around 90% since early December and the yen has declined by about 14.5% against the dollar at the same time. A weaker yen boosts inflation but is the type of price pressures the BOJ would arguably look pass. Large companies are expected to be able to better cope in the changing economic environment. The Topix 100 is off a little more than 2.25% this year, while the Mothers Index (start-ups) is off 33%. Still, it shows one reason that a Plaza-like agreement is unlikely. The BOJ does not want it (which is not to suggest any other member is calling for one). Separately, Japan's April cash earnings rose 1.7% after the March increase was revised to 2% from 1.2% (year-over-year). This, coupled with the lifting of Covid restrictions helped boost household spending 1% in April month-over-month, and pare the year-over-year decline to 1.7% from -2.3%. China's May reserves unexpectedly rose last month. It was the first increase of the year. The $8 bln increase is about a quarter of a 1% gain to almost $3.128 trillion. It is practically a rounding error and likely accounted for by the appreciation of other reserve currencies against dollar. In May, the euro rose by 1.8%, the Australian and Canadian dollars, by about 1.6%, the yen by 0.8%, and the Russian rouble by nearly 15%. Note too that the 10-year Treasury rallied, and the yield fell nearly 9 bp. The dollar rose to JPY133.00, a new 20-year high. It is the sixth gain in the past seven sessions, and it has risen by more than 4.5% during this run. The high from 2002 was a little above JPY135.00. The pace of the move may again spur cautionary comments from officials. Initial support is seen by JPY132.50. The Australian dollar has traded on both sides of yesterday's range (~$0.7185-$0.7230), and technically, the close is important, if it is outside of that range. In the European morning, it is spending time below yesterday's low. The Aussie is threatening to fall for the fifth session in the past six. Recall that as of the end of May, speculators in the futures market had the largest net short Australian dollar position in around two months. The greenback gapped higher against the Chinese yuan today and hardly looked back. The move was not particularly large. The US dollar rose 0.3% to around CNY6.6750. Last week's high was set near CNY6.7060 ahead of the Friday holiday. The PBOC set the dollar's reference rate at CNY6.6649. The median projection (Bloomberg survey) was CNY6.6638. Europe Prime Minister Johnson survived the confidence vote as widely expected, but it was a tighter vote than anticipated. He won 211-148. About 40% of the Tory MPs rebelled. It was more than had sought to force Johnson's predecessor May out. She was out within six months and much of the press accounts speculate on the damage inflicted on Johnson. Meanwhile, the Tories are seen losing the two special elections later this month, and some polls suggest the Tories would lose a snap national election. Technically, the party rules protect Johnson from another vote of confidence for a year. However, the next important opportunity may be the Conservative Party conference in October. Meanwhile, the economic challenges, and the cost-of-living crisis will likely deepen, even though the sharp drop in the May services and composite were pared in the revision. The consumer continues to be squeezed as the 1.5% decline May BRC sales showed. It is the third consecutive monthly decline.  Amid talk that some EMU members may seek an immediate end to the bond buying, reports suggest others may propose a new mechanism to prevent fragmentation (divergence). This seems unlikely for three reasons. First, the ECB has a great deal of flexibility with the reinvestment of maturing proceeds as well as being able to bring forward by up to 12 months other future maturities. Second, a facility for this already exists: The European Stabilization Mechanism. Thirdly, a similar idea was proposed last year--a precautionary instrument but was rebuffed by several creditor nations demanding conditionality. The compromise struck was for the flexibility in reinvesting. German factory orders fell 2.7% in April after the March decline was revised to 4.2% from 4.7%. The data is very disappointing. The median forecast (Bloomberg's survey) looked for a small gain (0.4%). The war in Ukraine and China's lockdowns took a toll. Foreign orders fell 4% in April after a 5.8% fall in March and a 2.4% decline in February. Orders from other eurozone members fell 5.6% after increasing 4.4% in March. Non-eurozone orders slumped 3% in April after a dramatic 11.2% plunge in in March. Domestic orders were off 0.9% after a 1.6% drop in March. There had risen 0.4% in February. Germany reports April industrial output figures tomorrow. The median forecast (Bloomberg) for a 1.2% gain (after the 3.9% drop in March) seems at risk of being too optimistic. The euro slipped to a three-day low near $1.0665 in late Asian turnover and bounced to the session high, a few ticks above $1.07 in early European activity. There is an option for slightly more than 1 bln euros at $1.0730 that expires today, which may be sufficient to cap upticks. For a little more than two weeks, the euro has been trading broadly sideways in a $1.06-$1.08 trading range. It can persist until at least Thursday's ECB meeting. Sterling barely reacted to the initial news that Johnson survived the vote of confidence. However, today, sterling broke out of the four-day consolidation to the downside, to record a low near $1.2430. That is the lowest sterling has been since May 18. It bounced back to trade to almost $1.2535 in the European morning. If that is not the high, we suspect it is close.  America Given the attention Microsoft drew recently when it said the exchange rate developments cut earnings by $460 mln, and other software giants also noted the exchange rate, the April trade figures may draw attention. However, there are two mitigating factors. First, the challenges to the software companies were not that the dollar made exports less competitive but that the dollar's appreciation made the translation of their foreign sales worth less for the dollar-functioning company. The trade figures have little to say about that. Second, US exports soared by 19% in March to a new record high of $180.8 bln (not seasonally adjusted, nominal terms). And we know from the advanced goods trade report that April good exports rose another 3%. Still, the important takeaway from the trade figures is that next exports are unlikely to be as large of a drag in Q2 as they were on growth in Q1. Recall trade subtracted a little more than three percentage points from Q1 growth. Consumer credit (excludes mortgages) soared by a record $52.4 bln in March. The April report comes late in today's session. The median forecast in Bloomberg's survey is for a $35 bln rise. This is would another strong increase. Consider the average in 2019 was $15.4 bln a month. Consumer credit fell in 2020 and rose by almost $20.6 bln on average last year. It seems that after a surge in consumption, and in the face of rising prices, households are sustaining, even if shifting the basket of goods, they are purchasing, consumption by four things:  more people working, drawing down savings, use of revolving credit, and equity withdrawals on mortgage refinances. Borrowing from the past and future to fund current consumption seems to be characteristics of late cycle behavior.  Canada also reports merchandise trade figures for April today. It is experiencing a positive terms-of-trade shock, and this has resulted in the trade surplus swinging into surplus. In 2019, the average monthly goods deficit was C$1.5 bln. Last year, the average was almost C$380 mln. The monthly average in the Q1 22 was C$3 bln, the highest since 2008. Separately, Canada's two-year yield has risen even faster than in the US. Since the end of April, the 10 bp US premium has become a swung to a nearly 30 bp discount. This is the most since late last year. The US dollar extended the rebounded that began yesterday against the Canadian dollar. The greenback recorded a low near CAD1.2535 yesterday and recovered to almost CAD1.26. The low had not been seen since April 21. Follow through buying today lifted the US dollar to almost CAD1.2620, but it is straddling the CAD1.26 area near midday in Europe. A move, and ideally, a close above CAD1.2630, lifts the greenback's technical tone, but the CAD1.2650-CAD1.2660 area may offer more formidable resistance. The US dollar recorded an outside day against the Mexican peso yesterday, trading on both sides of the pre-weekend range. However, the close was neutral and the consolidation phase looks set to continue. Resistance is seen near MXN19.62 initially with support around MXN19.50. Lastly, note that after trade figures this morning, Chile's central bank is expected to hike its overnight target rate by 75 bp to 9%. It has hiked rates at alternating meeting this year, but it hiked 125 bp in May. Tomorrow, May inflation figures will be released. The May CPI is expected to have jumped to 11.4% from 10.5% year-over-year. The quarterly monetary policy report is also due tomorrow. Officials want to keep their options open but also want to reassure businesses and investors that the tightening cycle in nearly over.   Disclaimer

June 06, 2022  $USD, China, Currency Movement, ECB, Fed, Japan, Oil, RBA, UK Overview: China and Hong Kong re-opened after the Friday holiday and equities rallied strongly. Japan, Taiwan, and South Korea advanced as well. However, India and Australia equities fell. Europe’s Stoxx 600 is up around 0.9% to recoup its pre-weekend loss and more. US futures are broadly higher. Benchmark 10-year yields are mostly firmer. The US 10-year yield is up about three basis points to 2.96%. European core yields are firmer but the yields in the periphery are lagging amid speculation that the ECB will announce a new facility to support them if needed. The 10-year UK Gilt yield is up nearly five basis points to 2.20%, a new three-month high. The dollar is trading lower against all the major currencies. Sterling is the strongest with almost a 0.6% gain. The yen and Swiss franc are the weakest, rising about 0.1%. Emerging market currencies are also mostly higher today. The main exceptions are a few Asian currencies and the Turkish lira. Turning to commodities, gold steadied after the pre-weekend reversal. It found support a little below $1850. July WTI reached almost $121 for easing back below $120. US natgas has jumped 4.3% today and Europe’s benchmark is up marginally. With China re-opening, iron ore prices extended their three-day rally into today with a 1% gain. It is trading at its best level in a month. Copper extended its reversal. At the end of last week, it reached 457.70 before reversing to close a little below 446.00. It fell to 440.60 today before stabilizing. July wheat has rallied 4.7% today after falling 10% last week. Asia Pacific China's May services Caixin PMI rose to 41.4 from 36.2, disappointing expectations for a larger rise. The composite rose for the first time this year (from 37.2 to 42.2). With the lockdown lifted in Shanghai and restrictions easing in Beijing (public transportation resume today), and the investigation into Didi completed (mobile app may appear in store again later this week), the world's second-largest economy appears to have turned the corner. While BOJ Governor Kuroda has persuasively argued that the rise in Japan's CPI, with the core reaching the target will not spur a change in monetary policy, fiscal policy in play. Prime Minister Kishida offers a "new form of capitalism."  It seems like it is the traditional LDP-economics of easy monetary and fiscal policies with an emphasis on greater economic equality. To be sure this is not a warmed-over socialism. Kishida thinks it can be done through growth efforts, including mid-career educations (retraining and acquisition of new skills). At the same time, he wants to promote an equity culture and is working on efforts to encourage households to participate in the returns to capital. Household financial assets were estimated to be worth around JPY2 quadrillion at the end of last year, or about $15.5 trillion. Over half is invested in low yielding savings accounts. Last year's supplemental budget had a commitment to record a primary budget surplus (excludes debt servicing costs) by the end of the fiscal year ending in March 2026. This year budget dropped the reference. Still, there is no sign that Japan's fiscal stance is an important market consideration. The 30-year bond yield is slightly above 1%. It set a six-year high in late March near 1.10%. Japan's 10-year breakeven poked above 1.0% in early May for the first time in seven years. It rose 11 basis points last week, the first increase in four weeks. The RBA meets first thing tomorrow in Canberra. The swaps market has almost 30 bp of tightening discounted. Economists, in Bloomberg's latest survey, look for a bit more, 40 bp. Since the end of April, the Australian dollar appreciated by about two cents, but the speculators in the futures market have boosted their net short position to almost 48.7k contracts (each contract is for A$100k) five weeks in a row through last Tuesday (May 31) and for a cumulative 20k contracts during the run. As we noted in the weekly commentary on prices, the Australian dollar's bounce faltered after retracing a little more than half of the decline from April's high (~$0.7660) to the mid-May low (~$0.6830). Australia's new Treasurer, Chalmers, warned that he may revise sharply higher this year's inflation forecast next week, and plans on publishing a new budget in early Q4. The dollar held JPY131 and is consolidating in about a half a yen below there. Support is seen in the JPY130.40 area, which has been the low since the better-than-expected US jobs data before the weekend. The greenback may be bolstered if the 10-year yield resurfaces above 3%. After reversing lower after the US jobs data, the Australian dollar fell further today to a slightly below $0.7190 before finding a solid bid. Its recovery began in the middle of the Asia Pacific sessions and carrying into the European morning, where it approached $0.7230. Recall, the pre-weekend high was near $0.7285. China's mainland markets were closed last Friday, and the offshore yuan was virtually unchanged. The dollar gapped lower today and fell to CNY6.6415, its lowest level in a month. A small gap remains (~CNY6.6568-CNY6.6595). The PBOC set the dollar's reference rate at CNY6.6691 compared to the median (Bloomberg) projection of CNY6.6708. Europe The euro bottomed against the dollar on May 13 (~$1.0350). The same day, the swaps market slipped to price in 60 bp of ECB rate increases through October. It has been trending higher and rose 13 bp last week to a little more than 100 bp. A similar force has seen the US two-year premium over Germany narrow by 50 bp over the past two months to approach 200 bp. To put this in some context, consider that the US premium peaked in the last cycle near 350 bp (November 2018) and around 220 bp at the end 2019. It bottomed ahead of 75 bp during the acute phase of the pandemic. Speculators in the futures market were long from early January through early May when the net position switched briefly to favor the shorts. However, in the last four CFTC reporting periods, the bulls stepped in and have been net buyers of euros for the past four weeks. At almost 52.3k contracts (125k euros per contract) the net long position is the largest in two-and-a-half months. The median forecast in Bloomberg's survey shows a near-term flat view ($1.0705 in three months), but a bullish outlook after. The median for year-end is $1.0850 and $1.1050 for the middle of next year. The year-end forecast (median) is $1.1500. Sterling is the strongest of the major currencies today, nearly recouping in full the roughly 0.7% pre-weekend decline. The gains appear to come as Prime Minister Johnson is expected to win the vote of confidence, which will take place later today. The vote of confidence requires at least 54 MPs to call for Johnson's resignation, but it appears the Prime Minister still enjoys the support of a majority of Tories in Parliament and the leading contenders in the government, including Sunak and Truss say they support Johnson. Surviving a vote of confidence today protects the PM from another such vote for a year. However, recall that Johnson's predecessor May survived a vote of confidence but resigned shortly after. Assuming Johnson survives today, the next challenge is the June 23 two special elections to replace two Tory officials that resigned amid separate sex scandals. Labour looks set to re-take its traditional stronghold in Wakefield, while the Lib-Dems may take the Tiverton and Honiton district from the Tories. The euro is trading inside the pre-weekend trading range (~$1.0705-$1.0765). The single currency is near the middle of the $1.07-$1.08 range protects by expiring options of a little more than 1.4 bln euros each side today. The risk of a hawkish hold by the ECB later this week may underpin the euro. Sterling's advance from the sub-$1.22 low in mid-May ran out of steam last week near $1.2660. It fell back two cents and has been confined to last Tuesday's range ($1.2460-$1.2655). The intraday momentum got stretched as sterling approached $1.2580 in the European morning. The consolidative tone looks likely to persist a bit long. America There are several reasons why gasoline prices are high and the size of last year's stimulus or the easy monetary policy are not among the major drivers. One factor that does not appear fully appreciated is the loss of around 1 mln barrels a day in refining capacity. Some was shuttered. Some was converted to biofuels. Another factor that has not received much attention is the strong gasoline exports, the most in a few years. Mexico's demand has been strong. Brazil and Argentine demand for distillates have been robust as in the face domestic shortages. Europe is shipping gasoline to the US East Coast, which may be cheaper than that from the Gulf due to the Jones Act. OPEC+ agreed last week to boost output by 648k barrels a day next month. It had problems fulfilling their previous quotas. An unscientific survey found a range of 132k to 350k barrels a day are expected to be provided. It was not seen as sufficient to ease the shortage with given the EU sanctions, the re-opening of China, and the seasonal demand in the US. The potential game changer is Iran. However, talks for the US to re-enter and for Iran to move back in accordance stalled in March. Some have raised the possibility that the US does not enforce the sanctions. However, the latest confrontation was late last month when the US confiscated Iranian oil on a Russian-operated ship near Greece and Iran retaliated by seizing two Greek ships. News that Saudi Arabia was boosting next month's premium for Asian customers $2.10 a barrel to $6.50 on top of its benchmark was more than expected and helped lift July WTI to a new high of almost $121 a barrel today before pulling back toward $119. The US jobs data did not sway economic views. The 390k increase in nonfarm payrolls was a little stronger than expected, especially after the ISM and ADP reports. It was the least number of jobs created in a year and was consistent with other high-frequency data points suggesting that the world's largest economy has lost momentum. However, the report was seen as sufficiently strong to keep the Fed on course. In fact, the implied yield of the December Fed funds rose every session last week for a cumulative 17 bp increase (to 2.70%). The Federal Reserve has committed to lifting the target rate by 50 bp at the next two meetings. Although some officials have been reluctant to venture what will happen at the September meeting, the market has increased the chances of another 50 bp hike. The Fed's quiet period ahead of the June 14-15 FOMC meeting has begun. Today is a subdued start to the week's data releases. Tomorrow sees the US trade balance and consumer credit. The trade deficit may be less of a drag on Q2 GDP than it was in Q1. American's have sustained consumption partly by drawing down savings, using credit cards (record increase in revolving credit in March) and monetizing the rise in house prices, through equity withdrawal refinancing. The highlight of the week is the May CPI figures on Friday. Little change is expected. Canada also reports trade figures tomorrow, but the highlight is the employment report at the end of the week. Employment is expected to rise by about 25k after a 15k increase in April. Mexico reports May CPI on Thursday. The year-over-year pace may steady around 7.6% and the core around 7.2%. Brazil's IPCA inflation measure is due the same day, and it is expected to moderate. April retail sales will be reported the following day and are expected to have edged higher. Chile has raised rates every other month this year but after hiking by 125 bp last month, many expect it to move again tomorrow. The overnight target rate stands at 8.25%. May CPI is due Wednesday and is expected to have risen by 1.1% for an 11.4% year-over-year rate (from 10.5%). Peru's central bank meets Thursday and is expected to hike rates 50 bp for 10th consecutive meeting. The tightening cycle began last August with a 25 bp move. The reference rate stands at 5.0% now with Lima inflation running near 8%. The US dollar settled last week on the session highs a little shy of CAD1.26. It briefly poked above there today before sliding back to almost CAD1.2555, just above the pre-weekend low (~CAD1.2550). Little technical support is seen ahead of CAD1.2500, where a $600 mln option expires today. The greenback looks more likely to return to the CAD1.2580-CAD1.2600 area. The Mexican peso is bid, and the US dollar is slipping through the low from the end of last week (~MXN19.50). The two-year low was set last Monday near MXN19.4135. Here too, the North American market may be more favorable disposed to the greenback. Initial resistance now is seen near MXN19.55.   Disclaimer

The divergent performances make it challenging to talk about the G10 currencies last week. The Canadian dollar led the advancing major currencies with a 1.2% gain last week. It and the Australian dollar rose above last month's highs. On the other side was the Japanese yen. The more than 20 bp backing up of the US 10-year yield, the biggest weekly advance in two months, lifted the dollar by more than 2.8% against the yen. That is the biggest weekly gain since March 2020. For its part, the euro was little changed on the week, unable to extend its two-week 3% upside correction.   The seeming lack of direction may have been partly the result of the weak ADP private sector job estimate, which proved wide of the mark. Then there was a leading US banker, who had talked up credit a week or so ago, came back and warned of a "hurricane" hitting the economy. Another argued that the Fed does not have the tools to fight inflation, which will stay high for years. Meanwhile, a clear consensus for 50 bp Fed hikes this month, and next has emerged.  Atlanta's Fed's Bostic idea of a pause in September never had much backing from his colleagues or the market. The September Fed funds contract moved from pricing around a 1 in 3 chance for a 50 bp rather than a 25 bp move in the last full week of May to a 2 in 3 chance now. And the bulk of the movement took place before the stronger than expected US employment report. US financial conditions have been tightening since last September, and housing and the labor market appear to be moderating but not sufficiently to give policymakers much comfort.  Dollar Index: The prospect of a hawkish ECB meeting on June 9 is coupled with narrowing the 2-year interest rate differential between the US and Germany (down more than 50 bp in the past two months to approach 2%, the least since early March). From mid-May to the start of last week, the Dollar Index fell by around 3.5%. That move looks complete. The MACD is still falling, but it is stretched. The Slow Stochastic is curling up from oversold territory. Ideally, there would be a three-legged recovery in the Dollar Index from a technical perspective. Last week, the first leg up met the (38.2%) retracement objective (of the down move since the May 13 high near 105.00). With the help of the stronger than expected US jobs report, it backed off and held the previous low (~101.30) for the second leg. The third leg will be signaled by rising above the 102.70 area, which would target the 103.15-103.60 area.   Euro:  The euro's rally from a five-year low in mid-May (~$1.0350) faltered at an important technical area. The $1.0785-$1.0800 band contains retracement objectives and the downtrend line connecting the February and March highs. The MACD is overextended, while the Slow Stochastic is turning down. The $1.0600-$1.0625 band needs to hold to continue the consolidation. However, a break of that area could signal another 1-2 cent pullback. Given the momentum indicators, we would be suspicious that any move above $1.08 would be a false break.  Japanese Yen: The May PMI confirms that the Japanese economic recovery continues, and the core CPI is at its target. Yet, the BOJ has made it clear that it is not about to change its monetary policy. The rise in the US 10-year yield back toward 3.0% from around 2.70% at the end of May coincided with the dollar pushing to almost JPY130. The 20-year high set in early May was near JPY131.35, and there is little to stand in the way of a retest. The momentum indicators turned higher in late May and continue to trend up and have more scope before getting stretched. The five-day moving average crossing above the 20-day moving average for the first time since mid-May also captures the dollar's upside momentum. A break of JPY128.50-JPY129.00 would suggest a range affair rather than a trending market.   British Pound: Sterling looks vulnerable. The Slow Stochastic has rolled over from overextended territory, and the MACD looks poised to do the same. Sterling upside momentum stalled around the (50%) retracement objective of the decline from the late April high (~$1.31). The retracement target was about $1.2625. It closed above it a couple of times in late May but fell to $1.2460 in the middle of last week. The bounce from there was worth about a cent before sellers re-emerged. A break of that area sets up a test on $1.2400, which may offer more formidable support. We would be suspicious of gains above the $1.2660 area as a possible false break.  Canadian Dollar: The Canadian dollar rose over 1.1% against the US dollar last week. It was the third consecutive weekly advance, the longest since last October. The rise was the largest weekly gain of the year. The greenback posted an outside down day last Thursday, rising above the previous day's high and then settling below its low. There was a little follow through USD selling after the job report, but it was minimal, and the greenback settled higher on the day, ahead of the weekend. The MACD is still falling, but the Slow Stochastic looks poised to turn higher. The test for the US dollar bottom pickers is the CAD1.2675-CAD1.2700 area. A move above there could target CAD1.28 initially.   Australian Dollar:  The Australian dollar also posted an outside up day on June 2. There was also a little follow-through ahead of the weekend that saw it briefly poked above $0.7280. However, it reversed lower and settled near session lows. The momentum indicators have turned down. Speculation of a more aggressive move by the central bank on June 7 may limit the aggressiveness of the move, but a move toward $0.7100 initially and maybe, $0.7050 seems a reasonable scenario. The swaps market has a 30 bp hike discounted, but a Bloomberg poll of economists found a median forecast for a 45 bp hike. Meanwhile, the formal decision to hike the minimum wage (5.1%) as the new government promised in the recent election is expected before the end of the month.   Mexican Peso:  The dollar began the week with a drop to new two-year lows against the Mexican peso near MXN19.3150. By the middle of last week, it had bounced to around MXN19.7715. That was the first leg of what we anticipate to be a three-part dollar gain. The second part was the setback to MXN19.50 ahead of the weekend. We suspect the third part will be evident next week as the greenback trades higher. Initially, the MXN19.77 area may be targeted, and the MXN19.80-MXN19.82 may stall gains. Above there is potential toward MXN19.80-MXN19.82. The Slow Stochastic has curled up though it is still overextended. The MACD is leveling off and is near its lowest level in nearly two months.   Chinese Yuan: Chinese officials showed greater acceptance of larger yuan moves starting in April than it has for several years. The broad dollar strength and significant disruption of the Chinese economy as a consequence of the zero Covid policy weighed on the yuan, and officials did not stand in the way. Like it did more generally, the greenback pulled back from over CNY6.80 to about CNY6.6450 in about two weeks. China's onshore market was closed Friday when the dollar strengthened against the major currencies. The offshore yuan was little changed. Shanghai and Beijing are re-opening, and last month likely represented the low point. One implication is that portfolio flows may be less adverse. Consider that the Shanghai Composite, for example, rose in nine of the last 11 sessions. A new trading range may be the most likely scenario, like CNY6.60-CNY6.75.       Disclaimer

June 03, 2022  $USD, Currency Movement, Inflation, jobs, Oil, PMI Overview:  For the large rally in US stocks yesterday and the sell-off in the dollar, US rates were surprisingly little changed. This set the tone for today's action, ahead of the US employment data. Asia Pacific equities moved higher and Europe’s Stoxx 600 has edged up to extend yesterday’s rise. The 10-year US Treasury yield is little changed, hovering around 2.91%. European benchmark yields are 1-3 bp higher. The greenback has stabilized after yesterday’s fall. The Antipodeans and Norwegian krone are weakest today, off 0.2%-0.5%. The euro and Canadian dollar are virtually flat. In the emerging market complex, Asian currencies, aside for the Philippine peso are generally outperforming central Europe. Gold initially extended its two-day (~1.7%) rally to $1874 but has reversed lower. Support is seen in the $1855-$1860 area. July WTI has been turned back from the $117.70 area. It settled near $115.10 last week and is below $116 near midday in Europe. US natgas is extending yesterday’s (~2.4%) retreat. It is off another 2% today. Iron ore rose 1.6% in Singapore. Its 8.6% gain this week is the most in three months, and likely reflects the optimism about the re-opening of Shanghai and lighter restrictions in Beijing. July copper is paring yesterday’s 5.2% surge, its biggest advance this year. It is the third weekly gain. July wheat has stabilized after falling more than 10% in the first two sessions this week. It rose 1.6% yesterday and is up fractionally today.  Asia Pacific Japan's preliminary May service and composite PMI were revised higher, suggesting that the world's third-largest economy continues to recovery from the Covid restrictions and mid-March earthquake. The service PMI was revised to 52.6 from 51.7. The composite PMI stands at 52.3, better than the flash estimate of 51.4. It is the third consecutive gain. It had been below the 50 boom/bust level in January and February. Separately, the BOJ offered to buy JPY50 bln of long-term bonds (25-years plus). The 3.22x the amount of selling interest was the lowest since January. Lastly, reports suggest that Japanese life insurers have boosted the proportion of dollar-denominated investments that are not hedged to the highest in more than 10 years.  Australia's preliminary PMI was also revised higher. The service PMI was tweaked to 53.2 from 53.0, but it still is a slowing from the 56.1 reading in April. Similarly, the composite PMI stands at 52.9, which is better than the 52.5 flash estimate, but still represents a deceleration from April's 55.9 level, the best since mid-2021. The Reserve Bank of Australia is still on course to hike next week. The swaps market has a 30 bp hike priced in, while the latest Bloomberg survey finds economists a bit more hawkish. The median forecast envisions a 45 bp hike. Perhaps, the economists have been spurred by news that the Prime Minister Albanese has formally proposed lifting the minimum wage by more than the inflation. During the recent campaign Albanese called for a 5.1% increase to the current national minimum wage of A$20.33 (~$14) an hour. A decision is expected before the end of the month.  The dollar is in narrow range against the Japanese yen. Most of the price action thus far today has been between JPY129.75 and JPY130.00. The dollar surged on the back of higher interest rates in the first part of the week but quieted down after reaching almost JPY130.25 yesterday. Ahead of the US jobs report, the greenback is up about 2.25% this week. It is snapping a three-week down draft, with its biggest gain in two months. The Australian dollar posted a big outside up day yesterday, trading on both sides on Wednesday's range and closing above its high. In fact, the Aussie closed above its 200-day moving average (~$0.7260) for the first time since late April. It edged up to almost $0.7285 today before stalling. The $0.7300 area offers psychological resistance, but the next important chart area is near $0.7345. The 4.5-cent rally off the mid-May low has stretched the momentum indicators. China's mainland, Hong Kong and Taiwan markets are closed for the holiday today. The dollar fell about 0.4% against the offshore yuan (CNH) after yesterday's 0.6% drop. This leaves the greenback near CNH6.6325, its lowest level in a month. Europe Oil traders were not impressed with the OPEC+ decision to boost output by around 50% to 648k barrels a day. The price of July WTI rallied 5.5% off the session low of $111.20 to $117.55, just shy of Wednesday's high. The fact of the matter is that OPEC+ are not keeping up with the past output commitments because most members have no spare capacity primarily due to the lack of investment. Some estimates suggest that something closer to half of the 648k barrels a day will likely be produced, which is still shy of the previous agreements. Also, the European effort to curb its demand for Russian oil, despite the modest and necessary compromises is seen exacerbating an already tight market. In addition, US oil inventories have fallen by almost 10 mln barrels over the past three weeks, the longest drawdown this year. The re-opening of Shanghai and easing of restrictions in Beijing are expected to boost Chinese demand for crude too. The eurozone final PMI disappointed. The preliminary German and French service and composite PMI were revised lower. Italy missed forecasts. Spain surprised on the upside, and in this case, it means that the composite was unchanged from April (at 55.7). The aggregate service PMI was revised to 56.1 from 56.3 and 57.7 previously. It is the first decline since January. The composite PMI stands at 54.8, slightly lower than the preliminary, but off from the 55.8 reading in April. This year, the EMU composite PMI has been alternating between gains and declines. It stood at 53.3 at the end of last year.  There are a few other high-frequency data points to note. First, Germany's April trade figures showed a rebound in exports (4.4% month-over-month) after a 3% drop in March. Economists had expected imports to fall by 2% but instead they rose by 3.1% on the heels of a 3.2% increase in March. The trade balance rose to 3.5 bln euros from a revised 1.9 bln surplus in April (initially 3.2 bln). The surge in energy prices has seen a dramatic deterioration of the notorious German trade surplus. This year it has averaged 5.8 bln euros a month. In the first four months of last year, the surplus averaged almost 17.0 bln euros. French industrial output in April slipped by 0.1%. Economists had looked for a small gain after a 0.5% decline in March (revised to a 0.4% fall). Manufacturing output fell by 0.4%. It is the third consecutive contraction in output. Finally, the aggregate retail sales collapsed by 1.3%. German and French figures had hinted at a disappointment with economists (median in Bloomberg's survey) looking for a small increase. That said, March's 0.4% decline was revised away to stand at a 0.3% increase. The euro recovered smartly yesterday. After slumping by about 1.3 cents Tuesday and Wednesday, it jumped nearly 1% yesterday to $1.0750. It settled above Wednesday's high and follow-through buying today lifted it to almost $1.0765. The week's high, set Monday, was slightly above $1.0785. The $1.08 area offers formidable resistance. It has not been above there since April 25. Initial support is seen near $1.0740, but it probably takes a break of the $1.0680 area to push some late euro longs to the sidelines. The more than four-cent rally off the mid-May lows is stretching the momentum indicators, but the risk of a hawkish hold by the ECB next week may keep the single currency supported. UK markets are still closed for the holiday today. Sterling is in a narrow range of a little less than a third of a cent above $1.2560. Like the euro, it snapped back yesterday after slipping in the previous two sessions. Last Friday, sterling poked above $1.2665 but has not seen it this week. Still, it had traded above $1.26 for five sessions through the middle of the week. Sterling has rallied a nickel off the mid-May lows, leaving it stretched. The Slow Stochastic has turned down. The MACD does not look far behind.  America The December Fed funds futures were not persuaded that the big miss on the ADP private sector jobs report was particularly meaningful. The implied yield edged slightly higher yesterday. It was the third consecutive increase for a cumulative increase of about 15 bp. It had fallen 10 bp last week. The dollar and equities seemed to have traded like the Fed was closer to breaking something and would not be able to hike rates as much as it may wish. Does the ADP report contain useful data?  Yes, over the longer-term, it tracks the non-farm payroll report. No, in the short run, the fit is not tight. In 2021, the ADP reported average monthly private sector payroll growth of 573k. The BLS figures were closer to 525k. This is fairly good for a time series that is notoriously difficult to forecast. However, in the short run the gap can be substantial. Through April, the ADP average was 395k, while the BLS average was 507k. The ISM survey warned manufacturing employment slowed, but ADP estimated that the goods-producing sector added 24k. The ADP report warned that small businesses were finding its especially difficult to recruit and retain employees. Businesses with less than 50 employees lost 91k jobs, and for four months, companies with 20 or fewer employees have reported declines. Large businesses, which the BLS report may do a better job of tracking, gained 219k positions, according to the ADP survey. The Federal Reserve wants the labor market to moderate, and it thinks it can achieve this without much of a rise in the unemployment rate, according to official comments and the Summary of Economic Projections (dot plot). Despite what appears to be widespread criticism of this view, the median forecast in Bloomberg's survey seems to concur. It has a 3.5% unemployment forecast for next year and CPI and the PCE deflator at 3%, and the Fed funds rate at 3.1%. Chair Powell has noted more than once that while its inflation target can be best expressed by the PCE deflator, there are many dimensions to the labor market. The failure of the higher wages and economic re-opening to boost the participation rate may be a factor encouraging tighter policy. Also, hourly earnings may not be the best gauge of wage pressure but it is handy and timely report. Average hourly earnings have risen by 0.4% on average this year, twice the average in the first four months last year. Recall that average hourly earnings rose at an average year-over-year pace of 3.2% in Q4 19. It was 5.4% in Q1 22. A day after the Bank of Canada hiked its target rate by 50 bp for the second time and committed to further hikes, possibly in larger increments, going forward, Deputy Governor Beaudry pressed the case. He opened the door to hiking rates beyond the 2%-3% neutral range. He acknowledged that inflation is much higher than expected. The year-end rate in the swaps market rose almost seven basis points to poke above 3% for the first time in nearly a month. The peak of 3.05% was actually recorded on April 22.    The US dollar posted an outside down day against the Canadian dollar. It first rose above Wednesday's high and then reversed and closed below Wednesday's low. It began the week above CAD1.27 and now, with the help of follow-through selling, has held below CAD1.26 today, where an option for $460 mln expires today. Since mid-May, the greenback has fallen by nearly 4%. The momentum indicators are stretched but have not turned. The greenback had fallen to two-year lows against the Mexican peso (~MXN19.4135) at the start of the week and bounced to around MXN19.7715 in the middle of the week. Yesterday's pullback returned it to the MXN19.5250 area. The dollar is finding support near there today. The momentum indicators are mixed. The MACD is falling but overextended while the Slow Stochastic has turned higher.    Disclaimer

June 02, 2022  $USD, Australia, Bank of Canada, Currency Movement, ECB, Federal Reserve, Japan, Mexico, OPEC+ Overview: Asia Pacific equities were mostly lower.  China and India bucked the trend.  Europe’s Stoxx 600 is steady with no follow through selling after yesterday reversal. US index futures are posting modest gains and are trying to snap a two-day drop.  The US 10-year yield is firm at 2.91%, while European benchmark rates are 2-3 bp higher.  Asia Pacific bonds were dragged lower by the sell-off in the US yesterday.  The dollar is broadly lower.  The Swedish krona and sterling are faring best among the majors.  The Canadian dollar is the laggard today, little changed near midday in Europe.  Emerging market currencies are more mixed.  The South Korean won was thumped by 1.2% and the Philippine peso is off by 0.6% to lead the losers, while, leaving aside the rouble, the Hungarian forint is the strongest, up about 0.8%. The central bank hiked the one-week deposit rate by 30 bp to 6.75%.  Gold is extending yesterday’s recovery from around $1828, a two-week low, and is probing the $1855 area.  After testing $120 earlier this week, July WTI is trading around $112.50 ahead of the OPEC+ decision on next month’s output.  There is speculation that the pact between OPEC and non-OPEC may be unraveling.  US natgas jumped 6.75% yesterday, its biggest rise since mid-April.  It is a bit firmer today.  Europe’s benchmark fell almost 6% yesterday but is bouncing back more than 4% today. Iron ore surged by 5.8% in Singapore and is at its best level in a month.  Copper is up 2% and is at levels not seen since late April.  July wheat is trying to stabilize after falling more than 10% in the past two sessions.   Asia Pacific The Bank of Japan reported its balance sheet shrank by 0.7% in the past ten days.  Its holdings of government securities edged up by 0.2%, corporate bonds by 0.5%, and commercial paper 0.3%.  These increases were offset in full by the 4.5% decline in loans.  There is no policy implication here, and despite the 2% increase in wages settlements in March and the upward pressure on inflation, where the core has met the 2% target, the BOJ has been clear that it is too early to tighten policy.   Australia's energy regulator will allow a 4%-14% increase in electric bills starting next month.  Between this and the increase in gas prices, Q3 CPI is likely to rise by around 0.4%.  This is seen clearing the way for possibly more aggressive tightening of monetary policy.  The swaps market has a little more than a 30 bp hike discounted for next week's RBA meeting.  Separately, Australia reported a larger than expected April trade surplus of A$10.50 bln.  Exports rose 1% and imports fell by 1%.  Coal exports rose 6% and iron ore shipments increased by 2.6%, while gold exports jumped 18%.  The impact of the lockdowns in China were evident as Australia's exports fell 2.9% and imports were off a little more than 14%.  Australia's positive terms-of-trade shock can be appreciated by comparing this year's trade surplus (average A$10.2 bln) to the first four months of last year (~A$8.6 bln) and the same period in 2019 (~A$4.3 bln).   The dollar extended yesterday's gains against the Japanese yen to reach almost JPY130.25, its highest level since May 11. The multiyear high was recorded a couple of sessions earlier at JPY131.35.   Not coincidentally, the 10-year US yield rose nearly 17 bp over the past two sessions coming into today.  The exchange rate has been consolidating since early in the Asian session.  Support is seen near JPY129.60.  After peaking yesterday near $0.7230, the Australian dollar backed off to $0.7040 today before finding a bid that lifted it back near $0.7200.  The intraday momentum indicator is stretched. Initial support now is seen near $0.7175.  The greenback poked above CNY6.70 briefly, its best level of the week, before reversing lower, though support was found just ahead of yesterday's low near CNY6.6660.  The PBOC set the dollar's reference rate at CNY6.7095, a bit firmer than the market expected (Bloomberg survey median, CNY6.7088).  Note that mainland markets are closed tomorrow.   Europe The central banks of Austria, Netherlands, and Latvia were advocating a 50 bp increase even before this week's higher than expected CPI.  Austria's central bank governor reiterated his call yesterday.  Next week's ECB meeting will finish preparing the market for a July hike, but it is not clear that a majority favor a 50 bp move.  ECB President Lagarde and the chief economist Lane have endorsed a 25 bp increase.  France, Italy, and Malta are in line with the ECB's leadership.  Economists at Germany's largest bank have forecast a 50 bp hike at the July meeting.  The swaps market recognizes the risk and is pricing in 34 bp of tightening.   There continues to be speculation that the OPEC+ cooperation may be unwinding amid reports that Saudi Arabia may be prepared to make up for the loss of Russian oil.  Yet, later today, OPEC+ is likely to announce another increase of 430k barrels a day next month.  The relationship may be strained but recent comments suggest it has not been broken.  Separately, but related, last month, OPEC output rose by 130k barrel a day to 28.85 mln a day. The 140k barrel a day drop brought Libyan output to its lowest level (760k) since October 2020.  Saudi Arabia, which is thought to have spare capacity to boost output, pumped 10.43 mln barrels a day last month, which was about 110k barrels a day below its formal target.   The euro slumped to almost $1.0625 yesterday, an eight-day low amid the sharp rise in US rates.  The single currency is firmer today, approaching $1.07.  To lift the tone, a move above $1.0725 may be needed, but it may be blocked initially by nearly 2.5 bln euros in options struck between $1.0725 and $1.0740 that expire today.  The UK is on holiday today and tomorrow, thinning sterling activity.  In yesterday's dollar recovery, sterling fell to $1.2460, its lowest level since May 20.  It met the (38.2%) retracement of sterling's recovery from the $1.2155 area visited on May 13. The next retracement (50%) is near $1.2410.  Sterling has recovered to almost $1.2550 in the European morning on the back of the broader dollar pullback.  The intraday momentum indicators are stretched, but a push above $1.2560-$1.2580 would be a bullish development.   America The Bank of Canada lifted the target rate by 50 bp as economists expected.  It threatened to act "more forceful" if needed to underscore its commitment to move against inflation. The market reacted to the signal accordingly.  The year-end rate implied by the swaps market rose 16 bp to almost 3%. The two-year yield rose 13 bp and extended its advance for the fifth consecutive session. Near 2.80%, the yield is at its highest level since 2008.  Canada was a discount to the US on two-year yields in early May, but is now at a 14 bp premium, the most since late January. If this is sustained, it may weaken the correlation between the Canadian dollar and the S&P 500.   Mexico's May manufacturing PMI moved above 50 (50.6 from 49.3) since October 2019.  It was the fourth consecutive increase.  Disappointingly, the IMEF surveys show activity moderated last month.  Work remittances were stronger than expected and at $4.72 bln, was the most so far this year.  The central bank shaved this year's growth forecast to 2.2% from 2.4% this year and 2.4% next year rather than 2.9%. The market (median forecasts in Bloomberg's survey) is more pessimistic and projects 1.8% growth this year and 2.0% next.  Banxico reiterated its inflation forecast announced last month for CPI to peak at 7.6% now (Q2) and finishing the year at 6.4%.  It is not anticipated to return to the 3% target until into 2024.  Like the Bank of Canada, Mexico's central bank indicated it would take more "forceful action" if required.   Some economists are forecasting 75 bp hike at the June 23 meeting.  The swaps market is pricing 100 bp of hikes over the next three months and another 100 bp in the following three months.  Given Canadian and Mexican central banks are threatening larger moves than the 50 bp increments, it is notable that the Fed's leading hawk, St. Louis Fed's Bullard, who had previously raised the possibility of 75 bp hike, endorsed 50 bp at the next two meetings, and cautioned against raising rates too quickly.  Like his former colleague, Governor Waller, Bullard's views are fairly close to the market.  Bullard suggested the terminal rate may be around 3.5%.  The swaps market is now around 3.25%.  Despite the Beige Book picking up anecdotes of a slowdown in several (four) districts, neither Bullard nor Barkin seem persuaded that the economy is on the cusp of a recession.  While the manufacturing PMI and ISM moved in opposite directions, the larger than expected fall in last month's auto sales (12.68 mln vehicles, seasonally adjusted annual rate, well below the 13.7 mln forecast, 14.29 mln in April, and 16.99 mln in May 2021), likely weigh on measures of consumption, including retail sales, and growth more broadly.  The Atlanta Fed's GDP tracker for Q2 fell to 1.3% from 1.9%.  Today's highlights include the ADP job estimate (~300k), weekly jobless claims and factory orders.  The Fed's Logan remarks at noon (ET) will be scrutinized for clues as she will be the new president of the Dallas Fed in August. Cleveland Fed's Mester discusses the economic outlook. She is a voting member of the FOMC this year and staked out a hawkish position.   The US dollar bounced off the CAD1.2610 area after the Bank of Canada's hike and stalled near CAD1.2675.  Today, it edged up to about CAD1.2685 in late Asian turnover, where new sellers were lurking and pushed the greenback down to CAD1.2650. Consolidation ahead of tomorrow's US employment report may be the most likely scenario for the North American session.  The US dollar hit a two-year low near MXN19.4135 on Monday and bounced to about MXN19.7715 yesterday.  It is trading heavier today to see the MXN19.6255 area in the European morning.  The MXN19.60 offers initial support.  Here too consolidation looks likely.     Disclaimer

May 31, 2022  Macro Russia's invasion of Ukraine and China's response to Covid continue to shape the broader investment climate. Europe is making efforts to reduce reliance on Russia's energy. Ultimately, the disruption to Ukrainian food shipments is a different story, and protectionism measures by India, Malaysia, and Indonesia do not help matters. An estimated 20%-30% of Ukrainian farmland is either unplanted or unharvested. At least two dozen countries depend on Russia/Ukraine for at least half their grains.  China's policy response to Covid seems out-of-proportion to the threat given the mutations in a way that arguably was not the case two years ago. Still, the important takeaway is that it appears that the max lockdown is passed, which is not to say that it is over. With the re-opening of large swathes of the economy, Beijing has announced new fiscal measures to support the economy. That said, the May economic data may mark the trough. Moreover, the downward revisions to this year's growth forecasts last month may also mark the peak in pessimism. George Soros has argued that Xi's third term is not assured, and some reporters have played up potential differences between President Xi and Premier Li. However, it has already been signaled that Li will not join Xi in another term. And it seems that by the 20th Party Congress in Q4, the economy will be in recovery mode, and possibly a robust one at that.  Almost at the same time that President Biden indicated that the US would defend Taiwan from an attack, and the White House walked it back for at least the third time, the Biden administration unveiled its new regional initiative. Hal Brands, professor at Johns Hopkins and columnist for Bloomberg, piqued that "once is a gaffe, three times is policy. And yet an element of ambiguity remains. The signal is not to China. On the contrary, Beijing's war planning must assume that Taiwan's allies, including the US, come to its aid. Rather America's "strategic ambiguity" was directed at Taiwan to deter it from unilaterally dragging the US into a war with China by, for example, declaring independence. Biden's new initiative, the Indo-Pacific Economic Framework (IPEF), includes 13 nations. If it is to fill the vacuum since the US withdrew from the Trans-Pacific Partnership, it is unambitious. No trade barriers are coming down. No tariffs are being cut. It is about clean energy/decarbonization, supply chain resilience, infrastructure, and taxation/corruption issues. It is vague and abstract. Two other elements will be noted by Beijing for their absence. First, despite a letter signed by half of the Senate to include Taiwan in the IPEF, the Biden administration did not. Second, Biden's FY2023 budget proposal calls for a reduction of the size of the US navy to 280 ships in five years from 298 today. The Pentagon estimates that China has 355 vessels now and projects it to increase to 460 by 2030. In fairness, US allies in the region--Japan, South Korea, and Australia, have as many ships combined as China--and US tonnage is greater than China, meaning that it has bigger vessels. Alongside the reverberations to shockwaves emanating from Russia's invasion of Ukraine and China's extreme reaction to Covid, countries must cope with the hawkish turn by the Federal Reserve and a strong US dollar as they wrestled with their own economic dynamics. Rising inflation was the driver of US rates and the Fed, which, in turn, underpinned the dollar. Last month, it looked like inflation may have peaked. Inflation expectations, measured by the 10-year breakeven or five-year five-year forward,  peaked in late April and fell around 50 bp in May. The two-year breakeven peaked about a week after the first Fed hike in March near 5% and by mid-May had dropped to about 3.75% before consolidating.   In early May, the market toyed with the idea that the peak in the Fed funds rate in this cycle would be around 3.75%. That is well above the 2.25%-2.50% range that captures most Fed officials' estimate for the neutral rate. However, softer economic data and some official comments saw peak Fed funds hover near 3% for most of the May. The implied yield of the December 2022 Fed funds futures fell from a little more than 2.90% in early May to 2.50% in late May as the market ruled out a 75 bp move and began to think about a pause.  The Federal Reserve has all but committed to lifting the Fed funds rate by 50 bp in both June and July, which would raise the target to 1.75%-2.00%. The balance sheet will begin shrinking in June as well. The Summary of Economic Projections ("dot plot") will draw much attention as two new governors have been confirmed (Cook and Jefferson), and the third (Barr) could be approved in time. Meanwhile, the Boston Fed has picked Collins to lead them, but she will not take the post until July 1, leaving the Philadelphia Fed President Harker voting in her stead. The policy outlook for the European Central Bank has been evolving, and it has now crystalized with President Lagarde's essay on the central bank's website. At the end of last year, Lagarde did not expect to lift rates this year, but now she has strongly signaled 25 bp hikes at the July and September meetings. She acknowledged that the deflationary dynamics are ended and are unlikely to return. The July rate hike is unusual as the ECB has clearly preferred to change rates at meetings where the staff updates its forecasts. However, the bond-buying under the Asset Purchase Program is set to continue into early July. Still, Lagarde has repeatedly noted that the first hike can come quickly after the bond-buying stops. The forward guidance at the June meeting will most likely confirm this. The swaps market has slightly more than one 25 bp hike discounted for Q4 22, with the year-end rate seen at 27 bp. The year-end rate was seen ibelow zero until early April and peaked slightly over 50 bp on May 23. While the Fed's tightening cycle is expected to peak next year, the ECB's cycle is seen stretching into 2024 and peaking between 1.25% and 1.50%. While many economists see US inflation peaking in Q2, eurozone inflation may not peak until Q3 or even possibly Q4. Nevertheless, the 10-year German breakeven trended lower law month. It peaked at the start of May near 3.00% and dipped below 2.2% in late May. It is not just Germany. Consider Italy. Its 10-year breakeven peaked slightly lower than the German equivalent and fell nearly 100 bp to a slip below 2% briefly in late May. The five-year five-year forward for the eurozone fell by around 50 bp to lows than 2.05% last month. The ECB has signaled it will adjust the Targeted Long-Term Refinancing Operations (TLTRO) rate. When the pandemic struck, the ECB cut the rate to 50 bp below the deposit rate (-50 bp). The TLTROs were a critical component of the monetary policy response (to the Great Financial Crisis and Covid). These long-term loans were a cheap source of funding and provided a risk-free arbitrage opportunity for the banks. Assuming certain lending targets were met, the banks could get funds from the ECB at -100 bp and deposit the same funds with the ECB at -50 bp. The TLTROs complemented the bond purchases and account for around a quarter of the ECB's 8.8. trillion-euro balance sheet. With inflation and/or inflation expectations possibly peaking in the US and interest rates falling, the dollar appeared to be rolling over. The US 2-year yield peaked on May 4 near 2.85%. By the end of the month, it was around 40 bp lower. The US 10-year yield peaked on May 9 at about 3.2%. It appeared to be finding a base near 2.70% in late May. The dollar fell against the major currencies, with the Norwegian krone being the sole exception. The Japanese yen rose 2% to halt a nearly 15% slide over the previous two months and led the major currencies higher. The euro rose about 1.8% in May, its first monthly gain of the year and the largest since last April. Not coincidentally, the two-year premium the US offers fell by around 50 bp since peaking in early April near 2.55%. Emerging market currencies were mixed. Capital controls, a positive terms-of-trade shock, a dramatic rate hike when it invaded Ukraine (to 20% from 8.5%), and the trade embargo limiting imports helped lift the Russian rouble by 8% in May. The currency appreciation has given the central bank the latitude to cut rates. The 600 bp cut in April was followed by a 300 bp cut in May to bring the key rate to 11%. In addition, some capital controls have been lifted or diluted. After the bout of profit-taking in April, Latam currencies were back in favor in May. Leaving aside the rouble, Latam currencies, led by the 5.1% gain of the Brazilian real, were four of the next five emerging market currencies. Central European currencies also did well, aided by the euro's recovery. Hungary was a notable exception. The Turkish lira was the poorest performer, depreciating by almost 8.5% on the back of rising inflation, a deteriorating current account, and limited official ability to defend it. Its year-to-date loss is 18%, after falling 44% last year. An inter-meeting rate hike failed to prevent the Indian rupee from falling in May (~1.4%). This year, it has fallen every month for a cumulative decline of about 4.2%. The Chinese yuan fell for a third month (~1.3%) and is off a little more than 5% this year. Bannockburn's World Currency Index, our GDP-weighted basket, edged up in May, reflecting the gains in the major currencies. The increase in the second half of the month more than recouped the losses from the first half. The emerging market currency component was weaker, reflecting the decline in the yuan, rupee, and South Korean won. The currencies from Brazil, Mexico, and Russia appreciated, but they account for only 6% of the index. The May gain pared the year's loss to around 2.2%. From a longer perspective, the BWCI peaked in June 2021 and has been trending lower since. At the May low, it had fallen by about 5.6%. That low may prove durable.      Dollar:  Two contrarian indications seemed to signal the dollar's setback. First, the talk of a need for a Plaza-like agreement and/or intervention to check the greenback's rise seemed exaggerated. Second, the non-commercial (speculative) accounts in the futures market that had been net long euros since early this year, despite its persistent decline, capitulated and briefly flipped to a net short position in early May. Unlike other dollar setbacks seen over the past year, this one is backed by a critical fundamental development: the peak in inflation/inflation expectations weakened its interest rate support. To be sure, barring a significant negative shock, businesses and investors should expect the Fed to deliver 50 bp hikes at least at the next two FOMC meetings (June and July). This is unlikely to mark the peak in policy, but a return to 25 bp steps as the Fed funds' rate enters neutral territory seems likely. The Fed's balance sheet peaked in mid-April and has since fallen by more than $50 bln, which may sound large but is around 0.6%. However, going forward, the balance sheet will begin shrinking in earnest as the Fed will not fully reinvestment maturing proceeds of its Treasury and Agency holdings. The idea was that the Fed would tighten until something breaks, and to put it simply, the market sees something breaking on the horizon. The interest-rate-sensitive housing market is already showing signs of tightening financial conditions. On the other hand, the Fed may welcome some moderation in housing and the labor market and some unwinding of speculative excesses in other markets. May was the third consecutive month that the odds (median result in Bloomberg's survey) of a US recession rose over the next 12 months. At 30%, it is twice what it was at the end of last year.    Euro:   Economic activity has proven resilient thus far in the face of the energy shock and disruption caused by Covid and the war. The May composite PMI stood at 54.9 compared with 53.3 at the end of last year. The acceleration and broadening of price pressures have spurred a significant change in rhetoric from ECB officials. President Lagarde's post on the ECB's website (May 23) was as explicit a statement imaginable but confirmed what the market had been anticipating, a 25 bp hike in July and September, though a few hawks are are reluctnant to rule out a 50 bp move.  The swaps market sees the ECB exiting sub-zero rates in Q4 for the first time since 2014. The IG Metall clash with the German steel industry will be closely monitored, and Germany's minimum wage will rise to 12 euros an hour from a little less than 10. The ECB's chief economist Lane has unveiled a new wage tracker, and according to it, the pay deals since January are the strongest in a decade. The ECB meeting on June 9 may be among the most important of the year. Under the umbrella of new staff forecasts, the ECB will confirm the end of its net bond purchases and a rate hike in July.Counter-intuitively, more revealing of the medium-term outlook for the euro will be the pullback from the two-week rally that it carries into June. The $1.08-$1.10 area provides the immediate cap, and a break back below $1.05 would be disappointing.   (May 30 indicative closing prices, previous in parentheses) Spot: $1.0780 ($1.0545) Median Bloomberg One-month Forecast $1.0605 ($1.0730)  One-month forward $1.0800 ($1.0565)    One-month implied vol 7.8% (9.4%)         Japanese Yen:   Japan has the fastest inflation in over a decade, but the central bank assures businesses and investors that it is not the right kind and will not be sustainable. That means that BOJ will continue to defend the 0.25% cap on the 10-year yield when necessary and expand its balance sheet. The fiscal package is expected to lower headline inflation by around 0.5%. The market accepts that disinflationary forces have not been fully defeated. The 5-year breakeven is slightly below 1.20%, and the 10-year is near 0.85%. With Covid pressures easing, the economy is gaining traction. The May composite PMI stands at 51.4, a five-month high. The correlation between changes in the exchange rate and the 10-year US yield remains strong. The 30-day correlation is finishing May at two-month highs (~0.57%). They both peaked on May 9. The dollar-yen exchange rate often appears to be rangebound, and trends occur as it moves from one range to another. If the JPY130 area marks the upper end of a possible new range, we suspect the lower end may be in the JPY124.50-JPY125.00 area.       Spot: JPY129.60 (JPY129.70)       Median Bloomberg One-month Forecast JPY129.90  (JPY126.70)      One-month forward JPY127.45 (JPY129.60)    One-month implied vol 9.4% (11.9%)     British Pound:  Sterling rallied by about 4.25%  after bottoming in mid-May, but the market is not convinced. Speculators in the futures market have amassed the largest next short sterling position in three years. Of the G7 countries, economists (median, Bloomberg survey) see the highest risk of a UK recession in the next 12 months (35%). Still, the swaps market has 127 bp of hikes priced in for the next five Monetary Policy Committee meetings for the remainder of the year. The strength of the labor market and the unexpected strength of April retail sales offset the four-year low in consumer confidence. The first stab at addressing the cost-of-living crisis, which included easing the energy bill for households, and a tax on profits of oil companies (and utilities), is unlikely to prove sufficient given the hike in the energy price cap in October. Meanwhile, Gray's report stirred the political pot, but "partygate" is not going away. The next phase is the Committee of Privileges, on which the Tories have a majority, to determine whether the Prime Minister deliberately lied to Parliament. The $1.27-$1.28 area may offer formidable resistance, but if sterling bottomed, it should hold above $1.2350-$1.2400.     Spot: $1.2650 ($1.2575)    Median Bloomberg One-month Forecast $1.2500 ($1.2800)  One-month forward $1.2655 ($1.2570)   One-month implied vol 9.1% (9.7%)     Canadian Dollar:  Near mid-May, the Canadian dollar had fallen to its lowest level since late 2020 but recovered smartly in the second half of the month. The US dollar finished may testing important support in the CAD1.2660-CAD1.2700 area. A convincing break targets CAD1.2400 initially. The swaps market sees the Bank of Canada lifting its target rate by 50 bp in June and July and then 25 bp at each of the last three meetings of the year. The expected terminal rate is now seen as around 3% in 2024. The peak was seen near 3.4% in mid-April. Canada's economic fundamentals are solid. It is expected to be the fastest-growing economy in the G7 this year. In addition, it is experiencing a positive terms-of-trade shock. An important drag on the currency, however, has been the sensitivity to the broader risk appetite. The correlation between the change in the exchange rate and the S&P 500 has been stable near 0.70% for the past 30 and 60 days.     Spot: CAD1.2655 (CAD 1.2850)  Median Bloomberg One-month Forecast CAD1.2800 (CAD1.2665) One-month forward CAD1.2660 (CAD1.2850)    One-month implied vol 6.9% (8.2%)      Australian Dollar:   The newly elected Labor government inherits a relatively strong economy and a robust jobs market (3.9% unemployment rate in April vs. 5.1% at the end of 2019). The rise in commodity prices has seen the trade surplus swell from almost A$33 bln in the 12 months through Q1 2019 to A$123.5 bln in the 12 months through March 2022. The RBA began its tightening cycle with a larger than expected 25 bp move on May 3, which brought the cash rate target to 0.35%. The swaps market favors another 25 bp hike on June 7 and scope for a 50 bp move in H2 on its way to a year-end rate between 2.00% and 2.25%. The terminal rate is seen closer to 3.6% in the middle of next year. In early April, the Australian dollar peaked near $0.7660 and tumbled 10.8% into the May low of about $0.6830. The recovery in the second half of May saw it approach $0.7200. The $0.7245-$0.7265 area, which also houses the 200-day moving average, offers the nearby cap. If a significant low is in place, the Australian dollar should hold above $0.7000.       Spot:  $0.7195 ($0.7060)        Median Bloomberg One-Month Forecast $0.7200 ($0.7240)      One-month forward $0.7205 ($0.7065)     One-month implied vol 11.1% (10.0%)        Mexican Peso:  The peso was among the strongest currencies in the world in May, appreciating by around 4.8%. The four-week rally lifted the peso to new two-year highs into the end of the month. In contrast, the JP Morgan Emerging Market Currency Index gained about 1.35% in May, leaving it fractionally higher on the year. Although there is little support ahead of the MXN19.20-MXN19.30 area, the dollar is stretched. Mexican price pressures may be peaking, and President AMLO's deal with a couple dozen businesses to limit price increases may help on the margins. Still, there has been speculation of a 75 bp hike at the June 23 Banxico meeting from 7.0%  reached in May. With the Fed committed to 50 bp increases and the Mexican economy sluggish, a half-point move in June and August seems a more likely scenario. The market expects the terminal rate to be between 9.25% and 9.50%  toward the middle of 2023. The peso is sensitive to the broader risk environment. Its correlation with the S&P 500 is near 0.6%, the most on a 60-day rolling basis since last July. Mexico holds six gubernatorial elections on June 1. Although the traditional parties have dominated, polls suggest the Ciudadano and Moreno (AMLO's party) are mounting a serious challenge. The PRI, PAN, and PRD have formed a coalition in four states to block the insurgency.      Spot: MXN19.5355 (MXN20.4280)   Median Bloomberg One-Month Forecast MXN20.2755 (MXN20.3610)   One-month forward MXN19.6375 (MXN20.55) One-month implied vol 11.6% (12.3%)      Chinese Yuan:   Since the end of February, the Chinese yuan has risen in only two of the 13 weeks through the end of May. The dollar rose by nearly 8%. However, the shifting view of the Federal Reserve and the re-opening of Shanghai and new stimulus measures announced seem to have capped the greenback around CNY6.80. As bottom pickers return to Chinese stocks, there is scope for the yuan to recover. As a result, the dollar may have scope to pull back toward CNY6.5400. Despite the new stimulus efforts, the official growth target of 5.5% this year is unlikely to be met. The median projection in Bloomberg's survey is for GDP to rise 4.5% this year, while many banks sub-4%. The pessimism stems from the zero-Covid policy, and although it is unlikely to be abandoned, the peak lockdown coverage has likely passed. May could very well mark the trough in the economy and sentiment.   While there is scope for some additional monetary support, Beijing looks likely to rely more on fiscal efforts.       Spot: CNY6.6615 (CNY6.6085) Median Bloomberg One-month Forecast CNY6.67(CNY6.5015)  One-month forward CNY6.6675(CNY6.6380)    One-month implied vol 6.6% (7.0%)     Disclaimer

(On vacation for the rest of the month.  Going to Portugal.  Commentary will resume on June 1.   Good luck to us all.) The market is a fickle mistress. The major central banks were judged to be behind the inflation curve. Much teeth-gashing, finger-pointing. Federal Reserve Chair Powell was blamed for denying that a 75 bp hike was under consideration. Bank of Japan Governor Kuroda was blamed for keeping the 0.25% cap on the 10-year Japanese Government Bond yield. Even though European Central Bank President Lagarde had indicated previously that rates could be increased within weeks of the end of the bond purchases, many observers embraced it as a new sign that the ECB was belated to hike rates as early as July. For the better part of three weeks, the swaps market has been pricing in a 20 bp rate hike. It peaked not when Lagarde spoke last week but on April 22. The US 10-year breakeven rate (the difference between the yield of the inflation-protected security and the conventional note yield) rose from 2.60% at the end of last year to a high a little bit above 3.05% on April 22. Since then, it has been trending erratically lower and bottomed near 2.63%, before the CPI report. It finished last week around 2.74%, falling about 12 bp on the week. The three-week decline is the longest since January. Many observers write and speak as if the Fed needs to catch up to the market. But this seems like a variant of the hubris virus that they often diagnose the central bank with. The relationship is much more complicated. Consider that a week ago, the swaps market was pricing in a terminal Fed funds rate of 3.75%. After elevated CPI and PPI prints, the terminal rate is now, ironically, projected close to 3.0%. Or consider that shortly after the Fed's statement and before Powell's press conference, the December Fed funds futures contract implied a 2.89% yield. It finished last week near 2.63%.   There is an industry built on criticizing the Federal Reserve. The Fed is damned if they do and damned if they don't. It is an easy mark. When it raised by 25 bp in March, it was criticized for not being more aggressive. When the Fed raised rates by 50 bp earlier this month, it was blamed for taking 75 bp off the table. Often, the same voices criticize the Fed for risking a recession. Many accept that the economic contraction in Q1 was the result of GDP math. Importing too many goods (relative to exports) and accumulating inventories at a slower pace than the record set in Q4 were critical drags. Consumption and business investment rose. That is ultimately what drives the economy. Nevertheless, some pundits play up the risk that the US is on the verge of a recession. We have expressed concerns about tightening monetary and fiscal policy as the economy slows. We brought attention to the doubling of oil prices, which has preceded the last three US recessions. The inventory cycle looks mature and is unlikely to be the tailwind going forward. The build-up of savings and pent-up consumer demand appear to have run their course. However, the doom and gloom camp is over-hyping the case. Monetary policy is known for its variable lags. The federal deficit may be halved this year, but that still leaves it above 5% of GDP. The US job growth remains impressive. Through last month, non-farm payrolls have risen by over 2 mln this year. It is not far off the pace in the same period last year (~2.2 mln). Weekly initial jobless claims are hovering around 200k, roughly half the pace of May 2021. Yes, the improvement in the labor market will slow, and it will have to slow much more than it has to support a recession scenario after the contraction in Q1.  Like those who see a currency war every year or so, the doom and gloom camp or the always-critical of the Fed crowd are crying wolf. And therein lies the importance of the economic data in the days ahead. There may be no reason to let the facts interfere with a good story, but the economic data may show a solid gain in consumption and continued growth in industrial output.  Or, to say the same thing, the data should show an expanding, not contracting, economy. April retail sales are expected to rise by a solid 1% by the median forecast in Bloomberg's survey after a revised 0.7% (from 0.5%) gain in March. We already know that auto sales were stronger, which likely lifted the headline figure. Some economic models use components for GDP calculations, which exclude autos, gasoline, building materials, and food services (the models pick up the information from different time series), are expected to rise by 0.6% after a revised 0.7% gain from -0.1) in March. Industrial output rose by nearly 3% in Q1, and that pace will not be sustained. Last year, industrial output rose by 0.3% a month. In April, output may have increased by 0.4%. Among the first places to look at financial conditions biting are the interest rate sensitive sectors, like housing. April housing starts will be reported on May 18. A decline is indeed expected after two months of gains, but the takeaway is that the level of activity is elevated. March housing starts were the highest in 16 years. The same is true of permits.  Another place to look for financial conditions biting is in the translation of foreign earnings into dollars for US companies. Figures cited in Barron's from Sentieo, a financial analytics company, noted that 20 US companies with market caps of more than $100 bln cited the dollar's appreciation as a headwind, which is twice from a year ago. What was left unsaid was that there are around 100 such companies, meaning something on the magnitude of 80% of the giants did not complain about the dollar's appreciation.   In addition to translation, there is an issue of competitiveness too. According to the OCED's model of purchasing power parity, the euro, sterling, and yen have not been this undervalued in at least 30 years. It may not be a short-run consideration, but it can impact the relative competitiveness and exposure of even purely domestic US companies to a foreign competition that may not have been there a couple of years ago. In addition to the divergence of monetary policy, part of the current political and economic environment is that America's two rivals, Russia and China, are shooting themselves in the foot. America's penchant for exaggerating the strength of Russian strength has again proved wide of the mark. Moscow's ability to project its power will be curtailed. NATO will be bigger than before--more members and a greater presence--and Russia's economy has been traumatized despite the capital-controls induced rouble appreciation. China's Covid response seems over-the-top and is hobbling the economy. Despite the best efforts of the Chinese government, the world has gotten a glimpse of the gap between the Chinese people and the rulers in Beijing. For years, Chinese officials have raised questions about the US model, but the chickens have come home to roost, and China's developmental model is being questioned in new ways. The sharp drop in Chinese lending in April is a warning of a dismal economic performance as the lockdowns and social restrictions crippled around half of its economy. The silver lining is that Shanghai may appear from the lockdowns shortly, and a "V" type recovery is possible if Covid can be brought under control. There is scope for China to cut its benchmark 1-year medium-term lending facility (MLF) rate, which has remained at 2.85% since being cut by 10 bp in January. A reduction in the MLF at the start of the new week would boost the chances of a cut in the loan prime rate at the end of the week. Japan has two data points that will be of interest. First, it will report Q1 GDP. It is expected to have contracted by 0.4%-0.5%. The Covid restrictions and earthquake weakened the economy after growing by 1.1% in Q4 22. The government has responded with a spending package, and in any event, the economy already appears to be recovering. Second, Japan will report the national CPI figures for April at the end of the week. The market got a hint of what to expect from the surge in the Tokyo CPI. In addition to rising food and energy prices, the dropping of last year's cuts in cell phone charges will lift measured inflation. Excluding fresh food and energy, Japan's CPI rose above zero in April for the first time since July 2020. The market does not pay much attention to Japan's trade figures. That seems to be the most straightforward explanation why so many observers insist on characterizing Japan as export-oriented. Japan will report its April trade figures early on May 19 in Tokyo. A sharp deterioration is expected (~JPY1.2 trillion deficit from a JPY414 bln shortfall in March. It will be the ninth consecutive monthly trade deficit. In April 2021, it recorded a nearly JPY227 bln trade surplus. The UK reports employment figures, April CPI, and retail sales. Employment growth is expected to slow, and average earnings growth will likely be little changed. Economists anticipate the unemployment rate to remain in the trough near 3.8%, which is also where it was at the end of 2019. Still, it is understood to be a lagging indicator. UK retail sales likely fell for the third consecutive month when gasoline is excluded. With two exceptions, it has been falling since last May as the cost-of-living squeeze intensifies. Meanwhile, CPI will surge. A 54% rise in the household energy cap was announced in February, effective in April. That alone will lift the month-over-month rate by more than 1.5%. The Bank of England forecast the year-over-year rate to rise to 9.1% from 7.0% in March. Lastly, we note that UK Prime Minister Johnson is expected to address Northern Ireland's protocol in a speech in the coming week. Tensions have been rising, and the recent election defeat for the Democratic Unionist Party allows it to play the obstructionist role. It refuses to join the government unless the protocol that was a result of extended negotiations is jettisoned. Turning to the price action:   Dollar Index:  The Dollar Index rose for the sixth consecutive week and pushed to almost 105.00 for the first time since late 2002. The main driver is the aggressiveness of the Federal Reserve and, secondarily, the poor news stream from Europe, Russia, and China. The momentum indicators are stretched but do not appear poised to turn lower. The 104.00 area may provide support as it capped the upside for a little bit. There is little on the charts until closer to 106.00. Euro:  The single currency continues to struggle to sustain even minor upticks. It has fallen for the past four sessions and made a new five-year low near $1.0350 ahead of the weekend. A break of the 2017 low ($1.0340) leaves very little to deter a test on parity. Given the elevated volatility (three-month ~9.5%), a move to $1.0 is not so much a tail risk. The $1.05 area now may offer the nearby cap.  A convincing move above $1.06 would suggest a bottom of some import could be in place.  Japanese Yen: The exchange rate and US yields continue to move nearly in lockstep. The direction seems more important than the level on a day-to-day basis. In the first four sessions last week, the 10-year US yield fell nearly 30 bp, and the dollar fell from around JPY130.50 to about JPY128.30. The yield rose ahead of the weekend, and the dollar traded a full yen off the lows. The momentum indicators have pulled back as one would expect, with a nearly 3% pullback in spot. We often find the dollar-yen pair to be rangebound, and when it does trend, it frequently is moving to a new trend. We suspect that the JPY127.00 area marks the lower end of the range.  British Pound:  Sterling fell for the fourth consecutive week, and it is poised to fall further. The $1.20 area is the next important target. There have been 23 sessions since April 13, and sterling has fallen in all but four sessions, and none of them was last week. In fact, sterling takes a seven-day slump into next week's activity. It fell to almost $1.2155 before the weekend, its lowest level since May 2020. The momentum indicators are stretched but show little inclination of turning. Initial resistance is likely around $1.2250 but probably takes a move above $1.24 to be of technical significance. Canadian Dollar:  The close movement of the yen and US 10-year yield has a parallel with the Canadian dollar and the S&P 500. For the past 30 and 60 sessions, the correlation of the changes is tighter with the Canadian dollar and the S&P 500 than between the yen and US yields. The US dollar reached almost CAD1.3080 on May 12, its highest level since late 2020. The recovery in US equities ahead of the weekend sent the greenback to almost CAD1.2900. A break of the CAD1.2850 area is needed to boost the chances that a high is in place. The MACD appears poised to turn down from extreme levels. The Slow Stochastic has fluctuated a bit but is essentially flat this month despite the rise in spot. Macroeconomic fundamentals look to be among the best in the G7. Australian Dollar:  Since the central bank induced bounce in the Australian dollar (May 4), it has tumbled about 6% to the May 12 low of around $0.6830. Nearly half of that decline was recorded on May 11 and 12, yet the bounce ahead of the weekend was not particularly impressive. It was unable to rise above the previous day's high (~$0.6955), and the close was still the second lowest since mid-2020. The Aussie fell by 2.3% last week, and it was the sixth weekly decline in the past seven. It lost around 8% this run. The momentum indicators are stretched. The MACD could turn higher in the coming days, but the Slow Stochastic is still trending lower in oversold territory. The next important target on the downside is around $0.6760, the halfway point of the Aussie's rally from the pandemic low near $0.5500 in March 2020 to slightly above $0.8000 a year later. Mexican Peso:  The peso's resilience is impressive even if under-appreciated. While the US dollar has been appreciating multiyear highs against the other major currencies, the peso has held its own. The peso has appreciated by a little less than 2% this year. Leaving aside the Russian rouble, only two other emerging market currencies are up for the year. The Brazilian real has appreciated by 9.6%, and the Peruvian sol has gained nearly 6%. The swaps market is pricing in 135 bp rate increases in the next three months when there are three meetings, which is about what the Fed funds futures have priced in for the Federal Reserve. The momentum indicators have flatlined near mid-range. Support is seen near MXN20.00, which held earlier this month. Initial resistance may be around MXN20.25-MXN20.30. It takes a four-day rally into the week ahead.    Chinese Yuan: There is nothing special about the Chinese yuan in some ways. It is falling like nearly all the currencies. The yuan has depreciated by about 6.4% so far this year. The bulk of the move has taken place in the last four weeks. The greenback rose from around CNY6.37 to reach a high a little more than CNY6.81 before the weekend. We suspect the dollar would be higher, but the PBOC seems to be moderating its rise by setting the dollar's reference rate lower than the market projects consistently since returning from the labor holidays earlier this month. We suspect the yuan may begin stabilizing and do not expect it to rise above CNY6.85. Initially, support may be in the CNY6.72-CNY6.74 area.    Disclaimer

May 03, 2022  $USD, Canada, Currency Movement, EMU, Mexico, RBA, UK Overview: The large bourses in Asia Pacific but Hong Kong eased.  Japan and China's mainland markets are closed for the holiday.  Europe's Stoxx 600 is up about 0.6%.  It gapped lower yesterday and has not entered the gap today.  US futures are a little softer.  The 10-year Treasury nicked the 3%-mark yesterday is just below there now.  European benchmark yields are mostly 1-3 bp higher, but the UK Gilt yield has jumped eight basis points, and Australia’s surged 13 bp after the RBA delivered a larger than expected hike.  The Australian dollar is the strongest of the majors, it is up about 0.70% near midday in Europe.  The Norwegian krone and New Zealand dollar are slightly heavier.  The other major currencies are a little firmer.  Outside of the South African rand and Mexican peso on the upside, the Thai baht and South Korean won on the downside, most emerging market currencies are little changed.  Gold, which two and a half weeks ago was testing $2000, found support near $1850 today.  June WTI is quiet in a roughly $103.50-$106 range.  US natgas is higher for a third session.  It is up about 4.3% after rising 3.2% yesterday.  Europe's natgas benchmark steady after gaining 3.1% last week.  Iron ore is off 1.5% while copper is about 1.3% higher after falling 3.2% yesterday.  July wheat is edging higher after falling for the past four sessions.    Asia Pacific The Reserve Bank of Australia surprised the market by delivering a larger than expected 25 bp rate hike to kick-off the tightening cycle to 0.35%. The market had been leaning toward a 15 bp hike.  The central bank clearly signaled more rate hikes will be forthcoming and updated its forecasts to show inflation hitting 6% this year from 5.1% in Q1.  It projects inflation falling back to 3% by mid-2024.  This year's growth is put at 4.25% and 2% next year. A recent Bloomberg survey found the median forecast for this year's GDP was 4.4% and 2.8% for 2023.  The RBA also announced it would stop reinvesting maturing proceeds of its roughly A$650 bln balance sheet.  It reportedly has few bonds maturing next year.  Still, the market is pricing in an aggressive tightening cycle and sees the year-end cash rate at 2.80%, rather than 2.60% discounted yesterday.   With Japanese markets closed for holiday, the dollar has trade quietly against the yen.  It has been confined to a JPY129.85-JPY130.30 range.  It is inside yesterday's range, which was inside the pre-weekend range and remain within last Thursday's range:  ~JPY128.35-JPY131.25. The consolidative phase may help ease Japanese angst about the pace of the move.  Still, the price action is often associated with a continuation pattern, like a spring coiling.   Australian interest rates jumped on the surprise RBA move and the Australian dollar jumped to almost $0.7150.  It set a low yesterday near $0.7030.  The Aussie stalled and a break of $0.7080 now could spur a return to the $0.7030-$0.7050 area.  A move above $0.7200 is needed to improve the technical tone.  The US dollar edged higher against the offshore yuan, reaching a new high near CNH6.6980.  Recall it settled near CNY6.4040 at the end of last week.   Europe The UK's April manufacturing PMI was revised to 55.8 from a preliminary reading of 55.3.  It stood at 55.2 in March.  However, it was at 57.9 at the end of last year.  The Bank of England meets Thursday and the odds of a 50 bp move instead of 25 bp stands are less than 1-in-5, according to the swaps market.  That said, over the next four meetings through mid-September, the market has 125 bp of tightening discounted.  This implies that the market is pricing in a 50 bp. Italy's Draghi has endorsed a new spending package of 16 bln euros to help families and businesses cope with rising food and energy prices.  It will include a cash payment, energy subsidies, tax credits, and more funds for local governments.  If it sounds familiar, it is because similar plan was unveiled in February (~6 bln euros).  The earlier plan was going to be funded by a 10% windfall tax on energy companies’ profits.  It was expected to raise 4.4 bln euros.  The new plan is funded by hikes that tax rate to 25% and is projected to raise closer to 10 bln euros.  Recall that GDP contracted by 0.2% in Q1.   The eurozone reported a larger than expected jump in March producer prices.  The 5.3% month-over-month surge lifts the year-over-year rate to 36.8% from 31.5%.  Separately, the March unemployment rate stood at 6.8% after the February series was revised to 6.9% (from 6.8%).  In March 2021, the eurozone unemployment rate was an 8.2% and before the pandemic struck, it was at 7.5%.   The euro is pinned near its recent lows.  For the fourth consecutive session, it is straddling the $1.05 level.  For the third day, it has found some support near $1.0490.  Last week's low was near $1.0470.  There is little enthusiasm for the euro ahead of the outcome of the FOMC meeting tomorrow.  Note too that the upside looks blocked by chunky options struck at $1.06 that expire over tomorrow and Thursday (1.9 bln euros and 1.5 bln euros, respectively).  The next area of potential chart support is the low from last 2016 near $1.0340.  Sterling also remains in its recent trough.  It is trading inside yesterday’s range, which was inside the range set at the of last week, approximately, $1.2450-$1.2615.  Initial support now is seen near $1.25.   America The US reports March factory orders and the final durable goods report and the JOLTS report.  Given that Q1 GDP was reported last week, and these data points will not impact expectations for revisions or tomorrow's Fed announcement, no important market reaction is likely.  Arguably, the most important data today will be the April auto sales figures.  Although they trickle in and the market typically does not react to them, auto sales feed into consumption and retail sales.  They are part will likely be part of the US economic resilience this year.  The median forecast (Bloomberg survey) projects auto sales to increase to a 14.1 mln seasonally-adjust annual pace from 13.3 mln in March.  It would be the first increase since January.  Auto sales averaged 14.15 mln in Q1 and 12.76 mln in Q4 21.  In Q1 21, they averaged nearly 16.7 mln.   Canada's April manufacturing PMI disappointed yesterday, slipping from 58.9 to a still robust 56.2.  Still, it was really March reading that stands out.  Canada's manufacturing PMI has been with a 56-handle for four of the past five months back to last December.  Today, the March trade figures are due.  Canada is benefitting from a positive terms-of-trade shock.  The 3-month average trade surplus has risen to C$1.43 bln.  A year ago, it was practically zero.  It is the highest three-month since 2014.  A C$3.75 bln surplus is expected today, which would be the largest since 2008.   Mexico has a quiet economic calendar after yesterday's flurry.  The manufacturing PMI held below the 50 boom/bust level at 49.3 (from 49.2 in March).  However, the IMEF surveys have held in better.  Separately, worker remittances into Mexico reached $4.68 bln, just shy of last October's record $4.82 bln. In March 2020, the stood at $4.16 bln.     The US dollar briefly traded above CAD1.29 yesterday and set a new high for the year near CAD1.2915.  It pulled back initially but found support earlier today around CAD1.2835.  The market looks like it wants to test the CAD1.29 area again.  Today, there is a $585 mln option there that expires.  The high from last December was closer to CAD1.2965 and that is the next key chart area.  Last Thursday, the greenback surged to MXN20.6380 but has since largely held below MXN20.50. In fact, it has not closed above MXN20.50 since March 17.  It seems to be in a consolidative phase with support near MXN20.35.     Disclaimer

April 28, 2022  $USD, BOJ, Currency Movement, Growth, Inflation, Mexico, Riksbank Overview: The BOJ underscored its commitment to capping the 10-year yield at 0.25% and sent the yen reeling.  The dollar rose to JPY131, a new 20-year high.  Sweden's Riksbank caught many wrongfooted with a 25 bp hike to initiate the tightening cycle.   The krona shot up and is the strongest of the major currencies, rising about 0.65% against the US dollar.  Most of the other currencies are =/- 0.25% against the greenback.  The euro briefly traded below $1.05 late Asia.  Better than expected results for Meta helped lift Asia Pacific equities.  Of the large markets in the region, only Taiwan and China failed to rise by more than 1% today.  The Chinese yuan is the weakest among the emerging market currencies, sliding about 0.75%, which puts the greenback above CNY6.60 for the first time since November 2020.   Europe's Stoxx 600 gapped slightly higher at the open and its gains are being led by tech, energy, consumer discretionary, and financials (also helped by favorable earnings).  The US 10-year yield is little changed near 2.82%.  The drop in the yen appears to have no impact.  European yields are mostly 1-2 bp higher.  Gold was sold to a new two-month low near $1872 but has steadied in the European morning and is now a little higher on the day.  June WTI continues to consolidate.  It has not been above $103 this week and for the second session is finding support around $100.  US natgas prices are struggling to extend the roughly 11% gain over the past three sessions, while Europe's benchmark is off almost 4.4% after rallying almost 17% in the past two sessions.  Iron ore rose for a third session, but it still has not recouped Monday's 9.5% drop.  Note that China announced it would remove tariffs on coal (3%-6%) to ensure adequate energy supplies. Copper is little changed.  July wheat is trading higher and has recouped yesterday's 0.35% decline.  Asia Pacific The Bank of Japan did not back down an inch, and instead reinforced its message.  The coming rise in inflation is not going to be sustainable and the economy still needs robust monetary support.  A weaker yen is overall beneficial but too quick of a pace could hurt companies.  The BOJ stands ready to buy an unlimited amount of 10-year Japanese government bonds to defend the 0.25% cap on 10-year yields indefinitely.  As expected, the BOJ raised this year's inflation forecast to 1.9% from 1.1% and left the next two year's forecasts unchanged at 1.1%.  It also reduced this year's growth forecast to 2.9% from 3.8% but lifted next year's projections to 1.9% from 1.1%.   Separately, Japan reported weaker-than-expected March industrial output.  The earthquake last month disrupted output and a 0.3% gain was recorded after a 2.0% rise in February.  On the other hand, March retail sales were stronger than expected, rising 0.9%, not the 0.3% that the median in Bloomberg's survey anticipated.  Meanwhile, according to the weekly MOF portfolio report, Japanese investors continue onto the campaign that goes back to the second half of October of selling foreign bonds.  In those subsequent 29 weeks, Japanese have sold foreign bonds in all but eight weeks.  The monthly breakdown that is included in the current account report does not appear to show that US Treasuries are being singled out, but rather a bear market in global bonds seems to be the main consideration. And at this point, indirect bidders, where foreign demand is recorded, at US auctions, continues to be strong.   After forging a down sloping pennant formation (bullish) against the yen for the past several sessions, the dollar surged higher today.  It reached JPY131 in the European morning on the apparent greenlight from the BOJ. It is the highest level since May 2002.  In 2002, the dollar peaked slightly above JPY135.  That is the next important level.  We suspect that the JPY129.50-JPY130.00 area now will provide support.  The Australian dollar fell to new two-month lows near $0.7075 before finding bids that lifted it back toward $0.7160.  It is consolidating the recovery in the European morning.  It needs to remain above $0.7100 now to give hope that a low is in place.  After the higher Q1 CPI figures earlier this week, many are looking for the Reserve Bank of Australia to hike rates next week.  If the PBOC cut reserve requirements on foreign currencies to signal the desire for a slower yuan descent, it did not work.  The yuan lurched lower today.  It may have fallen partly in sympathy with the yen, but the Covid response weighs on sentiment and undermines the attractiveness of Chinese assets.  Many banks have slashed their yuan forecasts.  The PBOC set the dollar's reference rate at CNY6.5628.  The median in Bloomberg's survey was CNY6.5664.  The lower dollar fix may also be a signal that market forces are driving the move.  The dollar gapped higher and has not looked back.  It is trading above CNY6.61.  There is some talk about a return to CNY7.0 but that seems particularly aggressive.  We suspect that the CNY6.70-CNY6.72 area may be the next target.   Europe Like the Reserve Bank of Australia, Sweden's Riksbank resisted pressures to raise rates. As recently as February, Governor Ingves was talking about the first hike in 2024.  However, he softened his stance recently in light of the stronger price pressures and today it lifted the repo rate by 25 bp. Moreover, the Riksbank signaled that the repo rate will be hiked 2-3 more times this year.  Lastly, the central bank also announced it will slow the pace of asset purchases in H2 so that the balance sheet begins shrinking.  Bill purchases end as of today.   Spain is the first eurozone member to report April CPI.  The harmonized measure slipped 0.2% to bring the year-over-year rate to 8.3% from 9.8%.  The Bloomberg survey had found a median projection of a 0.4% gain on the month and a 9.0% year-over-year pace.  Yet within the silver lining is a cloud.  The core rate rose to 4.4% from 3.4%.   Several German states have reported their inflation figures and the national figures are due shortly.  The state figures are not directly comparable with the harmonized national measure, but of the five states that reported, only one was lower than the median forecast for the aggregate national figure.  That would suggest there may be upside risk to the median forecast of 0.4% in the harmonized measure. A 0.4% monthly gain would leave Germany's harmonized measure at 7.6% year-over-year. Tomorrow, the eurozone's preliminary April CPI will be reported.  It is expected to have risen by 0.5%, which would keep the year-over-year measure steady at 7.5%.  The core rate is expected to rise to 3.2% from 2.9%.  Also, the eurozone will announce its Q1 GDP figures and a 0.3% quarterly expansion is anticipated.   The euro is trading lower for the sixth consecutive session.  Since March 30, it has risen in only four sessions, and two of them were last week.  The euro settled last week near $1.0810, and it slipped slightly through $1.0485 earlier today, a new five-year low.  The low from 2017 was set in January around $1.0340, and that is the last notable low before parity.  The euro has not traded below $1.00 since 2002.  Initial resistance may be near $1.0570.  Sterling briefly traded at a new two-year low, slightly below $1.2500.  The reactive bounce took it to $1.2570, the lower Bollinger Band, where sellers were lurking.  It needs to regain a foothold above $1.26 to help stabilize the technical tone.  The Bank of England meets next week and a 25 bp hike is anticipated.   America In recent days, economists have become more pessimistic about today's US Q1 GDP report.  Recent benchmark retail sales revisions spurred the Atlanta's GDPNow tracker to cut its projection from 1.0% to 0.4%.  After US reports a much larger than expected goods trade deficit for March (a record $125.3 bln) mitigated on the margins by the stronger inventory build, other economists shaved their forecasts as well. Inventories are particularly challenging to assess.  It is difficult to distinguish volumes from price.  Rising prices likely bolstered the nominal value of inventories, but was there some real accumulation as well?  Also, what is important for GDP, is the change in the change, so to speak.  Inventory accumulation accounted for the lion's share of Q4 21's 6.9% annualized growth rate.  Consumption may have also contributed more, and it looks like business investment increased.  There are two other considerations here.  First, it had generally acknowledged, including by Fed Chair Powell that the economy was going to slow markedly in Q1.  It does not represent the state of underlying growth.  In some respects, the details of Q1 GDP may be better than Q4 21.  Measures that exclude trade and inventories may have risen.  Also, final sales to domestic parties (personal consumption plus gross private fixed investment) looks to have improved.  A strong rebound in Q2 is expected, and it could prove to be the peak before a more gradual slowdown in the coming quarters.  Second, in this important way, it may not matter very much:  Regardless of the rhetoric, the Fed is on a pre-determined course to remove the monetary accommodation "expeditiously"   and the vagaries of the high-frequency economic data notwithstanding.  The weekly jobless claims, reported at the same time as the GDP figures, illustrate why.  The labor market is strong, and next week's employment report is expected to see another 400k positions being filled.    The US dollar edged up to almost CAD1.2860, its highest level since mid-March.  It tested the trendline drawn off last December and the March high.  The greenback has settled above the upper Bollinger Band for the last four sessions.  It comes in near CAD1.2835 today.  If the US equity market bounce can be sustained, the Canadian dollar may recover.  A close below CAD1.2800 would help its tone.  Mexican President AMLO is expected to announce a deal with some large companies to limit price increase next week.  Although some will see it as a form of price controls, these seem to be self-imposed, and the government may also help subsidize some food production.  It does not seem materially different from Bank of England Governor Bailey calling on workers to show wage restraint.  No one called that wage controls.  In any event, the greenback has been knocking against MXN20.50 in recent days and is better offered today but within yesterday's range (~MXN20.3255-MXN20.5365).  However, after finding support near MXN20.35 in the European morning, the dollar may try the upside again.     Disclaimer

April 27, 2022  $USD, Australia, BOJ, Brazil, Currency Movement, Mexico, Russia Overview: Russia's decision to cut gas supplies to Poland and Bulgaria and the sharp sell-off in US equities yesterday casts a pall over the markets today.  But not the dollar. The euro punched through $1.06 for the first time in five years and the greenback turned higher against the yen after falling to a seven-day low.  The major bourses in the Asia Pacific region fell by more than 1% except China and Hong Kong.  The Hang Seng eked out a minor gain, but China's CSI 300 rose nearly 3%.  Europe's Stoxx 600 gapped lower but has recovered with the help of materials, consumer discretionary, and energy sectors.  US futures are firm.  Treasury yields have recovered part of yesterday’s decline, putting the 10-year near 2.77% and the 2-year close to 2.58%.  European yields are mostly firmer and the core-periphery spreads are widening.  In the foreign exchange market, the greenback is mixed.  The Antipodeans and Scandis are firm, especially the Australian dollar, after the higher-than-expected Q1 CPI.  The yen, euro, and Swiss franc are heavy.  Emerging market currencies are mostly lower.  Of note, the Philippine peso and the Mexican peso are among the most resilient today.  Hungary, the only EU country that has agreed to pay Russia in roubles, is among the weakest (~0.9%).  That dubious honor goes to the South Korean won today, off 1.1%, the largest loss since last June and the fifth consecutive decline. Gold was sold to fresh two-month lows near $1887 before steadying.  June WTI is firm but in a narrow range (~$101.50-$103) near yesterday's highs.  US natgas prices are almost 0.75% higher after gaining nearly 5% over the past two sessions.  Europe's benchmark rose about 8.2% yesterday on top of yesterday's nearly 6% gain.  It is back to early April levels.  Iron ore rose for a second consecutive session, while copper is trying to end a three-day fall.  July wheat is steady after rising 2% yesterday.  Asia Pacific Australia's Q1 CPI rose 2.1%, faster than the 1.7% anticipated by the median in Bloomberg's survey and well above the 1.3% increase in Q4 21.  The year-over-year pace accelerated to 5.1% from 3.5%.  The underlying measures also rose.  The central bank meets next week, and the market sees the inflation figures as boosting the chances of a rate hike, which previously was expected after the May 21 election.  Yesterday the market had about six basis points of tightening discounted for the May 3 meeting.  Now there are 18 bp increase priced into the cash rate futures.   The Bank of Japan's two-day meeting began today.  Officials have clearly signaled no intention to change course.  Its defense of the 0.25% cap on the 10-year yield continued to today but the softer global yields yesterday took some pressure off the JGB market and there were sellers of 10-year bonds to the BOJ under its fixed-rate operation.  The BOJ is well aware that energy and food prices are lifting measured inflation and the reduction in wireless charges drop out of the 12-month comparison.  It pushes back and says that those developments do not make the increase in CPI sustainable.  Note too that the new economic package is estimated to shave 0.5% off headline CPI in the May-September period.   Many observers still seem to put the cart before the horse.  They are concerned that the weaker yen reduces Japanese demand for Treasuries.  The recent price action lends support for the hypothesis that the causation arrow is running the other way.  The increase in US yields weakens the yen.  The US 10-year yield peaked on April 20.  So did the dollar against the yen.  They both recorded eight-day lows earlier today and have recovered.  Moreover, the indirect bids show that the recent US Treasury auctions have been strong, including yesterday's two-year note sale.  That is where foreign participation is often picked up.   The dollar found a bid after slipping a little below JPY127. A $540 mln option at JPY126.75 rolls off today.  The greenback has already resurfaced above JPY128.  A move above JPY128.25 would lift the tone, but it needs to get above JPY128.50 to sign another attempt on the JPY129.50-JPY130 area. The Australian dollar recovered from around $0.7120 to almost $0.7200, but the upside momentum faltered and it fell back to the $0.7140 area in late Asia Pacific turnover.  That said, the intraday momentum indicators suggest the potential to retest the highs in North America.  The Chinese yuan is trading in its narrowest range for a little more than a week.  The dollar is consolidating its recent gains and traded roughly between CNY6.5480 and CNY6.5615.  The cut in reserve requirements for foreign currency deposits appears to have succeeded not in pushing the yuan higher but in steadying the exchange rate.  The PBOC set the dollar's reference rate slightly higher than expected in the Bloomberg survey (CNY6.5598 vs. CNY6.5596). Europe In a bizarre turn of events, Russia is insisting on being paid roubles for its gas while Europe is insisting to adhering to contracts to pay in hard currency, euros.  Russia is making good on its threats and announced that its cutting off gas supplies to Poland and Bulgaria.  Poland's gas supplies are around three-quarters capacity so the cut of new supply will not pinch immediately.  Bulgaria has indicated it has taken steps to secure alternative supplies.  Russia's actions do raise the question of who is next and that will likely be seen next month.  That said, Europe's reluctance or inability to move quicker on gas reveals their vulnerability, which Russia is exploiting.  It is quitting Europe before being fired, in a way.  Meanwhile, the tensions are rising in Moldova's breakaway region.  Some argue that Russia ultimately will likely link up the parts of Ukraine that it appears to be trying to take with the Moldova region, which would pen-in Ukraine.   Musk's leveraged buyout of Twitter is spurring a debate about freedom of speech in the US.  The constitutional right protects US citizens from abridgement of that right by Congress not by the private sector.  Clearly newspapers do not have to print all the op-ed submissions it receives and its not denying the rejected authors their freedom of speech.  In Europe, the reaction is different.  Musk is reminded that Twitter, regardless of its ownership structure, must adhere to the Digital Services Act, approved last week.  It forces the platforms to moderate illegal and harmful content that their users post.   The 1.4 bln euro option at $1.06 that expires today appears to have been neutralized.  The euro fell to about $1.0585 in late Asia/early Europe.  Initial resistance is seen near $1.0630 and then $1.0660. On the downside, the 2015-2017 lows were in the $1.0340-$1.0530 area, but there is increasing talk of a move to parity which has not been seen since 2002.  Sterling's losses have also been extended.  It fell to about $1.2535 before recovering to around $1.2590 in the European morning.  The $1.25 area represents the (61.8%) retracement of sterling's rally off the March 2020 low near $1.14.  The next chart point below there is the June 2020 lows around $1.2250.  Over the last five sessions, sterling has shed more than a nickel.  The lower Bollinger Band is set two standard deviations below its 20-day moving average and sterling's losses are nearly three standard deviations below the 20-day average.   America The US reports mortgage applications, which have fallen every week since the end of January but one. March pending home sales are expected to have fallen for the fifth consecutive month. The March trade deficit, which remains near a record imbalance, and March (wholesale and retail) inventories will help economists put their final touches on Q1 GDP forecasts ahead of tomorrow's report.  Due to the revisions in retail sales reported earlier this week, the Atlanta Fed's GDP tracker fell to 0.4%. It will update it again after today's reports.   As noted, there was a strong reception at yesterday's US sale of $48 bln two-year notes.   Indirect bidders took down 2/3 and direct bidders took another 21.4%.  This left the dealers with slightly more than 12%, the least in almost two decades.  On tap today are a $30 bln two-year floater auction and $49 bln 5-year note sale.  Still, the angst in some corners of the market about the implications of a strong dollar on foreign demand is unlikely to dissipate.   Bank of Canada Governor Macklem laid out the logic of raising rates even though it will have little impact on the prices of internationally traded goods that are understood to be the main drivers of Canadian inflation. He argued that keeping inflation expectations anchored will help prices ease when the higher energy and disrupted supply chains ease.   Mexico reports its March trade figures.  The balance may have swung into a small deficit after a $1.29 bln surplus in February.  Tomorrow it reports unemployment figures ahead of Friday's preliminary Q1 GDP.  After a flat Q4 21, it is expected to have grown around 1% in Q2 quarter-over-quarter.  Brazil reports April's IPCA inflation measure today.  It is expected to have accelerated to 12.15% from 10.79% in March. This will further challenge the signals by the central bank that next month could be the peak in what has been an aggressive tightening cycle.     The risk-off mood, which unlike when Russia first invaded Ukraine, is now seen as negative for commodities and commodity currencies.  The Canadian dollar has suffered in this phase despite constructive macro considerations.  The US dollar bottomed last week near CAD1.2460 and today has approached CAD1.2850.  The year's high was set in early March slightly north of CAD1.29.  The greenback has closed above its upper Bollinger Band for the last three sessions and remains above it (~CAD1.2810) now.  The greenback remains within the range set on Monday against the Mexican peso (~MXN20.16-MXN20.4850).  A convincing break of MXN20.50 could spur a quick move toward MXN20.60-MXN20.65.  Note the upper Bollinger Band is found today slightly above MXN20.40. The Brazilian real is a market favorite this year, with high yields, monetary policy near a peak, and commodity exposure. However, alongside Latam in general and the setback for metals, market participants have raced to reduce exposure in both the options and forward markets.  The dollar has jumped from around BRL4.60 a week ago to nearly BRL5.00 yesterday.  A move above there today could target the BRL5.20 area.       Disclaimer

April 26, 2022  $USD, Bank of Canada, China, Currency Movement, ECB, Japan, Mexico Overview: The recovery attempt of risk appetites, reflected in the recovery and strong close in US stocks yesterday was dealt a blow by Russia's Foreign Minister's warning of a "serious" danger of nuclear conflict.  In the Asia-Pacific, most of the large equity markets advanced.  China was an exception even though the currency snapped a five-day slide following the hike in foreign currency reserve requirements announced yesterday.  Australia's resource companies led the ASX to its largest loss (~2%) since Russia's invasion of Ukraine two months ago.  European shares are trying to stabilize after the Stoxx 600 fell by 3.6% over the past two sessions.US futures are softer.  The US 10-year yield is a few basis points lower around 2.79%.  European benchmark yields are sllightly softer. The dollar is mostly firmer, though the Antipodean and yen have edged higher.   The euro's loss has been extended deeper into the $1.06-handle and sterling still struggles to sustain modest upticks.  Among emerging market currencies, several Asia Pacific currencies, in addition to the yuan have traded better.  European currencies are taking the brunt.  Gold closed below $1900 yesterday for the first time since late February and is straddling that area in quiet turnover.  June WTI stabilized after falling to around $95.30 yesterday.  An attempt on the upside stalled in front of $100.  US natgas is up 3.5% after yesterday's 2% advance.  Europe's benchmark is off 1.7% after fell nearly 8% over the past two sessions.  Iron ore stabilized, rising by about 1.6% earlier today after dropping almost 9.7% yesterday. Copper is also tryint to steady.  It fell by more than 5% Friday-Monday.  Poor planting news is helping July wheat rise 2.1% after falling for the past five sessions.   Asia Pacific The PBOC cut the reserve requirement for foreign currency deposits in a clear sign of concern about the yuan, which had fallen sharply and was trading near 17-month lows.  The 1% cut was more symbolic than substantive.  It had lifted the reserve requirements twice last year for the first time in a decade and each move was 200 bp.  Ostensibly, the reduced reserve requirements boost the local supply of dollars and other currencies.  The Politburo's quarterly meeting is expected to announce new measures to support the economy and counter the effect of the lockdown.  Some industries are being allowed to re-open in Shanghai, while the lockdown continues, including autos and semiconductor producers.  Universal testing is required in Beijing and some fear that the testing is a prelude to a lockdown.  Some districts have already restricted movement.   There are four developments in Japan to note.  First, Finance Minister Suzuki denied reports that he discussed the possibility of intervention with US Treasury Secretary Yellen.  The initial press reported from Tokyo said that such a discussion was "likely," but in later reiterations in what seemed like an echo chamber, it become a definite.  Given the assessment by the IMF's regional head that the yen's gains reflected fundamentals, and the US efforts to rein in prices, the bar to intervention is high.  Second, Japanese labor market improved marginally last month.  The unemployment rate unexpectedly eased to 2.6% from 2.7% and the job-to-application ratio ticked up to 1.22 from 1.21.  Third, the BOJ's defense of the 0.25% 10-year yield cap had it buy JPY921.5 bln today, its largest purchase in nearly four years.  Moreover, it extended its fix-rate purchases for the next two days, which carries it through the BOJ meeting.  Fourth, the government's support measures for the economy are taking shape.  A JPY6.2 trillion (~$48.5 bln) package that will be funded by an additional budget and tapping into the fiscal reserves will be submitted.  The economic objective is to help curb the rise in energy prices, ensure stable food supplies, support small and medium-sized businesses, and help struggling families.  The current Diet session ends in mid-June ahead of the upper house elections.  The dollar made a marginal new five-day low against the Japanese yen near JPY127.35.  Buyers stepped in the middle of the Asia Pacific session and retested the session high around JPY128.20.  It is consolidating in the European morning.  The nearly 20 bp pullback in the US 10-year yield from last week's highs has helped to blunt the upside pressure.  A break of the JPY127.25 area could spur a move toward JPY126.75 initially.  On the upside, the greenback may be capped around JPY128.40.  The Australian dollar has stabilized after falling from about $0.7560 four sessions ago to $0.7135 yesterday.  It needs to rise above $0.7260 now to signal a correction is at hand.  And even then, the $0.7300 area may prove to be formidable resistance.  While the Chinese yuan snapped its losing streak, it still looks fragile and the relative wide range (~CNY6.5275-CNY6.5610) suggests the market remains unsettled.  The dollar traded inside yesterday's range.  The PBOC set the dollar's reference rate today at CNY6.5590, slightly below the median projection (Bloomberg survey) of CNY6.5606.   Europe The ECB's Lagarde seemed clear when she appeared on US television over the weekend.  She said that the bond purchases would end in Q3 and there was a high probability of them ending early in the quarter.  With over half of the eurozone's inflation stemming from energy prices (in March energy prices contributed around 4.4 percentage points to the 7.4% headline rate, Lagarde did not seem to be in a hurry to hike rates.  Lagarde also noted that the Covid response in EMU focused on protecting jobs/employment, while in the US the government replaced lost income via transfer payments.  Hawks are pushing for an early rate hike (July), but it does not seem that a consensus has formed yet.  Others seem to want to wait for September when the forecasts are updated.  The swaps market has priced in about a 20 bp hike in July and another 55 bp before the end of the year.  This seems to be aggressive.  While the Fed's balance sheet was expanded primarily through asset purchases, the ECB's balance sheet also grew by extending loans.  The TLTROs amounted to around 2.2 trillion euros.  The last of the loans expire in March 2024, but banks are thought likely to repay early.  Some suggest a trillion euros could be repaid in later this year and into early 2023.   Hungary is expected lift its bank rate by 100 bp today for the second consecutive month.  If delivered it would stand at 5.4%.  The central bank appears to be trying to close the gap between the bank rate and the one-week deposit rate, which become the key rate.  It stands at 6.15% and is expected to be raised later this week by 30 bp.   The euro dipped below $1.07 yesterday for the first time since March 2020 and today it fell deeper into the $1.06 territory.  The low in late Asian/early European turnover was slightly below $1.0675.  It has caught a little bid in late European morning turnover, but the immediate cap looks to be around $1.0725, where an 815 mln euro option expires today.  Recall that the low set in the early days of the pandemic was near $1.0635.  Sterling is also struggling to stabilize after yesterday's plunge that took it briefly below $1.27 for the first time since September 2020.  The pound has risen in only one session of the past nine counting today's losses.  A convincing break of $1.27 targets the $1.25 area. we America There is a full slate of US economic reports today.  March durable goods orders and shipments may help economists fine-tune Q1 GDP forecasts.  The first official estimate will be released at the end on Thursday.  House prices (February) and new homes sales (March) are also due.  The Conference Board announces the results of its consumer survey and the Richmond Fed's April manufacturing survey is due.   However, barring some shock, the data is unlikely to matter much to the Fed.  It is convinced of the economic resilience, the strength of the labor market, and that prices pressures are way too high.  The "expeditious" course, the language that several Fed officials have used, signals a campaign to bring the target rate to neutral.  While the risk of a 75 bp move is not very strong, the Fed funds market is pricing in 50 bp hikes at the next three meetings and leans strongly that direction at the fourth meeting in September.  Separately, note the heavy Treasury issuance starting today (~$165 bln in coupons to be sold this week), and what appears to be among the busiest weeks of the year for state and local government issuance as well.   The Bank of Canada Governor Macklem leaned against the speculation of a 75 bp hike in his testimony before Parliament yesterday.  The central bank hiked by 50 bp earlier this month for the first time in 20 years.  Macklem also seemed committed to bringing the target rate into the neutral range, which is seen between 2% and 3%.  The swaps market has the year-end target rate around 2.9%.   Mexico reports February retail sales.  Economists (median, Bloomberg survey) expected a 0.8% gain after a 0.6% rise in January.  The data is too old to have much impact.  Mexican President AMLO has promised to unveil new anti-inflation proposals next week.  With inflation still accelerating, and the Fed tightening set to accelerate, Banxico is under pressure to hike rates more the 50 bp moves delivered at the last three meetings.  It meets again on May 12.     The US dollar pulled back to around CAD1.2685 earlier today after peaking slightly above CAD1.2775 yesterday.  However, the risk-off mood has seen the greenback return bid and recorded the session high in the European morning near CAD1.2750.  This is just above the upper Bollinger Band.  The performance of the US stock market is arguable the number one driver of the Canadian dollar today.  The greenback has forged a shelf around MXN20.16.  If that is the lower end of the range, then the MXN20.50 is at upper end.  Chinese demand for commodities is being undermined by the lockdowns and this has spurred profit-taking in the Latam currencies broadly, for which the peso sometimes acts as a proxy.  The US dollar is rising for the third time in four sessions against the peso.  The Brazilian real, which had been the market's darling fell 3.75% before the weekend and another 1.7% yesterday.  The dollar tested resistance yesterday near BRL4.95.  The next target is the BRL5.00-BRL5.02 area.      Disclaimer

April 25, 2022  $USD, Australia, China, Currency Movement, Federal Reserve, France, Germany Overview:  Fears that the Chinese lockdowns to fight Covid, which have extended for four weeks in Shanghai, are not working, and may be extended to Beijing has whacked equity markets, arrested the increase in bond yields, and lifted the dollar.  Commodity prices are broadly lower amid concerns over demand.  China's CSI 300 fell 5% today and Hong Kong's Hang Seng was off more than 3.5%.  Most of the major markets in Asia Pacific were off more than 1%.  Europe's Stoxx 600 is off around 1.9% after falling 1.4% last week.  US futures are about 0.7%-0.8% lower. The S&P 500 fell last week for the third consecutive week, the longest losing streak in 18 months.  The US 10-year Treasury yield is almost seven basis points lower at 2.83%.  European benchmark yields are 4-6 bp lower.  The BOJ bought JPY727 bln of 10-year bonds at the pre-committed fixed rate operation, more than in the previous three operations last week combined.  The yield slipped half of a basis point.  The dollar rides high.  It has appreciated against all the major currencies but the yen. The Australian dollar, Scandis, and sterling have been hit the hardest and are around 0.9-1.2% lower in the European morning.  Emerging market currencies are heavy as well.  Hungary, Mexico, and China have seen their currencies decline by around 1% to lead the complex.  Gold fell to new lows for the month around $1912 before stabilizing.  June WTI is 4.3% lower near $97.70 after falling around 4% last week.  US natgas is extending last week's 10.5% sell-off, while the European benchmark is up 2.5% after a flat showing last week.  Iron prices are off 8.7%, after tumbling closer to 12% at one juncture today.  It fell a little less than 5% last week.  Copper is off around 2.1% after declining about 3% last week.  July wheat is up about 0.5% as it tries to snap a four-day slide.   Read next: Tightening Alert! How Have Exchange Rates Of Singapore Dollar (SGD), NZD, Canadian Dollar And Korean Won (KRW) Changed?| FXMAG.COM Asia Pacific China's Covid has emerged as a powerful economic force in its own right.   It is threatening demand for commodities and threatening to extend supply chain disruptions.  Shanghai reported a record number of fatalities, and the infection is spreading to Beijing.  The Chaoyang district will submit to three days of testing this week for people who live and/or work in the area.  Reports suggest 14 smaller communities have been sealed and another 14 have imposed limitations on movement.  China's demand for gasoline, diesel, and jet fuel has reportedly fell by 20% year-over-year, which may translate to 1.2 mln barrels of oil a day.   The US has threatened unspecified action if Beijing's new security pact with the Solomon Islands result in a permanent Chinese military presence.   While the US has defended Ukraine's right to make its own foreign policy decisions, it seems to want to limit Solomon Island's choices.  Prime Minister Sogavare has articulated his own 3 No's Policy.  He says that the secret treaty has no provision for a Chinese military base, no long-term presences, and no ability to project power from the islands. The Solomon Islands are about 2k kilometers of Australia's coast.    Read next: President Of France To Be Chosen. It Is Another Factor Which Is Shaping Markets| FXMAG.COM The dispute over the Solomon Islands has emerged as a campaign issue in the May 21 Australian elections.  Prime Minister Morrison, who seeks a fourth term, has defended his foreign policy, and tried shifting the focus back to domestic issues with a promise to cap tax revenue at 23.9% of GDP and A$100 bln of tax relief over the next four years if re-elected.  Government revenues were 22.9% of GDP in FY21.  Labor leader Albanese has been diagnosed with Covid at the end of last week.  This disrupted his campaign in the tight contest.  Morrsion had contracted the disease in early March.   The dollar initially approached JPY129 but falling US yields saw it come off and traded below JPY128, where a $425 mln option expires today.   The greenback remains in the range set last Wednesday (~JPY127.45-JPY129.40).  Indeed, it is trading within the pre-weekend range (~JPY127.74-JPY129.10).  The takeaway is two-fold.  First the exchange rate is still closely tracking the US 10-year yield.  Second, after surging in March and most of April, the exchange rate is consolidating.  The Australian dollar is falling sharply for the third consecutive session.  It fell 1% last Thursday and 1.75% before the weekend and is off another 1% today. It is lower for the 11th session in the past 14.  It fell to a two-month low near $0.7150 in late Asian turnover before stabilizing.  The $0.7200 area now offers resistance.  The sell-off of the Chinese yuan continued.  The greenback gapped higher and never looked back.  Recall that the dollar settled around CNY6.3715 on April 15.  A week later, last Friday, it settled above CNY6.50 and today, pushed over CNY6.56.  It is the greenback's 5th consecutive gain and today's advance of a little more than 0.9% is the largest advance since March 2020. The dollar is trading at its best level in nearly a year and a half.  The PBOC set the dollar's reference rate at CNY6.4909, slightly lower than market projections (CNY6.4911 in the Bloomberg survey). The next key chart area is CNY6.60.   Europe Macron was easily re-elected with a roughly 58%-42% margin.   Partisans, perhaps trying to bolster the turnout and some press accounts seemed to exaggerate Le Pen's chances.  No poll showed her in the lead.  Still, the euro initially trading higher (~$1.0850) before falling to almost $1.07 before the end of the Asia Pacific session.  The June parliamentary election will shape Macron's second term and his ability to enact his program.  Separately Slovenia voted not to grant Prime Minister Jansa another term.  This further isolates Hungary's Orban.  Golob, the former head of the state-owned power company before dismissed by Jansa, will lead what appears to be a center-left government.   Last week, Germany's flash PMI was mostly better than expected.   Recall that helped by the surprising gain in the service PMI, the composite fell to 54.5 not the 54.1 economists expected (median, Bloomberg survey).  Today, the IFO survey was also better than expected.  The current assessment ticked up to 97.2 from 97.1, while the expectations component rose to 86.7 from a 84.9.  The overall business climate reading rose to 91.8 from 90.8.  Separately, the government is expected to announce a supplemental budget on Wednesday that will boost this year's net new debt to at least 140 bln euros.  This is a 40 bln euro increase to fund government measures to cushion the impact of the war and the surge in energy prices.  Some of the off-budget 100-bln euro defense spending initiative will may also be funded this year.   The euro traded to almost $1.0705 in late Asia Pacific turnover, its lowest level since March 2020.   There is a 945 mln euro option struck at $1.07 that expires today.  The pre-weekend low near $1.0770 may now serve as resistance.  There are large options at $1.08 expiring over the next two days (1.6 bln euros tomorrow and 1.2 bln euros on Wednesday). The Covid-low was set in March 2020 near $1.06.  Sterling has been pounded again.  It dropped nearly 1.5% before the weekend, a roughly two-cent fall that took it to around $.12825.  It has lost another cent today to about $1.2730.  While we noted chart support near $1.2700, the next important chart area is closer to $1.25.  It finished last week below its lower Bollinger Band, and it remains well below it (~$1.2850) today. In fact, it is more than three standard deviations from the 20-day moving average (seen near $1.2755).   America St. Louis Fed President Bullard opined last week that a 75 bp hike may be needed at some juncture.   He explicitly said that it was not his base case.  Yet some in the markets, and more in the media seemed to play it up.  No other Fed official seemed to endorse it; Fed futures are pricing in a 51 bp for next week rather than 50 bp.  The Fed's quiet period ahead of the May 4 FOMC meeting means no more official talk.  Today's economic calendar features the Chicago Fed's March national activity index, which is reported with too much of a lag to provide new insight or a market reaction.  The Dallas Fed's April manufacturing survey is due as well.  The early Fed surveys have not generated a consistent signal.  The Empire State survey was stronger than expected while the Philadelphia Fed survey was weaker than anticipated.  The Dallas survey is expected to have softened.   Canada's calendar is light until Friday's February GDP print.   The Bank of Canada does not meet until June 1.  The swaps market currently has a little more than a 25% chance that it hikes by 75 bp instead of 50 bp.  However, the Canadian dollar itself seems more sensitive to the risk-off impulse spurred by falling equities than the policy mixed in Canada.   Mexico reports IGAE economic activity survey for February.   It is too dated to have much impact, and in any event, is being overwhelmed by the risk-off attitude.  The bi-weekly CPI report, covering the first half of April, released before the weekend, was stronger than expected.  The headline rate rose to 7.72% and the core rate rose above 7% for the first time in this cycle.  It is particularly disappointing because seasonal considerations, like the summer discount on electricity taxes, often point to less price pressures.  The risk of a 75 bp hike at the May 12 Banxico meeting is increasing.   Read next: How Are Markets Doing? US Bonds, EuroStoxx 600, CSI 300 And More| FXMAG.COM The US dollar jumped 0.65% against the Canadian dollar last Thursday and slightly more than 1% before the weekend.   It is up another 0.2% in the European morning to around CAD1.2740, after having approached CAD1.2760 in Asia Pacific turnover.  The greenback finished last week above its upper Bollinger Band and has spent most of today's session above it (~CAD1.2720).  The market is over-extended but there is little chart resistance ahead of CAD1.28.  The peso's fall is also continuing.  The US dollar traded above its 200-day moving average (~MXN20.42) for the first time since March 18.  It is also above the (38.2%) retracement objective of the slide since the March 8 high (~MXN21.46), which is found around MXN20.39.  The next retracement (50%) is closer to MN20.60 and the measuring objective of the potential double bottom is near MXN20.60.     Disclaimer

April 14, 2022  $USD, Australia, BOC, China, Currency Movement, ECB, Japan, Turkey, UK Overview: What appears to be a powerful short-covering rally in the US debt market has helped steady equities and weighed on the dollar.  Singapore and South Korea joined New Zealand and Canada in tightening monetary policy.  Attention turns to the ECB now on the eve of a long-holiday weekend for many members.  The tech-sector led the US equity recovery yesterday, snapping a three-day decline.  Most of the major markets in Asia Pacific advanced but Taiwan and India.  Europe's Stoxx 600 is posting small gains for the second day, and US futures are little changed.  The 10-year Treasury yield is a little softer at 2.69%.  It peaked on April 12 near 2.83%.  The two-year yield is almost one basis point lower to about 2.34%.  It peaked on April 6 around 2.60%.  The drop in US yields yesterday and softer than expected jobs data conspired to a 10 bp drop in Australia's 10-year yield.  European yields are 3-4 bp higher, with the periphery leading, perhaps on ideas that the ECB will signal the end of its bond-buying.  The dollar is mostly heavier against the major currencies, with the Swedish krona and New Zealand dollar the strongest.  Among emerging market currencies, those from central Europe have been helped by the euro's bounce.  The high-flying South African rand and Mexican peso have come back a bit lower.  Gold is softer but consolidating inside yesterday's range.  June WTI is pulling back a little after testing the $104 area.  US natgas prices are higher for the fourth session and have risen by around 58% since mid-March.  Europe's benchmark is off about 3% and is near its lowest level since March 25.  Iron ore rose 1.6% after yesterday's 2.5% decline as the sawtooth pattern of alternating gains/declines this week continues.  July copper is edging higher for the third session.  July wheat is struggling after four days of gains.   Asia Pacific Australia's March employment report fell shy of expectations.  Overall, employment rose by 18k, not the 30k the median forecast (Bloomberg survey) anticipated.  Full-time positions rose by 20.5k after increasing by nearly 122k in February.  The unemployment rate was steady at 4.0% rather than slipping as expected.  The participation rate was steady at 66.4%.  It had been expected to increase slightly.  Separately, the Melbourne Institute's measure of inflation expectations rose to a new high of 5.2% from 4.9%.  The central bank is waiting for stronger signs of wage pressures to build before lifting rates, but this risks putting it further behind the curve.  A rate hike is expected after next month's election.   How are Japanese investors responding to the slide in the yen?   For the 10th week of the past 11, Japanese investors have been selling foreign bonds.  US Treasuries are their largest holding, so the divestment hit them hardest.  Given the developments in the foreign exchange market, the repatriation of unhedged proceeds buys more yen.  Sometimes in the past, it appears that the weakness of the yen encouraged Japanese investors to export more savings.   The market will be disappointed if China's benchmark one-year medium-term lending facility rate is not cut tomorrow.   It was last cut by 10 bp to 2.85% in January.  This was the first cut since the pandemic struck in early 2020.  The MLF rate was cut by 20 bp in April 2020 after a 10 bp cut in February.  Covid and the associated lockdowns are hitting an economy that already appeared to be struggling.  More than a token 10 bp cut is necessary.  There are heightened expectations for a cut in reserve requirements as soon as next week.  Prime loan rates may also be reduced next week.  China reports Q1 GDP early next week.  It has expected to have slowed to 0.7% quarter-over-quarter after growing 1.6% in Q4 21.   The pullback in US yields has helped the yen stabilize after sliding for the past nine consecutive sessions.   Still, the greenback has found support ahead of JPY125.00.  A break of the JPY124.80 area is needed to signal anything important technically.  On the upside, the JPY125.60-JPY125.70 area may offer an immediate cap.  Support at $0.7400 for the Australian dollar frayed yesterday but it recovered to almost $0.7470 today before new offers proved too much.  It is finding support in the European morning near $0.7440.  The Chinese yuan has not drawn much benefit from the heavier US dollar.  The greenback did make a new low for the week near CNY6.3625 but recovered and resurfaced above CNY6.3700. The PBOC set the dollar's references rate slightly lower than expected at CNY6.3540 (vs. median forecast in Bloomberg's survey for CNY6.3547).  Europe The ECB meets amid claims by its first chief economist Issing that its approach to inflation has been misguided.   The preliminary estimate of last month's CPI was 7.5% (3% core) year-over-year.  At the same time, growth forecasts are being cut. There has also been a serious blow to consumer and business confidence.  Monetary policy, as is well appreciated, has impact with variable lags.  That is partly why simply subtracting inflation from the bond yield may not be the most robust way to think about real interest rates.  Nominal rates should be adjusted for inflation expectations.  In any event, the takeaway from the ECB meeting will be about the forward guidance on its asset purchases. Does it pullback from last month's decision in which it indicated its monthly bond purchases here in Q2 or does it commit to suspending the Asset Purchases Program at the end of the quarter?  What about the other policy tool discussed in the press that would give the ECB a way to counter a surge in yields that could lead to diverging rates?  It seems like it is not imminent, but more importantly this may be an effort to modify the Outright Monetary Transactions facility that Draghi launched.  Note that there were conditions attached and although the facility has not been used, it seemed to have helped ease the crisis mentality. It reveals something about the power of the communication channel.   Turkey's central bank sets the one-week repo rate today and it is likely to remain at 14%.   What may prove more interesting are the weekly portfolio flows.  In the week ending April 1, foreign investors were net buyers of Turkish bonds for the first time in six weeks. The $104 mln was slightly more than the cumulative total of the last three weeks that they were net buyers (late Jan-mid-Feb). The Turkish lira has stabilized.  Consider that actual volatility (historic) over the past month is about 7.1%.  A month ago, it was around 13%. At the end of last year, it was almost 100%.   The Johnson government lost its junior Justice Minister Wolfson over the "repeated rule-breaking."   Meanwhile, reports suggest the prime minister will likely be fined a second time.  However, sterling is unperturbed by these developments.  It is extending yesterday's dramatic recovery. Sterling posted a key reversal yesterday by falling to new lows before rallying and settling above the previous day's high.  There has been follow-through buying that has lifted sterling to almost $1.3150 today.  Yesterday, it recorded a low near $1.2975.  The $1.3175-$1.3200 area may offer stronger resistance.  The euro is also extending its recovery.  Buying emerged yesterday ahead of $1.08.  It reached a three-day high slightly below $1.0925.  There is a 600-euro option at $1.0920 that expires today.  Nearby resistance is seen around $1.0950.   America US retail sales look to have strengthened, but the devil is in the details.   The median forecast (Bloomberg survey) sees retail sales rising 0.6% after a 0.3% gain in February.  However, high price gasoline can again skew the data. Recall that the CPI figures showed an 18% rise in gasoline prices last month (which accounted for more than half of the 1.2% monthly gain). What Bloomberg calls the control measure, which excludes food services, gasoline, autos, and building materials, is used by some economic models of GDP, which pick up those items through a different time series than the retail sales report.  After being crushed in February, falling 1.2%, the median in Bloomberg's survey calls for a 0.1% gain.  The risk is that rising gasoline prices slams discretionary purchases.  Separately, import and export prices are expected to have continued to accelerate last month.   Although export prices are rising faster than import prices, the US trade deficit has deteriorated. The US reports weekly jobless claims.  Revisions to the seasonal adjustment may be exaggerating the recent decline, but the labor market remains tight in any event.  Business inventories are expected to have risen in February (~1.3%) after a 1.1% gain in January.  While it would be strong, for GDP purposes the key is the change in the change, as it were.  In Q1 business inventories grew by an average of about 1.7% a month.  The slower inventory growth is part of the slowing we anticipate in Q1.  Lastly, the University of Michigan's consumer confidence measures is likely to have deteriorated, but it may be the inflation gauges that draw the most attention.  Many economists suspect US CPI, especially the core measure, may have peaked.   The Bank of Canada delivered the much anticipated 50 bp hike yesterday.   The market has fully priced in a 25 bp hike at the next meeting in early June.  The risk seems to be for another 50 bp hike. The central bank lifted the neutral rate to 2.50% from 2.25% and suggests that is where it was headed.  It lifted its inflation forecasts.  It now expects CPI to average 5.3% this year, up from the 4.2% forecast in January.  Next year's forecast was lifted to 2.8% from 2.3%.  Also, as anticipated, the Bank of Canada will stop recycling maturing proceeds and allow its balance sheet to shrink.  Over the next 12-months about a quarter of the bonds bought on net basis during the pandemic (C$350 bln) will roll-off.   The US dollar posted a key downside reversal against the Canadian dollar yesterday and follow-through selling has been seen.   Initially the greenback made new highs for the move to around CAD1.2675 yesterday before turning around and settled below the previous session's low (~CAD1.2580).  It has been sold to around CAD1.2540 today, which is the (50%) retracement of the greenback's rally off the April 4 low for the year near CAD1.2400.  The next retracement (61.8%) is closer to CAD1.2500.  The Mexican peso's run is getting stretched.  It managed to extend the most recent streak to its fifth consecutive advance yesterday, but the upticks are getting harder to secure. The peso is better offered today, with the dollar near MXN19.80.  Initial resistance may be in the MXN19.88-MXN19.92 area.       Disclaimer

April 11, 2022  $USD, Bank of Canada, China, Currency Movement, ECB, France, India, UK Overview: Macron's victory in the first round of the French presidential contest lifted the euro, which is resilient to the broader greenback gains scored on the back of the continued rise in yields.  The US 10-year yield is up around five basis points to 2.75% after increasing by more than 30 bp last week. European yields are higher, but the euro-sensitive Germany-Italy spread has narrowed by almost seven basis points.  Japan's benchmark is nearing the 0.25% cap and China's premium briefly switched to a discount for the first time since 2010.  The dollar rose to new highs against the yen, reaching almost JPY125.45.  Central European currencies are being pulled higher by the euro, but most emerging market currencies are weaker.  Equities are heavy.  In the Asia Pacific, the Hang Seng and China's CSI 300 is off 3% in a sea of red.  Australia was a notable exception, eking out a small gain for the second consecutive session.  Europe's Stoxx 600 is giving back half of last week's 0.6% gain, while US futures are softer.  The rising yields have not sapped gold, which is knocking on $1960.  Concerns about weakening Chinese demand as it struggled to get the pandemic under control are keeping oil on the defensive.  May WTI is off 2.5% near $95.75  It remains in the range set last Thursday roughly $94-$99.  OPEC and the IEA update their forecasts tomorrow and Wednesday. US natgas is higher.  Last week, it gained nearly 9.8%, in its fourth weekly advance for a cumulative increase of about 33%.   European natgas benchmark is lower after falling 6.6% last week.  Iron ore is off for a fifth session.  It is down 2% after falling almost 4% last week.  May copper is paring last week's 1% gain.  July wheat is extending the pre-weekend gain of 3.2% and is at its highest level in around two and a half weeks.   Asia Pacific Shanghai's lockdown and economic disruption overshadows much of China's economic news.  Still, it reported a rise in March CPI to 1.5% from 0.9%.  A surge in the price of vegetables narrowed the drop in food prices to -1.5% from -3.9%.  Non-food prices rose by 2%.  Excluding food and energy prices, China's core CPI was steady at 1.1%.  China reported the fifth consecutive monthly slowing of PPI.  It eased to 8.3% from 8.8%, a little less than expected.   Separately, China reported a surge in lending last month.  New yuan loans from the banks rose CNY3.13 trillion, well above expectations, and a multiple of the CNY1.23 trillion in February.  Aggregate financing, which includes shadow banking activity, jumped by CNY4.65 trillion from CNY1.19 trillion. This was about a third more than expected.  The three-month average of CNY4.0 trillion may be the largest on record.  Unlike in the US and Europe in the Great Financial Crisis, Chinese bank lending has continued, which is seen as a cushion for the economy.   Before the weekend, India's central bank signaled a shift in priorities that could lead to a rate hike later this year. First, it dropped the reference to maintaining an accommodative stance. Second, it lifted the floor of its liquidity adjustment facility to the standing deposit facility of 3.75% rather than the reverse repo rate of 3.35%. Third, the RBI lifted its CPI forecast to 5.7% from 4.5%. It shaved its GDP forecast to a still robust 7.2% from 7.8%. India reports March CPI tomorrow. The median forecast in Bloomberg's survey calls for an acceleration to 6.35% from 6.07% in February.  Biden and Modi hold a video call today ahead of a high-level meeting later between the US Secretaries of State and Defense and their Indian counterparts.  India is part of the Quad and an important bulwark against the expansion of China.  However, it also has had longstanding military ties with Russia and has been cautioned about helping Russia evade the sanctions.   The Bank of Japan reduced its assessment of eight of the nine economic regions in its quarterly report.  The virus and supply-chain bottlenecks are the main challenges. The sobering assessment will feed into the BOJ's quarterly economic outlook due at the end of the month.  The report is consistent with the need for a supplemental budget the government is pulling together, which is also due later this month.  The BOJ appears determined to continue to defend its 0.25% cap on the 10-year JGB.   The dollar reached almost JPY125.45 in late Asian turnover.  The next chart point of note is the 2015 high near JPY125.85.  Although it traded above JPY125 last month, it did not manage to close above it.  The rising US yield is the key driver, and its gains suggest upward pressure may remain.  Australia has set its election for May 21 and shortly afterward the central bank is expected to begin its tightening cycle.  Still there is little reprieve for the Australian dollar, which has continued to bleed lower for the fourth consecutive session.  It is trading near three-week lows near $0.7430. It has now retraced roughly half of its gains since the March 15 low near $0.7165.  A break of the $0.7400 area could spur another half-cent loss.  The greenback is firm against the Chinese yuan for the third consecutive session.  The PBOC set the dollar's reference rate a little lower than the market (median in Bloomberg's survey) for also the third consecutive session CNY6.3645 vs. CNY6.3652).  China has fallen out of favor among global asset managers.  Europe Reports ahead of the weekend suggested that at least some at the ECB would like to have a new tool that would allow it to act against fragmentation of the eurozone debt market that may be caused by external shocks. A challenge is that it may need to be rules-based instead of discretionary to appeal to creditor countries (hawks). At the end of last year, as discussions about the Pandemic Emergency Purchase Program that was going to end in March, there was also an attempt to create a new precautionary tool. However, the hawks insisted on attaching conditionality to such an effort. In the end, the compromise struck was to introduce flexibility in the reinvesting of maturing bonds.  The UK's February GDP disappointed with a 0.1% gain.  Industrial output unexpectedly fell by 0.6% and manufacturing was off 0.4%.  Poor weather appeared to be behind the disappointing 0.1% fall in construction, which economists had expected to have risen by 0.5%.  Services slowed as expected to 0.2% after rising 0.8% in January.  The trade deficit with the EU narrowed sharply but a change in methodology means that it may not be directly comparable with the January figures.  It is an important week for UK data.  Tomorrow sees the employment update and CPI and PPI are due Wednesday.  The swaps market is discounting a 25 bp hike at the May 5 and June 16 meetings and about another 90 bp in the second half of this year.   UK Chancellor of the Exchequer, Sunak, was among the most popular politicians during the early days of the pandemic as he doled out support. There was speculation that he was the leading candidate to replace Johnson.  According to the latest YouGov polls, his support has been more than halved since last month's Spring Statement. Some attribute it to pressing forward with the National Health Service tax increase. However, today shows another dimension. The basic rate of unemployment benefits increased by 3.1% today, based on inflation in September. Since then, it has more than doubled and is likely to have accelerated further last month. March CPI will be reported on Wednesday.   News that Sunak's wife held non-domestic tax status, which meant no UK taxes were paid on overseas earnings does not appear illegal, and Sunak has requested a formal review.  However, it strikes many as unseemly even if legal.   The euro initially gapped higher in Asia as the French election news spurred a quick short-covering rally that lifted the single currency to almost $1.0955.  The gap that extended to last Friday's high (slightly above $1.0890) was closed.  It found new bids on the pullback and is probing the $1.0920 area in the European morning.  While the intraday momentum indicators suggest it may not be likely, an extension of the euro's gains in North America would likely meet resistance around $1.0970. Sterling frayed the $1.30 support ahead of the weekend and dipped below it again today.  However, buyers emerged in late Asian activity carrying through the European morning.  Sterling has recovered to session highs near $1.3045.  Initial resistance is seen in around $1.3060.      America It might not seem like it, but Covid is rising in 21 states, and hospitalization rates are rising in 11 states. The war in Ukraine, inflation and Fed policy seem to eclipse the virus. Some polls show that immigration is also weighing on Biden's support in addition to inflation. About two-thirds of Americans blame Putin and oil companies for the increase in gasoline prices. Meanwhile, one of the most outspoken critics of the Biden Administration and the Federal Reserve, former Treasury Secretary Summers, argues that the US has not been able to avoid a recession when inflation gets above 4% and unemployment below 4%.   This is a big week for US data, but it begins quietly today.  The main feature is the Fed-speak (Bostic, Bowman, and Evans).  However, participants recognize a consensus has formed in favor a 50 bp hike next month and a campaign to lift the funds rate toward neutrality.  It is also expected to let the balance sheet unwind beginning next month.  The Fed speeches and the high-frequency data may pose headline risk but is unlikely to alter the underlying view.  Tomorrow sees the March CPI, which is expected to have accelerated toward 8.4% from 7.9%.  The core is expected to poke above 6.5%.  Some economists expect it to peak shortly, partly due to the base effect.  In Q2 21, US CPI jumped 2.2% cumulatively over the three months. It repeated this in Q4 after a 1.2% cumulative rise in Q3.  However, the elevated level and the tight labor market means that the Fed will not be distracted.   The Reserve Bank of New Zealand will likely hike rates a few hours before the Bank of Canada does on Wednesday.  The swaps market has a little less than a 65% chance of a 50 bp move by the RBNZ. However, the market is more confident that the Bank of Canada hikes by 50 bp.  In fact, the swaps market has 66 bp of tightening discounted.  That would seem to imply a split market between a 50 bp and 75 bp move.  We think that is a bit exaggerated, especially given that the Bank of Canada is also expected to announce its balance sheet reduction strategy.  It also suggests that even if the Bank of Canada hikes by 50 bp, it might not be enough to spur a strong Canadian dollar recovery.  The swaps market currently shows the terminal rate for both the US and Canada is a little more than 3%.     The US dollar settled near session lows before the weekend on the back of another strong Canadian jobs report.  However, the broadly stronger US dollar, helped it hold the pre-weekend low (~CAD1.2565) and test the CAD1.2620 area that capped last week's gains.  The market may be reluctant to extend short CAD positions ahead of the central bank meeting.  We see scope for the greenback to retest the lows and maybe a bit more in the North American session today.  The US dollar ran into offers since the middle of last week around MXN20.19.  We see potential to around MXN19.96 today.  It has not traded below MXN20.00 since last Wednesday.  It reports February industrial output figures today.  A small gain is expected.  AMLO's referendum on his tenure was seen more as a political stunt than a real threat to his remaining three years.  The turnover was low (less than 20%) and appears to have little significance, though it could boost the attention to the regional elections in early June.    Disclaimer

April 06, 2022  $USD, balance sheet, China, Currency Movement, Federal Reserve, Germany, Hungary, Japan, Poland Overview:  Federal Reserve Governor Brainard's suggestion of a rapid unwind of the Fed's balance sheet stoked a bond market sell-off that is continuing today, rippling through the capital markets.  The US 10-year yield is rising for the fourth consecutive session.  The six-basis point gain today puts the yield near 2.62%, which represents a little more than a 25 bp increase since the jobs data on April 1.  European benchmark yields are 3-6 bp higher.  Japan's 10-year yield is poking above 0.23% to again challenge the BOJ's Yield Curve Control.  Equity markets are taking it on the chin.  The major markets in the Asia Pacific region fell, led by a 2%+ sell-off in Hong Kong. China's markets re-opened after a two-day holiday, and although the Shanghai and Shenzhen markets posted minor gains, the CSI 300 slipped by 0.3%.  Europe's Stoxx 600 is off around 1.1% and US futures are about 0.75% weaker.  The dollar is mixed.  The Swiss franc, Norwegian krone, and Japanese yen are weaker.  The Swedish krona, sterling, and euro are posting small gains.  Among the emerging market complex, the South African rand leads the few currencies higher.  Poland, which is expected to lift rates 50-75 bp today has not prevented the zloty from softening.  The Hungarian forint and Indian rupee lead the decliners today.  Gold is edging higher within its consolidative range, after the $1915 area held.  May WTI is firm near $104, but within yesterday's range (~$99.90-$105.60).  US natgas is extending yesterday's 5.6% gain by another 2% today. It is up roughly 40% since mid-March.  Europe's benchmark is snapping a three-day 13% decline with a 2.75% gain today.  Iron ore is off around 1.3%, while copper is slipping lower for the first time this week.  May wheat is paring the two-day 6% rise.   Asia Pacific China's mainland markets re-opened after the two-day holiday.  The news was poor.  The Caixin service and composite PMI were weaker than expected.  The services PMI slumped to 42.0 from 50.2. The composite dropped to 43.9 from 50.1.  In some ways, the news confirms what the market already knew in broad strokes.  The world's second-largest economy is struggling mightily as the zero-Covid policy is disrupting activity.  The lockdown in Shanghai, for example, has been extended.  The economic disappointment will underscore expectations for additional policy support.   New Zealand is placing a 35% tariff on imports from Russia while extending its export prohibitions.  Australia reports February trade figures tomorrow.  Weaker exports and stronger imports are projected to translate into a smaller surplus.  The new pact between the US, UK, and Australia (AUKUS) is not just about the nuclear-powered submarines.  It was announced that they are also working on developing hypersonic weapons.  Meanwhile, a Quad (Australia, Japan, India, and the US) meeting slated for next month may be delayed until after the Australian election.  This also means that US President Biden's first trip to Japan will also be rescheduled.   Rising US yields have helped lift the greenback to JPY124.  The dollar's multiyear high set in late March was almost JPY125.10.  The market looks set to challenge it again and a marginal new high is possible.  Recent comments by the Minister of Finance and the BOJ Governor show continued sharp depreciation of the yen is not desirable.  A month ago, the dollar was near JPY115.  The Australian dollar surged yesterday as the central bank appeared to signal the likelihood of an earlier hike, but it is trading quietly today.  The Aussie is in around a 15-tick range on either side of $0.7575.  Although it reached $0.7660 yesterday, the $0.7600 area may offer a cap today.  China's mainland market re-opened today, and the dollar initially jumped to a five-session high near CNY6.3765.  It spent the local session drifting lower and is now near CNY6.3600, back within the April 1 range.  The PBOC set the dollar's reference rate at CNY6.3799.  The median projection (Bloomberg survey) was CNY6.3791.  Europe German factory orders slumped 2.2%. It was the first decline in four months.  The median forecast (Bloomberg) anticipated a 0.3% decline.  The January series was revised to 2.3% from 1.8%, offering a small consolation.  Domestic orders fell for the second consecutive month, while foreign orders slid 3.3%.  That said, foreign orders have been alternating between gains and losses since at least last August.  A group of economic advisers to the German Chancellor cut this year's growth forecast to 1.8% from 4.6%, while warning that a recession was possible.  Tomorrow, Germany is to report February industrial production figures.  The median forecast is for a 0.2% gain after the 2.7% surge in January.  The risks are on the downside.  Note that yesterday, France reported February industrial output fell by 0.9%, three-times the decline the median forecast anticipated.  The aggregate report is due next week.  Poland's central bank is expected to deliver its seventh consecutive rate hike today.  The reference rate stands at 3.5%.  The median forecast is for a 50 bp hike, while the average forecast leans toward a 75 bp move. Poland began the tightening cycle last October with a 40 bp move.  It was followed by 75 bp in November and then three 50 bp moves before a 75 bp hike last month.  Meanwhile, the EU has wasted no time since Hungary's Orban handily won the weekend election to begin pressing with the untested "conditionality mechanism" which can lead to the denial of EU assistance (~40 bln euros) for violating core values.   Since posting a key downside reversal last Thursday, the euro has been unable to sustain even modest upticks.  It had been turned back from around $1.1185 and tested $1.0875 today, its lowest level since March 8.  The low was recorded in Asia, and early European dealing squeezed it to about $1.0925 before it ran out of steam.  The single currency looks poised to re-test the $1.08 area seen on March 1.  Sterling posted an outside down day yesterday, trading on both sides of Monday's range and then settling below Monday's low.  Follow-through selling pushed it briefly below $1.3050 before it too bounced in the European morning to almost $1.3110.  There may be scope for additional minor gains, but we expect it to come off in the North American morning.   America Many observers seem confused.  They had the Fed's Brainard as a dove.  Yet her comments yesterday were as hawkish as they have come.  Reducing inflation was paramount.  She seems to be part of the growing consensus to hike 50 bp next month.  It was her comments about the balance sheet that may have done the most damage to stocks and bonds.  She referred to a "rapid" pace.  The previous exercise saw the unwind limited to $50 bln a month and it took several months to ramp up to the limit.  Brainard appeared to confirm a more aggressive unwind that could begin as early as next month.  The 2-10-year yield curve steepened back to a positive slope, but it is not because investors think that the balance sheet adjustment will take some pressure off the need to raise interest rates.   On the contrary, the implied yield on the December Fed funds futures contract rose to a new high and is now implying 220 bp of hikes this year.  Hawk and dove labels may be helpful for analytic purposes, but they are always contextual.  Bullard, the leading hawk now, may not have gotten what he wants, hence the dissent at the March meeting.  However, the rest of the FOMC is converging to his broad position.   Consider that in March, there were only two dots above 2.38% for the Fed funds target at year-end.  The December Fed funds futures contract implies a year-end rate of 2.54%.  Brainard did not steal all of the thunder from the FOMC minutes.  The market still wants to have a better idea of the pace of the unwind.  Anything more than around $100 bln would surprise.  The phase-in period likely begins next month and will quickly ramp-up toward the caps.     The US dollar rebounded off CAD1.24 yesterday and settled near the session high just below CAD1.25.  A bullish hammer candlestick pattern was left in its wake.  Follow-through buying today has been minimal and the greenback tested CAD1.2510.  It looks like the move in early March near CAD1.29 has been completed.  A consolidative/corrective phase looks likely from a technical perspective.  Initial resistance is seen near CAD1.2550, we suspect a move toward CAD1.2600 is likely.  The 200-day moving average is around CAD1.2620.  The greenback's slide against the Mexican peso appeared to have ended.  The move began on March 9 after peaking the day before near MXN21.4675.  At the start of this week, it fell to MXN19.7275.  That move ended with aplomb yesterday and the greenback raced above MXN20.00 for the first time since March 29. Momentum and trend-followers are caught leaning the wrong way.  A short-squeeze could lift the dollar toward MXN20.14 and then, possibly MXN20.35-MXN20.40.     Disclaimer

April 05, 2022  $CHF, $USD, Australia, Currency Movement, EMU, Hungary, Japan, Mexico, RBA, Russia, Trade, UK Overview: The Reserve Bank of Australia hinted that it was getting closer to a rate hike.  The Australian dollar was bid to its best level since the middle of last year.  Australian stocks advanced in a mixed regional session while China and Hong Kong markets were closed for the local holiday.  BOJ Kuroda called the yen's recent moves "rapid."  The yen is sidelined today as the dollar weakens against other major currencies, led by the Antipodeans.  In addition to the yen, the Swiss franc and euro are also among the laggards.  European equites have edged higher and the Stoxx 600 is at its best level since mid-February.  US futures have turned lower in the European morning.   The US 10-year yield is around five basis points higher at 2.45%.  European yields are mostly 5-10 bp firmer.  Gold is quiet in a $1925-$1934 range.  May WTI is extending yesterday's 4% advance to add more than 1% to probe the $105 a barrel level.  It finished last week near $99.25.  US natgas is up almost 2.7% and is approaching the $6 level.  It has only fallen in one week since the Russian invasion of Ukraine.  Europe's benchmark is almost 3% lower (-0.3% yesterday) after jumping almost 12% last week.  Iron ore is higher for a third session, while copper is up almost 1% after yesterday's 2% advance to trade at new four-week highs.  May wheat is up 3.2% on top of yesterday's 2.6% gain. It fell near 10.7% last week.   Asia Pacific The Reserve Bank of Australia dropped its reference to being patient and this was all the encouragement the market needed.  The Australian dollar rallied, and local rates jumped.  The cash rate futures now fully imply a hike in June.  Yesterday, there was only an 80% chance discounted.  The upcoming inflation and next month's wages are still important pieces of the policy puzzle.  A move in June would come after the election which must be held by late May.  Separately, the preliminary service and composite PMI were revised lower and now show a decline from February.  The service PMI was revised to 55.1 from 571 and 57.4 in February.  The final composite PMI is at 55.6, down from 57.9 flash reading and 56.6 in February.   While the pandemic and earthquake hobbled the Japanese economy in Q1, the groundwork for a recovery is becoming clearer.  Labor cash earnings were twice as strong as the median forecast in Bloomberg's survey projected, rising 1.2% in February and the January series was revised higher (1.1% from 0;9%).  Rising inflation meant that in real terms there were unchanged.  The median forecast looked for a 0.7% drop.  The preliminary March service PMI was revised higher from 48.7 to 49.4, while the final composite reading edged above the 50 boom/bust level (to 50.3 from 49.3 and 45.8 in February.   Last week, the Japan's Minister of Finance suggested that impact of the yen's weakness should be reviewed.  We suggested that it was a small first step on the intervention escalation ladder. Earlier today, BOJ Governor Kuroda took another small step and characterized the recent moves as "rapid."  This reinforces our sense that the JPY125 area marks the upper end of a new range for the dollar.  Our first stab at the lower end of the range is around JPY121.00 but it might extend into the JPY119.50-JPY120 area.   The dollar is trading quietly against the yen today, mostly within yesterday’s JPY122.25-JPY123.00 range.  We are more inclined to see the greenback trading lower in North America and re-test the lows.  The consolidative phase in Australian dollar has ended with the surge to almost $0.7640 today.  It has surpassed the $0.7610 area, which represented the (61.8%) retracement of the decline since from the February 2021 high slightly above $0.8000 to the late January low near $0.6980.  The next important chart area is in the $0.7675-$0.7700 area.  With China's mainland market still closed, the offshore yuan continues to trade quietly.  It was largely confined to yesterday's range and is virtually unchanged since the weekend.   Europe The final eurozone PMI readings were mixed.  There was something for everyone.  The German readings were revised higher.  The March service PMI stands at 56.1, up from the 55.0 flash reading, and an improvement for the 55.8 February report.  The composite is at 55.1 rather than 54.6, but still a little softer than the 55.6 in the prior month.  French readings were little changed.  Services were unchanged at 57.4, but the composite was revised to 56.3 from 56.2 after 55.5 in February.  Italy's service PMI was stronger than expected at 52.1 compared with 52.8 in February.  The composite was spot on with expectations at 52.1 (down from 53.6).  Spain disappointed.  The service PMI fell to 53.4 from 56.6 and the composite stands at 53.1 vs. 56.5 previously. The net result was that the aggregate service PMI stands at 55.6, up from the 54.8 flash reading and a touch better than the 55.5 February report.  The composite was revised to 54.9 from 54.5 but still a little softer than February's 55.5.   The UK PMI was revised higher from the preliminary estimates.  The service PMI stands at a lofty 62.6.  The flash report has shown improvement to 61.0 from 60.5 in February.  The composite stands at 60.9 compared the 59.7 preliminary estimate and 59.9 in February.  It is the strongest since last June.  The details were a little disconcerting.  While output prices rose to a new record high, business optimism at a 17-month low.  Next week, the UK reports inflation and employment figures.   The euro posted a key reversal last Thursday, turning back from a four-week high near $1.1185 and settled below the previous day's low.  Follow-through selling saw it test support near $1.0960 yesterday.  It is consolidating today in narrow quarter-cent range below $1.0990.  It takes a move above $1.1015 to stabilize the tone but regaining the $1.1050 area is important to lift the outlook.  Sterling appears to be going nowhere quickly.  It continues to trade in the range set last Wednesday (~$1.3085-$1.3185).  It is trading with a firmer bias today, but is holding below $1.3150, near where it peaked before the weekend.  Elsewhere, we note that the euro is consolidating at four-week lows against the Swiss franc.  It needs to regain a foothold above CHF1.02 to stabilize the tone.  A double top may have been carved that projects toward parity.  The rise in sight deposits reported yesterday is consistent with SNB intervention.  Lastly, with Orban securing a fourth term in Hungary, the confrontation with the EU will likely heat-up.  Orban has opposed EU sanctions on Russia but has not vetoed any of them.  Still, there are outstanding issues.  The euro carved a base last week against the forint and now appears set to appreciate against it.  We suspect there is scope of a 3%-5% advance.   America The US took another step in weaponizing the dollar to squeeze Moscow.  Russian government accounts will no longer became to make dollar payments through US financial institutions.  The chokehold gets tighter.  Moscow is forced to draw down their dollar holdings that the Russia central bank has, spend its income revenue, which is estimated to be around $1 bln a day, or default on its obligations.   The US reports the February trade balance.  A small improvement from February should not hide the significant deterioration that is taking place.  The combined Jan-Feb deficit last year was about $132.7 bln.  If the median (Bloomberg survey) projection of a $88.5 bln shortfall is accurate, the Jan-Feb shortfall this year would be a little more than $178 bln, a 34% deterioration.  Canada reports its February goods trade balance.  If the median (Bloomberg survey) is fairly accurate, Canada's Jan-Feb surplus will be a little more than 50% greater than the year ago period.   The final service and composite PMI and the ISM services are also on tap.  Recall that the flash reports showed unexpected gains.  The service PMI improved to 58.9 from 56.5 and the composite rose to 58.5 from 55.9.  The ISM services ae expected to have improved to 58.5 from 56.5.  Fed Governor Brainard will speak about inflation today (~10 am ET). San Francisco Fed President Daly (who seems to favor a 50 bp hike) and NY Fed President Williams also speak later today.   Recall that the NY Fed President has a permanent vote on the FOMC, and Williams seems inclined to hike by 50 bp too.     The US dollar is trading at a four-day low against the Canadian dollar near CAD1.2460.  Last week's low, which was also the low since last November, was around CAD1.2430.  A break targets the CAD1.2380-CAD1.2400 area.  That said, we look for a bounce in early North American activity that could see the CAD1.2480-CAD1.2500 area.  Mexico has reinstated gasoline subsidies at states bordering the US after closing them because US drivers were taking advantage of the cheap gas to fill-up.  The peso needs consolidation.  Consider that coming into today, the dollar has fallen for six consecutive sessions against the peso.  Last Monday's greenback gain halted an 11-day slide, the longest in half a century.  The dollar has fallen in every session but last Monday's, beginning on March 11. The momentum indicators are stretched, and the greenback's downside momentum is slowing.     Disclaimer

March 30, 2022  $USD, BOJ, China, Currency Movement, German, Inflation, Japan, Russia, Spain, Ukraine, Yield Curve Overview:  A pullback in US yields yesterday and the Bank of Japan's stepped-up efforts to defend the Yield Curve Control policy helped extend the yen's recovery.  This spurred profit-taking on Japanese stocks, where the Nikkei had rallied around 11% over the past two weeks.  Hong Kong, China, and Taiwan led the regional advance.  However, facing a surge in inflation (Spain and German states) and a jump in European natural gas prices (~9%) is snapping the Stoxx 600's three-day advance.  US futures are trading with a heavier bias.  The US 10-year yield has edged a little higher to 2.40%, while the two-year that briefly traded above the 10-year yield yesterday is off about four basis points.  European benchmark yields are 3-6 bp higher.  The greenback is trading lower against all of the major currencies, led by the yen's recovery.  After poking above JPY125 to start the week, the dollar fell to around JPY121.30 today before steadying.  The Canadian and Australian dollars are the laggards with minor gains.  Among emerging market currencies, the Turkish lira is the notable exception, and is posting a modest decline.  Gold appeared to post a bullish hammer pattern yesterday but there has not been much follow-through and the yellow metal is in around a $6 range on either side of $1922.  May WTI is also in a narrow range--mostly $105-$107 today. Copper and iron ore are trading firmer.  Wheat is still soft after losing around 8% over the past couple of sessions.   Asia Pacific The Bank of Japan stepped-up its efforts to cap interest rates earlier today.  It increased the amount of bonds it bought at its regular scheduled operation.  It offered to buy JPY600 bln (instead of JPY450 bln) 3–5-year bond, and JPY725 bln (instead of JPY425 bln) of 5-10-year bonds, in addition to the pre-announced defense of the 0.25% cap on the 10-year bond.  It did not increase the amount of longer-term bonds.  Tomorrow, the BOJ is expected to announce next quarters asset purchase plans.  Although BOJ Governor Kuroda, who met with Prime Minister Kishida earlier today, does not seem concerned about the yen's weakness, Finance Minister Suzuki seemed more cautious.  He suggested continuing to check if the yen's weakness is harming the economy.  For example, the weaker yen is aggravating the surge in energy prices, which Kishida was to cushion the blow to households and businesses. If intervention is best understood as an escalation ladder, as we suggest, then this might be seen as a low rung.  Separately, Japan reported that retail sales fell by 0.8% in February, which was more than twice the decline expected by the median forecast in Bloomberg's survey.  It also drove the year-over-year rate below zero (-0.8%) for the first time since last September.  Beijing has offered some economic support for Shanghai, but the surge in Covid there, and lockdowns there and elsewhere, are seeing economists slash growth forecast and lift inflation projections.  China's March PMI will be released tomorrow. A poor report is expected, and the risks are on the downside.  Thus far, though, officials have used targeted measures and have not provided the overall economy with new support. The dollar did not trade for long above JPY125 on Monday, but it seems to have completed something and the greenback has traded down to JPY121.30 today.   The (38.2%) retracement of this month's rally is around JPY121.10 and the next retracement (50%) is a little below JPY120.  Month-end and fiscal-year end considerations may also be at work but is often used as a catch-all narrative.  Note that reports suggested that Japanese retail accounts were beginning to buy yen toward the end of last week.  The Australian dollar bounced off four-day lows slightly below $0.7460 yesterday and settled above $0.7500.  It is firm today but below this year's high set Monday near $0.7540.  It still feels like it is consolidating.  The broad US dollar weakness was evident against the Chinese yuan today.  It is trading nearly 0.25% lower, the most in about two weeks.  The greenback is trading at a nine-day low near the 20-day moving average, slightly below CNY6.35.  That is also around the middle of this month's range (~CNY6.3080-CNY6.3860).  The PBOC set the dollar's reference rate at CNY6.3566.  The median projection in Bloomberg's survey was CNY6.3560.   Europe The common narrative now is that Putin initially anticipated a quick overwhelming victory over Ukraine and as it has stalled, he is falling back on Plan B.  Plan B is to secure the territorial claims of the two separatist regions and later incorporate them into Russia. Russia is curtailing the use of Hryvnia in the occupied areas and introducing the rouble. This military objective has not been met. Turning Clausewitz on his head, the political negotiations are a continuation of the war by other means. Putin has already achieved a key strategic goal; Ukraine will foreswear joining NATO.  One cannot help but wonder that if Zelenskiy accepted this more than a month ago, the course of events may have been different. The date for the next round of negotiations have not been set.  In a war, the losing side is more anxious for negotiations by definition. After consolidating its forces and enlarging the field of control of the separatist regions, Russia can then be in a position to negotiate.  This seems to be the key to the timeline that can lead to a sustainable cease-fire.  The cost of rebuilding Ukraine, which had serious developmental challenges before the war, will fall to the EU, IMF, World Bank, and UN.   A surge in eurozone inflation was expected, but the Spanish and German state figures are over the top. The market (Bloomberg median forecast) was for a strong 1.3% monthly increase in Spain, instead the national figure jumped 3%. The harmonized measure surged 3.9% this month and lifted the year-over-year rate to 9.8% from 7.6% in February.  Details are sparse in the initial estimate, but the Economic Minister suggested that three-quarters of the rise was due to food and energy.  Still, the core rate rose by 0.4% on the month. Most of the German states reporting CPI figures today showed a 2.6%-2.7% month-over-month increase in their CPI. The national and harmonized figures are due shortly.  There seems to be upside risk to the expectations that the year-over-year rate of the harmonized measures (HICP) will accelerate to 6.8% from 5.5% in February.  The aggregate preliminary estimate for the euro area is due Friday.  The euro rallied yesterday on the hopes that the Russian invasion of Ukraine may be near the endgame and is extending the gains today amid further positioning squaring.  We note that that the US premium over Germany on two-year money has reversed sharply lower.  It peaked on Monday above 245 bp and is testing 230 bp today.  The German two-year yield is up around seven basis points today and is again trying to secure a foothold above zero for the first time since 2014.  Yesterday's attempt was rebuffed.  The surging inflation will strengthen the hawks’ hands, many of whom see scope for two hikes this year that could bring the deposit rate to zero. The euro is trading at its best level since March 1, which was the last time it traded above $1.12. Its gains have now retraced a little more than half of this month's decline (~$1.1150).  The next technical target is the $1.1200-$1.1230 area.  Sterling is a laggard.  It is trading inside yesterday's range (~$1.3050-$1.3160). There may be scope for additional gains, albeit marginal, as the intraday momentum indicators are stretched.  We suspect the $1.3180-$1.3200 cap may suffice today.   America The US 2-10-year yield curve briefly inverted yesterday before finishing around three basis points.  It is drawing a great deal of attention, but like any statistic it needs to be placed in a context. Few believe the US is recession-bound.  The median forecast in Bloomberg's survey has the US economy growing 3.5% this year and 2.3% next year.  This is still above the Fed's estimates of the long-term growth trend (1.6%-2.2%.). The most pessimistic forecasts in Bloomberg's survey do have growth less than 1% this year or next.  That said, there are those who are warning of a recession, including ourselves, and the yield curve did not enter the picture.  Interest rates are not waiting for the Fed's meetings to increase, as the 93 bp increase in the 2-year yield this month.  The halving of the deficit (as a percentage of GDP) this year still strikes us as an under-appreciated drag.  The rise in energy and food prices cuts the purchasing power of households.  US inflation expectations are not just a function of what the Fed is or is not doing.  The correlation of the change in the 10-year breakeven (the difference between the yield of the inflation protected security and the conventional note) and oil (the front-month light sweet crude oil contact, WTI) over the past 30-days is nearly 0.65, the highest in seven months. The 60-day correlation is almost 0.55, a five month-high. The price of May WTI has risen by almost 25% ($20 a barrel) net since the US warned that a Russian attack could happen at any moment on February 11.  OPEC+ meets tomorrow and there still seems little chance that it will boost output.  Most of OPEC's spare capacity is in Saudi Arabia (~1.6 mln barrels a day) and the UAE (~1.3 mln barrels a day).   Today's ADP private sector jobs estimate is the data highlight. We remind that it is not a particularly useful guide to the BLS estimate for the particular month, though it gets the larger trend fairly right.  The median estimate for Friday's nonfarm payroll report has crept up in recent days to stand at 490k. The US also reports another revision to Q4 21 GDP.  It may be left at 7.0%.  With Q1 22 nearly over, the market will not be sensitive to Q4 data.  The economy is expected to have slowed to around 1.0%-1.5% this year from 7% last.  The Fed's Barkin and George speak today. While George is a voting member of the FOMC this year, Barkin, like Harker and Bostic, who spoke yesterday, do not.   Mexico reports February unemployment today.  It may have ticked up slightly.  Canada's economic calendar is light, but there is much talk about Ontario's imposition of a 20% tax on foreign purchases and real estate in the province.  The "speculation levy" is meant to slow the surge in house prices. Lastly, late yesterday Chile hiked its overnight target rate 150 bp to 7.0%.  This was a bit less than expected and the central bank indicated that it may not need to make such big moves going forward. Latam countries hiked rates early and many aggressively, and ideas that the tightening cycles may end later this year appears to be encouraging flows into local bond markets.  That said, the swaps market has about 300 bp of additional hikes over the next six months before a cut in rates toward the end of the year or early 2023.    The US dollar is near the recent trough against the Canadian dollar (~CAD1.2465-CAD1.2475).  Below there is the year's low around CAD1.2450.  A break targets the CAD1.2400 area. However, the intraday momentum indicators suggest the greenback may bounce first in early North American activity and a retest of CAD1.2500-CAD1.2515 would not be surprising.  Meanwhile, the greenback is slipping to new lows for the year against the Mexican peso (~MXN19.9120).  The next notable chart support is closer to MXN19.85, a shelf from last September. Here, too, the intraday momentum indicators favor a US dollar bounce in the North American morning.     Disclaimer

March 28, 2022  $USD, BOJ, China, Currency Movement, German, Interest Rates, nuclear, Russia, Ukraine Overview: Yields are surging.  Canada and Australia's two-year yields have jumped 20 bp, with the US yield up 10 bp to 2.37% ahead of the $50 bln sale later today.  The US 10-year yield has risen a more modest three basis points to 2.50%, flattening the 2-10-year yields curve.  The 5–30-year curve has inverted for the first time since 2016.  European 10-year benchmark yields have risen 3-7 bp.  Tech stocks helped power the Hang Seng and Australia eked out a small gain, but most equity markets in the Asia Pacific region sold off for third consecutive session.  Led by financials, utilities, and communication, the Stoxx 600 has risen by about 0.75% in the European morning.  US futures are trading with a heavier bias.  The greenback is firm, with the yen again under the most pressure.  It is trading briefly above JPY125 in late morning activity in Europe, before pulling back.  The Australian dollar is the only major currency higher on the day.  Emerging market currencies are mostly lower.  The South Korean won, and Thai baht are hardest hit alongside the Polish zloty.  The jump in yields takes some shine off gold, which reached $1966 last week.  It is now straddling the $1930 area.  The $1900 area may offer important support.  The lockdown in Shanghai is sparking concerns about oil demand.  May WTI is off almost 4% after last week's 10.5% rally.  There is also speculation (hope) that OPEC+ agrees to boost output at this week's meeting.  US natural gas prices are little changed after rising in every session last week.  Europe's benchmark has risen by a little more than 8% today after falling 2.4% last week.  Iron ore is a little firmer, while copper is falling for the third session in a row.  May wheat is offered, giving back 2.4% after last week's 3.6% a rally.    Asia Pacific The Bank of Japan entered the market to reinforce the 0.25% cap of the 10-year yield.  Its first offer to buy an unlimited amount of bonds failed to draw any interest.  The second attempt had to buy JPY64.5 bln (~$525 mln).  The BOJ recognizes it is engaged in a struggle now and has pre-announced will be there for the next three sessions.  Separately, we note that according to the latest Nikkei poll, support for Prime Minister Kishida has risen six percentage points to 61%, with high marks given for handling the Russia's invasion of Ukraine.   On the one hand, China rejects the sanction regime against Russia, it says, because it is being imposed with a UN resolution.  On the other hand, reports suggest that Beijing and mainland companies are asking US officials for clarification with the idea in mind to understand what is permitted.  China and India purchases, for example, of Russian oil is not violating the sanctions.   There was thought that China would abandon its strict zero-Covid course.  Some suggested that the easing of restrictions in Hong Kong could be a prelude to a change by Beijing.  However, that does not appear to be the case.  Yesterday, Beijing announced a lockdown of Shanghai, China's largest city (population estimated around 25 mln).  The eastern half of city will be locked down for four days starting today.  This covers the financial district.  The purpose is mass testing.  The western half of the city will be locked down as of April 1.  Residents will be barred from leaving home and public transportation and ride-hailing services will be halted. A record 5500 cases were said to have been reported on Saturday. Recall that earlier this month, Shenzhen, an important tech hub was locked down. China is taking a new initiative though that has not been widely reported. It appears that China and the Solomon Islands are close to a security pact.  The leaked documents suggest that the pact could lead to a Chinese military presence there.  The Solomon Islands did not confirm the leaked details but did acknowledge that it was broadening out its security arrangements and China would be included in the changes.  This is a blow to Australia, which had seemingly secured the strategically located country into the Western alliance.  Solomon Islands had abandoned Huawei in 2018 and struck an agreement with Australia to build a 2500-mile internet cable to it. Last year, Australia sent some police to help quell riots in Honiara, the capital of the Solomon Islands, over economic problems, and anti-Chinese sentiment.  Yet, China has been making inroads.  For example, in 2019, Honiara dropped its recognition of Taiwan.  The US has acted belatedly.  Its embassy was closed in 1993 and not re-opened until last month.  As the map here shows, a Chinese presence in the Solomon Islands would compromise Australia's security.     The BOJ's defense of its Yield Curve Control policy in the face of surging global yields and especially US rates keeps the yen on the defensive.  The yen edged higher at the end of last week for the first time in six sessions, but its losses have accelerated today.  As we have noted the last significant high was in 2015 and then the greenback reached about JPY125.85. The notable high before that was in 2002, a little above JPY135.  The Australian dollar is firm.  It posted a marginal new five-month high near $0.7540.  It is approaching last October's high by $0.7550.  It is the fifth consecutive advance, if sustained, and it would be the ninth gain in the past 10 sessions.  The positive terms-of-trade shock seems to the be chief driver.  A pre-election due first thing Wednesday in Canberra is expected to include a cut in the fuel tax for six months, support for first-time home buyers, and boost funds for roads and rails.  The election is expected to be called by late May.  The greenback gapped higher against the Chinese yuan, reaching a little more than CNY6.3810, but has subsequently trended lower to fill the nearly fill the gap (the pre-weekend high) by CNY6.3680.  The PBOC's reference rate for the dollar was lower than the Bloomberg survey anticipated (CNY6.3732 vs. CNY6.3740).    Europe In an unexpected turn of events, Germany's Economic Minister Habeck, a member of the Green Party, suggested that he is open to re-examining the decision to close the county's remaining three nuclear plants later this year.  Previously, the Greens and Habeck ruled out this option.  Still, the surge in energy prices and the belated efforts to reduce its dependence on Russia is pushing the pragmatic Greens (realos) in this direction.  Merkel's push to close the nuclear energy plants after Japan's nuclear accident in 2011 resulting in increased reliance on Russia and spurred the Nord Stream 2 pipeline.  Among the scenarios that were bandied about before Russia's invasion of Ukraine was that it could pursue a limited objective of securing the entire regional claims Donetsk and Luhansk.  Since the war began, Western sources has played up different scenarios, one of total occupation of Ukraine.  The narrative it tells now is that after having suffered some significant setbacks, for which the higher range of estimates suggest Russia has lost as many soldiers (15k) in Ukraine as it did in 10 years in Afghanistan.  Russia admits to less than a tenth of those estimated deaths in Ukraine.  Even taking into account the number of injuries inflicted, the lower bottom of NATO's range is (7k).  It is quite clear that both sides have it in their interest to, shall we say, see what they want.  Still, the point now is that Russia's 1st Deputy General of the Chief of Staff suggested Russian forces will focus on gaining the full control of the Luhansk, for which it may be nearly there, and Donetsk, which is thought to be a little more than half secured.  The idea is that when the territory is militarily secure, a referendum would be held to formally join Russia.  Strategically, a land-bridge to Crimea will also be secured.   The euro was sold to an eight-day low near $1.0945 after holding above $1.0960 last week.  It popped up in early European turnover to the session of just below $1.10.  That is an important level in the coming days, with large options expiring there.  The nearly 585 mln euro expiry today is the smallest.  Tomorrow's expiring options are for almost 2.5 bln euros and the same for Wednesday ahead of Thursday's nearly 2.9 bln euro expirations.  If the upside is blocked, look for a test on $1.09 and below there is this month's low slightly ahead of $1.08.  Sterling is testing last week's low by $1.3120.  A break targets the $1.3070 area, and possibly $1.30, which was seen in the middle of the month. It last traded below there in late 2020, when it found a base around $1.2880.    America The US Treasury indicated that Russia could use frozen funds to make debt payments until May 25.   Next Monday, there is a $2.2 bln debt servicing payment due.  Some covenants allow for the rouble payments, but these reportedly do not.  After May 25, it needs to raise money other ways, including selling its oil and gas.  Over the weekend, President Biden implied relations with Russia cannot be normalized while Putin is in control.  It was later walked back by Secretary of State Blinken.  However, with the US claiming Putin is a war criminal, it is hard not to conclude that the US seeks regime change.  Some might find the US assertion of war crimes more powerful and compelling if Washington or Moscow were signatory members of the International Court of Justice.  If you are ke