Marc Chandler

Marc Chandler

Marc Chandler has been covering the global capital markets for more than 30 years, including stints as the global head of currency strategy for both HSBC and Brown Brothers Harriman. Chandler recently joined Bannockburn Global Forex as a Managing Director and Chief Market Strategist in 2018.

A prolific writer and speaker, Chandler appears regularly in the financial media. He is often quoted in the Financial Times, the Wall Street Journal, Barron’s, Bloomberg, and the Washington Post, among others. Marc also provides his insights and commentary on the markets on the most widely watched financial news channels, including CNBC, Bloomberg TV, CNN, and Fox Business.

Marc’s first book, Making Sense of the Dollar, was published by Bloomberg Press in 2009 and received a Bronze Award from Independent Publishers. Chandler's second book, Political Economy of Tomorrow, was published in February 2017.

Chandler is also an honorary fellow of the Foreign Policy Association and has been named a Business Visionary by Forbes.

Currently, Chandler teaches at New York University Center for Global Affairs, where he is an associate professor. He is also an honorary visiting professor at the Darden School of Business at the University of Virginia.

Though a Chicago native, and lifelong Cubs fan, Chandler currently resides in New York City with his wife, Jeannine, and son, Nathan.

No Turn Around Tuesday

No Turn Around Tuesday

Marc Chandler Marc Chandler 28.06.2022 15:19
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
Johnson's Ability to Lead Tories into Victory at Risk with Today's By-Elections

Johnson's Ability to Lead Tories into Victory at Risk with Today's By-Elections

Marc Chandler Marc Chandler 23.06.2022 15:51
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
US Holiday Facilitates Consolidative Tone

US Holiday Facilitates Consolidative Tone

Marc Chandler Marc Chandler 21.06.2022 09:52
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
Chart of the Week : Housing IS the business cycle

The Yen is Beaten Down after BOJ Stands Pat

Marc Chandler Marc Chandler 17.06.2022 15:36
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
No Turn Around Tuesday

Is a 0.3% Miss on Headline CPI Really Worth a 77 bp Rise in the December Fed Funds Yield?

Marc Chandler Marc Chandler 15.06.2022 23:58
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
Japan: retail sales rise while consumer sentiment weakens

Prospects of Aggressive Tightening Sends Shock Waves through the Capital Markets | MarcToMarket

Marc Chandler Marc Chandler 15.06.2022 09:08
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
Japan: retail sales rise while consumer sentiment weakens

Dollar Jumps, Stocks and Bonds Slide

Marc Chandler Marc Chandler 14.06.2022 09:16
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
Energy crisis to worsen as Russia cuts German gas supply | MarketTalk: What’s up today? | Swissquote

Fed 50, BOE 25, and the BOJ to Stand Pat: Week Ahead

Marc Chandler Marc Chandler 13.06.2022 09:00
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
The eurozone’s consumer’s still not putting their money where their mouth is

How ECB Meeting Is Going To Affect Stocks And Forex?

Marc Chandler Marc Chandler 09.06.2022 13:21
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
AUD/USD Eyes 0.6945 on Strong Australia Retail Sales Data

The Greenback Bounces Back

Marc Chandler Marc Chandler 08.06.2022 15:01
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
Video market update for June 29, 2022  | InstaForex

Can We Call USD/JPY Record-Breaking FX Pair!? US Dollar Against Japanese Yen Has Reached 20-Year-High. Has RBA Helped Australian Dollar (AUD)?

Marc Chandler Marc Chandler 07.06.2022 21:21
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
Crude Oil Higher, Gold Price Slips, Crypto: Bitcoin (BTC/USD) Vulnerable

EuroStoxx 600 Has Seemed To Feel Quite Good, So Have Asian Stocks. Has Gold Price Stabilised? | MarcToMarket

Marc Chandler Marc Chandler 06.06.2022 23:31
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
Eurozone: A step in the right direction for peripheral bonds

Greenback Looks Poised for Additional Gains

Marc Chandler Marc Chandler 06.06.2022 08:15
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
US Dollar To Mexican Peso Chart - Trading plan for USDMXN on June 27, 2022

Moderating Labor Market is what the Fed Wants | MarcToMarket

Marc Chandler Marc Chandler 03.06.2022 12:59
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
Japan: retail sales rise while consumer sentiment weakens

SEK, Stocks, CAD (Canadian Dollar), OPEC And Gold In Eyes Of Marc Chandler | MarcToMarket

Marc Chandler Marc Chandler 02.06.2022 15:43
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
Rates Spark: taking the inflation blinkers off

June Monthly | MarcToMarket

Marc Chandler Marc Chandler 01.06.2022 09:47
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
Spanish Economics Can Gain Much In The Near Future | ING Economics

Marc To Market: "Macro and Prices: Sentiment Swings Between Inflation and Recession"

Marc Chandler Marc Chandler 15.05.2022 18:10
(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
UK retail sales dip as confidence falls to another all-time low

"RBA Surprises with a 25 bp Hike" - Marc Chandler (MarcToMarket)

Marc Chandler Marc Chandler 03.05.2022 12:12
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
FX - Currencies: EUR/USD Looks To Break 1.0600 Ahead of Key Events

25bps Rate Hike Is Real! Riksbank Is Going To Support Swedish Krone (SEK) Further!? Rallying Japanese Yen (JPY) Incoming?

Marc Chandler Marc Chandler 28.04.2022 16:58
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
Markets eye Canadian job report, US inflation

Will US Dollar (USD) Beat British Pound (GBP), Japanese Yen (JPY) And All Other Currencies? Bank Of Japan To Tackle The Weaking Of JPY?

Marc Chandler Marc Chandler 27.04.2022 22:09
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
Group Of Market-Movers Collect Next Members!

Group Of Market-Movers Collect Next Members!

Marc Chandler Marc Chandler 26.04.2022 12:26
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
Not Again! CSI 300 And Hang Seng - COVID Makes Stock Market Struggle! EuroStoxx 600 and S&P 500 (SPX) Don't Set A Good Example

Not Again! CSI 300 And Hang Seng - COVID Makes Stock Market Struggle! EuroStoxx 600 and S&P 500 (SPX) Don't Set A Good Example

Marc Chandler Marc Chandler 25.04.2022 18:31
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
What Today's NFP Means For Markets? High Value May Boost USD, But Weaken Gold Price. Low NFP May Help Stockmarket | Oanda

Tightening Alert! How Have Exchange Rates Of Singapore Dollar (SGD), NZD, Canadian Dollar And Korean Won (KRW) Changed?

Marc Chandler Marc Chandler 14.04.2022 13:47
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
FX: British Pound (GBP) Keeps Struggling, Can EUR/GBP Go On With Recovery? Gold Price: What About XAGUSD?

President Of France To Be Chosen. It Is Another Factor Which Is Shaping Markets

Marc Chandler Marc Chandler 11.04.2022 16:29
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
German inflation comes down as government measures bite

How Are Markets Doing? US Bonds, EuroStoxx 600, CSI 300 And More

Marc Chandler Marc Chandler 06.04.2022 15:39
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
German inflation comes down as government measures bite

RBA Decided. Will AUD Do Significantly Better?

Marc Chandler Marc Chandler 05.04.2022 12:45
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
FX: British Pound (GBP) Keeps Struggling, Can EUR/GBP Go On With Recovery? Gold Price: What About XAGUSD?

Japanese Yen (JPY) Being Healed, Nikkei Has Added 11%, Wheat Has Decreased By Ca. 8%

Marc Chandler Marc Chandler 30.03.2022 14:18
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
China’s economic outlook for the second half of 2022

Gaining Canadian, Australian And US Yields In Focus. Won, Baht And PLN Weaken

Marc Chandler Marc Chandler 28.03.2022 14:41
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 keeping records of such things, Beijing is not a member either.  The ICJ does not have authority over non-members.   President Biden is struggling in the polls.  His support is around 40%, near the levels that Trump experienced at the same time of his presidency.  One poll found that some 70% have little confidence in his handling of Russia and the war.  This suggests that his base has also softened.  Meanwhile, Biden is expected to unveil new budget proposals, which will include record spending for "peace" time.  He is expected to formally endorse the previous Senate Democrat proposal for a "billionaires' tax that would be extended to unrealized gains.  It is said to raise $360 bln over the next 10 years.  At the same time, without the Covid-related spending and income replaces, the budget deficit will be projected to fall.  The median forecast in Bloomberg's survey has the budget deficit falling to 5.1% of GDP this year form 10.8% last.   Lastly, there seems to be a misunderstanding about trend growth in the US.  Some observers talk about a growth recession as the most likely or best outcome that can be anticipated.  Yet the 2% pace or so bandied about can hardly be called a "growth recession” because for the Fed this would simply be a return to trend growth.  The Fed estimates that the long-term growth rate is 1.8%-2.0%.   On tap today is the US February advanced goods trade balance.  It was a record deficit in January.  Wholesale and retail inventories are also due.  Retail inventories rose by an average of 2.3% a month in Q4 21.  They are expected to have risen by about 1.4% after January's 1.9% increase.  Wholesale inventories rose by an average of 2.2% in Q4 21.   They are rising at about half that pace in the first two months of Q1 22.  We have noted that the inventory cycle is maturing, and it will not provide the tailwind as it did previously, and especially in Q4 21. The Dallas manufacturing survey is expected to have soften a little.     The US dollar has a nine-day drop in tow against the Canadian dollar coming into today's session.  It is pinned near the pre-weekend low around CAD1.2465.  It has not been above CAD1.2505 today.  We anticipate some near-term consolidation that could see the greenback trade toward CAD1.2520-CAD1.2540.  The US dollar is poised to snap an 11-day slide against the Mexican peso.  During that run, the greenback fell from around MXN21.06 to about MXN19.91.  It has been up to MXN20.12 today and since then it has found support ahead of MXN20.00.  We suspect near-term potential extends into the MXN20.20-MXN20.22 area.       Disclaimer
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Forex Pairs And Currencies Analysis: USD, GBP, CAD, AUD

Marc Chandler Marc Chandler 28.03.2022 11:04
March 27, 2022  $USD The recent themes in the foreign exchange market continued last week. On the one hand, the dollar-bloc currencies and Norwegian krona trended higher, while the euro, and especially the yen, traded heavier. On the other hand, although some critics argued that the Fed's 25 bp rate hike earlier this month was too timid, the Fed is signaling it could accelerate the pace. The interest rate adjustment continued in dramatic fashion. The Fed funds futures imply almost a 77% chance of a 50 bp move at the next meeting (May 4). The general resilience of the US economy, the tight labor market (with weekly initial jobless claims falling to new lows since the late 1960s) and upticks in the flash PMI may embolden the Federal Reserve.  The two-year note yield has risen by 50 bp since Russia invaded Ukraine, and it is not done. The consensus that appears to be developing at the Fed favors a march toward neutrality, seen in 2.25%-2.50% by the vast majority of Fed officials. The two-year note yield is near 2.2%, up from a little less than 0.75% at the end of last year.   More than half of the Fed officials and economists think the target rate will have to rise above neutral to counter the inflationary pressures.  A few trends in the foreign exchange market are worth noting. First the yen's weakness. The dollar has risen in 13 of the past 15 sessions against the yen. The rise in US yields and the lack of official resistance appear to have spurred and sustained the move. BOJ's Kuroda was still finding good things to say about the yen's slide ahead of the weekend. Second, the dollar bloc is on fire. The Canadian dollar has strengthened for nine consecutive sessions and 13 of the past 14. Rising commodity prices, the reduction of the US premium at the short-end, and the policy mix, following the Liberal-NDP pace, lend support to the Canadian dollar. The S&P 500 has advanced in seven of the past nine sessions, and this proxy for risk appetites underpinned the Loonie. The Australian dollar has rallied in 10 of the past 13 sessions. Its 3.5% appreciation this month leads the majors. The New Zealand dollar's advance may not be as impressive, but its 2.8% gain against the greenback puts it in second place this month.   Third, Latam currencies continue to shine among the emerging market currencies. High yields, commodity exposure, and the ebbing public health crisis appear to be the main drivers. Contrary to conventional wisdom that seems to believe "everyone" wants weaker exchange rates, currency appreciation is desired throughout the region with price pressures and tighter monetary policy.   Let's drill down.  Dollar Index:  Ahead of the weekend, the Dollar Index successfully tested the 20-day moving average. (~98.40). It has not closed by this moving average since February 22. Still, the high for the move was recorded on March 7 (~99.42), and despite the widening market moving to fully discount 200 bp more of Fed tightening this year, the upside momentum has stalled. The near-term barrier is the downtrend line of this month's highs at the start of the new week, around 99.00. The consolidation pattern is seen to signal the continuation of the trend, which is higher. The MACD and Slow Stochastic have drifted lower but are in the middle of the range. The Slow Stochastic may be trying to turn higher. The Dollar Index peaked in March 2020 near 103.00. However, a break of the 97.70 area would weaken the technical tone.  Euro:  The euro spent the past four sessions in a $1.0960-$1.1040 range. The MACD and Slow Stochastic are trending higher, but the latter has flattened out and could turn lower in the coming days. The flash March PMI showed economic activity more resilient than economists expected. Still, sentiment surveys have weakened materially. The US-German two-year interest rate spread has widened sharply in the US favor (from about 137 bp at the end of last year to above 240 bp at the end of last week.  However, it is not just the US side of the equation that is moving. Since the end of last month, Germany's 2-year yield has risen from almost -80 bp on March 7 to around -15 ahead of the weekend, a new seven-year high. If there was a genuine ceasefire, the euro would likely to recover. The swaps markets anticipate about 45 bp of tightening before the end of this year.  Japanese Yen:   The three-week dollar rally against the yen has stretched momentum indicators and frayed the upper Bollinger Band, which begins next week near JPY122.60. Correlations of the change in the exchange rate and change in US yields are stronger with 10-year rates than the two-year. In the past, US industry (and officials) has often protested against yen weakness, but this time, radio silence. The OECD's measure of Purchasing Power Parity put fair value near JPY96, which makes the yen more than 26% under-valued, second only to the euro's 32% undershoot. With BOJ Governor Kuroda still embracing the benefits of the weak yen, and US rates still trending higher, there is little compelling reason to pick a top in the dollar. The JPY123.75 area may offer resistance, but the next important target is the JPY125.00-JPY125.85 area, where it peaked in 2015. Then Kuroda suggested he did not want to see a move above JPY125.00.   British Pound: Sterling is frustrating. On March 18, it tested a neckline (~$1.32) of a bottoming pattern projected toward $1.34. However, after reaching nearly $1.33 in the middle of the last week, it slipped back to almost $1.3150. The market seemed to judge the Spring budget as milquetoast, and the unexpected drop in February retail sales reported before the weekend was disappointing. That said, the momentum indicators are pointing higher, and the five-day moving average crossed above the 20-day moving average for the first time since late February. The $1.3150 area corresponds to the (50%) retracement of sterling's bounce from the test on $1.3000 on March 14 to the recent high by $1.3300. The next retracement (61.8%) is near $1.3115.  The market-perceived odds of a 50 bp hike at the next meeting in May rose to almost 40% by the end of last week from about 26% the prior week.  Canadian Dollar: The Bank of Canada meets next on April 13. The swaps market now prices roughly an 85% chance of a 50 bp move, up from a 55% chance the previous week. Stronger than expected January retail sales (3.2% instead of 2.4% as the median forecast in Bloomberg's survey had it) may have played a role.  Still, the Liberal-NDP tie-up means more fiscal support was also important. The central bank has suggested that the economy will be operating near full capacity around midyear. The nine-day slide in the greenback saw it fall through the six-month trendline drawn off lows from last October, January, and earlier in March (~CAD1.2565) to test CAD1.25 before the weekend. As one would expect after such a sustained move, the momentum indicators are stretched, and the Slow Stochastic could turn higher. The lower Bollinger Band begins the new week near CAD1.2475. This year's low, set in January, was around CAD1.2450.  Australian Dollar:   The Australian dollar fell by about 5.6% last year, and here in Q1, it has rallied 4% to lead the major currencies. The Aussie's strength has materialized even as the two-year rate differential moved sharply against it. Its discount to the US more than doubled here in March to almost 70 bp. The futures market has pulled the first hike into June from July. The Aussie set a new five-month high ahead of the weekend near $0.7535, which meets the (61.8%) retracement objective of the slide since the $0.8000 was tested last May. The high from last October was closer to $0.7555, where the upper Bollinger Band is found. The momentum indicators are stretched.   Initial support is seen around $0.7450.  Mexican Peso:  AMLO's policies have not been to the liking of investors.   Fiscal policy has not been engaged though around 45% of the population lives below poverty. Still, the peso has appreciated for the past 11 sessions and is at its best level in six months. It is the longest streak in half a century. The greenback took out the MXN20.00 level before the weekend and after the central bank delivered the third consecutive 50 bp hike. The next important technical area is MXN19.50-MXN19.60. By revising higher its inflation forecast, Banxico seemed to signal it intends to hike again. The swaps market has about 120 bp of tightening discounted over the next six months. The move has stretched the momentum indicators, and the lower Bollinger Band is found near MXN19.9060. The MXN20.00-MXN20.05 area that had been support may now serve as resistance. The Brazilian real surge continued. It rose by around 5.6% last week to bring this month's advance to a stunning 8.3%.   The central bank signaled its intention to hike by another 100 bp in May when it meets again to finish the aggressive cycle. The market seems less convinced and has another 50 bp hike.   Chinese Yuan: The dollar rose against the yuan for the fourth consecutive week, its longest streak since last July. Over the four weeks, the greenback has risen slightly less than 0.8%. Even though the PBOC's daily dollar fix is not always stronger than the market projections, it still seems clear that Beijing would prefer a somewhat weaker yuan given the divergence of monetary policy and the recognized need for more stimulus. China's 10-year premium over the US continues to shrink. It halved last week to about 32 bp. It has been a dozen years since the US offered a premium over China, but that is where it appears to be headed. Next week's PMI readings will likely reflect an economy that is struggling. Higher commodity prices, the Covid-related lockdowns, and the loss of the property market as an engine are taking a toll. The dollar's high this month was set on March 15 next CNY6.3860. It is also the year's high. The next important chart point is CNY6.40. Dollar support is seen in the CNY6.3500-CNY6.3550 area.       Disclaimer
China Stocks Go Up As There Might Be More Buybacks Coming

China Stocks Go Up As There Might Be More Buybacks Coming

Marc Chandler Marc Chandler 23.03.2022 14:35
March 23, 2022  $USD, Canada, China, Currency Movement, Federal Reserve, Japan, UK Overview: The capital markets are subdued through the early European morning.  The continued sell-off of the yen (almost 5% this month) and anticipation of more share buybacks in China helped lift equities in the Asia Pacific after the strong performance of the US indices yesterday. The S&P 500 closed above its 200-day moving average for the first time in a month and reached its highest level since February 9.  The NASDAQ closed at its best level since February 16, around 13% above the March 14 low.  European shares are threatening to snap a five-day advance.  US futures are better offered.  The sell-off in bonds may be taking a breather in Europe, where yields are mostly 3-4 bp lower.  The 10-year Treasury yield poked above 2.40% before softening to around 2.36%.  The dollar is firm against most of the major currencies, while emerging market currencies are mixed.  The JP Morgan Emerging Market Currency Index is posting a small gain for the second consecutive session.  Gold is flattish in a a little more than a $5-range on either side of $1925, the middle of the $1900-$1950 broader range.  May WTI is s firmer, above $111 in the European morning.  A move above yesterday's $113.35 high could signal another run at the high from earlier this month around $126.40.  US natgas is consolidating after yesterday's nearly 6% rally.  Europe's natgas benchmark is up almost 4% after yesterday's 3.4% advance.  It fell almost 5% on Monday.  Iron ore rose nearly 2% today, its first gain of the week.  It lost about 4.7% over the past two sessions.  Copper is quiet inside yesterday's narrow range.  May wheat is edging higher and recouping yesterday's small decline.  It is consolidating after rallying 5.2% on Monday.    Asia Pacific Chinese tech companies are in play.  Alibaba announced it was expanding its share buyback efforts yesterday and Xiaomi did the same today.  More tech firms, rich in cash, are expected to follow suit in the coming days.  Hong Kong Technology Index has rallied 40% from last week's low, which still leaves it around 50% below last year's peak.   The dollar reached JPY121.40 today.  At the end of last week, BOJ Governor Kuroda seemed to approve the yen's slide, by observing that the weakness was still helpful for the economy overall. The question that naturally arises is there a BOJ's pain threshold.  Some observers see it around JPY125, based on Kuroda's comments from back in 2015. In 2015, the dollar peaked near JPY125.85.  More immediately, the BOJ faces a fresh challenge to its Yield Curve Control stance, which caps the 10-year yield at 0.25%.  It rose to almost 0.23%, just shy of last month's high that prompted the BOJ offer to buy bonds there.  Still, until the Japanese or US pain threshold is found, the market still seems content to buy dollars on pullbacks against the yen.  Initial support now is seen ahead of JPY120.50.  Note that the one-month put-call skew (25 delta risk reversal) traded in favor of US dollar calls for the first time since last November.  The three-month skew narrowed to almost -0.38%, the least in almost five-months.  The skew typically sees dollar calls sell at a discount and it is often linked to Japanese exporters protecting their dollar receivables.  The Australian dollar extended its advance to almost $0.7480, its best level since early last November as well to approach its upper Bollinger Band.  It met some resistance and slipped to around $0.7450.  Initial support is seen in the $0.7430-$0.7440 area.  The greenback's strength is proving too much for the Chinese yuan.  It has recorded higher lows for the fourth consecutive session and is trying to establish a foothold above CNY6.37.   Recall, that the US dollar bottomed late last month near CNY6.3065.  The PBOC set the dollar's reference rate at CNY6.3558.  The median projection in Bloomberg's survey was CNY6.3540.  The Chinese 10-year premium over US Treasuries has fallen to almost 40 bp, the least since February 2019.    Europe It is all about the UK today.   First, late yesterday, the US and UK struck a deal that will lift the odorous steel and aluminum tariffs imposed by the Trump administration on national security grounds.  Rather than reverse itself immediately, the Biden administration used the tariffs to get concessions from Europe and Japan as well that will limit the metal exports to the US-based on historic market share.  The UK agreed to lift its retaliatory tariffs.  Second, the UK February CPI was a little higher than expected.  The CPIH, which includes owner-occupied cots, rose to 5.5% from 4.9% in January.  The median forecast (Bloomberg survey) was for 5.4%.  After falling by 0.1% in January, CPI rose 0.8% in February.  The market looked for a 0.6% gain.  Core CPI is up 5.2% from a year ago, accelerating from 4.4% in January.  Turning to producer prices, output PPI rose 0.8%, slightly less than expected for a 10.1% year-over-year pace.  It had risen 9.9% in January.  Input price pressures were a bit stronger than expected, rising 1.4% in February after a revised 1.5% gain in January (initially 0.9%).  This lifted the year-over-year rate to 14.7% from a revised 14.2% pace.   The odds of a 50 bp move at the next MPC meeting (May 5) has edged up from around 25% chance at the end of last week to about 38% today.   Still on tap is Chancellor of the Exchequer Sunak's Spring Budget Statement.  Reports have played up the likelihood of a modest cut in the fuel duty and perhaps a higher threshold for the health insurance tax.  There focus seems to be on easing the squeeze on the cost of living, which is set to worsen next month as the price cap on energy bill and taxes are set to rise.  Yesterday's news that the budget deficit is smaller than expected through the first 11 months of the fiscal year gives the Sunak some room to maneuver, but he is not expected to exhaust it. The euro recovered from yesterday's dip to about $1.0960, which met the (50%) retracement objective of the recovery form the March 7 test on $1.08.  However, the buying dried up near $1.1040.  A break of that $1.0960 area could spur a quick move to $1.0930, while a bounce needs to rise through $1.1060 to be anything of note.  The flash PMI due tomorrow are expected to have softened but a significant disappointment may play on fears that the war and energy shock will drive the eurozone into a recession.  Sterling finally pushed above the $1.3200 cap yesterday and traded to almost $1.33 today before meeting strong offers.  It was pushed back to a little below $1.3220 in the European morning.  Provided the $1.3200-level holds now, our target near $1.34 is still reasonable.   America There was only one dissent from the FOMC meeting last week as Bullard wanted to hike by 50 bp.  Many observers were critical of the Fed for not taking more decisive action.  However, the dispute at the Fed appears to be over minor tactical differences.  Chair Powell came out swinging earlier this week and the market took the bait and now prices in not the 150 bp of hikes this year, which would imply a 25 bp hike at the remaining six meeting.  Instead, it is pricing in near 190 bp of tightening.  That means the Fed funds futures are pricing in not just one 50 bp move but is favoring a second 50 bp move too.  There seems to a growing consensus to raise the Fed funds rate toward neutral, and the difference between the doves and hawks seem to be narrow.  Today, the market hears from Powell (at the BIS again), San Fran Fed President Daly, and St. Loise Fed's Bullard.  The US economic calendar features MBA mortgage applications and February new home sales.  Typically, they are not market moving. Tomorrow is a different story: weekly jobless claims, durable goods orders, and the flash PMI.  There have been two developments in Canada to note.  First, the railroad strike ended with the help of federal mediation after two days.  The strike had threatened to further disrupt the supply chains, especially for potash ahead of the beginning of the new planting season.  Second, Prime Minister Trudeau secured support for his minority government through a deal with the New Democrat Party.  In exchange for support in confidence votes, Trudeau will push for key elements in the NDP agenda, which overlaps in parts with his campaign promises.  New initiatives in housing, health care, and the environment are expected.  The net effect is that fiscal policy may not be as tight as expected.  That policy mix, tighter monetary and easier fiscal policy tends to be supportive of a currency.  Also, the market recognizes that easier fiscal policy may push the Bank of Canada to tighten monetary policy quicker.  The odds of a 50 bp move at next month’s meeting (April 13) increased from about 55% at the end of last week to a little more than 70% now.   Mexico will report its bi-weekly CPI figures for the first half of March tomorrow alongside January retail sales.  Late tomorrow, Banixco is expected to deliver its third consecutive 50 bp increase in the overnight rate to 6.50%.  Argentina and Paraguay hiked yesterday.  Chile and Colombia are expected to hike next week.  Separately, reports suggest that Mexico will not carry out its plans to cut oil exports in half this year and cease them entirely next year.  President AMLO already seemed to be softening his push.  The windfall from the surge in prices appears too good to pass up.  That said, PEMEX output appears to have fallen by around 200k barrels a day from the end of 2021.     The US dollar appears to be forging a base around CAD1.2565 this week.  A move above CAD1.2625 might signal a near-term low is in place.  Recall that the greenback peaked last week by CAD1.2870.  There has been a small shift in rate differentials in the Canadian dollar's favor.  The US 2-year premium has narrowed from around 17 bp on March 9, the most since Q3 19, to around three basis points today.  The 10-year differential has switched and now Canada offers a small premium (~5-6 bp), which is the most since the end of last year.  The US dollar is also edging lower against the Mexican peso and is testing the MXN20.25 area. The low for the year was set in late February near MXN20.1575.  The 200-day moving average (~MXN20.4250) has capped the greenback so far this week.     Disclaimer
Powell to hit bullish sentiment at semiannual testimony | MarketTalk: What’s up today? | Swissquote

Fed's Powell Power Supports USD And Yields. Alibaba Gets Back In The Game

Marc Chandler Marc Chandler 22.03.2022 12:12
March 22, 2022  $USD, Brazil, Covid, Currency Movement, FOMC, India, Japan, UK Overview:  Hawkish comments by Fed Chair Powell stoked a jump in yields and lit the dollar.  News that Alibaba was boosting its share buyback program to $25 bln from $15 bln helped lift HK shares, while the weaker yen favored Japanese exporters.  Most equity markets in the region advanced.  European bourses are showing a modest upside bias with US futures and are little changed.  The US 10-year Treasury yield is pushing five basis points higher to 2.34%.  European yields are also 3-5 basis point higher.  The dollar is rising against most currencies today.  The Antipodean currencies are the most resilient, while the yen and Norwegian krone are taking it on the chin.  The dollar, which began last week near JPY117.30, is knocking on JPY121 today.  Emerging market currencies are also mostly softer, led by the central European complex.  Hungary is expected to hike its base rate 100 bp to 4.4% today, while the key rate (one-week deposit rate) is expected to be raised by 30 bp to 6.15% later this week.  Turning to the commodities, gold is consolidating inside yesterday’s range.  The higher yields appear to be sapping demand.  May WTI is reversing lower after completing a (61.8%) retracement near $113.35.  US natural gas prices are also pulling back from better levels earlier today. Europe's benchmark is firm.  Iron ore slipped by 2.5% after a 1.6% loss yesterday.  Copper is recouping most of yesterday's loss, the first decline in four sessions.  May wheat is up about 3%, adding to yesterday's 5.2% gain and soy has fully recouped last week's 1.4% decline.   Asia Pacific Japan has lifted some Covid restrictions in Tokyo and outlying areas.  This will help set the stage for a recovery in Q2.  The earthquake earlier this month and the Covid restrictions hobbled the world's third-largest economy.  As we have been tracking, Prime Minister Kishida is reportedly cobbling together a supplemental budget of around JPY10 trillion (~$83.5 bln).  Meanwhile, with inflation set to jump starting next month (cell phone charges fell sharply a year ago) and global yields tugging the JGBs, the Bank of Japan may be forced again to defend its Yield Curve Control cap of 0.25% on the 10-year bond.  The yield is pushing above 0.20%.  India, which is a member of the Quad (along with Japan, Australia, and the US) to ostensibly check China, has a more nuanced relationship with Russia.  It bought the same air defense system from Russia as Turkey did without the fanfare.  As we noted last week, India is exercising options to buy Russian oil at a discount.  Indian officials hinted that three-days of the country's oil needs are being secured.  That is about 15 mln barrels over the next 3-4 months.  Last year, India reportedly bought about 33 mln barrels from Russia.  The amount is not so much.  After all, consider that according to reports, about 9 mln barrels of Russian oil is headed to the US this month and another 1 mln at least next month.  Businesses were given a 45-day wind-down grace period.  Rather what is more interesting is the that some reports indicate that India could pay rupee for the oil, but the payment might be benchmarked to the US dollar. The dollar extended its recent gains against the yen and is testing the JPY120.50 area.  Such lofty levels have not been seen for 6-7 years.  The next important chart point is not seen until closer to JPY121.50, but a move toward JPY125 over the slightly longer-term cannot be ruled out.  The dollar's ascent pushed it through the upper Bollinger Band (two standard deviations above the 20-day moving average) repeatedly last week.  It comes in near JPY120.30 today.  As we noted, the exchange rate is more correlated to rising US yields than as a safe haven (when it is inversely correlated to equities). The JPY120 area, which was "resistance" may now offer support.   The Australian dollar is trading inside yesterday's range (~$0.7375-$0.7425).  The high from earlier this month was near $0.7440, and the upper Bollinger Band is found slightly above it.  A break of $0.7360 would weaken the technical tone. After a few larger than normal moves, the dollar-yuan was confined to a narrow range today (~CNY6.3590-CNY6.3660).  It has remained within yesterday's range, which was itself within the pre-weekend range.  Recall that in the first part of March, the dollar was in a CNY6.3070-CNY6.3270 range.  It jumped to a higher range, roughly CNY6.3400-CNY6.3670.  The PBOC set the dollar's reference rate at CNY6.3664 today compared with projections for CNY6.3660 (seen in the Bloomberg survey).  Note that the China's premium over the US of 10-year yields is about 50 bp, the least in three years.   Europe Russia's invasion of Ukraine is a watershed in a way that Moscow's 2008 invasion of Georgia or the war with Ukraine when it took Crimea was not.  It is not only because of the widespread sanctions, but as many noted, it is spurring German (and others) military spending.  While a monetary and banking union is not complete, a common defense policy is strengthening.  Europe is on the verge of establishing a rapid response force that could be ready for joint exercises as early as next year. Meanwhile, the debate about whether the EU can ban Russian oil imports continues and is one of the drivers of oil prices.   Tomorrow is an important day for the UK.  February inflation is expected to have accelerated. The swaps market is pricing in another 25 bp hike at the next BOE meeting (May 5).  Chancellor of the Exchequer Sunak will deliver his Spring Statement.  Today's data seems to give him more room to maneuver.  The deficit in the first 11 months of the fiscal year is about GBP26 bln smaller than projected.  Sunak is expected to offer some relief from the jump in food and energy prices, while going forward with the tax increase next month for the National Health Service.  Still, on balance, given the great uncertainty, and the political considerations, Sunak is expected to be restrained in new commitments.   The euro fell to a four-day low near $1.0960 in late Asian turnover before recovering to almost $1.1015 in the European morning.  Nearby resistance is seen in the $1.1020-$1.1040 area.  Note two sets of option expirations today.  The first is at $1.10 for about 935 mln euros and the second is for nearly 680 mln euros at $1.1025.  The intraday momentum indicators are stretched, and North American participants may be inclined to buy dollars, for which they are increasingly paid to do.  A break of $1.0960 could see $1.0930 tested.  Sterling is faring a bit better, but it remains for the third consecutive session in the range forged on March 17 (~$1.3090-$1.3210).  It has flirted with $1.32, which we identified at a possible neckline of a bottoming pattern.  It has yet to close above it, but if it does, it would still seem to target $1.34.  The euro has been sold from nearly GBP0.8460 on March 17 to almost GBP0.8340 today, almost a two-week low. A break of GBP0.8330 would target GBP0.8280-GBP0.8300.  America Federal Reserve Chair Powell sharpened his hawkish message yesterday and reiterated that the central bank is prepared to move further and faster.  The market responded as one might imagine and boosted the risk of a 50 bp move at the next meeting (May 4).  The market has a little more than 190 bp of tightening discounted for the remainder of the year.  There are six meetings left.  This means that the market is leaning toward two 50 bp hikes.  Powell's remarks were conditioned with "if necessary" and "if appropriate."  Some observers think it is necessary, and was so last week, though were disappointed that Governor Waller did not join his former boss, St. Louis Fed President Bullard in dissenting in favor of a 50 bp move.   While different parts of the US curve are flattening or, like the 5-10-year curve turning inverted, Powell played it down.  The Chair cited Fed staff research that found that the 18-month curve to be more important and it has steepened not flattened as the market prices in a more aggressive tightening path. What can challenge this trajectory?  Disappointing economic data.  The February durable goods orders due Thursday may not be it, as the series is volatile in any event.  However, the preliminary PMI is due the same day.  It is expected to have slipped, but a composite lower than expected and edging back toward the 50 boom/bust level would be a yellow flag.  The March employment data is due on April 1. A significant disappointment there could temper the rate hike fever.  Separately, we note that supply chain disruptions are hitting the auto sector and share prices have fallen to reflect it.  That is in addition to surging oil and metal prices.   It is a light economic calendar for North America today.  The Fed's Mester, Daly, and Williams speak.  Mester is a voting member of the FOMC, and Williams, the President of the NY Fed, has a permanent vote.  Williams is part of the Fed's leadership, and we will see how much he echoes Powell.  He had expressed doubts about a 50 bp move before this month's meeting, well ahead of Powell's endorsement of a 25 bp hike before Congress.      The US dollar is recovering from the dip to CAD1.2565 yesterday, its lowest level since late January.  It is pushing back above CAD1.26 in the European morning.  A move above CAD1.2650 would likely confirm that a near-term low is in place, with initial potential toward CAD1.2700.  The greenback recovered after dipping below MXN20.27 yesterday, its low here in March, but has been turned back from MXN20.42, just shy of the 200-day moving average. Banixco is expected to hike its overnight target by 50 bp to 6.50% in a couple of days.  Still, this month, the peso has gained almost 0.75% and is lagging behind the Brazilian real (~4.4%) and the Colombian peso (~3.2%). Strong demand for Brazilian equities has been reported.  Yesterday, the dollar fell to almost BRL4.93, which has not been seen since mid-2020.  The next major chart point is near BRK4.82 and the 200-day moving average close to BRL4.71.         Disclaimer
Markets eye Canadian job report, US inflation

Stock Markets In China Go Up, The US (The Whole World Probably) Awaits Fed Move, EuroStoxx 600 Increases - What's More?

Marc Chandler Marc Chandler 16.03.2022 15:07
March 16, 2022  $CNY, $USD, Brazil, China, Currency Movement, Federal Reserve, Iran, Russia, Saudi Arabia Overview: Chinese officials offered reassuring words and sparked a dramatic rally of equities and risk appetites more broadly. At the same time yields are surging as the markets anticipate the Fed to signal a more aggressive tightening course as it upgrades its inflation forecasts. China's CSI 300 rallied 4.3%, while the Hang Seng soared 9% and an index that tracks mainland shares listed in HK jumped 12.5%.  Most equity markets in the region rose 1-2%.  Europe's Stoxx 600 is around 2.2% better and US futures point to a strong opening.  The US 10-year yield is a little firmer at 2.15%. European benchmark yields are mostly 2-5 bp higher.  The 10-year JGB yield is a little near 0.20%, as it approaches the top of the Yield-Curve Control band (0.25%).  The dollar is on its heels.  The Scandis are leading the charge followed by the dollar bloc.  The dollar managed to extend its advance against the yen for the seventh consecutive session yesterday and is edging higher today.  Emerging market currencies are also gaining on the greenback, and the JP Morgan Emerging Market Currency Index is rising for the third consecutive day.  Rising yields seem to be tarnishing gold.  It is little changed, after falling for the past three sessions.  It is holding above yesterday's low near $1907.  April WTI is consolidating inside yesterday's range.  So far, it has held below $100 a barrel for the first time this month.  US natgas is jumping 3.0% to recoup most of what was lost in the past two sessions.  Europe's benchmark is up almost 1% after a nearly 2% advance yesterday.  Recall that it dropped 17.3% on Monday.  The supportive comments by Chinese officials arrested the six-day slide in iron ore prices with an 8.3% bounce today. Copper is rising for the first time in four sessions.  Nickel trading briefly re-opened and shut again, citing a technical issue with the new daily limit.  May wheat is about 3% weaker after rallying 5.3% yesterday.   Asia Pacific Chinese officials confirmed the shift from structural reforms to supporting the economy and growth.  A meeting chaired by Vice Premier Liu He promised to keep the stock market stable, support foreign listings, new policies for property developers, and signaled the end of its effort to "rectify" internet platform companies.  It could be that Chinese officials understood that the recent batch of economic data was not very convincing, such as the 12.2% jump in fixed-asset investment despite a sharp drop in cement and steel output (-17.8% and -10% respectively).   Reports suggest that Saudi Arabia is considering allowing China to pay for its oil in yuan. It is important to recognize that this is not the first time such a story has circulated.  China is Saudi Arabia’s single biggest customer, taking around a quarter of the Kingdom’s oil exports.  At $100 a barrel, it runs around $155 mln a day. What is Saudi Arabia going to do with the equivalent amount of yuan?  It is not like Saudi companies need yuan to service their RMB-debt or other obligations like they do with the dollar or euro.  The Saudi riyal is pegged to the dollar.  If Riyadh pushes too hard, will speculators test the commitment to the dollar peg? Will it be costly, like when it decided to grow wheat in the desert and cost it a quarter of its aquifer?  Riyadh could boost the allocation of its reserves to yuan, but to what end?  Given that the yuan shadows the dollar closely, the diversification argument is weak.  The yield premium over 10-year Treasuries has fallen below 70 bp for the first time in three years.  Saudi Arabia and US interests have diverged in several areas over the past year or two, including Yemen, Iran, and Afghanistan.  It has rejected the US and others’ entreaties to boost oil output, even though OPEC+ is not meeting the 400k barrel addition a month commitment.  The US used to buy 2 mln barrels of oil a day from Saudi Arabia.  At the end of last year, it was about 500k bpd and surpassed by Russia, Mexico, and Canada. Japan's February trade balance always improves from January, but this time the improvement was much smaller than expected.  Japan reported a JPY668 bln shortfall after a JPY2.19 trillion deficit in January.  Exports rose 19.1% year-over-year, which was a little less than expected.  On the other hand, imports soared by 34%, well above the 26.4% expected (median forecast in Bloomberg' survey).  The surge in the cost of energy drove the imports.  Japan reports February CPI figures Friday ahead of the outcome of the BOJ meeting. Excluding fresh food and energy, Japan is expected to show that deflationary forces persist.  The US dollar is about a quarter yen range as it holds above JPY118.15.  Provided the greenback closes above JPY118.30, it will be the eighth consecutive advance. Our JPY118.60 target has been approached.  Above there, the JPY120 area beckons.  Still, we caution chasing it higher.  The technical indicators are stretched, and the dollar closed above its upper Bollinger Band for the past three sessions and remains above it now (~JPY118.15).  The Australian dollar is extending its recovery that began yesterday.  It is approaching $0.7240, which is the (38.2%) retracement of the leg down that began at the end of last week from about $0.7365.  Note that the five and 20-day moving averages converge near $0.7255 today. The Chinese yuan rallied for the first time in five sessions today. The dollar had gapped higher on Monday and again on Tuesday.  It reversed lower yesterday, but the opening gain was not closed.  Today, the dollar closed Tuesday's gap and entered Monday's without closing it.  It extends to last Friday's high slightly below CNY6.34. The greenback's decline of a little more than a third of 1% would be the biggest drop of the year, if sustained.  Today the PBOC's dollar fix was a weaker than expected at CNY6.38 (vs. CNY6.3811, the median in Bloomberg's survey).   Europe Reports suggest that the US has promised that if the 2015 nuclear accord with Iran can be re-started, its sanctions would not impact Russia's atomic supply arrangements with Iran.  This had appeared to be a key issue behind the suspension of talks at the end of last week.  The revival of talks, which appeared to be moving in the right direction in recent weeks, would likely allow some phasing in of Iranian oil as adherence to the pact met certain benchmarks.   The Bank of England meeting concludes tomorrow.  The swaps market has about little more than a 25% chance of a 50 bp hike.  There had been a 60% chance discounted on February 10, the day before the US warned that a Russian attack on Ukraine could happen at any moment.  Recall that last month's 25 bp hike was delivered by a 5-4 majority, with the minority seeking a 50 bp hike.   The BOE's balance sheet begins shrinking this month as the large maturity will not be recycled into new purchases.  The euro is trading inside yesterday's range (~$1.0925-$1.1020).  There is a 1.23 bln euro option at $1.10 that expires today.  It looks likely to consolidate until the reaction to the FOMC meeting later today.  We note that the US two-year premium over Germany widened to almost 228 bp yesterday, the most since late 2019.  Despite the anticipation of the BOE's rate hike tomorrow, sterling remains pinned near the $1.30-trough seen on Monday and Tuesday.  Yesterday's high was about $1.3090, and today, it has been unable to sustain upticks abvoe $1.3070.  The $1.3100 area corresponds the (50%) retracement objective of the leg down since reversing lower from $1.3200 on March 10.  America Before the outcome of the FOMC meeting is announced, February retail sales will be reported.  It is unreasonable to expect a strong gain on top of the 3.8% surge in January (even without autos and gas). The dramatic gain was in reaction to the Covid-related 2.5% slump in December. The data is reported in nominal terms, reflecting volumes and prices.  We know that auto sales, as reported by the manufacturers, disappointed.  The median forecast in Bloomberg's survey is for a 0.4% increase in the headline pace month-over-month and slightly slower for the components that feed into GDP models (excludes autos, gasoline sales, building materials, and food services. Economists will scrutinize the data to see how much the increase in gasoline prices is compressing discretionary purchases.  It is Fed Day, and this is the main focus. There seems little doubt that the Fed will hike the target rate by 25 bp.  That is probably the element that there can be the most certainty about.  The market has about a 13% chance that it could be 50 bp after Chair Powell clearly endorsed a 25 bp hike in testimony before Congress earlier this month.  Still, there is greater uncertainty over the other two elements of the Fed's announcement.  The pace of the balance sheet unwind is anxiously awaited.  We penciled in $40-$50 bln a month of Treasury and $20-$25 bln a month in Agencies.  Talk has circulated for a few months, but it seemed to pick up recently that the Fed could avoid an inversion of the curve if it relied more on QT (quantitative tightening) than rates.  Powell has insisted that the interest rate target is its primary monetary policy tool. Is this cast in stone? The dot-plot is the third element.  In December, the median projection was for rates to rise about 75 bp this year, with a 0.75%-1.0% target at the end of the year.  The Fed funds futures market has about 175 bp in tightening discounted. The median Fed dot saw the longer-term equilibrium rate at 2.5%.  In December, only five Fed officials anticipated that the target rate would be above there at the end of 2024.  The swaps curve sees rates peaking between 2.25% and 2.50% in 2024.  Canada's February CPI is expected to have accelerated to 5.5% from 5.1%.  More important for the central bank may be the acceleration in the underlying core rates.  The average may rise to 3.4% from 3.2%.  The Bank of Canada meets next on April 13 and is widely expected to hike again and signal the roll-off its balance sheet.   Late in the session, Brazil's central bank will likely raise the Selic Rate by 100 bp to 11.75%.  The past three hikes have been in 150 bp increments.  The IPCA measure of inflation edged up to 10.54% last month from 10.38%.  The central bank may warn that inflation has not peaked.  The swaps market has the peak in rates near 13.75% later this year.   The US dollar reversed lower after testing CAD1.2870 yesterday.  It settled on its lows (~CAD1.2760) and follow-through selling has pushed to about CAD1.2720 in the European morning.  Initial support is seen at CAD1.27, where a $1.1 bln option expires today.  Last week's low was near CAD1.2685. The CAD1.2650-CAD1.2660 area had previously offered support.  The greenback is pushing lower against the Mexican peso for the fourth consecutive session.  It is fallen from MXN21.05 before last weekend to MXN20.7635 earlier today.  It had been finding bids near MXN20.81.  If the break can be sustained, the next target is the MXN20.60-MN20.66 band.   On the other hand, the dollar has risen for the past four sessions against the Brazilian real.  The risk-on mood coupled could help stem the tide.  Resistance is seen near BRL5.20.  A break of yesterday's low near BRL5.10 may signal a top may be in place.      Disclaimer
Markets eye Canadian job report, US inflation

Hang Seng Decreasing By Ca. 6%, EuroStoxx 600 Gaining As Well

Marc Chandler Marc Chandler 15.03.2022 19:17
March 15, 2022  $USD, Bitcoin, China, Currency Movement, El Salvado, Germany, Japan, UK Overview: China reported stronger than expected data, but it did not prevent a further slide in mainland and Hong Kong shares today.  The Hang Seng got tagged for nearly 6% and the China's CSI 300 slumped a little more than 4.5%.  Note that the Golden Dragon Index of Chinese companies that trade in the US has fallen by more than a third since Russia invaded Ukraine.  Nearly all the regional markets but Japan fell.  Europe's Stoxx 600 is giving back yesterday's 1.2% gain plus more, and US futures are slightly softer.  Falling equities appears to be helping the bond market stabilize after yesterday's sharp sell-off. US and European benchmark yields are 1-3 bp lower, while Asian yield played catch-up to yesterday's move in the US.  The 10-year US Treasury yield is near 2.10%. The dollar is snapping a six-day advance against the Japanese that had lifted it from about JPY114.80 to JPY118.20.  The greenback is softer against major currencies, but the Canadian dollar.  The euro is pacing the move.  After testing $1.09 yesterday, the single currencies are struggling to sustain a foothold above $1.10.  Central European currencies are leading the emerging market complex higher.  Gold and oil are extending their pullback.  Gold held the $1925 area, which is about the midpoint of the rally from below $1800 that began in late January.  A break could signal a move toward $1890.  April WTI has been sold below $100 and appears headed toward support near $90.  It fell about 5.8% yesterday and is off about another 6% today.  OPEC's monthly production report is expected later today.  US natgas is around 2.3% lower, while Europe's benchmark is up 8.6% after falling 17.3% yesterday. Iron ore fell for the sixth consecutive session, during which time it has fallen about 16.5%.  Copper is firm after falling 2.25% yesterday.  May wheat is up 2.5%.  It had fallen almost 1% yesterday.   Asia Pacific There is much pessimism surrounding the Chinese economic outlook, but today's data for last month were mostly better than expected.  Industrial output rose 7.5% year-to-date compared with a year ago.  The median forecast (Bloomberg survey) was for a 4% increase.  Retail sales rose 6.7%, more the twice the median forecast.  Fixed asset investment jumped 12.2%.  The market expected 5.0%.  Property investment was to have contracted by 7% but instead, increased by 3.7%.  One disappointment stands out.  Surveyed unemployment rose to 5.5% from 5.1%.  Separately, China's one-year Medium-Term Lending Facility was left unchanged at 2.85%. There had been speculation that it would be reduced.   Japan reports February trade figures tomorrow.  Without fail for more than 25 years, Japan's February trade balance improves over January.  The January deficit was nearly JPY2.2 trillion.  The February shortfall is expected to be around JPY150 bln.  Still, higher food and energy prices poses a negative terms-of-trade shock on Japan.  This coupled with some administrative prices looks likely to boost Japan's inflation reading starting next month.  The dollar approached resistance we identified near JPY118.60 but has backed off.  Initially, the greenback looked poised to extend its advance for the seventh consecutive session against the yen, but after reaching JPY118.45, it reversed to test JPY117.70.  The dollar was extremely over-extended as it moved more than three standard deviations above its 20-day moving average (Bollinger Band is set at two standard deviations).  We see support in the JPY117.35-JPY117.40 area.  The Australian dollar extended its losses to about $0.7165.  It finished last week near $0.7280.  The $0.7150 area corresponds to a (61.8%) retracement of that rally that began in late January around $0.6970 and peaked earlier this month by $0.7440.  A close above $0.7200 may help stabilize the technical tone.  The dollar gapped higher for the second day in a row against the Chinese yuan.  The greenback reached CNY6.3860, its highest level of the year.  The reference rate was set at CNY6.3760, well above projections for CNY6.3630.   Europe The UK's employment report was better than expected.  Unemployment for the three-months through January fell to 3.9% and is below the pre-pandemic level for the first time.  The number of employed jumped 275k in February, more than twice what the median forecast projected in Bloomberg's survey, even though the January gain was revised to 61k from 108k.  The claimant count fell by 48k in February and by a revised 67.3k in January (from -32k).  Average weekly earnings were also a bit firmer than expected. The BOE meeting concludes on Thursday and the swaps market is pricing in about a 1-in-4 chance of a 50 bp move.   Germany’s March ZEW survey collapsed.  The assessment of the current situation dropped to -21.4 from -8.1.  It is the lowest since last May. The expectations component plummeted to -39.3 from 54.3.  The median forecast in the Bloomberg survey anticipated a 5.0 reading.  This may warn of a marked deterioration in the preliminary March PMI due next week.  While Ukraine's capital is under fire, it is seeking missile defense systems.  Israel has turned own its request for the Iron Dome intercept system.  Each missile costs around $50 mln and Israel says it does not have sufficient supply.  There is some speculation that the US may offer its two Iron Dome systems.   Estimates suggest Ukraine has received more than 17k anti-tank missiles and thousands of anti-aircraft missiles.  The US has warned China against materially aiding Russia following claims that Russia sought Beijing's assistance in the early days of the invasion.   The euro recovered from yesterday's brief foray below $1.09 to reach $1.1020 today.  A move above $1.1040 is needed to signal anything of importance technically.  The intraday momentum indicators suggest this is unlikely.  Indeed, the risk is that North America brings the single currency back to the $1.0940 area. Sterling held support at $1.30, but the bounce is less than impressive.  It stalled near $1.3050.  Yesterday's high was near $1.3080, and the five-day moving average is about $1.3065.  The (50%) retracement of sterling's rally from the March 2020 low is about $1.2830 and it is the next big target below $1.30.   America The US reports February producer prices today.  The headline is expected to have accelerated to 10%, while the core may approach 8.7% (from 8.3%).  The market looks for a gain in the March Empire State manufacturing survey (6.1 vs. 3.1), but would anyone really be surprised with a softer report?  The focus is squarely on the FOMC meeting that begins tomorrow.  A rate hike, an estimate of the pace of unwinding of the balance sheet, and new forecasts are anticipated.  West Virginia Senator Manchin has rejected Biden's nominee for the Fed's Vice Chair of Supervision and all but scuttling Raskin's nomination.  Manchiin has emerged as a key vote for the administration's agenda.  Recall that in 2020, Trump beat Biden by 39 percentage points in West Virginia.  Canada reports February housing starts, existing home sales, and January manufacturing sales.  There are not market-moving data points even in the best of times.  Tomorrow, Canada reports February CPI figures and an acceleration in the headline and underlying core measures will reinforce the expectations for at least another 25 bp rate hike next month (OIS has about a 62% chance of a 50 bp move) and for its balance sheet to begin shrinking in either April or May.  Note that El Salvador's Bitcoin bond is expected to be brought to market later this week, though some suspect it could be delayed.  A 10-year bond issued by a thermal energy company is planned, and the government hopes it can raise $1 bln, which seem awfully optimistic.  Many seem skeptical and a report suggested than about 2% of the work remittances in January used digital wallets, despite the ostensibly lower costs.  Bitcoin has lost about 20% of its value since the day before it became legal tender in El Salvador.    After testing support near CAD1.27 at the end of last week after Canada reported a much stronger than expected February jobs data, the greenback jumped above CAD1.28 yesterday and is approaching CAD1.29 today.  Last year's high was recorded in late December near CAD1.2965. The intraday momentum indicators are stretched, but the risk-off and falling oil prices weigh on sentiment.  Support is seen in the CAD1.2825 area.  The greenback is consolidating in a narrow range against the Mexican peso.  Support is seen in the MXN20.83 area.  It has not traded below there since March 4. Initial resistance is seen near MXN21.00, though last week it reached nearly MXN21.47.     Disclaimer
Nickel And Wheat Prices Rise. EuroStoxx 600 Increased A Little

Nickel And Wheat Prices Rise. EuroStoxx 600 Increased A Little

Marc Chandler Marc Chandler 08.03.2022 14:20
March 08, 2022  $USD, Bonds, China, Crypto, Currency Movement, EU, gasoline, Japan, joint bonds, Poland, Trade Overview: A powerful short squeeze in nickel saw the price double for the second day before the London Metal Exchange suspended trading.  It had allowed traders to defer delivery obligations.  However, other key commodity markets are a bit calmer today.  April WTI is in a $3 range on either side of $120.  US natural gas is about 3% lower after a 3.6% loss to start the week. European natgas is seeing early gains of more than 11% pared back to around 2.5%.  Copper is a little firmer after sliding more than 4% yesterday.  Iron ore slipped after rising 5.7% on Monday.  Wheat is threatening to snap a six-day 50% rally. Turning to the capital markets, after a rough start in the Asia Pacific, which saw most bourses slump 1%-2%, except India, equities have stabilized.  Led by strong gains in utilities and financials, Europe's Stoxx 600 is up about 0.4% near midday, as earlier stronger gains are pared. US futures are showing small gains. Yields recovered yesterday in the US and Europe, and Asia Pacific played catch-up earlier today.  Europe's peripheral bonds are outperforming the core markets today.  The US 10-year benchmark yield is up about seven basis points to 1.85%. The Scandis and euro are enjoying modest gains in the foreign exchange market, while the dollar-bloc, which reversed lower yesterday continues to trade heavily.  The yen and Swiss franc are also under modest pressure.  Among the emerging market complex, the central European currencies are enjoying a reprieve from the recent selling, as the market awaits the Polish central bank decision.  While most expect a 50 bp hike, the larger than expected Hungarian move last week, and zloty weakness that spurred central bank intervention, warns of an asymmetrical risk of a larger hike.  The JP Morgan Emerging Market Currency Index is off about 0.4%, after falling almost 3.5% over the past three sessions.   Asia Pacific Anecdotal reports seemed to suggest that several large asset managers reduced their exposure to Chinese bonds last month. Bloomberg reports that global funds appeared to have sold CNY35 bln (~$5.5 bln) of Chinese debt last month, which would be a record amount. Since the Russian invasion of Ukraine (February 24), Chinese bonds have performed miserably (30th of 46 sovereign bond markets Bloomberg tracks).   Some suspect that Russian names may have liquidated some Chinese bonds to help buffer the sanctions.  Chinese bonds had been touted a safe haven, but the 10-year yield is up about 15 bp since late January.   Reports also suggest mainland investors, including domestic funds, brokerages and commercial banks were also sellers.  Japan reported an unexpectedly strong rise in January cash earnings, but a larger than expected deterioration of its current account.  Labor cash earnings, which fell by 0.4% year-over-year in December, jumped 0.9% in January.  The median forecast in Bloomberg's survey was for a 0.1% gain.   It is the largest rise since last May.  Unlike what many workers are experiencing in Europe and North America, real wages rose in Japan (0.4% year-over-year).  It is too early to draw a conclusion about the trajectory.  A survey in the Nikkei of more than 6000 companies showed almost a third do not intend to raise wages in the fiscal year beginning April 1.  Most planned to grant raises by less than the 3% Prime Minister Kishida advocates.  Japan's current account balance always (more than 20 years) deteriorates in January from December.  The deterioration was more than expected this year as the deficit widened to JPY1.19 trillion from JPY370 bln.  Most of the worsening came from the trade balance.  The deficit swelled to JPY1.6 trillion from almost JPY319 bln. In January, Japanese investors bought JPY1.15 trillion (~$10 bln) of euro-denominated bonds, the most in more than a year. They divested JPY15.4 bln of Russian bonds, the most in almost eight years.  Japanese investors were also sellers of US and Australian bonds.  The dollar is trading with a firmer bias against the Japanese yen.  It reached a three-day high near JPY115.65.  Recall it briefly traded below JPY114.80 yesterday.  The greenback has not traded above JPY115.80 since mid-February.   We suspect that will cap advances today, barring new developments.  Support is seen in the JPY115.20-JPY115.40 area initially.  The Australian dollar staged a stunning reversal yesterday, falling from around $0.7440, its highest level since early last November, to nearly $0.7310.  Follow-through selling today pressured it to almost $0.7265 where new bids were found. There are about A$1.2 bln in options struck in the $0.7250-$0.7254 area that expire today.    The dollar opened near CNY6.3160 and briefly dipped below CNY6.31 before snapping back to its opening levels.  The PBOC set the dollar's reference rate weaker than expected at CNY6.3185 compared with expectations (Bloomberg survey) for CNY6.3239.  Some suggest that the rouble's volatility is making it more difficult to anticipate the fix.  There is no onshore price for the rouble exchange rate.  Many are relying on offshore indications where spreads are very wide.   Europe The recent string of German economic data suggests the economy was off to a strong start of the year before Russia's hostilities.  Yesterday, Germany reported a slightly stronger than expected 2% rise in January retail sales and a 1.8% rise in factory orders (1.0% expected).  Today, Europe's largest-economy reported a 2.7% jump in industrial output, more than five-times the gain expected by the median forecast in Bloomberg's survey.  And on top of that the 0.3% fall in December's industrial production was revised away.  It rose 1.1%.   US legislation to ban imports of Russian oil and gas is making progress.  Europe says it is working on cutting Russian gas imports by 2/3 within a year.  Russia is threatening to cut Nord Stream 1 gas deliveries.  Separately, JP Morgan indicated it will remove Russian bonds from all of its indices, which are used as benchmarks for asset managers.  MSCI and S&P have taken similar actions.   The European Commission is reportedly set to propose a large joint bond issue to finance defense and energy projects.  An emergency EU summit (heads of state) will be held on Thursday.  This follows last year's initiative that included joint debt to fund a 1.8 trillion euro (~$2 trillion) emergency package.  The details are still being worked out, but the prospect seems to be helping support the euro today and narrowing the spreads between core and peripheral bonds.   The euro is trading within yesterday's range (~$1.0805-$1.0960).  It could be the first session in seven that the euro does not take out the previous session's low.  Still, there is little enthusiasm or energy on the upside.  A move to $1.0920 in late Asia seemed to attract sellers in early European turnover.  Initial support is seen around $1.0850.  Note that the lower Bollinger Band is near $1.0880. Sterling was not as lucky.  It fell below $1.31 for the first time since November 2020 in late Asian activity but has rebounded in the European morning to around $1.3135.  There may be scope for additional near-term gains, but they look to be limited to the $1.3150-$1.3170 area.   America Average US gasoline prices are north of $4 a gallon, the highest since 2008.  Last week's 10% rise lifted the year-over-year increase to around 50%.  Oil imports from Russia accounted for 245 mln barrels last year or around 8% of US imports, which is less than Mexico and Canada, but more than Saudi Arabia.  The US imported 198 mln barrels of Russian oil in 2020.  Coinbase announced it froze thousands of Russian crypto accounts.  Switzerland said that it too was freezing crypto assets owned by Russian individuals and companies that had been sanctioned by the EU.  The Biden administration is expected to outline the government's broad approach to crypto later this week.  Some fear that Russia could use crypto to bypass the sanctions.  Meanwhile, note that the US Congress is coming against Friday's deadline for funding the government.  However, the failure to do so would likely generate another continuing resolution rather than a government shutdown.    The US reports the January trade deficit.  It likely deteriorated by almost 10% to more than $87 bln.  Some US imports are likely going to rebuild inventories.  Canada reports its January merchandise trade balance and after a small deficit in December, it is expected to have swung back into surplus.  Canada is experiencing a positive terms of trade shock fueled by rising commodity prices.     The US dollar dipped below CAD1.26 in the middle of last week.  This was the lowest level for the greenback since late January and looked to be a breakout.  However, this year has seen many false breaks, and this was another one.  The US dollar reversed higher off that low and rallied about 1.8% through yesterday's high, which was above CAD1.28.  Follow-through buying has the greenback near CAD1.2835 in the European morning.  Late last month, it spiked to almost CAD1.2880.  The US dollar is getting stretched technically as it toys with the upper Bollinger Band (~CAD1.2830).  Still, there is no compelling sign that it is exhausted.  However, look for a top in the next day or two, ahead of the Canadian jobs data at the end of the week.  The Mexican peso remains out of favor.  The dollar settled February a little below MXN20.50.  It peaked above MXN21.46 today before steadying.  The greenback is well above its upper Bollinger Band (~MXN21.17) for the third consecutive session.  A firm inflation report tomorrow may boost talk of a 75 bp hike instead of 50 bp when Banxico meets on March 24.       Disclaimer
Markets News: Crude Oil, Gold, EuroStoxx 600, Copper

Market News: Crude Oil, Gold, EuroStoxx 600, Copper, Natural Gas

Marc Chandler Marc Chandler 07.03.2022 14:46
March 07, 2022  $USD, China, Currency Movement, Oil, Russia, SNB, South Korea Overview:  The economic disruption seen since the US warning of an imminent Russian attack on February 11 continue to ripple through the capital and commodity markets.  Equities are being slammed.  Most Asia Pacific bourses were off 2-3% today. Europe's Stoxx 600 gapped lower ad has approached February 2021 levels, orr about 2.6% today.  US futures are around 1.5% lower. The reaction in the major bond markets is subdued.  The US 10-year yield is near 1.72%, off about 10 bp from a week ago.  European benchmark yields are mostly firmer after falling 15-20 bp last week.  In the foreign exchange market, the dollar-bloc currencies continue to show resilience, while the European complex remains under pressure.  The Swedish krona continues to underperform.  It is off more than 5% in the past week.  The euro slumped to almost $1.0810 in the European morning. The JP Morgan Emerging Market Currency Index is down 1.3% after last week's 4.6% drop.  Central European currencies, as one might expect, continue to be punished the most.  They appear to be being treated like high-beta euros.  Gold is flirting with $2000.  April WTI gapped higher and spiked to $130.50 before pulling back to around $123.  US natgas is up more than 1%.  It has risen by more than a quarter of the past three weeks.  Europe's natgas benchmark is surging by nearly a third today after jumping by almost 123% last week.  Iron ore rose about 5.5% today after 14.7% last week.  Copper initially rose by more than 1.5%, but is pulling back a bit. Still, it is up around 0.5% after gaining more than 10% last week.  May wheat is rising for the sixth consecutive session.  Today's 7% advance comes on top of last week's 40.6% jump.   Asia Pacific China and Russia's relationship is on two-tracks.  The strategic relationship is based on the antipathy to a US-centric world and the expansion of NATO, which Beijing says the US is trying to create a Pacific version.  The other track is tactical.  They avoid saying much about each other's neighborhoods, including Ukraine, Taiwan, or the fact that Russia sells weapons to India that ae used to fight and resist China.   China reports a larger than expected Jan Feb trade surplus of nearly $116 bln.  The median forecast in Bloomberg's survey was for a $95 bln surplus.  Exports rose 16.3%, more than anticipated, while imports rose 15.5%, a bit less than expected.  Separately, and also surprisingly, the value of China's reserves fell to $3.21 trillion from $3.22 trillion.  A small gain had been expected.  Still, it appears that valuation, weaker non-dollar reserve currencies and a sell-off in bonds, is the key consideration.    China's National People's Congress gave a 5.5% growth target this year.  It is on the upper end of expectations and is higher than a weighted average of the projections of the provinces, which typically over-deliver. Still, it is the lowest since 1990, excluding 2020.  China's economy is said to have grown 8.1% last year. Despite increased spending and slower growth, the NPC projected that the budget deficit would fall to 2.8% of GDP from 3.2% last year.  Here, Beijing seems to plant to draw from unspent funds from past year.  The targets seem ambitious and would seem to require more monetary and fiscal support.   South Korea votes on Wednesday for a new president, who serves one five-year term.  The contest will go down to the wire. Lee represents the governing Democrats, who enjoy a super-majority in parliament.  Of note, he has endorsed a universal basic income.  Yoon is the candidate of the major opposition People Power Party.  He enjoyed a slight lead in the last poll, and he may have enjoyed a slightly bump when a minor conservative candidate dropped out and endorsed him.  Both campaigns have been marred with gaffes and petty scandals.  Unlike Japan and China, South Korea is experiencing rising price pressures (3.7% February CPI and 3.2% core). The seven-day repo rate has been hiked three times beginning last August to 1.25%.  The won is off about 3.1% this year.   The yen is sidelined.  The dollar is trading in a narrow range between about JPY114.80 and JPY115.15.  Last week's range was roughly JPY114.65-JPY115.80.  Nevertheless, benchmark three-month implied volatility has risen above 8% to approach last November's spike to 8.2%, the highest since September 2020.  The put-call skew (risk-reversal) is the most extreme since October 2020.  Demand for dollar puts, perhaps has protection for dollar receivables appears to be a key factor.  The Australian dollar's rally continues, as its commodity exposures attracts participants.  It reached $0.7440 today, its best level since last November.  It rose 2% last week, its fifth consecutive weekly advance.  It is getting stretched.  The upper Bollinger Band (two standard deviations above the 20-day moving average) is around $0.7330, and the Aussie has closed above it the past two sessions.  The greenback gapped higher against the Chinese yuan.  It opened on the session high near CNY6.3265 but ground lower to CNY6.3170.  The PBOC set the dollar's reference rate at CNY6.3478.  The market (Bloomberg survey) looked for CNY6.3450.   Europe The economic noose on Russia continues to tighten.  Mastercard and Visa will no longer support Russian activity (as of March 10).  Euroclear and Clearstream will no longer settle rouble transactions.  Russia's ability to service its debt is at risk.  While some bonds allow for rouble settlement and coupon payments, some do not.  Some dollar bond coupons are due next week, which reportedly do not have the rouble payment clause, and this could be the default event that triggers credit-default swaps.  Of course, these is talk that China will help, but its assistance is likely limited.  It CIPS payment system works for yuan settlement only.  Meanwhile, Russia has begun rationing staples ostensibly to prevent hoarding.   The euro plummeted through the CHF1.0 level for the first time today since early 2015 when the Swiss National Bank lifted its cap (floor) on the franc (euro).  Under the threat of intervention by the SNB, the euro rebounded to CHF1.0050 in early European turnover but has begun coming off again.  The weekly sight deposit report suggests not intervention took place last week.  Overall sight deposits were little changed, while the domestic sight deposits fell by about CHF3 bln.  While the SNB may not have intervened, central banks in central Europe are thought to have intervened.  The proximity to Russia and the weakness of the euro are the proximate triggers.   The euro is unable to sustain even modest upticks.  It is off for the sixth consecutive session. Last week, it tumbled 3%.  It was the fourth consecutive weekly drop.  The euro has risen in only two weeks this year.  A break of $1.08 could spur a move to the March 2020 low near $1.06, but there is increasingly talk of a move to parity.   Sterling is trading near $1.3150, its lowest level since December 2020.  The $1.3165 area corresponds to the (38.2%) retracement of the big rally since March 2020 low close to $1.14.  A convincing break of this area suggests a move into $1.2830-$1.3000 band.  America While the US begins moving to ban Russian oil imports (500k-600k barrels a day), Europe does not appear ready to do the same.  April WTI futures gapped higher and pushed a little through $130 a barrel before pulling back.  It is hovering around $123.  The pre-weekend high was near $116.00.  There have been several developments over the weekend to note.  Iran will provide more data on its nuclear efforts, and this could lead renewing the accord the US pulled out of and allow for Iranian oil in Q3.  US officials reportedly met with senior members of Venezuela's Maduro government, apparently to discuss lifting sanctions.  The US cut diplomatic ties in 2019.   Before the sanctions and mismanagement, Venezuela's was producing around 3 million barrels a day.  Meanwhile, some Canadian capacity is being taken offline for maintenance, and Libya has lost 200k barrels a day over the past few days due to the political crisis.  Lastly, Saudi Arabia announced it will hike prices to Asia next month.  The economic highlight for the week in the US is the February CPI figures on Thursday.  The headline pace could approach 8% and the core near 6.5%.  Ahead of that report, on tap today is the January consumer credit.  Note that American household debt increased by $1.02 trillion last year, the most since 2007.  Total consumer debt is around $15.6 trillion, including cars and houses.  Tomorrow, the US see the January trade balance, where a large deficit is expected, and the wholesale inventories, which may be linked to stronger imports.   In some quarters, there is still talk about "artificially" low rates in the US. However, consider what would happen if next week, the Fed Chair Powell were to channel Volcker and hike the Fed funds target by 100 bp.  We suspect that medium and long-term US interest rates would fall sharply.  Many would likely assume that it would drive the world's largest economy into contraction.  Note that 2-10-year yield curve is slipping below 25 bp today. Canada reports tits January trade figures tomorrow and return to surplus is expected.  The highlight of the week will be the jobs report on Friday.  After losing 200k jobs in January, the Canadian jobs market is expected to have recovered smartly.  The unemployment rate is expected to fall to 6.3% from 6.5% even while the participation rate is projected to rise to 65.2% from 65.0%.  Mexico report February CPI figures on Wednesday.  A rise to nearly 7.25% is expected after 7.07% in January.  At the end of the week, January industrial production figures are due.  A small decline is expected.     Since late January, the US dollar has mostly been in a CAD1.2650-CAD1.2800 range.  It was briefly pushed below CAD1.26 in the middle of last week but quickly snapped back to the upper end of the range.  It is trading inside the pre-weekend range (~CAD1.2670-CAD1.2790).  The Canadian dollar appears pulled between its commodity exposure and its risk-off sensitivity.  The Mexican peso is less ambivalent.  The greenback jumped 1.5% before the weekend and is up another 1.2% today.  Near MXN21.20, the US dollar is at its best level since mid-December, when it poked above MXN21.36.  The dollar is rally has lifted it more than three standard deviations (~MXN21.21) from its 20-day moving average.    Disclaimer
Inflation Is Not The Only Consequence Of The Russian Invasion

Inflation Is Not The Only Consequence Of The Russian Invasion

Marc Chandler Marc Chandler 03.03.2022 15:04
March 03, 2022  $USD, Australia, Bank of Canada, China, Currency Movement, Hungary, Japan, Mexico, PMI, Turkey Overview: Russia's invasion of Ukraine and the global response is a game-changer, as Fed Chair Powell told Congress yesterday.  The UK-based research group NISER estimated that world output will be cut by 1% next year or $1 trillion, and global inflation will be boosted by three percentage points this year and two next.  The recovery in US stocks yesterday may have helped lift Asia Pacific shares today (China and India are notable exceptions). However, Europe's Stoxx 600 is softer as are US futures.  The 10-year US Treasury is hovering around 1.86%, while European yields are mostly 3-6 bp higher.  The US dollar remains strong. The Canadian and Australian dollars have been among the most resilient.  CAD traded at its best level since late January but is now consolidating those gains in the aftermath of yesterday's 25 bp rate hike and the risk-on move.  The Australian dollar is at its best level since mid-November.  Major European currencies, except the Swiss franc, and emerging market currencies are bearing the brunt.  Even the Hungarian forint is finding little traction after the central bank hiked the one-week deposit rate by 75 bp instead of the 50 bp that were expected.  Gold is in a narrow $13 range mostly below $1935.  Last week's peak near $1975 has not been approached and this week's high is around $1950.  April WTI poked briefly above $116.50 a barrel and is still firm.  US natgas prices are up another 1.5% after climbing 8% in the past two sessions. Europe's natgas benchmark has reversed early gains and is off about 7.5% after jumping more than 65% over the past two sessions.  Industrial metals, from iron ore, copper to zinc and aluminum are extending their rallies. May wheat prices are up 4.5% to bring this week's gain to around 25%.   Asia Pacific China's Caixin service PMI was stronger than expected but still falling to 50.7 from 51.4.  The composite was unchanged at 50.1, suggesting little momentum.  Reserves and trade are due next, followed by CPI next week.  Both PPI and CPI are expected to have slowed.  Japan's final PMI service and composite readings were revised up but remain in contraction territory and more pronounced than in January.  The service PMI stands at 44.2 rather than 42.7 of the flash report and 47.6 in January.  The composite fell to 45.8, not 44.6, from 49.9. The report underscores the challenge to the world's third-largest economy this quarter. However, it appears to be largely a result of Covid and the social restrictions.  This could set the stage for a recovery in Q2.  Australia's final service and composite PMI were revised higher, and the January trade surplus was much larger than expected.  The final service PMI stands at 57.4, up from 56.4 of the preliminary estimate and 46.6 in January.  The composite PMI is at 56.6.  The flash reading put it at 55.9 after January's 46.7 final report.  The January trade surplus swelled to A$12.9 bln from A$8.8 bln in December.  The January surplus was about a third larger than the median forecast in Bloomberg's survey, helped by an 8% rise in exports in the month, while imports fell by 2%.  The one disappointing report today from down under, came from the January building approvals, which tanked by almost 28%.  Economists (Bloomberg survey) saw a 3% decline.  The dollar is trading near two-week highs against the yen around JPY115.80.  The JPY116.00 area offers initial resistance and a $450 mln option expires there today.  The high seen in January and retested in February was JPY116.35.  Support is now pegged in the JPY115.35-JPY115.50 area.  The Australian dollar has risen to its best level, almost $0.7325, since mid-November.  The 200-day moving average comes in today near there and it last was tested late last October.  It has not closed above it since last June.  Note that the (61.8%) retracement of its losses since that October high is near $0.7330.  The Chinese yuan has been confined to yesterday's range (~CNY6.3110-CNY6.3225).  The PBOC fixed the dollar at CNY6.3016, while expectations (Bloomberg survey) were for CNY6.2997.  The PBOC has not set the dollar's reference rate below CNY6.30.  Note that Chinese bond futures fell to their lowest level in nearly four months as some have second thoughts about the aggressiveness of the expected easing.  Europe The financial choke hold on Russia continues to tighten.  MSCI and FTSE are dropping Russian stocks, which are untradable given the sanctions.  Moody's and Fitch slashed Russia's rating to junk.  Some oligarch's assets have been confiscated.  The number refugees fleeing Ukraine is approaching a million.  Reports suggest that the US held off a scheduled ICBM test to avoid any possible misinterpretation.   The German and French flash service and composite PMIs were revised lower in the final estimate, while Italy, and especially Span, surprised on the upside.  Of note Italy and Spain's service PMI recovered back above the 50 boom/bust level that had been violated in January.  The aggregate service PMI rose to 55.5 from January's 51.1, a little below the flash estimate of 55.8.  The composite PMI is also at 55.5, not the 55.8 of the preliminary estimate, and better than the 52.3 seen in January.   The UK follows the similar pattern seen in Germany and France.  The flash PMI was revised lower, but the final reading still was an improvement from January.  The UK service PMI stands at 60.5, not 60.8, after January's 54.1.  The composite PMI is at 59.9.  The flash reading put at 60.2 after January's 54.2.  Turkey's CPI accelerated to 54.44% from a year ago, up from 48.69% in January.  The month-over-month increase was 4.81%.  The median in Bloomberg's survey called for a 3.75% increase.  The core rose to 44.05% from 39.45%.  Producer prices jumped another 7.22% in the month of February after a 10.45% increase in January.  The year-over-year pace accelerated to 105.01% from 93.53%.   Elsewhere, we note that Hungary's central bank hiked the key one-week deposit rate to 5.35% from 4.60%.  A 50 bp hike was expected and a 75 bp move was delivered.  It is the largest move since the one-week deposit rate as activated for policy purposes in Q4 21.  The euro is spending more time below $1.11.  The session high has been slightly above $1.1120.  Yesterday's high was a little below $1.1150.  Today is the eighth consecutive session that the euro is setting lower highs. Yesterday it has briefly dipped below $1.1060.  Today's low so far has been just above $1.1070. There is an option for almost 900 mln euros at $1.11 that expires tomorrow.  Sterling has fared better than the euro but seems range-bound between $1.3270 and $1.3440.  Late in the European morning, it is trading around $1.3380. Two BOE officials have been quoted on the news wires. Deputy Governor Cunliffe warned of downside risks to growth while Tenreyro noted the upward risks to inflation.  The intraday momentum indicator favors a test on the highs.   America Fed Chair Powell testifies in the Senate today.  His prepared remarks are the same, even if the questions are different.  Still, the Chair got good reviews from yesterday's measured comments and clear endorsement of a 25 bp hike later this month, while reserving the right to accelerate later if needed.  At the same time, the 2-10-year curve flattened further yesterday, dipping below 35 bp.  There is a full slate of US data.  The Q4 productivity and unit labor costs are derived from Q4 GDP, but it is notable that despite the worries that higher wages were spurring inflation, unit labor costs, which wages, benefits and output rose by 0.3% in Q4, will show that the final estimate today is expected to confirm it.  The US also sees the final Markit services and composite PMI and the ISM services.  January factory orders and the final durable goods reading are also due.  Economists may use the ISM data to help fine-tune forecasts for tomorrow's jobs report.  The median forecast (Bloomberg's survey) has crept a little higher to 418k from 400k.  The Bank of Canada delivered the first hike in sequence that will run well into next year.  The 25 bp hike lift the bank rate to 0.50%.  There was no new forward guidance on the balance sheet strategy, which took many observers by surprise.  Perhaps it is the way the central bank could acknowledge the uncertainty spurred by Russia's invasion of Ukraine.  Governor Macklem speaks today and holds a press conference, where more insight into the central bank's thinking is likely.   Mexico's central bank cut this year's GDP forecast to 2.4% from 3.2%.  A little was pushed into next year (now seen at 2.9% rather than 2.7%) but some is simply lost.  It expects CPI to peak shortly and head back to 4% toward the end of the year.  That still seems optimistic.  Meanwhile, Deputy Governor Heath indicated he suggested a 75 bp hike last month but voted for the 50 bp move.      The US dollar set the high for the year last week near CAD1.2880.  Yesterday, it fell below the CAD1.2650-CAD1.2660 shelf that had been forged last month and settled on its lows slightly below CAD1.2630.  Follow-through selling saw the greenback slip below CAD1.2590 in early European turnover.  However, it snapped back to almost CAD1.2640.  Old support may now act as resistance. The US dollar rose slightly above last month's high yesterday against the Mexican peso (~MXN20.7850) but did not sustain the momentum and fell back to around MXN20.58.  It is inside yesterday's range today but looks poised to rechallenge the highs.  The year's high, set in late January, was near MXN20.9150.    Disclaimer
Global Markets In Times Of Affection Of Situation In Eastern Europe

Global Markets In Times Of Affection Of Situation In Eastern Europe

Marc Chandler Marc Chandler 02.03.2022 15:03
March 02, 2022  $USD, Bank of Canada, China, Currency Movement, Russia Overview: There is much talk about how the sanctions being imposed on Russia will hasten the demise of the dollar's role in the world economy, but today the dollar rides high.  There is no sign of its abandonment as its safe haven appeal shines.  The dollar-bloc currencies, helped perhaps by the commodity exposure are faring best.  The Canadian dollar is the most resilient and that may be a function of expectations of a rate hike and guidance on the balance sheet later today.  Of note, the euro has been sold to about $1.1060.  Among emerging market currencies, eastern and central European currencies are the weakest. The JP Morgan Emerging Market Currency Index is off for a third day, and the cumulative loss is around 3.5%.  Equities in the Asia Pacific region were lower, snapping a three-day advance.  South Korea and Australia were the exceptions.  Europe's Stoxx 600 is recovering from early losses. US futures are firmer. The US 10-year yield is slightly firmer at 1.74%, while European benchmark yields are mostly 3-5 bp higher.  Italy is an exception, and the bonds are under greater pressure.  The 10-year yield is up almost 14 bp.  Gold stalled near $1950 and is offered in Europe below $1930.  April WTI rose to $111.50 before stabilizing.  It finished last week near $91.60.  US natgas is up about 3% after a nearly 4% advance yesterday.  The same can be said for Europe's natgas benchmark. It is matching and repeating yesterday's gains, except there, we are talking about something closer to 26%-28%. Iron ore is up around 1.5%, its third advance this week, while copper is edging higher after yesterday's 3.2% gain.  May wheat is up over 7.0% today to bring this week's gain to over 20% after last week's nearly 7% gain.   Asia Pacific Chinese banks are treading carefully and do not appear to be the escape-valve for Russia that was feared.  Chinese business is concerned about payments, and this impacts not only Russia's seaborne oil but also commodity shipments, including coal.  China's criticism of Russia has been ratcheted up.  Foreign Minister Wang said China "deplores the outbreak of conflict between Ukraine and Russia, and yesterday for the first time officials seemed to refer to it as a war.  Russia has been calling it a "special military operation."  Economic data in the region was not the focus, but for the record, Japan's Q4 capex was stronger than expected rising 4.3% year-over-year, up from 1.2% in Q3.  The median forecast in Bloomberg's survey was for a 2.9% gain.  Corporate profits were also strong, rising 24.7% year-over-year on a 5.7% increase in sales.  In Q3 profits rose by 35.1% on an 8.4% increase in sales.  Australia's Q4 GDP rose 3.4% after the virus-induced 1.9% contraction in Q3. South Korea's January industrial output edged 0.2% higher.  The market had expected a decline in output, though December's 4.3% increase was shaved to a still impressive 3.7% pace.  The dollar is trading just inside yesterday's JPY114.70-JPY115.30 range against the Japanese yen. The greenback highs were recorded in the European morning, but the intraday momentum indicators are stretched, suggesting additional gains may be hard pressed to secure. Resistance is seen in the JPY115.40-JPY115.50 area.  The Australian dollar is also trading inside yesterday's $0.7240-$0.7290 range.  The positive terms of trade shock appear to have helped make it more resilient in the face of the risk-off moves that have often weighed on it.  With the exception of January 13 on an intraday basis, it has not traded above $0.7300 since mid-November.  The greenback is slightly firmer against the Chinese yuan for the second consecutive session, but it remains a little lower for the week.  It settled near CNY6.3175 last week.  The dollar's reference rate was set at CNY6.3351 compared with median projections (Bloomberg survey) of CNY6.3341. Many suspect that the PBOC is quietly resisting a push below CNY6.30.   Europe The four large economies in the euro area reported higher February CPI than expected.  It is little wonder that the aggregate surprised on the upside as well.  The month-over-month increase of 0.9% lifted the year-over-year pace to 5.8%.  It was 5.1% in January and the median forecast (Bloomberg survey) was for a 5.6% rate in February.  While food and energy were important culprits, the core rate, at 2.7% was also a little stronger than expected, and follows a 2.3% year-over-year rise in January.  Separately, the Bundesbank, in its annual report, warned that German inflation could average 5% this year.   The ECB meets next week (March 10) and will provide a new economic forecast and is expected to adjust its forward guidance on asset purchases to secure the flexibility to raise rates later this year, if necessary.   OPEC+ meet today to decide next month's output.  Most observers expect it to maintain its declaratory strategy of boosting output by 400k barrels a day.  However, operationally, it is well appreciated that the actual increase is considerably less.  Moreover, even though some Russian oil is still being bought, it seems to be less than before.  With the energy shock sending oil well above $100 a barrel, and Russia increasingly isolated, a break of the pact, would have significant ramifications.  Separately, there are efforts in the US and UK to ban Russian oil and gas imports completely.  The IEA has coordinated a 60 mln barrel release of strategic reserves.  The US will account for half of it, which is about five days’ worth of Russian imports.  Note that Canada has formally announced a ban, but it has not bought Russian oil for a couple of years, according to reports.  The euro has been sold to about $1.1060 today.  That represents about a two-cent loss from last week's close.  We have suggested a $1.1000-$1.1050 target but did not imagine this is how it was going to happen.  The buying that had offered a shelf near $1.1100 has been absorbed and that area now offers resistance.  Note that the lower Bollinger Band (two standard deviations below the 20-day moving average) is around $1.1125 today.  The euro closed below it yesterday and remains below it through most of today's session (high is about $1.1135).  Sterling briefly slipped through last week's low (~$1.3280) to make a marginal new low on the year (slightly above $1.3270).  However, it caught a bid in early European turnover and is trying to establish a foothold back above $1.3300. The market continues to price in a 25 bp hike later this month by the Bank of England.   The Bank of England's balance sheet is also expected to shrink by around GBP23 bln this month as it refrains from recycling maturing holdings.   America The Fed funds market has gone from an 80% chance of a 50 bp hike on February 10 to slightly less than a 100% chance of a 25 bp increase.  The market had been divided between 150 bp and 175 bp in hikes this year.  Now the market is pricing in almost 125 bp.   Despite some recent US data and favorable optics, including yesterday's stronger than expected gain in the ISM and new orders, the US economy appears to be slowing sharply.  The Atlanta Fed's GDPNow tracker puts growth at zero this quarter, down from 0.6% in late February.  Our own guesstimate was closer to 1% annualized after the 7% expansion in Q4 21.   The ADP private sector jobs estimate is the data highlight.  The median forecast (Bloomberg survey) looks for a 375k increase.  Recall that it has seen payrolls fall by 301k in January even though the official report showed a 467k gain.  While ADP estimates diverge in the short run, in the medium and longer-term, they are fairly good.  That warns against using it to forecast the jobs report at the end of the week.  Still, the Federal Reserve is front and center today.  Evans and Bullard get the ball rolling, but Powell's testimony in the House of Representatives is the main event.  His comments are expected to shed some light on the Fed's disposition and balance sheet strategy ahead of the March 16 statement and press conference.  After Powell's testimony, the Fed's Beige Book in preparation for the FOMC meeting will be released.  And then, after the markets close, the Fed's Logan will discuss the Fed's asset purchases.  The Bank of Canada is widely expected to join the ranks of central banks hiking rates.  A week ago, the swaps market was pricing in almost a 70% chance of a 50 bp hike.  Now the odds of a 25 bp hike are slightly less than 100%.   In addition, the central bank was expected to announce its balance sheet roll-off strategy could begin as soon as next month.  It may seek to preserve some flexibility given the elevated uncertainty.  The market has about a little more than 100 bp of tightening priced in over the next six months.  That is about 25 bp less than was expected before Russia's invasion.     After briefly trading above the top of its range against the Canadian dollar on Monday (above CAD1.28), the greenback tested the lower-end yesterday in the CAD1.2650-CAD1.2660 area.  It held and the US dollar recovered to around CAD1.2750.  Ahead of the central bank meeting outcome, it is in a CAD1.2700-CAD1.2750 range.  We suspect that the risk-off mood will offset the impact of the rate hike and higher oil and commodity prices.  Look for a retest on the CAD1.2750-CAD1.2800 area.  The greenback is bid against the Mexican peso.  It is approaching last week's high near MXN20.7850. A move above there targets the year's high by MXN20.9150.  We note that with falling output, Mexico is not able to take advantage of the higher oil prices.  The central bank's quarterly inflation report is released today.   The risk is for another 50 bp hike later this month when Banxico meets.     Disclaimer
Having A Look At The Markets Considering Tensions, COVID-19 And National Banks Decisions

Having A Look At The Markets Considering Tensions, COVID-19 And National Banks Decisions

Marc Chandler Marc Chandler 28.02.2022 15:36
February 28, 2022  Macro March will be a pivotal month. Three key elements shape the investment climate: geopolitics, easing of Covid pressures in Europe and North America, and the continued monetary policy response.  Russia's threat to Ukraine had been simmering for several weeks before the February 11 warning by the US that an attack was imminent.  It became a significant risk-off factor and added to the pressure on equities, while helping support the bond markets.   While several concessions were offered, there has been no common ground on the key issue of NATO enlargement. Whatever military victory Putin may enjoy, Russia will see more NATO rather than less.  Not only will NATO boost its presence, but it is possible that Sweden (and maybe Finland) joins the military pact.  The risk is that the economic fallout from Russia's military action spurs more inflation and weaker growth.  Most immediately, it has seen the market downgrade the chances of a large rate hike (50 bp) by the Federal Reserve or the Bank of England at their mid-March meetings.     The virus appears to be receding and social restrictions are being lifted in Europe and North America. Economies are re-opening.  Delivery times are improving, suggesting supply chain disruptions are easing. After a slow start, the G7 economies appear to be strengthening, with the exception of Japan. Japan imposed new social restrictions in late January that ran through mid-February.  The February composite PMI was below the 50 boom/bust level for the second consecutive month. In the UK and France, the service PMI has risen above the manufacturing PMI, another sign of a post-Covid recovery.   The normalization of monetary policy takes a big step forward in the coming weeks with the first rate hikes by the US and Canada, and the first balance sheet reduction by the Bank of England.  The European Central Bank will update is forward guidance for its asset purchases and is expected to allow for a hike toward the end of the year.  The Bank of Japan's Yield-Curve Control cap on the 10-year bond at 0.25% may be challenged if global yields drag higher in their wake.   The Reserve Bank of Australia continues to push back against expectations of an early hike, which the swaps market says likely happens in July.   Commodity prices continue to rise.  The CRB Index rose by about 3.5% in February after a 9.8% gain in January.  It has not had a losing week since mid-December.  Adverse weather conditions in South America are helping boost corn and soy prices, which also translates into higher livestock prices.  Oil prices remain near multiyear highs and the April WTI contract has risen by around a quarter this year. The high does not seem to be in place yet, but a nuclear accord with Iran would boost supply.  US natural gas prices are up about 20% this year, but partly it is a function of the weak finish last year. Still, it is above the 200-day moving average by around 4%.  Europe's benchmark (Netherlands) has risen by almost 40%.  Higher oil and natural gas prices have knock-on effects on food production via fertilizer and pesticides, let alone transportation. We note that the last three recessions in the US were preceded by a doubling of oil prices.  The price of WTI has doubled since the start of last year.  Emerging markets have been resilient to start the year.  Brazil and Russia raised rate particularly aggressively 2021 and early this year.  Others, including Hungary, Czech, and Chile have done much of their heavy lifting.  The MSCI Emerging Market Equity Index has held in better than the MSCI World Index of developed countries in the first two months of the year (-4.9% vs. -7.8%).  Year-to-date the JP Morgan Emerging Market Currency Index has risen by almost 1%.  Carry and valuation were often cited as the main considerations.   Bannockburn's GDP-weighted currency index rose about 0.3% in February as the currencies tended to have appreciated against the dollar.  The Chinese yuan (21.8%) and euro (19.1%) have the most weighting after the US dollar (31%) in the index.  They rose by 0.7% and 0.3% respectively. The strongest performer in the index was the Brazilian real (2.1% weighting) with a 3.0% gain, followed by the Australian dollar's (2.0% weighting) 2.25% increase. The weakest by far was the Russian rouble (2.2% weighting), which tumbled 6.75%.     Dollar:   There is no doubt that the Federal Reserve will launch a new monetary cycle at the mid-March meeting.  At one point, the market had priced in a little more than an 80% chance of a 50 bp move out of the gate. The pushback was mild, but the market understood, and the odds now are near 28%, which may still be high.  The focus is on the updated economic projections and any fresh guidance on the balance sheet.  At issue is terminal target rate in the cycle.  In December, five officials projected the Fed funds target rate in 2024 would be above the long-term rate of 2.5% (all but two Fed officials saw it above 2.0%-2.5%).   The Federal Reserve is getting closer to deciding the parameters of its balance sheet strategy.  It may be a bit early for details, but Chair Powell could confirm a start around midyear.  Meanwhile, the US economy is slowing sharply after the historic inventory contribution that lifted Q4 22 growth to about 7fx%.  The Atlanta Fed's GDP tracker sees Q1 growth at 1.3% while the median forecast in Bloomberg's survey is for 1.6% GDP at an annualized pace. Still, a strong rebound is likely to play out before the more sustained slowdown, we expected, starting in H2.     Euro:  First it was the divergence of monetary policy that drove the euro to $1.1120 in January.  The euro recovered to almost $1.15 on February 10, the day before the US warned that Russia could invade Ukraine. Then it was actual invasion took the euro to almost $1.1100.  The European Central Bank's leadership opened the door to a rate hike later this year, before the US warning about Russia's deadly intentions, the market began pricing in a hike in June.  This seemed exaggerated at the time.  The ECB has been very clear on the sequence.  Bond buying, under the Asset Purchase Program will end shortly before the first rate hike. To prepare for a possible hike, the ECB needs to adjust its forward guidance on its asset purchases at the March 10 meeting. It will likely reaffirm purchases in Q2, but it may look for an exit shortly thereafter.  The market has pushed the first rate hike back to the end of Q3. Meanwhile, the US-German two-year interest rate differential continues to trend in the US favor.  Consider that at the end of last September, the US premium was a little less than 100 bp. Now it is near 200 bp.  On the eve of the pandemic, it was almost 220 bp, although there is not a one-to-one correspondence between the exchange rate and the interest rate differential, the euro was in a range between $1.10 and nearly $1.1250 in December 2020.    (February 25 indicative closing prices, previous in parentheses) Spot: $1.1270 ($1.1150) Median Bloomberg One-month Forecast $1.1300 ($1.1175)  One-month forward $1.1280 ($1.1160)    One-month implied vol 7.0% (6.0%)         Japanese Yen:  Unlike most other large economies, Japan continues to experience deflationary pressures as seen by the GDP deflator (-1.3% year-over-year Q4 2021) or the January CPI (excluding fresh food and energy, -0.5% year-over-year).  This, coupled with signs of a weak Q1 has persuaded the market that BOJ is on hold until after Governor Kuroda's term ends in April 2023.  Given the monetary policy divergence and the deterioration of the balance of payments (with rising oil and commodity prices), the yen appears vulnerable.  However, the exchange rate's correlation with the change in the US 10-year yield has slackened, while improving with equities. In other words, its "safe haven" status is outweighing carry considerations.  Still, on balance, we look for the dollar to challenge the January and February high near JPY116.35.  Above those highs, there appears to be little chart-based resistance ahead of the late 2016/early 2017 high around JPY118.60.     Spot: JPY115.55 (JPY115.25)       Median Bloomberg One-month Forecast JPY115.00 (JPY115.15)      One-month forward JPY115.50 (JPY115.20)    One-month implied vol 6.3% (6.1%)     British Pound: Sterling was stuck in a $1.35-$1.36 range for most of February.  Intraday violations common but there was only one close outside the range until Russia invaded Ukraine.  It briefly crashed through $1.32 before rebounding.  The UK gets only 5%-6% of its oil and gas from Russia, but foreign direct investment exposure can be substantial for some companies in some sectors.  Consider that BP has a 20% stake in Rosneft.  The Bank of England meets on March 17.  The market has dramatically downgraded the risk of a 50 bp move, which had been rejected in favor a 25 bp move by a 5-4 vote in February.  Before the US warning about a full-scale Russian attack, the swaps market had more than a 60% chance the BOE would deliver a 50 bp hike in March.  Two weeks later the odds have fallen to less than 20%, the lowest since mid-December.  With the base rate at 50 bp, the BOE will stop reinvesting maturing proceeds of its holdings, and GBP28 bln of bond maturing in March that will not be recycled.  The outright selling of assets from its balance sheet can begin when the base rate reaches 1.0% but it is not a trigger as much as a pre-condition.      Spot: $1.3410 ($1.3400)    Median Bloomberg One-month Forecast $1.3500 ($1.3450)  One-month forward $1.3405 ($1.3395)   One-month implied vol 7.0% (6.5%)     Canadian Dollar:  Like sterling, the Canadian dollar spent most of February in a clear range.  It broke down on the dramatic wave of risk-aversion on the Russian invasion, but, unlike sterling, it was back into the old range within 24 hours.  The US dollar's range was CAD1.2650-CAD1.2660 on the downside and CAD1.28 on the upside.  It shot up to CAD1.2860 but returned to CAD1.27 the following day.   The Bank of Canada meets on March 2.  The swaps market sees a 75% chance that the Bank of Canada delivers a 50 bp to initiate its tightening cycle.  The market is discounting almost 180 bp of hikes over the next 12 months and peaking between 2.25%-2.50% next year from 25 bp now.  It is the most among the G7 countries.  It is also where the central bank sees the neutral rate.  The Bank of Canada is also expected to signal that it plans on letting the balance sheet shrink passively, not replacing maturing securities shortly.     Spot: CAD1.2715 (CAD 1.2770)  Median Bloomberg One-month Forecast CAD1.2600 (CAD1.2690) One-month forward CAD1.2710 (CAD1.2765)    One-month implied vol 6.7% (7.1%)      Australian Dollar: After falling 2.7% in January, the Australian dollar rebounded by 2.25% in February.  Of the major currencies, only the New Zealand dollar outperformed it and its central bank hiked rates for the third consecutive meeting and announced its balance sheet reduction strategy.  Australia's economy appeared to recover quickly from the Covid-related disruption that pushed the January composite PMI below the 50 boom/bust level (46.7).  It bounced back in February to 55.9, the highest since last June.  Higher commodity prices are delivering a positive terms of trade shock.  The average monthly trade surplus was A$10.2 bln last year compared with an average of nearly A$5.7 bln in 2019. While the Reserve Bank of Australia acknowledges the possibility of rate hike later this year, the market is considerably more aggressive.  The swaps market has discounted around 145 bp in tightening over the next 12 months.  However, in recent weeks, the market has pushed the first hike in Q3 from Q2.  For the last four months, the Australian dollar has mostly traded between $0.7000 and $0.7300.  This range may continue to dominate.      Spot:  $0.7220 ($0.6990)        Median Bloomberg One-Month Forecast $0.7200 ($0.7090)      One-month forward $0.7230 ($0.6995)     One-month implied vol 10.0% (10.4%)        Mexican Peso:  The peso appreciated by 1.4% in February.  Latam currencies shined. and accounted for four of the top six EM performers, led by the 3% gain in the Brazilian real.  At her first meeting as Governor of the Bank of Mexico, Rodriguez delivered a 50 bp hike. With price pressures still accelerating, she is poised to repeat it at her second meeting on March 24.   It would bring the target rate to 6.5%.  Recall that in the last cycle, Banxico had raised its target to 8.25% before cutting by in August 2019.  It was at 7.25% in January 2020.  The swaps market expects it to peak in early near year in the 8.00%-8.25% area.  The key is inflation, which has been above 7% for three months through January.  The bi-weekly inflation report had it accelerating in mid-February.  Mexican asset markets are underperforming.  Consider, the yield on its 10-year dollar bond is up 100 bp this year.  Brazil's is up half as much. Mexico's equity benchmark is off almost 1.4% this year while the MSCI Latam equity index is up 11.5%.  The dollar set five-month lows in late February slightly below MXN20.16. It peaked in late January near MXN20.9150.  The bulk of the move is probably behind it and the MXN20.00-MXN20.10 area may offer a nearby floor.      Spot: MXN20.35 (MXN20.80)   Median Bloomberg One-Month Forecast MXN20.50 (MXN20.78)   One-month forward MXN20.46 (MXN20.90)     One-month implied vol 11.0% (10.6%)      Chinese Yuan:  Few observers seem to place any importance on Chinese officials claim that it is making the currency move flexible.  The yuan still can only move in a 2% band around the reference rate that the central bank sets daily ostensibly submissions by its banks.  Although it does not appear to intervene directly, it can still have various levers of influence.   The yuan has risen against the dollar for six of the past seven months.  The currency moves are small but have a cumulative effect. In February, the yuan rose by about 0.7% against the dollar.  It was sufficient to lift it to a new four-year high and what appears to be a new record-high against its trade-weighted basket (CFETS).  After cautioning the market against driving the yuan higher and raising the reserve requirement for foreign currency deposits (earned in part from selling the yuan to offshore buyers), the PBOC shifted in February.  It began setting the dollar's reference rate below expectations.  While a couple of large asset managers have reduced their weightings of Chinese bonds as the premium over Treasuries narrows considerably, foreign investors have been buying Chinese stocks outside of the technology and property sectors.  It is difficult to know the extent of the official tolerance of a stronger yuan when monetary and fiscal policy is more stimulative.  The dollar's low from 2017 was around CNY6.24-CNY6.25.     Spot: CNY6.3175 (CNY6.3615) Median Bloomberg One-month Forecast CNY6.3800 (CNY6.3895)  One-month forward CNY6.3300 (CNY6.3820)    One-month implied vol 3.1% (3.1%)         Disclaimer
US IPO Activity Chart

US Seems To Be Unsure If Russia Ceased Actions, Gold Goes Up

Marc Chandler Marc Chandler 17.02.2022 13:03
February 17, 2022  $USD, Australia, Canada, Currency Movement, Japan, Norway, Oil, Russia Overview: US intelligence claims that Russia is still mobilizing for an attack on Ukraine is sapping risk appetites and lifting gold to its highest level since last June around $1885-$1890.  Asia Pacific equities advanced, except in Japan.  Europe's Stoxx 600 is nursing a small loss, while US futures are off around 0.4%-0.6%.  The 10-year US Treasury yield is hovering slightly above 2.0%.  European benchmark yields are 2-4 bp lower.   The Scandis and euro are bearing the brunt of the risk-off move among the major currencies, while the Antipodeans, yen, Swiss franc, and sterling have pushed higher.  Emerging market currencies are mostly lower, led by Russia and central European currencies, but the JP Morgan Emerging Market Currency is edging higher for the fourth consecutive session, recovering from earlier weakness.  Hungary left its one-week repo rate steady at 4.3% and Turkey is expected to also stand pat (14%).   April WTI is retracing most of yesterday's 1.8% gain and is straddling $90 a barrel.  US natural gas is falling for the first time this week.  Europe's benchmark is up about 10% since Tuesday's 16% slide.  Iron ore slumped 7% after it rose 3.2% yesterday.  Copper is slipping for the first session in four.  Asia Pacific Japan reported weaker than expected exports and stronger than expected imports drove the trade deficit to JPY2.19 trillion. It was a third larger than expected.  Seasonally, Japan's January trade balance always (20-years-plus) deteriorated from December.  Yet, there is something more going on.  Rising energy and commodity prices more generally are deteriorating Japan's terms of trade.  It shares that with the eurozone that reported its largest trade deficit in 13 years earlier this week. EMU's trade balance also typically deteriorates in January from December, but surge in energy prices appears to have aggravated the seasonal pattern.  Meanwhile, nearly every day that passes now means that a significant disruption of Russia's gas supplies could have a diminishing impact on Europe as spring approaches.  Australia's jobs market held up better than expected last month.  It created almost 18k jobs.  The market expected a flat report.  The positions created were all part-time posts, while full-time positions fell by 17k after increasing 41k in December.  Australia grew an average of almost 3 full-time jobs last year after losing a little more than 8k a month in 2020.  While the unemployment rate was steady at 4.2%, the participation rate ticked up to 66.2% from 66.1%.  The virus (sick-leave) and extended time-off (vacations) saw the hours worked fall 8.8% month-over-month.  Australia's employment report is unlikely to impact expectations.  The market continues to price in the first hike around mid-year.  Rather than ratify market expectations, the central bank continues to pushback.  The US dollar slipped through JPY115.00 for the first time since February 7.  The low was recorded in early European turnover.  The intraday momentum indicators are stretched, but a break of the JPY114.90 could see JPY114.60.  There is an option for nearly $1.1 bln struck there that expires today.  The JPY115.20 area may offer the immediate cap.  The Australian dollar was initially sold from around $0.7210 down to $0.7150 before finding good bids.  It recovered back to session highs before stalling.  It is straddling the $0.7200 area in late morning turnover in Europe, leaving it little changed on the day.   The greenback briefly and shallowly slipped through CNY6.33 and rebounded to almost CNY6.34.  For the third session in a row, the PBOC set the dollar's reference rate a little softer than expected (CNY6.3321 vs. CNY6.3325, median projection in Bloomberg's forecast).   Europe The US claims that rather than withdraw troops as previously reported, Russia has mobilized another 7k troops.  Moscow denies it.  Russia is involved in military exercises.  The operations in the Crimea appeared to have ended, but the ones with Belarus are expected to last through the weekend. It seems like Russian troop movement next week may be more telling.  The G7 foreign ministers are meeting on Saturday.   NATO chief Stoltenberg's term ends in October.  He will serve out his term before heading home to lead the central bank.  Norges Bank Olsen's term ends next month.  Deputy Governor Ida Bache who vied for the top job will act as interim head until Stoltenberg is ready.  The Norges Bank Governor also leads the $1.3 trillion sovereign wealth fund.  Last month, the central bank signaled its intention to hike rates in March.  The swaps market has 100 bp of tightening priced in over the next 12 months.   The euro was sold slightly through $1.1325 in Asia after holding below $1.14 yesterday.  The $1.1380-$1.1400 area looks to still cap upticks. The 1.7 bln euro in options struck in the $1.1435-$1.1450 area look set to roll-off today.  If uncertainty over Russia's intentions is a negative for the euro, the narrowing of the US two-year premium over Germany for the third consecutive session is a supportive development.  Sterling is bid.  It is trading above $1.36, which it has not settled above in nearly a month. The intrasession high this month was set near $1.3645.   The UK reports January retail sales tomorrow and a bounce is expected after January's large fall.  The euro has fallen to back to around GBP0.8350 near where it bottomed on Monday.  America How prices respond to fundamental news is often revealing.  Yesterday, the US reports stronger than expected January retail sales and industrial output figures.  But the two-year yield fell five basis points and the implied yield of December Fed funds futures contract shed 4.5 bp.  The two-year yield is another 3.5 bp lower today and is about 1.5 bp lower on the week (slightly above 1.48%).  With today's five basis point slippage, the December Fed funds futures implies an average effective yield of 1.53% at the end of the year, which is about 6.5 bp lower than where it finished last week after the US warned of a possible Russian attack on Ukraine in days.  Europe, Russia, and Iran are seemingly more optimistic than the US a deal with Iran may be near. With OPEC+ struggling to fulfill their commitments to boost output by 400k barrels a day and low inventories among many of the large consuming countries, new supply from Iran would help ease address the global shortage that has lifted price to almost $100 a barrel.  Saudi Arabia is believed to have about 2 mln barrels a day in spare capacity is reluctant to jeopardize the six-year agreement under the OPEC+ framework. The US EIA reported an unexpected build of US oil inventories yesterday, but Cushing saw an almost 2 milt barrel draw.  The US reports January housing starts and permits.  Both are expected to have softened but remain at historically elevated levels.  Although adverse weather may have impacted starts, the concern is rising rates and commodity prices (e.g., March lumber has risen by around 25% this month alone) will weaken demand.  The US also sees the Philadelphia Fed's manufacturing survey and weekly initial jobless claims.   Canada's January CPI surprised on the upside yesterday.  The 5.1% year-over-year headline pace was the highest since 1991, while the monthly increase of 0.9% was the largest since January 2017.  Gasoline prices rose 3.2%, meat jumped a little more than 10%, and homeowner equivalent expenses jumped 13.5%.  The Bank of Canada is set to hike rates on March 2.  The market has about a 1-in-3 chance of a 50 bp move discounted.  For about a week, the US offered a premium over Canada for two-year money, but it slipped back into a discount yesterday and is a little larger today.  Oil is firmer, but the general risk-off mood, given the uncertainties in Eastern Europe, weighs on the Loonie.  Meanwhile, the Canadian police have sent written warnings to hundreds who decamped in Ottawa.  It appears to be a prelude to arrests. The US dollar remains confined to a CAD1.2650-CAD1.2660 to CAD1.2800 trading range.  It approached the lower end of the range yesterday and is checking out the air above CAD1.27 near midday in Europe.  The greenback finally took out the 200-day moving average against the Mexican peso.  It is trading at its lowest level since last October (~MXN20.25-MXN20.26).  There is little chart support ahead of MXN20.12.  Still, the intrasession momentum indicators are stretched, warning against chasing it in early North American activity.    A bounce can carry the dollar back to the MXN20.30-MXN20.33 area.     Disclaimer
Tension Beetween Ukraine And Russia Definetely Shaped News In Recent Days

Tension Beetween Ukraine And Russia Definetely Shaped News In Recent Days

Marc Chandler Marc Chandler 16.02.2022 15:43
February 16, 2022  $USD, BOJ, Canada, China, Currency Movement, EMU, FOMC, Trade, UK Overview: Hope that the geopolitical tensions in Eastern Europe are de-escalating is underpinning risk appetites.  The large bourses in the Asia Pacific region but China were all up more than 1% and Europe's Stoxx 600 gapped higher, but has come back to close the gap, with communications and financial sectors the largest drags.  US futures have softened over the past couple of hours.  The 10-year Treasury yield is hovering around 2.04%, while European yields are a little softer.  In the foreign exchange market, the risk-on means the dollar, yen, and Swiss franc are underperforming, while the Canadian and Australian dollars are leading the advance.  Most emerging market currencies are firmer, and the JP Morgan Emerging Market Currency Index is edging higher for the third consecutive session.  Gold and oil are stabilizing after yesterday's downside reversals.  After dipping below $1845 yesterday, the yellow metal is approaching $1860.  March WTI is recovering from yesterday's $90.65 low to resurface above $93.00.  API estimated that US crude inventories fell by 1.1 mln barrels and the drawdown at Cushing was more than twice as much.   US natural gas prices are higher for a third session and around 13% for the week.  Europe's benchmark has steadied after collapsing 16% yesterday.  Iron ore bounced almost 3.5% to snap an 11% slide over the past three sessions, while copper is edging higher.   Asia Pacific While many countries are combatting price pressures, China is moving in the opposite direction.  Falling food prices helped the January CPI slow to 0.9% year-over-year from 1.5%.  Pork prices fell by more than 40% year-over-year and fresh vegetable prices dropped 4.1%.   Excluding food and energy prices, the core CPI was unchanged at 1.2% year-over-year.  Falling coal, steel, and other industrial goods prices say the PPI eased from 10.3% at the end of last year to 9.1% in January.  Both the price gauges were lower than expected and underscore the scope for further official support.  Many expect rate cuts and a reduction in required reserves to be delivered with Q2 a favorite timeframe.   The Bank of Japan conducted its normally scheduled bond buying operation today. The offer-to-cover rose to over 5x, the highest since last October, reflecting the greater willingness to sell the bonds to the BOJ.  There may have been some extra interest to sell 20-year bonds ahead of tomorrow's auction.  BOJ Governor Kuroda was clear.  The offer to buy unlimited amounts of 10-year bonds to defend the yield-curve-control cap of 0.25% can be made again.  The BOJ has no intention to abandon it or widen the band for the 10-year yield.  The IMF has previously suggested targeting a short-term rate, but Kuroda showed no interest.  While a strong reception at tomorrow's auction may buy some time, the pressures emanating from the rise in global rates suggests a running battle with the BOJ will continue.   The US dollar has been confined to about a 20-pip range above JPY115.60.  It is too narrow of a range to persist.  The upside looks blocked around JPY116.00 and is reinforced by the expiration of a nearly $1 bln option there today.  On the downside, the JPY115.30-JPY115.40 may limit a pullback.  The Australian dollar tested the $0.7185 area, the high before the weekend and US warning that a Russian invasion of Ukraine could happen any day.   This area corresponds to the (61.8%) retracement objective of the slide from last week's high set near $0.7250.  It appears to have stalled there and a test of nearby support in the $0.7140-$0.7150 area appears likely ahead of the jobs report first things tomorrow in Australia. The US dollar fell by a little more than 0.25% against the Chinese yuan yesterday, the most in two months, and slipped a little further today.  The market may have been encouraged by the PBOC's dollar reference rate, which for the second consecutive session was slightly below market expectations (of the median forecast in the Bloomberg survey).  Today's reference rate was set at CNY6.3463 vs. expectations for CNY6.3465.  Europe Understandably, the focus is on geopolitics and monetary policy, but the eurozone trade balance is at an important junction.  Yesterday, the EMU reported its largest monthly trade deficit (9.7 bln euros) in 19-years, mostly due to the surge in the cost of energy.  For last year as a whole, it recorded an average monthly surplus of about 10.2 bln euros, down from 18.7 bln in 2020 and 16.5 bln average in 2019. Last year's average was the smallest since 2012.   After the four largest EMU members report larger than expected declines in December industrial output, the median forecast in Bloomberg's survey for a 0.3% increase seemed wide of the mark.  Consider that German output fell by 0.3% (median forecast 0.5%), French output fell by 0.2% (median forecast 0.5%), and Italy's fall by 1.0%, which was only slightly more than expected. Spain was the biggest disappointment. It collapsed by 2.6% while the median forecasted a 0.5% decline.  Nevertheless, the Eurostat reported a 1.2% jump in December industrial output and appears to use different national figures.   UK January inflation gauges were slightly firmer than expected.  CPIH, which includes owner equivalent housing costs edged up to 4.9% from a year ago.  It was at 4.8% in December.  The month-over-month decline in CPI of 0.1% was slightly less than expected. The core measure rose 4.4% after a 4.2% pace at the end of last year.  Output producer prices accelerated to 9.9% from 9.3%, dashing forecasts of a decline (to 9.1%).  Input prices rose 13.6% from a year ago. This has also been a quickening if not for the upward revision of the December series to 13.8% from 13.5%.  Today's inflation report will not change many minds about the outlook for next month's meeting. The swaps market continues to show a better than even chance of a 50 bp rate hike on March 17.   The euro extended its recovery to $1.1395 in late Asian turnover today.  Recall that the geopolitics and widening rate differential had pushed it to about $1.1280 at the start of the week.  The upside looks blocked at $1.1400 by a one-billion-euro option that expires today and another a little larger at $1.1425.  Initial support is seen in the $1.1340-$1.1350 area.  Below there, support may be near $1.1320.  Sterling remains mired in a $1.35-$1.36 range.  It briefly slipped to below $1.3490 on an intrasession basis yesterday but quickly rebounded.  It has not settled outside this range this month.   America After the recent price data, the US economic news turns to the real sector today with consumption and production news.  Helped by a jump in prices and auto sales, retail sales are expected to have recouped December's 1.9% drop.  Auto and gasoline likely accounted for around half the projected increase.  The core measure, which excludes autos, gasoline, building materials, and food services are expected to have risen by 1.4%, the median forecast in Bloomberg's survey.  After dropping 3.1% in December, it may be a little disappointing. Next week, the more comprehensive consumption expenditures will be reported.  Like the headline retail sales, the PCE is expected to fully recover the 0.6% decline at the end of last year.  Industrial output is expected to have risen by 0.5% last month.  It fell by 0.1% in December.  However, parts of manufacturing remain disrupted and factory output is forecast to have risen by 0.2% after falling by 0.3%.  Perhaps, an under-appreciated component in industrial output is the surge in shale output from the Permian Basin.  It hit a new record high for the third consecutive month and was above 5 mln barrels a day for the first time since 2007 when the time series began.  America's seven major shale areas are ramping up output and is expected to reach 8.7 mln barrels a day next month.  That said, there are two medium-term challenges that ought to be monitored.  First, output per well is falling.  It is now back to August 2020 levels.  This means more wells are needed for the same level of output.  Second, the inventory left in the ground as in drilled but not completed wells has been trending lower and is now the lowest since 2014.  Late in the session, the FOMC minutes from last month's meeting will be released. Recall the statement was not as hawkish as Chair Powell comments.  Powell sought maximum flexibility and the market, with the help of some Fed officials (see Bullard) and the jump in CPI, read into that flexibility a sign of more aggressive monetary policy.  On the eve of Powell's press conference, the Fed funds futures had discounted around a 50% chance of a March hike and almost four hikes this year.  Now the Fed funds market is discounting almost a 2/3 probability of a 50 bp hike in March and is divided between six and seven hikes this year.  The swaps market is pricing in two hikes next year and a cut in 2024.   Canada reports January CPI figures.  It appears that after the US reported a stronger than expected increase, some economists tweaked their Canadian forecasts higher.  In January 2021, Canada's CPI rose by 0.6%.  The median forecast (Bloomberg survey) now looks for a 0.6% increase last month.  This will keep the year-over-year rate steady at 4.8%.  The underlying measures may also be broadly stable.  Note that last February through May, Canada's CPI rose by 0.5% each month.  Still, it may not impact expectations for monetary policy.  The swaps market has nearly 175 bp of tightening priced in for this year--seven hikes. The market sees a terminal rate of about 2.5%, which Bank of Canada Governor Macklem says may be higher.   The upper end of the US dollar's range against the Canadian dollar held earlier this week near CAD1.28. The greenback is being pushed lower now and is back near the pre-weekend/pre-US warning low (~CAD1.2670).  The lower end of the range is around CAD1.2650-CAD1.2660.  Last week, there was an intrasession spike to almost CAD1.2635. However, the intrasession momentum indicators are stretched, warning of the risk that the greenback bounces in early North American turnover.  The CAD1.2700-CAD1.2720 may serve as a nearby cap.  The US dollar remains soft against the Mexican peso.  The deputy governor of the central bank made it seem as if the Fed delivers a 50 bp hike by mid-March, it would be matched by Banxico at its meeting on March 24. The greenback has been testing the 200-day moving average, which comes in today near MXN20.34.  Yesterday's bounce off it has been particularly shallow, suggesting that the bids are being absorbed. A break would target this year's low around MXN20.28. Below there, the greenback could fall toward MXN20.10-MXN20.15.     Disclaimer
Getting Back To Risky Assets As A Result Of Russian Move?

Getting Back To Risky Assets As A Result Of Russian Move?

Marc Chandler Marc Chandler 15.02.2022 14:54
February 15, 2022  $USD, Canada, Currency Movement, Federal Reserve, Germany, Japan, PBOC, Russia, UK, Ukraine Overview: Russia's decision to return some troops to their bases following the completion of some military exercises has stoked a relief rally in equities, while weighing on the dollar, gold, and oil.  The announcement was made too late for most Asia Pacific bourses, but those open late, like India, are benefitting.  A boost in China's policy loans help lift the local shares.  Europe's Stoxx 600 is recouping around half of yesterday's 1.8% loss, while the US S&P and NASDAQ futures are 1.0%-2.0% higher.  The US 10-year yield is probing the highs near 2.03%, while European yields are a little firmer with the peripheral premium narrowing, except for Greece.  The greenback is heavier against most currencies, while the other "safe-havens" (Japanese yen and Swiss franc) are slightly softer.  Among emerging market currencies, central European currencies are leading the relief rally.  The JP Morgan Emerging Market Currency Index is up about 0.2% for the second day.  Gold is reversing lower after reaching an eight-month high near $1880, around $100 higher than late January.  Initial support is seen in the $1840-$1850 area.  After poking above $95 a barrel briefly yesterday, March WTI is giving back all of yesterday's gains.  Nearby support is seen near $92.  US natural gas is up almost 4.5% after a 6.5% gain yesterday. It fell nearly 14% last week.  Europe's benchmark is unwinding yesterday's 5.5% gain plus more today.  China's warning against speculation and hoarding took a toll on iron ore prices.  They are off around 7.2%, for the third consecutive decline.  Copper prices are edging higher for the second session.   Asia Pacific Japan's economy returned to growth in Q4 22, but it was not quite as strong as expected, and deflationary forces seemed to strengthen.  The world's third-largest economy expanded by 5.4% at an annualized rate in the last three months of 2022, missing forecasts for 6% (median in Bloomberg's survey).  The contraction in Q3 was revised to 2.7% from 3.6% with the help of an upward revision to consumption, which was also a little stronger than projected in Q4. Business spending was slightly softer.  Net exports contributed 0.2% (not the 0.3% expected). The new social restrictions introduced last month is expected to be a drag on Q1 22 growth. The GDP deflator, which fell 1.1% in Q2 and 1.2% in Q3, fell 1.3% in Q4, the most in a decade.  The January CPI figures are due late this week.  Excluding fresh food and energy, prices are expected to have fallen around 1%, the most since 2011.   The PBOC injected CNY100 bln ($15.7 bln) into the banking system via policy loans for the second consecutive month.  This is understood to signal that Beijing is stepping up its support for the economy.  The medium-term lending facility (1-year) rate was kept steady at 2.85%.  It had been cut by 10 bp last month.  Tomorrow, China is expected to report that both CPI and PPI moderated in January. Less price pressures are thought to underscore the scope for PBOC action, which is expected to spur additional monetary easing.   The dollar is trading with a firmer bias against the Japanese yen, though within yesterday's (~JPY115.00-JPY115.75) range.  There is an option for almost $765 mln at JPY115.75 that expires today.  There is another set of options for $1.13 bln at JPY116 that also roll off today.  The softer yen, if sustained, and the risk-on sentiment can help Japanese stocks on Wednesday.  The Australian dollar is trading inside yesterday's range as well (~$0.7085-$0.7160).  A move above yesterday's highs would lift the tone, but the expiring options (A$450 mln) at $0.7195 seem too far away.  The US dollar slipped below CNY6.35 for the first time this month.  It recovered after reaching about CNY6.3475. The PBOC set the dollar's reference rate slightly lower than expected (CNY6.3605 vs. CNY6.3607, the median in Bloomberg's survey). Separately, the PBOC's foreign exchange holdings appear to have risen by around CNY33.6 bln last month.   Europe Reports suggest the Russia's top diplomat Lavrov got Putin's permission to continue to pursue diplomatic solutions. At the same time. the head of Ukraine's National Security and Defense Council dismissed reports of a February 16-17 invasion.  Some of Russia's troop movement may have been part of its military exercises.  Press reports indicated that some of the exercises were completed in recent days, which was linked to today's news that some forces are returning to their bases.  A key date may be February 20 with the end of the Russian-Belarus military exercises.  As part of the pressure on Russia is that the lower chamber of parliament, the Duma, is considering a bill to request Putin officially recognize the separatist region of Ukraine (Russia created in 2014).  This seems like a non-military move that could further Russia's influence.  Meanwhile, Germany's Foreign Minister Baerbock is encouraging other parts of the of German government to consider China a "systemic rival" (like the EU has already done), but Chancellor Scholz, who is meeting with Putin today in Moscow, told Russia that Ukraine joining NATO is not a priority.  The UK's employment data underscores the strength of the labor market.  The number of employees rose by 108k in January after a revised 131k in December (initially 184k).  There are about 435k more workers than on the eve of the pandemic.  The unemployment rate was steady at 4.1% in the three months to December.  Vacancies reached a record high of almost 1.3 mln in the three months through January.  Average weekly earnings rose 4.3%, up from 4.2%, while base wages (excluding bonuses) slowed slightly to a 3.7% pace from 3.8%.  However, note that between taxes and inflation, real wage income is being squeezed.  The swaps market is pricing in about a 70% chance of a 50 bp hike next month.  The euro recovered from the dip below $1.13 yesterday to reach almost $1.1355 today in the European morning.  It stalled there where options for 1.35 bln euros will expire today (~$1.1340-$1.1350).  The focus shifts one negative development (geopolitical tension) to another (diverging monetary policy).  The US premium on the 2-year month widened to around 195 bp, about 40 bp higher than on the eve of the January employment data.  A move above $1.1400 would lift the technical tone.  Sterling is going nowhere quickly.  It stays mired in a $1.35-$1.36 range, which has largely contained it this month.  Intraday penetration has taken place a few times, but the range has been respected on a closing basis.   America The Fed's Bullard did not walk back last week's hawkish remarks.  He advocates front-loading the rate hikes and reiterated his call for 100 bp by July 1. He says the Fed's credibility is on the line with inflation much higher than expected six months ago. Bullard wants the central bank to ratify market expectations contained in the two-year note. The yield is up more than 20 bp since January CPI print.  The swaps market implies a terminal Fed funds rate of 2.00%-2.25%.  The Fed fund futures are discounting almost a 66% chance of a 50 bp hike in March.  Almost 100 bp is priced by the end of H1. The January US PPI is expected to have risen by 0.5%, but given the base effect, the year-over-year rate will likely pullback from the 9.7% year-over-year pace reported for December.  The core rate may moderate to below 8%.  The first look at February survey data comes from the Empire State manufacturing survey.  A modest recovery is expected after a dramatic slump in January (31.9 in December, -0.7 in January).  The median forecast in Bloomberg's survey is for a rise to 12.  Late in the day the Treasury's December capital flow report (TIC) will be reported.  Capital flows increased markedly last year.  Consider that the monthly average through November was about $102 bln.  In the first 11 months of 2020, it averaged a little more than $47 bln and in 2019 $5.4 bln.  The pattern with long-term flows is similar--almost $72 bln in Jan-Nov 2021, compared with around $42 bln in the same period in 2020 and $32.5 bln in 2019.   Although the convoy protests in Canada that had paralyzed the capital, disrupted production and trade have dissipated, other border blockades (Alberta and Manitoba) persist.  Downtown Ottawa was still reportedly occupied yesterday.  Prime Minister Trudeau invoked the 1988 Emergencies Act for the first time, claiming a serious challenge to law enforcement.  It will be divisive. Consider that a new Angus Reid poll found that nearly 75% of the surveyed wanted the convoy protesters to go home, but more than two-thirds think Trudeau has aggravated the situation.  Under the emergency powers, the federal forces (police not military) will enforce municipal and provincial laws, and secure and protest places and infrastructure critical to the economy (e.g., border crossings and infrastructure).  It authorizes financial institutions to prevent the funding of illegal protests without a court order.   The motion must be presented to the House and Senate over the next week.   However, once a declaration of emergency is made, it is considered to be in effect, unless it is revoked by parliament.  If not extended it will expire in 30 days.   The opposition Conservatives are unorganized.  A caucus during the protests dismissed O'Toole and is now led Bergen, the interim leader.   Bergen has been among the most supportive of the convoy protests.  Before Trudeau’s announcement, Singh, the head of the New Democrat Party seemed to be opposed, saying use of the emergency powers was a failure of leadership.  After Trudeau's announcement, Singh endorsed it, though in a backhanded way. He blamed Trudeau for allowing the "siege" of Ottawa to continue for weeks without addressing it.  The US dollar approached CAD1.28 yesterday, the upper end of its recent range and it held.  The risk on mood, reflected in equity prices is overriding whatever negative impulse there may be from the softer oil prices.  So far, the low for the day is slightly above CAD1.27.  There are options for roughly $2.3 bln between CAD1.2695 and CAD1.2700.  A break returns to the greenback to the shelf forged in the CAD1.2650-CAD1.2660 area. Meanwhile, the US dollar has returned to test the 200-day moving average against the Mexican peso.  It is found a little below MXN20.35. It has not closed below the long-term moving average since last September. Last month's low was set near MXN20.28.  The deputy governor of the central bank suggested that the magnitude of the Fed's rate hike will influence the next Banxico move.  A 25 bp move by the Fed would be matched by Mexico.       Disclaimer
Russia-Ukraine Conflict And The US Reaction Act On Markets

Russia-Ukraine Conflict And The US Reaction Act On Markets

Marc Chandler Marc Chandler 14.02.2022 12:59
February 14, 2022  $USD, BOE, BOJ, China, Currency Movement, ECB, Federal Reserve, Turkey Overview: Fear of a Russian invasion of Ukraine, spurred by comments from US officials triggered a dramatic market reaction ahead of the weekend, and it has continued today.  Risk has come off in many markets.  Equities have tumbled. Most of the major bourses in the Asia Pacific region were off 1-2%.  Australia was a notable exception as its gold and energy stocks lifted ASX 200.  The Stoxx 600 is off around 2.5% near midday in Europe, its third consecutive fall.  US futures are off about 1% lower.  Bond markets are bid.  The US 10-year Treasury yield is near 1.92% after poking above 2% last week.  European yields are 4-7 bp lower, and the peripheral premium is edging wider.  The yen and Swiss franc are firm, while the other majors, led by the Scandis and Antipodeans are around 0.50%-1.0% lower.  Emerging market currencies are mostly lower, with central European currencies particularly vulnerable.  Gold is consolidating after surging to three-month highs near $1865 before the weekend. Oil edged higher initially, with the March WTI contract rising to almost $95 before steadying.  US natural gas prices are snapping a three-day decline to surge 5% today, while Europe's benchmark is almost 10% higher.  Iron ore was off around 1% for its first back-to-back loss in a month.  Copper is softer after falling 3.3% before the weekend.   Asia Pacific The Bank of Japan pre-announced its willingness to buy an unlimited about of 10-year bonds at 0.25% today.  However, there were no offers for the first such operation in three years.   The fall in global yields saw the JGB yield ease slightly.  The BOJ's challenge of defending its Yield Curve Control policy is not over.  There are also other actions the central bank can take to reinforce its 0.25% cap such as offering to buy at a fixed rate lower than the prevailing market rate.  Some upward pressure was seen on the longer-dated bonds, with the 20- and 30-year yields edging higher.  Even if the exit from YCC is not imminent, many see it as an ongoing BOJ challenge.  Note that the Q4 GDP deflator and the January CPI figures due this week are expected to show deflationary pressures still evident.   The People's Bank of China sets the one-year medium-term lending facility tomorrow.  The rate was cut by 10 bp last month to 2.85%.  The market is split on whether another cut will be delivered now.  A Bloomberg poll found 16 of 27 expect no change, while the others expected a 5-10 bp reduction.  The PBOC is encouraging lending, and officials have made it easier for property developers to tap cash from home pre-sales.  The cap on loans to develop public housing has also been lifted.   After trading above JPY116 last Thursday and Friday, the dollar is poised to fall through JPY115.00 in Europe.  The uptrend line connecting the late January and early February is around JPY114.95.  Below there, support is seen in the JPY114.60-JPY114.75 area.  The Australian dollar is coming under more selling pressure in the European morning and is being pushed through $0.7100.  some selling may be related to the A$1.13 bln option expiring today at $0.7110.  Last week's low was near $0.7065.  The greenback edged slightly higher against the Chinese yuan but remained in a particularly narrow range within the pre-weekend price action.  Yet it was third consecutive session that the dollar traded above CNY6.36 on an intraday basis but was unable to close above.  The dollar's reference rate was set at CNY6.3664, a little above expectations (CNY6.3661, Bloomberg survey).   Europe Over the past few days, a handful of ECB officials have pushed back against speculation of a rate hike near mid-year: Lagarde, Lane, Rehn, Visco, and Makhlouf.  Next month's meeting is still important.  There will updated forecasts and forward guidance, but the guidance in December, including the sequence (bond buying continues under APP until shortly before the first rate hike, and APP will be stepped up after the buying under the PEPP effort concluded next month).  Officials do not see a wage impact but may seek faster access to wage data (suggested Visco).   Last year, the Bank of England unveiled its balance sheet strategy.  It would recycle the maturing proceeds of its bond holdings until the base rate reached 0.50%.  It would not actively sell its holdings until the base rate was at 1.0%.  At the time, the swaps market did not envision the 1% level being reaching for several years.  Now the market is pricing in about a 75% chance that it is reached at the March 17 MPC meeting.  At the end of last week, reports indicated that the BOE was talking with the Debt Management Office about handling the active sales.  The central bank owns GBP875 bln of Gilts (~$1.2 trillion).  The BOE is unlikely to begin selling off its holdings as soon as it is able.  Pill, the BOE's Chief Economist, recently explained that the 1% base rates is not a trigger for action but the beginning of the discussion.   Ahead of the weekend, Fitch cut Turkey's sovereign credit rating to B+ from BB- and retained a negative outlook.  It was a catch-up move.  S&P has Turkey as a B+ credit since August 2018.  It changed its outlook to negative last December.  Moody's B2 equivalent was adopted in September 2020 and maintains its negative outlook.   With high inflation and widening current account deficit (despite the massive devaluation), the risk is of additional downgrades.  DBRS gives Turkey a high BB rating, which is the highest of the speculative category.  It has been there since July 2016 and seems a bit dated.  The central bank cut the one-week repo rate by 500 bp in the last four months of 2021 to bring it to 14%.  It was left there in January and is expected to remain so when the central bank meets February 17.   The euro is under pressure.  It is testing the $1.1300 area, which is around the middle of its recent range.  The (61.8%) retracement of its rally from late January is near $1.1265.  There is an option for 635 mln euros at $1.1240 that expires today.  Resistance now is seen in the $1.1325-$1.1350 area.  Sterling has largely been confined to a $1.35-$1.36 range since February 1.  While shallow intrasession penetration has been seen, the range has held on a closing basis.  Today, it has found bids slightly below $1.3500.  Immediate resistance now is seen around $1.3540-$1.3560.   America The sell-off in the US 10- year that followed the stronger than expected January CPI (7.5% vs. median forecast in Bloomberg's survey of 7.3%) and the Fed's Bullard comments were unwound in response to the US claim that the long-warned of Russian attack on Ukraine could take place in the coming days.  The US 2-year yield surged more than 21 bp on the CPI/Bullard and fell back nearly eight basis points on the elevated geopolitical tension.  Some have argued that the market misunderstood Bullard, though he seemed to be fairly clear about the key issue:  Favors 100 bp increase in the next three meetings and wants to begin the unwinding of the balance sheet quickly and aggressively.  He will be on CNBC at 8:30 am ET today.  One should not be surprised if he does not walk make his arguments.  He has consistently been consistently among the most hawkish of Fed official.   The trucker-led protest that disrupted Ottawa, Canadian production, and trade with the US appeared to end over the weekend.  Several automakers, including GM, Ford, Stellantis, and Toyota cut production.    Of note, Canada raised an objection some of the funding for the protest may have been funded via US financial institutions.  The Ambassador Bridge has re-opened, but Canadian officials warn against non-essential travel.  Similarly inspired demonstrations have been seen to varying extents in several European countries, including France, Netherlands, Switzerland, Austria, and Belgium.  There are some reports of a like-minded demonstration in Washington DC around the March 1 State of the Union address.    The risk-off moment and the deepening Canadian discount to the US on two-year money are helping lift the US dollar toward the upper end of its recent range against the Canadian dollar.  The CAD1.28 area has capped the greenback since early January when it briefly traded around CAD1.2815 on an intrasession basis. Above there, the CAD1.2845-CAD1.2855 may offer resistance.  Initial support is around CAD1.2720-CAD1.2740.  Note that around $2.2 bln in options expire tomorrow in the CAD1.2695-CAD1.2700 area.  The greenback jumped from around MXN20.3645 to MXN20.64 in the flurry before the weekend.  However, like most emerging market currencies today, the peso seems sidelined.  Still, the geopolitical overhang argues against a return to the 200-day moving average (~MXN20.33) it was testing in the second half of last week.  The risk-off may weigh a bit more on Brazil, which has been one of the strongest emerging market currencies this month. It traded at its best level since September last week (~BRL5.1750) before the pre-weekend sell-off.  The US dollar faces resistance near BRL5.30.     Disclaimer
We Will Probably Review All Of Inflation Indicators Around The World This Weekend

We Will Probably Review All Of Inflation Indicators Around The World This Weekend

Marc Chandler Marc Chandler 11.02.2022 13:43
February 11, 2022  $USD, Canada, Currency Movement, ECB, Federal Reserve, Inflation, Mexico, RBA, UK Overview: The higher-than-expected US CPI coupled with strong comments from the Federal Reserve's leading hawk saw a surge in interest rates, knocking stocks and lifting the dollar.  Japanese markets were closed today for a national holiday, but nearly all the other equity markets in the MSCI Asia Pacific Index fell to pare this week's gains.   Europe's Stoxx 600's 0.8% loss is shaving this week's gain to about 1.35%. US futures are modestly lower.  Australian and New Zealand benchmark yields rose 10 bp and 8 bp respectively to play catch-up.  The ECB's Lagarde and Lane argued against "hasty" action, helping to take some pressure off European bonds.  However, the widening of the core-periphery spreads warns that it may be temporary.  The US 10-year yield is a little softer, hovering around 2%. The two-year soared by 21 bp and is firm today slightly below 1.60%.  The US dollar is trading higher against most currencies.  The Australian dollar is the weakest of the majors, off about 0.5%, as the central bank governor continues to push against market expectations for the beginning of the tightening cycle.  On the week, however, the Aussie, along with the New Zealand and Canadian dollars are holding on to modest gains. The South African rand and Mexican peso are resisting the pressure that is weighing on emerging market currencies.  This week five of the eight strongest emerging market currencies are in Latam. JP Morgan's Emerging Market Currency Index is posting a gain of around 0.8% this week, its fifth gain in the past eight weeks.  As widely expected, the central bank of Russia delivered a 100 bp hike (bringing the key rate to 9.5%).  Gold is recovering from a test on $1820 and is up about 1% on the week.  Crude oil is firm for a third session, but not enough to prevent March WTI from posting its first weekly loss in nearly two months.  US natural gas prices are flat a little below $4 and is holding on to its biggest weekly losses since mid-December.  European natgas is consolidating the week's 10.6% decline after falling nearly 12% the previous week.  Iron ore fell 2% today and is up about 5% on the week. Copper is off around 2.5% to leave the red metal up 1.3% for the week after a 4.1% rise last week.    Asia Pacific Governor Lowe of the Reserve Bank of Australia continues to resist market pressure that sees an early start to the tightening cycle.  He argued that it is too early to conclude that inflation is sustainably in the 2%-3% target.  Without formally accepting the average inflation target like the Federal Reserve did, Lowe argued that after a sustained undershoot, he is willing to tolerate the near-term overshoot.  The risk, he says, of hiking too early would deal a blow to the labor market.  On February 17, Australia reports January employment figures and economists look for a flattish report. Next week, Japan reports Q4 GDP and the January CPI figures.  The world's third-largest economy likely bounced back strongly after the Q3 Covid-induced contraction.  However, new quasi-emergency measures that went into effect last month risks another contraction in Q1.  The GDP deflator is expected to have fallen by about 1.3%, the third consecutive quarter of a more than 1% deflation.  Similarly, the CPI report should show less price pressures, and more deflation when fresh food and energy prices are excluded.  China reports January CPI and PPI.  Both are expected to have softened.   Yesterday, the dollar tested last month's multiyear high against the Japanese yen near JPY116.35.  It backed off to find support near JPY115.75, where a $750 option expires today.  The greenback met resistance in Asia, where Tokyo markets were closed, around JPY116.20.   The Australian dollar reversed lower after approaching $0.7250 yesterday and the retreat has continued today.  The Aussie tested $0.7100 today, and support below there is seen around $0.7075. The greenback continues to trade quietly against the Chinese yuan.  It is a little firmer but below CNY6.36 after reaching CNY6.3660 earlier.  It is virtually flat on the week.  The PBOC set the dollar's reference rate at CNY6.3681, slightly above the market projection (Bloomberg survey) for CNY6.3674.  Europe ECB President Lagarde and Chief Economist Lane pushed back against calls for more imminent action to combat price pressures.  Some press reports have been playing up the "loss of confidence" in the ECB's forecasts.  Leave aside that the EC's updated forecasts also see inflation falling back below 2%.  The issue is who takes their case to the press?  Those that are coming on top of the internal debate have no need.  The hawks that go to the media lap it up as if it were gospel instead of part of the internecine struggle.  That said, Lagarde and Lane have not been particularly persuasive and the swaps market now prices in about 65 bp in tightening over the next 12 months.  The UK economy grew by 1.0% quarter-over-quarter in Q4, the same as Q3 after the revision (from 1.1%).  Consumption slowed from 2.9% in Q3 to 1.2% in Q4.  Government spending, which was flat in Q3, increased by 1.9% in Q4.  Fixed capital formation rose by 2.2%, well above expectations after falling by a revised 0.2% (from -0.9%) in Q3.  The UK also reported that the expected contraction in December was less than feared, hobbled by the Omicron variant.  Output fell by 0.2% not the 0.5% of the median forecast in the Bloomberg survey, helped by stronger than expected industrial production, construction, and a smaller than expected decline in services.  A week ago, the market had about a 45% chance of a 50 bp hike in March and now it is about 80%. The euro stopped 5/100 of a cent below the $1.15 level yesterday, where about 3.25 bln euros in options expire today.  The single currency made a new low for the week near $1.1370. Nearby support is seen closer to $1.1350, and a break could spur a test on the $1.13 area early next week.   The US 2-year premium is widening for the sixth consecutive session, and at 190 bp, it is the most since February 2020.  At the end of 2019, it was near 225 bp.  Sterling made a new high for the month yesterday near $1.3645 before surrendering the gains in the face of the broader greenback recovery.  It found support today near the lower end of its recent range around $1.35.  Nearby resistance is seen in front of $1.3580.  Sterling settled at $1.3530 last week.   America The higher-than-expected US CPI panicked market participants and drove the 2-year yield up a whopping 21 bp and the implied yield of December up 26.5 bp.  One inflation report that was 0.2% above the median in the Bloomberg poll is worth another 25 bp rate hike this year?  The Fed's leading hawk, St. Louis Fed's Bullard talked about a 100 bp increase in rates here in H1, which implies a 50 bp move.  However, it seemed like professional courtesy more than conviction deterred him from calling for a 50 bp at next month's meeting.  Two other Fed officials that spoke, Barkin and Daly, seemed more measured in their remarks.  That said, there is a perception that if the market has 50 bp priced in (~86%), it makes it more likely in and of itself for the Fed to deliver it.  It offers the Fed a free option, as it were.  Yet, it makes it more difficult for the Fed to get ahead of expectations.  At the same time, it may reinforce perceptions that the Fed is often a slave to the markets.  The vaccine-mandate protest continues to roil Canada.  The disruption is estimated to be costing Canada around CAD350 mln a day.  There is some fear that a similar protest may be coming to Washington DC in time for President Biden's State of the Union speech on March 1, even though the judiciary has circumscribed the vaccine mandate on the federal level.  However, the vaccine mandate may spur demonstrations in France as early as this weekend.   The new governor of Banxico led the central bank in delivering the second 50 bp hike in a row.  It was widely expected, especially after the firm CPI reading above 7%.  The swaps market has another 100 bp discounted over the next three months and 260 bp over the next 12 months.  The next meeting is March 24th.  Peru also delivered a 50 bp hike yesterday.  It has raised its target rate by 50 bp for six consecutive meetings now and it stands at 3.5%.  Lima's CPI rose by almost 5.7% last month after 6.4% in December.   The US dollar recorded an outside up day against the Canadian dollar by trading on both sides of Wednesday's range and closing above Wednesday’s high.  The greenback briefly took out the shelf in the CAD1.2650-CAD1.2660 area where about $4.9 bln in options expire today, before rallying to about CAD1.2730.  Follow-through buying lifted the US dollar to almost CAD1.2755 earlier today.  The CAD1.28 area has held back the greenback a couple of times in the past few weeks.  The risk off move yesterday saw the US dollar bounce from the 200-day moving average against the Mexican peso (~MXN20.35) to almost MXN20.59.  Some follow-through buying lifted it to around MXN20.64 today before backing off and it looks set to fall back below MXN20.50 today.  Initial support is seen around MXN20.44.     Disclaimer
A Look At Markets Around The World: US CPI, Sweden Riksbank EU Yields And More

A Look At Markets Around The World: US CPI, Sweden Riksbank EU Yields And More

Marc Chandler Marc Chandler 10.02.2022 14:33
February 10, 2022  $USD, Banxico, BOJ, China, Currency Movement, ECB, Inflation, Riksbank Overview: Equities in Asia extended their recovery and Europe's Stoxx 600 is up for the fourth consecutive session.  US futures, are, however, trading lower ahead of the January CPI figure.  Benchmark 10-year bond yields are mostly firmer, with the US 10-year hovering around 1.95%.  European yields are 2-4 bp higher, and peripheral-core spreads are widening a little.  The dovish hold by Sweden's Riksbank has the krona joining the yen as the laggards today, which have seen most major and emerging market currencies edge higher.  The JP Morgan Emerging Market Currency Index is posting small gains for the fourth consecutive session.   Gold made a new marginal high for the month, but met sellers around $1836, pushing it back toward $1830.  The unexpectedly large draw down in US oil stocks (4.75 mln barrels, the biggest decline since last September) had helped March WTI regain the $90 handle after a brief bout of profit-taking.  US natural gas prices are steadiest, while Europe's benchmark was a little softer.  Copper is up for a second day, while iron ore jumped by more than 5% after yesterday's 1.75% loss snapped a six-day advance.  Asia Pacific  The BOJ moved to defend its Yield Curve Control policy.  The yield on the 10-year JGB crept closer to the 0.25% cap as the market tested the central bank's resolve.  The BOJ announced it would buy an unlimited amount of 10-year bonds on Monday at a fixed rate of 0.25%.  Japanese markets are closed for a national holiday tomorrow.  It is the first such operation in 3.5 years.  With today's purchases, the Reserve Bank of Australia completed its QE.  It holds about 40% of the government's debt or around A$650 bln.  Last year, the RBA bought about three-times more bonds than the government issued.  Sequentially, the next issue is what to do with the maturing proceeds, and Governor Lowe said a decision will be made in May.  The Bloomberg survey finds most economists expect a hike in August, while the swaps market sees the hike a little earlier.  China's aggregate lending soared to record levels last month of CNY6.17 trillion.  Lending typically rises in January as new quota are tapped. However, the increase was well more than expected.  Bank lending was strong (CNY3.98 trillion), but so was shadow banking activity (the difference between bank lending and aggregate financing). Still, it seems to simply confirm what was already signaled, namely that officials have shifted their stance to support the economy.    The US dollar drew the closest to JPY116.00 in a month.  The high was made in the brief overlap of last Asia with early European activity.  There is an option for $750 mln that expires tomorrow at JPY115.75.  Support is seen a little lower, near JPY115.50. The Australian dollar is pushing toward $0.7200, a level it has not been above since January 21.  Above there, we have been looking for $0.7230.  The Aussie seems well supported, with over A$1 bln in options expiring today between $0.7150 and $0.7155, though the intraday momentum indicators are stretched.  The PBOC set the dollar's reference rate spot on the median forecast in the Bloomberg survey at CNY6.3599.  The dollar eased to a marginal new low for the week (slightly below CNY6.3540).  Note that India and Indonesia held policy rates steady.   Europe The European Commission published a new economic forecast today.  While it raised its CPI forecast this year and next, it still has the rate below 2% next year.  This year's projection was raised to 3.5% from the 2.2% forecast made last November.  Inflation next year now looks to be 1.7% rather than 1.4%.  Price pressures are anticipated to peak just shy of 5% this quarter (4.8%) and stay above 3% until Q4, when they fall to 2.1%.  The EC shaved its growth forecast for this year to 4.0% from 4.3% but sifts it into 2023 by raising its forecast by 0.3% to 2.7%.  The real interest is with the ECB forecasts in March, and some see the EC forecasts as a hint of what the central bank update may look like.   Sweden's Riksbank left policy steady as widely expected.  It now sees the H2 24 rather than in Q4 24.  The swaps market is less sanguine and has about 70 bp of tightening priced in over the next 12 months.  There were three dissents over its bond purchases and advocated a more pronounced tapering.  Governor Olsen cast the deciding vote to continue its QE.  With upward revisions in the Riksbank CPI forecasts, the decision appears to be a dovish hold.  This year's CPI forecast was raised to 2.9% from 2.3%.  Next year's CPI projection was tweaked to 2.0% from 1.9% and 2024 to 2.4% from 2.2%.  The Swedish krona is the weakest of the major currencies today, off about 0.65% against the dollar and 0.75% against the euro.   The euro remains in Tuesday's range, roughly $1.1395 to $1.1450.  It is near the upper end of the range in the European morning.  It is unlikely to make much more headway ahead of the US CPI figures.  The $1.1500 level is the important cap, and it appears to be protected in by two large option expirations there, with a 1.76 bln euro option today and a 1.9 bln euro option tomorrow.  Initial support is seen in the $1.1420-$1.1430 area.  For its part, sterling continues to chop between $1.35 and $1.36.  It reached the session high near $1.3580 in early European turnover and met a wall of sellers. Nearby support is seen at $1.3540, and then $1.3520.  The UK reports Q4 GDP and details for December tomorrow.   America Today's US January CPI may be a bit anti-climactic. Nearly everyone expects a small acceleration to 7.2%-7.3% from 7.0% at the end of last year.  The market has fully discounted a 25 bp hike next month and has about a 30% chance of a 50 bp move. Still, it may be near a peak, and at least one Fed official (Bostic) has said as much.  Remember that last year, the CPI surged from March through August.  As they drop out of the 12-month comparison, the year-over-year rate will likely ease.  Mexico reported slightly higher than expected January CPI yesterday and it reinforced expectations of a 50 bp hike today that would lift the overnight target rate to 6.0%.  It is the first meeting with the new governor, Victoria Rodrigues Ceja, at the helm.  Some observers expressed concerns that she was untested and likely dovish.  A 50 bp hike at her first meeting, especially given the fact that the economy contracted in Q3 21 and Q4 21 (a simple rule of thumb for a recession), would underscore the central bank's anti-inflation credentials.    Bank of Canada Governor Macklem sounded a hawkish note yesterday, warning that the policy rate may have to go over neutral (2.25%) in order to address the price pressures.  The swaps market has stopped just shy of this (almost 2% in 12 months and 2.25% in 24 months). Canada reports January CPI next week. It stood at 4.8% in December.    The US dollar continues to hold important support in the CAD1.2650-CAD1.2660 area.  There are options for $700 mln that expire today at CAD1.2670.  Tomorrow, the optionality is stronger.  Options for almost $4.5 bln struck between CAD1.2650-CAD1.2660 expire. Tomorrow, there is also another option for CAD1.22 bln at CAD1.2685.  Ahead of the Banxico meeting, the peso is bid.  The greenback is near three-week lows against the peso around MXN20.42-MXN20.43.  A break sets up a test on the 200-day moving average near MXN20.33.  Last month's low was near MXN20.28. Still, the North American session may be more cautious.  A bounce could lift the dollar toward MXN20.50.   Disclaimer
Tension Beetween Ukraine And Russia Definetely Shaped News In Recent Days

Risk Appetites Return (for the Moment)

Marc Chandler Marc Chandler 09.02.2022 12:15
February 09, 2022  $USD, BOJ, Brazil, China, Currency Movement, ECB, Japan, Mexico, Oil, Russia, Ukraine Overview: A pullback in yields is bolstering risk appetites today, lifting equities and weighing the greenback.  Most Asia Pacific equity markets rallied at least 1%, led by Hong Kong.  It was the be regional performance in a month.  Europe's Stoxx 600 is up nearly 1.5% in its third consecutive advance, while US futures are pointing to a higher opening.  The US 10-year yield has backed off from the test on the 2% threshold and is around four basis points lower near 1.92%.  European benchmark yields are 3-5 bp lower.  The dollar has softened by as much as 0.25%, led by the Scandis and the Antipodeans.    Emerging market currencies are also mostly firmer, with the JP Morgan EM FX index rising for the third session.   Gold is pushing higher for the fourth consecutive session to test $1830.  After falling about 3.25% in the past two sessions, March WTI is stabilizing above yesterday's low near $88.50.  After steadying yesterday, US natural gas prices are near two-week lows, while Europe's benchmark is firm after falling 7.5% over the last two sessions.  Iron ore is snapping a six-day advance, while copper is under pressure for the third consecutive session.   Asia Pacific The Bank of Japan's absence continues to be notable.  Many expected the central bank to step in to buy bonds to defend the upper end of the 10-year yield band at 0.25%.  However, they have been patient, and may even allow the yield to rise above the cap, if it thought it would be for a short time.  The BOJ has its next scheduled purchases for February 16.  Officials seem confident that it has the tools to enforce the cap if needed, including fixed rate operations.  Chinese officials warned against about false price disclosure in the iron ore market, which may have triggered today's sell-off from five-month highs.  Ideas that strong infrastructure efforts and easier monetary policy helped drive the metal higher.  Officials warned against speculation and fraudulent price information last month.  Iron ore had extended its rally when Chinese officials postponed the deadline for "peak-emissions" in the steel sector by five years to 2030.  The dollar reached the high from late January just shy of JPY115.70 before coming off.  The lower yields are offsetting the risk-on impulses from equities.  The $780 mln option that expires today at JPY115.80 looks "safe".  There is another option for $725 at JPY115.00 that may be more at risk today, but we see support ahead of it, near JPY115.20.  The Australian dollar is testing last week's high near $0.7170, where a A$605 mln option expires today.   A move above $0.7180 targets the $0.7230 area initially but could lift technical tone and spur a retest of the year's high around $0.7315.  The Chinese yuan strengthened a little today, recouping yesterday's minor slippage.  The PBOC set the dollar's reference rate slightly lower than expected, CNY3653 vs. CNY6.3659.  The dollar appears to be in a CNY6.35-CNY6.37 near-term range.   Europe The ECB has used about 1.65 trillion euros of its 1.85 trillion "envelop" for the Pandemic Emergency Purchase Program that is set to end next month.  Several countries have sold long-term bonds this week, including 30-year bonds from Spain, the EU's Next Generation fund, and Germany (today).  The UK sold 50-year bonds.  One of the focuses at next month's ECB meeting will be on the updated forward guidance about its pre-existing bond purchases program, APP.  Under APP around 20 bln euros a month are being bought and this was going to double to smooth the transition from the end of PEPP.  Meanwhile, France's Villeroy joined ECB President Lagarde in trying to temper the response the ECB's "hawkish pivot".   Press reports suggest the crisis in eastern Europe may be entering a new phase.  Pressure may be mounting on Ukraine to implement that Minsk agreement that requires the reintegration of the Russia-controlled separatist regions.  It is terribly unpopular in Ukraine and could trigger a collapse in the government.  Russia has tended to keep the US central to the talks, but Europe is pushing ahead and tomorrow's meeting in Berlin (Germany, France, Ukraine, and Russia) could potentially be important. Separately, Russia reports January CPI later today.  It is expected to accelerate and spur a 100 bp rate hike when the central bank meets at the end of the week.    It has raised rates at its last seven meetings.  The rate target has doubled from 4.25% to 8.50%.  The central bank is expected to deliver another 100 bp hike (as it did last December and July).  With this hike the market expects the tightening cycle to be over or nearly so.  A resolution of the crisis could see foreign investors buy Russian bonds.   The euro continues to consolidate after last week's surge.  Yesterday's dip below $1.14 did not spur follow-through selling and euro is trading quietly in yesterday's range (~$1.1395-$1.1450). It is hard to get enthusiastic about the price action.  Large options at $1.15 expire over the next two sessions.  Sterling is firm near $1.3585.  This brings last week's highs (~$1.3615-$1.3630) into view.  However, the intraday momentum indicators are getting stretched, suggesting limited scope for gains in early North America turnover.  Tomorrow, the UK reports its first estimate of Q4 GDP (~1.1% quarter-over-quarter expected, the same as Q3.  That said, the economy appears to have lost some momentum at the end of the year, and this should be reflected in the December details.  America The Fed's Bowman and Mester speak today ahead of tomorrow's CPI report.  The odds of a 50 bp hike next month is off its peak above 40% and is now slightly below 30%.  No Fed official has explicitly endorsed such a move, and several have argued against.  Today's mortgage applications and wholesale inventories are not what moves the capital markets.   The EIA boosted its estimate for US oil production this year and next.  Next year, it anticipates that the 2019 record of 12.3 mln barrels a day is surpassed.  It now projects output of 12.6 mln bpd.  While large shale producers are stepping up their investment plans, it is still modest by 2019 standards. Several are returning more to shareholders via buybacks and dividend increases.  Oil prices are still vulnerable to a change in tensions in Eastern Europe and progress in negotiations with Iran.  Meanwhile, OPEC continues to struggle to meet its output goal, and reports indicate that Russia missed its quota last month.  API is saw a 2 mln barrel drop in US inventories, while the EIA is expected to report a 1.2 mln barrel build.  Note that Canada is the largest oil supplier to the US and its inventories are also running low.  India, the Netherland, and Canada are the three biggest destinations for US oil exports. Mexico and Brazil report January inflation figures today.  Mexico's CPI may slip for the second consecutive month, but it is expected to remain above 7%.  The central bank meets tomorrow.  Economists expect a 50 bp hike by Banxico as the new governor takes the helm.  The swaps market has a little more than 100 bp tightening priced in for the next three months and 200 bp over the next 12 months.  After easing in December, Brazil's IPCA inflation measure likely ticked up last month.  While it may stay off its 2021 peak of 10.74% in November, it likely remained above 10% for the fifth consecutive month.  The swaps market has another 200 bp of tightening discounted for the next six months but anticipates a cut by the end of the year.  Brazil also reports December retail sales figures.  This is the other side of the economy.  The real economy is weak.  It contracted in Q2 and Q3 21.  It may have stagnated in Q4.  Retail sales are expected to have fallen by 0.6% in December.  Separately, note that a drought is stressing Brazil's soy harvest and driving up US prices as the other major source of supply.  US soy export orders are strong.     The US dollar built a base in the CAD1.2650-CAD1.2660 area.  Note that Friday, options for more than $2.7 bln expire at CAD1.2650.  A break may find support around CAD1.2600.  On the upside, initial resistance is seen in the CAD1.2720-CAD1.2730 area which holds about $735 mln in expiring options.  The greenback is offered against the Mexican peso.  It is testing the lower end of its recent range near MXN20.50.  The next area of support is around MXN20.43.  Meanwhile, the dollar may break out lower against the Brazilian real, where it closed yesterday near BRL5.26.  Below there, support is by BRL5.20.    Disclaimer
Tension Beetween Ukraine And Russia Definetely Shaped News In Recent Days

European Rate Surge Continues

Marc Chandler Marc Chandler 07.02.2022 20:02
February 07, 2022  $USD, China, Currency Movement, ECB, Fed, Germany, Japan, UK Overview: The capital markets are calmer today, but the re-pricing of interest rates continues.  The German 2-year yield is rising for the tenth consecutive session.  The yield is minus 23 bp.  It was at minus 65 bp when the sell-off began.  Japan's 10-year yield reached its highest level since 2016 and no response from the BOJ as the yield approaches the cap of the yield-curve control policy.  Equities are mixed.  China's market re-opened with solid gains; Hong Kong and Taiwan markets also rose.  Japan, South Korea, Australia, and India moved lower, among the regional markets. Europe's Stoxx 600, which lost 3% in the past two sessions is slipping after opening higher. US futures are slightly softer. The US 10-year yield is hovering around 1.90%. Italy's 10-year yield is up nearly 13 bp, and Greece's benchmark yield has risen twice as much. Core yields are 3-5 bp firmer.  The greenback is mixed.  Among the majors, the Australian and Canadian dollars, alongside the yen are posting small gains.  The euro, sterling and Norwegian krona are off 0.25-0.50% lower.  Most emerging market currencies are weaker  The Russian rouble is the chief exception. It snapped a five-week drop with a nearly 2.7% rise last week.  With today's gains its year-to-date loss is pared to about 1.1%.   The JP Morgan Emerging Market Currency Index is slightly softer after rising about 0.75% last week, the fourth weekly gain in the first five weeks of the year.  Turning to commodities, gold tested a seven-day high around $1815.  Crude is around $2 off last week's high, which culminated in a seven-week rally.  After pushing to almost $93.20 last week, March WTI slipped below $91 today.  Natural gas in Europe and the US is under pressure.  Iron ore eased 0.7% last week, but rose in the last four sessions, and advanced 2.4% today and is at new six-month highs. Copper is paring last week's 4% gain.    Asia Pacific China's markets re-opened today after last week's holiday.  There were three notable developments.  First, the Caixin January service PMI fell to 51.4 from 53.1, which was not quite as weak as expected.  Recall that the Caixin manufacturing PMI had fallen to 49.1 from 50.9.  The net result is that the composite fell to 50.1, just above the 50 boom/bust level.  Second, China's reserves fell for the first time in four months to stand at $3.221 trillion.  Even though the other major reserves currencies and bonds fell, economists surveyed by Bloomberg expected a small increase.  The $28.5 bln decline can be accounted for by valuation adjustments, it appears.  Third, the PBOC set the dollar's reference rate at CNY6.3580.  The median projection (Bloomberg survey) was CNY6.3328.  The big miss likely reflects 1) the difficulty the market had in its assessment after the long holiday and 2) the PBOC making its desires known.   The rise in Japan's leading economic indicator in December to 104.3 was higher than expected but seems dated.  Japan reintroduced quasi-emergency protocols late last month and have a cooling off effect on the economy.  Last week, the Markit January composite PMI slipped below 50 for the first time since last September.  Meanwhile, progress has been reported that will soon allow the US steel tariffs to be partly lifted, while the aluminum tariffs look likely to remain in place.   The dollar is trading quietly within the pre-weekend range against the Japanese yen (~JPY114.80-JPY115.45). The market appears to be finding support around JPY115.00 near midday in Europe.  A $570 mln option at JPY115.00 expires today.  The trendline drawn off last month's highs comes in today around JPY115.50.  Australia's Q4 real retail sales were stronger than anticipated and this appears to have helped the Australian dollar stabilize after falling nearly 1% before the weekend that snapped a four-day advance.  The Aussie is straddling the $0.7100 level, where a A$730 mln option expires tomorrow.  Last week's high was near $0.7180 and a move above there lifts the technical tone.  We noted the much stronger dollar fix today in China, but the greenback was confined to the pre-holiday range (~CNY6.3545-CNY6.3615).  Many participants expected more stimulus measures to support the economy, while its lockdown Covid policy is working in the opposite direction, it would seem. Europe Given dramatic reaction to last week's ECB meeting and Lagarde's reluctance to pledge no hikes this year, the focus remains on the ECB.  Lagarde speaks later today.  A leading hawk (Dutch central bank Governor Knot) spoke over the weekend in favor of an early end to bond purchases and a hike in Q4 followed by another in early 2023. Finland's Rehn, a dove, suggested a hike "by 2023", Latvia's Kazaks pushed against a July hike, but seemed to think an early end to QE is possible.    Investors already know that the German economy contracted in Q4 22.  This should take away the sting from today's industrial output figures.  Industrial production fell by 0.3% while the median forecast in the Bloomberg survey called for a 0.5% increase.  The November series was revised to show a 0.3% gain rather than a 0.2% decline.  It is a quiet week for eurozone data, and today's small gain in the Sentix investor survey (to 16.6 from 14.9) is it.  Still, later in the week the European Commission updates its economic forecasts.   It is a bigger week for the UK, where the highlight is Q4 GDP and the December details.  Politics threatens to overshadow the data.  Prime Minister Johnson is re-staffing after last week's flurry of resignation.  Reports suggest that 35-40 Tory members of parliament have signed letters of no confidence, while 54 are needed trigger a vote.   Some ministers, including Sunak and Javid are seen offering lukewarm support.   According to Bloomberg, the euro made a marginal new high (1/100 of a cent) before the weekend but has come back offered today. It has held above the pre-weekend low (slightly above $1.1410) in the European morning.  A break of $1.1400 could push more momentum traders to the sidelines. There are options for about 960 mln euros that expire there tomorrow.  The US two-year premium was a little above 181 bp on January 27.  Today it is near 153 bp.  Sterling is trading heavily in the European morning and is testing the $1.3500, where a GBP410 mln option expires tomorrow.  A convincing break sees sterling test the $1.3450-$1.3460 area.  The upside many be capped near $1.3560, where a GBP1.04 bln option also expires tomorrow.  America The implied yield of the December Fed Funds futures contract jumped 13.5 bp to 2.37% after the stronger than expected jobs growth.  The perceived odds of a 50 bp hike next month doubled to a little more than 40%.  Many accept that the data were flattered by the new seasonal adjustment factor and revised population estimate.  It does not jive with other readings of the labor market.  The increase of 151k leisure and hospitality jobs seems at odds with other signs of the cooling effect from the virus.  Still, the 709k upward revision in November and December goes a long way recasting the sluggish job growth in late 2021.  In fact, the Q4 average now sits at 611k, the third consecutive quarterly acceleration.   Last week, several Fed officials, including St. Louis Fed's Bullard, the leading hawk, argued against the need for a 50 bp move.  Many do not appear to expect officials to push against market expectations, but the next FOMC meeting is not until mid-March.  There will be another employment report. The dramatic flattening of the yield curve is also a key issue for market participants and official remarks will be closely monitored.  Even if one recognizes that the yield curve is often not driven by only one factor, and that the curve's predictive vs. contemporaneous value is debatable, the flattening is a yellow flag.  The 2-10-year curve peaked near 160 bp at the end of Q1 21.  It hovers now around 60 bp, the flattest since Q4 20.  Meanwhile, the 10-year breakeven (difference between the yield of the inflation protected security and the convention 10-year note) peaked in the middle of last November near 272 bp and is now slightly above 240 bp.    A flattening curve and a falling breakeven is what one would expect with a credible central bank policy.  However, much further in these directions and a stronger case of a policy error could be made.  Many pundits have focused on the Fed being arguably behind the inflation curve.  But the more serious risk may be that to overcome the pundits' criticism, it impales itself on the other horn of the policy dilemma.  Aggressive rate hikes in combination of tightening fiscal policy and the energy shock (experienced by households like a tax) act as a brake on the economy. Given the state of emergency declared in Ottawa following the protest over the vaccine mandate over the weekend, the Canadian dollar is faring fine.  Prime Minister Trudeau heads up a minority government and polls show he is being blamed for the rising inflation.  Canada's economic schedule is light this week with the main feature being tomorrow's December trade report.  Mexico reports January CPI figures on Wednesday, the day before the central bank meets.  Most economists in Bloomberg's survey look for the new central bank governor to start with a 50 bp rate hike (which would bring the overnight rate to 6%).   The economy contracted slightly in Q3 and Q4 22.  Still a 25 bp hike could disappoint, leading to pressure on the peso.  Brazil reports January IPCA inflation figures Wednesday and December retail sales the following day.     The US dollar has chopped in a CAD1.2650-CAD1.2800 range in recent days.   After rising a little more than 0.6% ahead of the weekend, matching its largest rise since January 4, it is a bit softer today near CAD1.2730 near midday in Europe.  It looks likely to remain rangebound today.  The broad risk environment seems more important than crude oil prices.  The greenback rose by around the same amount against the Mexican peso before the weekend and is also a little softer now.  It is consolidating in a narrow range around last week's close (~MXN20.68).  Consolidation in the MXN20.50-MXN20.80 range seems the most likely near-term scenario.  The dollar rose against the Brazilian real ahead of the weekend as well.  It settled near BRL5.3260.  A move above BRL5.3650 may confirm a low is in place.     Disclaimer
Considering Portfolios In Times Of, Among Others, Inflation...

Dollar Rides High

Marc Chandler Marc Chandler 28.01.2022 12:11
January 28, 2022  $USD, Bank of Canada, BOE, China, Currency Movement, ECB, Federal Reserve, Italy, Japan, UK Overview: The more hawkish turn by the Federal Reserve continues to ripple through the capital markets.  Equity markets are struggling to stabilize.  Apple's earnings help its shares and ecosystem stabilize.  The MSCI Asia Pacific Index pared with week's losses helped by 2%+ gains in the Nikkei and Australia. Strong industrial production figures helped Korea's Kospi.  It pared its weekly loss to 6%, the most in the region.  All the sectors are trading lower in Europe's Stoxx 600 today as the finishing touches are put on the fourth consecutive weekly decline.  It is off around 1.5% near midday. US futures are narrowly mixed, with the NASDAQ faring best.  Benchmark 10-year yields are firm in Europe and the US.  European yields are 2-4 bp higher, and we note that for the week, the Italian premium over Germany narrowed is virutally unchanged with the basis point widening today.  The US 10-year yield is 1.83%-1.84% The 10-year JGB yield rose to 0.165%, testing the last couple years' high.  It has not been above 0.20% since 2016.  Foreign investors sold the most Japanese bonds last week since last September.  The Scandis and dollar bloc are bearing the brunt of the greenback's broad strength today.  The dollar's weekly gain ranges from around 1% against Norway to 2.7% against Sweden.  Most emerging market currencies are lower too.  Of note, today India, Russia and China are seeing small gains against the dollar.  The JP Morgan Emerging Market Currency Index is snapping a three-week advance.  Rising yields is sapping the appeal of gold.  It tested $1850 earlier this week and is now near $1786.  It looks set to test the month's low a little below $1783.  March WTI is quiet as it puts the finishing touches on its sixth consecutive weekly advance.  US natural gas went on a wild ride yesterday.  A powerful short squeeze saw the expiring February contract rise by over 70% yesterday.   The generic contract was up almost 46.5%, while it is off almost 30% today. Net-net, it is up around 11% for the week.  Europe's benchmark 2.5% higher on the day, which brings the weekly gain to about 17.5%.  Iron ore prices were virtually flat on the week before today's 6% advance.  Copper prices are heavy and now breaking below the 200-day moving average ($438).  Asia Pacific Mainland Chinese markets will be closed next week for the Lunar New Year celebration.  Over the weekend, the January PMI and Caixin manufacturing PMI will be reported, and are expected to have softened.  The lockdowns are taking a toll.  Recall that China reported stronger than expected growth in Q4 21 (1.6% vs. 1.2% expected and 0.2% in Q3).  Still, it is clear that officials are pushing different levers to induce stronger growth.  Separately, China approved AMD's $35 bln acquisition of Xilinx.  It won regulatory approval in the US and Europe.  China has rejected the last big chip merger a few years ago.   Tokyo's January CPI was a little disappointing.  The headline pace slowed to 0.5% from 0.8% year-over-year.  The core measure, which excludes fresh food, slowed to 0.2% from 0.5% year.  The deflationary thrust can be seen when fresh food and energy are excluded. This measure stands at -0.7%, matching last year's low point, which was the lowest since 2013.  One key development will come in the few months when last year's cut in mobile phone fees drop out of the 12-month comparison.    Rising US yields have eclipsed equities and is driving the dollar higher against the yen. Today is the fourth advance of the week.  Up until this week, the dollar had only risen against the yen four time this month.  The greenback finished last week slightly below JPY113.70 and is knocking on the JPY115.70 area now.  Some demand may be linked to the $1.6 bln option at JPY115.50 that expires today.  The five-year high was set on January 4 near JPY116.35.  The Australian dollar is break below key support near $0.7000.  It has scraped it before, but it has held on a closing basis since July 2020.  A convincing break could signal a medium-term move toward $0.6750, from a technical perspective.  We have seen a few false breaks this year already. Caution is advised ahead of next week's RBA meeting, which is expected to shift toward a less dovish bias.  The intraday momentum indicators are stretched.  After surging (relative concept) against the Chinese yuan yesterday, the greenback consolidated at slightly lower levels today.  Hopes of a cut in reserve requirements ahead of the Lunar holiday were unfilled.  Continued currency strength and soft incoming data may still get the PBOC to move.  The IMF is encouraging more fiscal support.  The dollar's reference rate was set at CNY6.3746.  The market (Bloomberg survey median) was for CNY6.3738.  Europe The divergence between the Fed and the ECB will be driven home next week and that is one of the reasons why are not particularly sympathetic to ideas that this is a false break like the upside move was earlier this month.  Consider that European businesses have a practice of cutting prices in January.  This pattern was broken for the first time in more than a decade last year.  However, it appears to be back in play this year.  A day before the ECB meets next week, the preliminary estimate of January CPI is expected to fall by around 0.8% on the month.  This would bring the year-over-year rate down toward 4.3% from 5.0%.  The core rate may ease below 2% from 2.6% at the end of last year.  This will allow President Lagarde to resist the pull of the hawks.   Italy's president contest extends to the fifth round today.  We suspect that the longer it goes the less likely it is given to Draghi.  There does seem to be a reasonable recognition that if Draghi were to become president, the risk of political instability could return.  Of course, a compromise candidate, including having the current president begin another term, could simply extend the calm a year or so until next year's parliamentary elections move into the fore.  Without a political party, Draghi is unlikely to serve as PM again.   The launching of a police investigation into "partygate" appears to be complicating the internal report conducted by Susan Gray.  Her "internal" report was expected this week, but now it appears that it could be stripped of key details at the request of the police.  Press reports say that the police have request Gray's report include only “minimal reference" to the parties.  The police apparently have not asked Gray to limit her inquiry into other events or to delay the report.  On balance and from afar, our best guess is that Johnson leads the Tories into the May elections before his political future is decided. The euro's sell-off has been extended to almost $1.1120.  Recall that two weeks ago it was near $1.1485.  There is an option for 1.2 bln euros at $1.1150 that expires today.  It could come back into play as the intraday momentum indicators are stretched and Europe has not managed to push it below the lows seen in Asia.  This week's 1.8% loss (at $1.1135) is the largest since last June.  We continue to see potential toward $1.10 and will re-evaluate if/when it is approached.  Sterling is consolidating this week's 1.25% drop (at $1.3380).  The $1.3400 area, which it is hovering around, corresponds to the (61.8%) retracement objective of the rally from the December 20 low near $1.3175 to $1.3750 (January 13).  The next area of technical support is seen a little above $1.3300.  On the upside, the $1.3440 area offers initial resistance. The BOE is expected to hike next week and signal it is prepared to let the balance sheet begin shrinking too.    This may deflect some selling pressure away from it.   America Fed Chair Powell repeated a few times a mantra about how growth is robust (even though Covid-inspired weakness in Q1), labor market tight, and prices elevated.  In December and again this week, he mentioned labor costs.  Many liberal and neoliberal economists see core inflation driven by wage growth.  Profits are seen as a residual after cost are incurred.  While that may be helpful for analytic purposes, it is not clear that that it is factually true.  Many years ago, I was talking to the CFO of a large auto manufacturer.  I told him that I did not consistent effort to cut labor costs.  I noted that in the annual report, the company was very proud of being able to produce a car in less than 20 man-hours.  Assume labor costs and legacy costs (pensions, etc.) are $150 an hour that is $3000 of labor costs for a car that will cost me $30,000 to $35,000.  I said saving $100 or $200 in labor costs will have little meaningful impact on the price. The CFO criticized me for thinking like an economist instead of a businessperson.  He explained that the company could not control the price of capital or raw materials or other inputs, but labor.  Getting a $100 more from labor, doubles and sometimes more than doubles, the profit per vehicle.  The US reports Q4 Employment Cost Index today.  Powell has specifically cited this time series.  Although it is not typically closely followed by market participants, it will likely draw more attention now that market participants know that the Fed is watching it closely.   The index is a broad measure of changes in compensation that include direct costs (ages, bonuses, in-kind benefits) and indirect costs (social security contributions, taxes, medical and other benefits).  It jumped 1.3% in Q3 21, which is the highest since least 2000.  It can be a volatile series.  The four-quarter moving average is 0.9%, the highest since Q4 04.  A 1.2% rise is projected for Q4 (median forecast Bloomberg survey), which would lift the four-quarter moving average above 1% for the first time since 2001. In Q3 21, total compensation rose 3.7% year-over-year, accelerating from 2.8% in Q2.   Private sector wages and salaries rose by 4.6%.  The market is pricing in roughly a 1-in-4 chance of a 50 bp rate hike, something the Fed has not delivered since May 2000.  Labor costs are of the variable move the proverbial needle.  The US also reports personal income and spending for last month.  While the deflators may draw attention, the activity was already included in the first estimate of Q4 GDP (6.9% annualized quarterly pace) released earlier this week.  Lastly, note that some 1700 west coast dock workers have tested positive for the virus, which fans fears of more supply disruptions.    The Bank of Canada seemed as hawkish as the Fed.  A March rate hike is as much of a done deal as these things get and the balance sheet will likely be brought into play relatively quickly.  Still the Canadian dollar continue to be sold.  The greenback punched above CAD1.27 yesterday and is pushing near CAD1.28 today.  There is an option for almost $500 mln at CAD1.28 that expires today.   Note that the CAD1.2770 area corresponds to the (61.8%) retracement of the US dollar's retreat from the December 20 high (~CAD1.2965) to the January 20 low (~CAD1.2450).  Chart resistance above CAD1.2800 may be encountered around CAD1.2815-CAD1.2835. Meanwhile, the Mexican peso is weaker for the fifth consecutive session and eight of the last nine.  It continues to be a laggard in the region, with international asset managers seemingly drawn to Brazil.  Brazil's central bank has pre-committed to a 150 bp hike at next week's meeting.  The next target for the dollar is near MXN20.98, the halfway mark of the slide that began from MXN20.1550 late last November. A note of caution comes from push above the upper Bollinger Band (~MXN20.7960).  Lastly, Colombia is expected to hike its overnight lending rate by 75 bp to 3.75% later today.     Disclaimer
We Will Probably Review All Of Inflation Indicators Around The World This Weekend

Markets Full Of Events and Volatility. Fed Isn't the Only One to Watch

Marc Chandler Marc Chandler 26.01.2022 14:08
January 26, 2022  $USD, Bank of Canada, Chile, China, Currency Movement, FOMC, IMF, Italy, Oil, SNB Overview:  After a slow and mixed start in Asia, where Australia and India are on holiday, equity markets have turned higher.  Europe's Stoxx 600 is up around 1.9% near midday in Europe, which if sustained would be the biggest gain of the year.  US futures are snapping backing too, with the S&P 500 popping more than  1% and NASDAQ by 2%.  The equity recovery is having little impact in the bond market, where the US 10-year yield is up a basis point or so to near 1.79% and European yields are slightly firmer.  The risk-on sentiment is evident throughout the foreign exchange market as the Swiss franc and yen are underperforming and the Norwegian krone, and dollar-bloc are leading the advance.  Emerging market currencies are mixed.  While the South African rand tops the performers, Russia and Eastern European currencies are sporting modest declines.  The JP Morgan Emerging Market Currency Index is paring yesterday's gain.  Meanwhile, gold's rally may be stalling around $1850, a two-month high.  March WTI is firm and has held above $85 a barrel and is pushing through $86.  US natural gas is up around 5% to extend its rally for a fourth consecutive session, while Europe's benchmark (Dutch) is snapping a four-day rally with a 3% pullback.  Iron ore extended its gains to the best level since August, and copper is firm in the middle of its recent range.  The main interest today is on the equity performance after the volatility and the Fed and Bank of Canada meetings.   Asia Pacific The IMF downgraded this year's forecast for global growth to 4.4% from 4.9% projected in October.  The virus, higher inflation, and high debt levels were key considerations.  The new constraints on mobility are expected to weigh on Q1 activity but recover in Q2.  Still, a reassessment of the world's two largest economies is at the heart of it.  The combination of more aggressive Fed tightening and failure to pass the large (~$2.2 trillion) hard and soft infrastructure measures led to a sharp cut in the IMF's US growth forecast to 4% from a little over 5%.  China's zero-Covid policy and travel restrictions, prompt the IMF to reduce its projected growth by 0.8% to 4%.   Beijing has continued to harass Taiwan by sending warplanes into its Air Identification Zone, with nearly 40 planes earlier this week, which is the most this year.  Trying to make rhyme or reason for the continued action, some point to the two US carrier strike groups in exercises in the South China Sea.   On another front, reports suggest Lithuania is considering asking Taiwan to change the name of its de facto embassy.  It had planned to break tradition and allow Taiwan's name to appear, rather than the more customary Taipei.  China reacted as one would expect.   Coming into this week, the dollar had fallen against the yen for 11 out of 13 sessions.  Today is the second day this week the dollar is posting gains and has resurfaced above JPY114.00.  Initial resistance is seen in the JPY114.25-JPY114.50 band.   Support is seen near JPY113.80.  As it was yesterday, so too today, the Australian dollar is within Monday's range (~$0.7090-$0.7190).  Indeed, it is within yesterday's range (~$0.7120-$0.7175) but appears set to push higher.  A move above $0.7200 would lift the tone, while a break below $0.7150 would be disappointing.  The Aussie is also extending its gains against the New Zealand dollar to new highs since last July above NZD1.07.  The next important technical level is near NZD1.08.  The Chinese yuan continues to edge higher.  Today is the sixth consecutive advancing session.  It has only fallen in four sessions this year.  The dollar finished last year near CNY6.3560 and tested CNY6.3200 today.  The PBOC does not appear to be using the fix to express its displeasure, and today its reference rate for the dollar (CNY6.3246) was spot on the market projection (Bloomberg survey median forecast).   Europe Italy's presidential selection process continues.  Tomorrow things will turn more interesting.  The first three rounds of votes are really about the behind the scenes jockeying, which is far from transparent.  However, after today's vote, the threshold is lowered to a simple majority to win, making a deal more likely.  There is concern that if Draghi gets the nod, the coalition he led may not survive.  Because snap elections cannot be entirely ruled out, voter polls are being watched closely.  The latest shows the center-left PD with a small lead around 21.4%, but the right's Brothers of Italy have been edging up and are now at 20.2%, followed by the League at 18.5%.  Support for the 5-Star Movement has slipped to 13.8%, while Berlusconi's Forza Italy has a little below 8%.  The euro had fallen to CHF1.03 at the start of the week, its lowest level in almost seven years.  Despite no relaxation in Eastern European tensions, it has recovered to almost CHF1.04.  The fingerprints of the Swiss National Bank are suspected, and Monday's sight deposit report will be scrutinized for evidence of intervention.  Separately, an SNB board member (Maechler) argued that the risk of a central bank digital currency for retail outweigh the benefits.  The central bank's efforts will be focused on a wholesale digital currency.   The euro is softer for the third consecutive session.   The bounces after dipping below $1.13 have become shallower as if the bids are being absorbed.  Yesterday's low, slightly below $1.1265 is the first obvious target and below there is $1.1235.  The 1.2 bln euro option at $1.1225 that expires today seems too far away to be in play, especially ahead of the FOMC outcome.  That said, the trendline drawn off last year's low in late November (~$1.1185) and catching the mid-December lows (~$1.1220 and $1.1235) held on Monday and was penetrated on an intraday basis yesterday.  It comes in today around $1.1285.  Sterling made a marginal new low for the move yesterday (~$1.3437), held the month's low (~$1.3430) and recovered above $1.3500.  Follow-through buying lifted it to $1.3520 before stalling.  It encountered mild selling pressure in the European morning.  Support is seen by $1.3480 and there is an option for GBP365 mln at $1.3450 that rolls off today.  At the end of last week, the euro had been sold to almost GBP0.8300, its lowest level since March 2020.  The rebound began ahead of the weekend and peaked near GBP0.8425 on Monday. It has drifted lower and is back near the week's low (~GBP0.8350).  An expiring option for 360 mln euros at GBP0.8325 may attract interest.   America The US reports the December goods balance and some inventory figures that may be helpful to fine tune Q4 GDP figures due tomorrow.  New home sales may be interesting after a 12.4% surge initially reported for November.  But the real interest lies with the central bank meetings.  The Bank of Canada's meeting concludes first.  The market has about a 70% chance of a hike discounted that economists (Bloomberg survey) are almost 50/50 split on.  The case against a hike is that the central bank has indicated that the output gap won't close until later in the first half.  However, a case can be made that the economy is outperforming expectations, and the Q4 business outlook (surveyed by the Bank of Canada) suggest strong investment and hiring intentions.   The Bank of Canada meets eight times a year and the swaps market has six hikes and a little more (1-in-3 chance) of a seventh hike.  This is pretty aggressive and disappointed traders could punish the Canadian dollar.  In the Thursday-Monday trading and the volatile equities, the greenback recouped half of what it lost from December 20 through January 19.  A break of Monday's high near CAD1.2710 could signal a move toward CAD1.2770-CAD1.2815.  On the other hand, given that the outcome of the Fed's meeting is a few hours later, a 25 bp hike may spur a strong advance.  Separately, there had been some talk that after having finished the buying a little abruptly last year, the Bank of Canada could surprise by announcing an early roll-off of its balance sheet.  Such a move would seem to surprise the market and could spur knee-jerk gains for the Canadian dollar.    Given the number of hikes that some banks have suggested by the Fed this year, today could be the most boring meeting of the year.  It is the only one that nearly everyone agrees will not see a rate hike.  The assessment of the economy will be tweaked, and word cues are expected to confirm a March hike, where the Fed Funds futures has about a 1-in-5 chance of a 50 bp move discounted.  Given the apparent marching directions from Congress and the White House, the Fed may have little interest in indicating that it is not taking inflation seriously and therefore may not push against such views, regardless of its intentions.  At his confirmation hearings, Chair Powell suggested it may take two-four meetings to sort out the balance sheet strategy.  It seems reasonable that Powell repeats something like this at his press conference, but the statement is unlikely to refer to it.  The Fed is still buying securities.  There seems little Powell can say to push against market expectations for four hikes this year when several officials seem open to it.  A reporter is bound to ask about the volatility of the stock market.  Powell will be reluctant, we suppose, to accept much blame for the overvalued metrics or the timing of the volatility.  He could explain how he monitors the equity market not simply because of the impact on shareholders, but what it may say about broader economic and financial conditions.   Last week's EIA estimate of US oil inventories rose by 515k barrels (through January 14), the first increase since mid-November.  API estimated that inventories fell by around 875k barrels (in the week through January 21).  Economists expected EIA to show inventories increased by one million barrels.  Separately, but not totally unrelated, the US announced it would loan 13.4 mln barrels out of its strategic reserves, which would be the second-largest operation.  Many observers are concerned about the possible disruption of supplies should Russia invade Ukraine. Reports suggest that the German government sought to get an exemption for the energy sector if the US moved to prevent Russian banks from clearing dollar transactions.  Other European countries have reportedly also looked for carve-outs, advocated transition periods for implementing sanctions, and protections for existing contracts.     The Canadian dollar is bid ahead of the central bank meeting outcome and amid better risk sentiment.  The US dollar has approached Monday's low (~CAD1.2455).  The CAD1.2545 area corresponds to the (61.8%) retracement of the recent greenback bounce from around CAD1.2450 to CAD1.2700.  Below there, we note the 200-day moving average is near CAD1.2500.  Mexico reports November retail sales, which even on uneventful days, tends not to be a market-mover.  The dollar is consolidating its recent gains against the peso and is also within Monday's range (~MXN20.4370-MXN20.6900).  The intraday technicals favor a greenback bounce in early North American activity.  Initial resistance may be near MXN20.65.  Note that the Chilean central bank meets today too, and late in the session, it is expected to lift its rate target to 5.25% from 4.00%.   It would match a similar move last month and in October.  The policy rate began at 0.50% last year.   Local politics, and the weakness of emerging market currencies as an asset class saw the Chilean peso depreciate by 16.5% last year, making it the worst performer after Turkey and Argentina.  So far this year, the peso's 6.5% gain leads the world.     Disclaimer
HK Rallies and PBOC Cuts, US Stocks Stabilize

HK Rallies and PBOC Cuts, US Stocks Stabilize

Marc Chandler Marc Chandler 20.01.2022 13:59
January 20, 2022  $USD, Ausrtalia, China, Currency Movement, Japan, Norway, Russia Overview:  Amid inflation fears and the decline in crypto prices, gold was resurrected, rallying the most in three months yesterday to its best level since November.  It is consolidating those gains today, straddling the $1840 level.  Equities are trying to stabilize.  The MSCI Asia Pacific Index snapped a five-day slide with a 1% gain helped by a 3.4% rally in Hong Kong, helped by the mainland's initiatives, which included a small reduction in the loan prime rate and promises of stepped-up support for the property sector.  China's CSI 300 rose almost 1%, its third gain this week.  A rebound in the tech sector also helped lift the Nikkei by 1.1%.   European shares opened higher, but the lack of breadth saw the Stoxx 600 turn lower.  Gains in utilities and communications are not to offset the losses elsewhere, led by energy and financials.  US futures are firm after closing poorly yesterday.  Benchmark 10-year yields are softer.   The US 10-year is off three basis points to near 1.83%.  European yields are 1-3 bp lower.   The US dollar is trading off against most of the major currencies.  The Norwegian krone, where the central bank stood pat, and the Swedish krona are laggards today. A strong employment report is helping lift the Australian dollar by around 0.4% to lead the pack.  Emerging market currencies are mixed, with Russia, Hungary, and Turkey leading the decliners.  The Thai baht and South African rand are the best performers, but the JP Morgan Emerging Market Currency Index is slightly weaker today after posting its best gain in a month yesterday (~0.75%).  Industrial metals are firmer.  Tin and nickel shortages are behind their surge, while iron ore prices are up 2%+ for the third consecutive session and at their best level since last August.  Copper prices are extending yesterday's 2% rally.  Crude is consolidating a three-day rally that lifted March WTI to almost $86.80.  US natgas tumbled almost 5.9% yesterday and is straddling the $4 level today.   The Dutch benchmark is paring initial follow-through after dropping 8.3% yesterday.   Asia Pacific China's loan prime rate was cut.  The one-year rate was cut by 5 bp in December and 10 bp earlier today to stand at 3.7%.  The five-year loan prime rate was cut by only five basis points (to 4.6%).  This was less than expected and is seen as a cautionary signal about the property market.  Still, policymakers are seen taking other efforts to promote stronger growth more broadly.  Further easing by the PBOC is expected.   Japan reported a smaller than expected December trade deficit.  Exports did not pullback as much as expected.  After rising 20.5% year-over-year in November, they slowed to a 17.5% gain in December.  Imports slowed more than expected, to 41.1% from 43.8%.  This is broadly consistent with the seasonal pattern that December often sees improvement from November.  Last year, Japan reported an average monthly trade deficit of JPY122.7 bln.  In 2020, the average monthly trade surplus was JPY32 bln. An average trade shortfall of almost JPY140 bln was recorded in 2019.  Yet, through this period, Japan continued to experience a current account surplus, driven not by trade in goods and services, but by the return on foreign investment.   Despite new social restrictions, Australia's December jobs data was better than expected.  Overall job growth was near 65k (Bloomberg median was for an increase of 60k), and the unemployment rate tumbled to 4.2% from 4.6% (4.5% anticipated).  Three-quarters of the jobs were full-time positions, and the participation rate was steady at 66.1%.  The swaps market has about 40 bp of tightening priced in over the next six months.  The central bank has pushed against such expectations.   It meets again on January 31. The US dollar recorded a new low for the week near JPY114.00, where a $520 mln option expires today.  It has not been able to rise much about JPY114.50.    We suspect the North American market can probe the upside.  A close above JPY114.60 would help stabilize the tone.  The Australian dollar is firm after the employment data pushed it to new highs for the week just shy of $0.7260.  The market does not seem to have the energy to test the $0.7290-$0.7300 area, where options for around A$660 mln lay. The dollar spent the entire mainland session below CNY6.35.  The PBOC set the dollar's reference rate at CNY6.3485, the strongest in three years, and stronger than the Bloomberg survey projected (~CNY6.3478).  Still, state-owned banks (aren't they all?) were seen on the dollar's bid when it approached CNY6.3400.  Europe The economic news stream is light.  The ECB's record of last month's meeting will be published shortly, but it tends not to be a market mover.   The December CPI was revised to show a 5.0% year-over-year increase rather than 4.9%, while the monthly increase remained at 0.4% and the core rate was steady at 2.6%.   The US and Europe agree that a Russian invasion of Ukraine needs to be resisted, but there is still differences on the response.  Biden raised the prospect yesterday of something short of a full invasion, which he acknowledged would complicate the response. Russia has continued to reinforce its troops and artillery.  US Secretary of State Blinken and Russia's Foreign Minister Lavrov are to talk today.  Russia continues to deny plans to invade but demands concessions from NATO that will not be forthcoming.  This hangs over the markets like the sword of Damocles.  Norway's Norges Bank kept rates on hold today, but reaffirmed a hike in March, which would be the first meeting with a new governor, who has yet to be named.  The swaps market sees 85 bp of tightening this year.  Last year, it hiked rates in September and December.   Elsewhere, we note that as widely expected Turkey's central bank left the one-week repo rate unchanged at 14.00%, lending credence to ideas that the easing operations are complete after 500 bp in cuts were delivered in the last four months of 2021.   The euro is trading quietly in less than a 30-pip range below $1.1370. The $1.1380 area is the (38.2%) retracement objective of the decline from last Friday's high near $1.1485.  A break of $1.1340 could see $1.1320 but a close below $1.1300 is needed to lend credence to ideas that a high is in place.  There is a large option (nearly 1.1 bln euros) at $1.1350 that expires today.  Sterling is coiling.  It is inside yesterday's range, which was inside Tuesday's range (~$1.3575-$1.3660).  The consolidative tone may persist today ahead of tomorrow's retail sales, where there could be room for disappointment after a 1.4% gain in November.   America The US reports weekly initial jobless claims, the Philadelphia Fed survey, and existing home sales.   The high frequency data points may pose some headline risk, but the market is focused on policy ahead of next week's FOMC meeting.  That said, the Empire State manufacturing survey, reported earlier this week, was a disappointment, while yesterday's housing starts, and permits were stronger than anticipated. Canada's December headline CPI yesterday was in line with expectations (4.8% vs. 4.7% in November), but the underlying core measures were firmer.  The Bank of Canada meets next week, and the swaps market has a little more than a 2/3 chance of a hike.  Tomorrow, Canada reports November retail sales, which are expected to be robust (1%+). Mexico reports its December unemployment, which is expected to have drifted lower.   The greenback is chopping roughly between CAD1.2450 and CAD1.2550 for the sixth session.   This consolidation phase follows the US dollar's decline from last year's high on December 20 near CAD1.2965.  Without re-kindling the downside momentum, the greenback may be set up for a bounce.  The Slow Stochastic is turning up.  The CAD1.26 area is technically important.  It is the neckline of a head and shoulders pattern.  The dollar's downside momentum faded against the Mexican peso.  Despite repeated attempts, it could not punch below the 200-day moving average (~MXN20.2850) and bounced yesterday to close above MXN20.50 for the first time since January 5.  It is in a narrow range straddling MXN20.50 today. The intraday technicals caution against chasing the dollar higher.  A pullback toward MXN20.40-MXN20.45 looks reasonable.       Disclaimer
Considering Portfolios In Times Of, Among Others, Inflation...

Bi-Polar Market: It is and It isn't

Marc Chandler Marc Chandler 14.01.2022 14:35
January 14, 2022  $USD, China, Currency Movement, Fed, Germany, South Korea, UK Overview:  Sentiment is unhinged.  It has swung from fears that the Fed is behind the inflation curve and unemployment is below the long-term equilibrium rate to the central bank is going to kill the economy by raising rates and allowing the balance sheet to shrink too quickly.  Today's US data for retail sales and industrial output may play on such fears.  Both are expected to have slowed sequentially (retail sales may fall outright even when the dismal auto sales and gasoline are excluded).  NASDAQ snapped a three-day advance, and its 2.5% slide retraced the gains of the past two sessions.  The US 10-year yield weathered the CPI and Fed rhetoric, and after probing 1.80% to start the week, slipped to almost 1.69% yesterday.  Asia Pacific and European equities are lower today.  Japan, South Korea, and Australian markets lost more than 1%, and the regional index pared this week's gains. Europe's Stoxx 600 is nearly flat on the week coming into today and is off about 0.6% near midday in Europe.  US futures are little changed.  Bond yields are firmer, with the US benchmark yield near 1.75%, leaving it a couple basis points lower on the week.  European yields are 2-3 bp higher today, but off mostly 3-5 bp on the week.  Of note, Japan's five-year yield is approaching zero to reach its highest level since 2016.   Led by the Norwegian krone and Canadian dollar, most major foreign currencies are stronger, with the minor losses of the Antipodeans being the exception.  For the week, the euro's 0.9% gain is the least among the majors.  Most emerging market currencies are firmer, with India bucking the move.  The JP Morgan Emerging Market Currency Index is edging higher but looks set to post its first back-to-back weekly gain since last August-September.  Gold is little changed around $1823, which puts it nearly 1.5% higher for the week.  Oil has pushed to marginal new highs (~$83.20)  Iron ore is off around 1% for the second session to give back this week's gains plus 0.5%.   Copper is trading off for the second day, but is up around 2.6% for the week, its best showing since mid-October.  After jumping more than 22% in the first three sessions this week, US natgas prices fell 12.1% yesterday and are off another 2.5% today.  Net-net, it is up about 6.4% this week on top of last week's 5% advance.  Europe's benchmark continues to be volatile but was flat for the week coming into today, where it is rising by around 7.3%.   Asia Pacific China's trade surplus soared last month.  Exports were stronger than expected and imports weaker.  The surplus reached almost $94.5 bln.  Economists (median in Bloomberg's survey) expected a little less than $74 bln. They had expected the surplus to fall in yuan terms, but it did not.  In dollar terms, exports rose 20.9% year-over-year (to $340.5 bln), slower than November, but stronger than expected.  Imports rose by 19.5% (~$246 bln) after November's 31.7% rise.  Economists had projected 27.8% gains.  Last year, China recorded a $676 bln surplus.  Exports of steel and aluminum remained strong.  Consumption goods shipments showed strong increases (e.g., toys 23.6%, shoes 29.3%).  In real terms, the import of oil rose 19.9% last year and copper imports increased by 15%.  Imports of iron ore declined year-over-year in December.  Exports to the US rose 21.2% year-over-year in the last month, while imports rose 3.3% to produce a $39.2 bln surplus.  Exports to the EU rose 25.6%, while imports fell by nearly 3%.  The bilateral trade surplus stood at $25.1 bln.  China's shipments to ASEAN rose 12%, but its imports fell 22.5%.  China's trade was more balanced with Australia.  Exports for almost 20% while imports rose by 19.5%.   Note the Regional Comprehensive Economic Partnership, the ASEAN, China, Japan, South Korea, Australia, and New Zealand trade pact was officially launched January 1.  It will eventually eliminate tariffs on 90% of the goods trade.  As widely anticipated, South Korea's central bank delivered its third rate hike since last July.  The 25 bp increase brings the 7-day repo rate to 1.25%.  The swaps market has 75 bp of tightening discounted for the rest of the year. Consumer inflation rose 3.7% year-over-year in December (2.7%) core rate.  The economy expanded by 0.3% quarter-over-quarter in Q3 and is expected to have accelerated to around 1% in Q4 (due January 24).  Separately, and with little market impact, North Korea appears to have conducted its third missile test of the year.   After setting multi-year highs in the first few days of 2022 trading, the dollar reversed hard against the yen.  It reached JPY116.35 on January 4.  It has been sold every day since but one and today reached a low of about JPY113.65.  We fell for what has turned out to be a false breakout.  The JPY113.60 area corresponds to the (38.2%) retracement of the dollar's rally that began in late September around the FOMC meeting.   A break signals a test on the JPY112.70-JPY113.00 area. On the upside, JPY114.25-JPY114.50 offers the first hurdle.  The Australian dollar peaked yesterday near $0.7315, its best level since mid-November but gave the gains up by the close. It has come back offered today to pare its weekly gain.  Around $0.7270, it is up around 1.25% for the week.  Initial support is seen in the $0.7250-$0.7260 area.  The booming trade surplus and broad US dollar weakness is making it difficult for the PBOC to resist yuan gains.  The dollar fell to just above CNY6.34 today to match the year-end spike.  It is still trading below CNY6.35, where the central bank seemed to want it above.  State-owned banks (redundancy?) were seen buying dollars near the end of the mainland session.  The PBOC set the dollar's reference rate at CNY6.3677.  The Bloomberg survey found a median projection of CNY6.3662.   Europe The UK economy expanded by 0.9% in November, twice what economists projected, and October's expansion was revised to 0.2% from 0.1%.  This leaves the UK economy about 0.7% larger than it was on the eve of the pandemic.  The details were strong with a 1% gain in industrial production and a 0.7% increase in services, but better than anticipated.  The overall trade balance remains in surplus for the second month (GBP626 mln after GBP151 mln in October).  The market continues to expect (~88%) of a 25 bp hike at next month's MPC meeting on February 3.  The swaps market has four hikes discounted for this year.  Germany became the first G7 country to report 2021 GDP.  It grew 2.7%, in line with expectations.  Few details were announced with this preliminary estimate.  However, the Federal Statistics Office warned that Europe's largest economy may have contracted between 0.5% and 1% in Q4.  This would leave the German economy around 2% smaller than it was before the pandemic struck and appears to have lagged the other large eurozone countries.  There is some risk that the German economy contracts this quarter as well.    Of course, the US will not recognize a Russian sphere of influence in eastern and central Europe.  It was never a realistic possibility.  It is like free trade, which often means in practice that the other should reduce their trade barriers.  The more critical issue is whether the US will defend its sphere of influence in South America and the Caribbean.  Russia made pointed comments about possibly putting troops in Cuba or Venezuela?   We have already noted that China's Belt Road Initiative is finding a more receptive audience in Jamaica and Barbados.  Do not forget that the Cuban Missile Crisis nearly 60 years ago was resolved by the Soviet Union pulling its missiles out of Cuba and the US pulling its missiles out of Turkey.  If the US does not recognize Russia's sphere of influence (or China's) why should they respect America's?   Meanwhile, the Russian ruble has been sold.  Since the start of the year it has rivaled the Turkish lira for the dubious distinction of weakest emerging market currency, off almost 1.7% with today's small gain.  The price of insurance against a sovereign default has doubled since late October and has risen by a third this year (to about 1.65%).  There had been some hope that Russian inflation was near a peak as the central bank doubled the key rate last year to 8.5%. The year-over-year CPI slipped ever so slightly in December (8.39% from 8.40%).  Ruble weakness could boost price pressures, forcing the central bank to extend the tightening cycle and slow growth.  The World Bank's new projections put Russian growth at 3% this year, and the market (Bloomberg median) is at 2.6%.  The euro took out yesterday's high by 1/100 of a penny, according to Bloomberg data, to reach $1.1483.  The market seems hesitant about extending the gains ahead of the weekend, perhaps given the geopolitical backdrop. But the intraday momentum indicators suggest the North American market may have another go. Initial support is seen in the $1.1440-$1.1450 area. If it closes above $1.1455, it would be the fourth consecutive advance. Barring a dramatic reversal, it will be the third weekly gain in four weeks.  Despite the robust November GDP figures, sterling has held below yesterday's high of almost $1.3750.  It is still there and hovering around the 200-day moving average (~$1.3735).  The next upside target is the $1.3800-$1.3840 area, the last high from October. The intraday momentum indicator seems consistent with consolidation ahead of the weekend.   America There are three US issues for investors to consider today.  First, the White House has indicated its three nominations for the Federal Reserve Board of Governors:  Raskin, Cook, and Jefferson.  All have been discussed in the press, so there is no surprise.  We are more reluctant than others in projecting how they will vote.  Being hawkish or dovish is very contextual, as we have seen with many of the current members.  It is clearer now than it was a couple of weeks ago that to preserve the flexibility for four (or more) hikes this year, the Fed must start early and that means a March hike.  The second consideration is the economic data. December retail sales and industrial production are the highlights. Import/export prices and the preliminary University of Michigan consumer confidence and inflation expectations are also due.  The surging virus likely weighed on activity and the Beige Book hinted at this.   Monthly changes in retail sales last year ranged from -2.9% to +11.3%.  The average (1.7%) and median (4.2%) are misleading.  In any event, a small decline in the headline and ex-auto/gasoline measure is likely.   Monthly industrial output ranges from around -3% to +2.8%.  It is expected to have edged up by 0.2% after a 0.5% rise in November.  Note that the capacity utilization rate is forecast to rise to 77%.  It stood around 76.5% at the end of 2019.  The third consideration are the large bank earnings (JP Morgan, Wells Fargo, and Citibank).  Bank earnings, like US corporate profits more broadly had a strong year.  With rising interest rates, many see the bank shares outperforming this year.   After falling to CAD1.2455 yesterday, the greenback bounced back to close at new session highs near CAD1.2520.  Follow-through buying was limited to the CAD1.2525 area before dollar sellers reemerged.  There are two sets of large options expiring today.  The first is for $1.38 bln at CAD1.2500 and the other is at CAD1.2525 for $1.42 bln.  The US dollar traded below its lower Bollinger Band for the past two sessions but is holding above it so far today (~CAD1.2470).  Consolidation is likely the flavor of the day.  The greenback traded quietly against the Mexican peso this week but made a new low near MXN20.28 earlier today, its lowest level since late October.  The 200-day moving average is found slightly lower (~MXN20.2780).  It has been recording lower highs since Monday's peak near MXN20.5230.  Today is the sixth session that the dollar has taken out the previous session's low.        Disclaimer
Considering Portfolios In Times Of, Among Others, Inflation...

Dollar Eases

Marc Chandler Marc Chandler 05.01.2022 13:19
January 05, 2022  $USD, auto sales, Currency Movement, Omicron, PMI, technology Overview:  The tech sell-off in the US yesterday, ostensibly driven by higher rates, carried over into trading today.  South Korea, China, and Hong Kong led the regional sell-off.  News that China's zero Covid tolerance led to a lockdown of the city of Xian with a population of around 13 mln played on fears of more supply chain disruptions.  A second city, Yuzhou, considerably smaller, has also been lockdown.  Japan, India, and several smaller markets gain.  European bourses, where tech is less prominent have edged higher and the Stoxx 600 is extending its gain for the third consecutive session.  US futures are softer.  Asia and most European bonds yields have risen today, while the US 10-year is steady around 1.64%.  Of note, with Italian politics rising as an issue ahead of the presidential contest later this month, maybe helping lift the 10-year BTP to new six-month highs near 1.22%.  The US dollar is seeing its recent gains trimmed against the major currencies.  The Japanese yen is recovering a little after falling to five-year lows yesterday.  The Canadian dollar is the laggard today, amid a sell-off in its bonds.   The emerging market currency complex is mixed, and the JP Morgan EM FX index is recouping about half of yesterday's 0.35% loss.  Gold is firm but remains within Monday's range (~$1798.50-$1832). Among the industrial metals we monitor, iron ore bounced back after yesterday's minor loss and is at its best level since Xmas eve.  Copper is being turned back after yesterday's rally stalled near the $448 cap.  Crude oil is consolidating yesterday's gain and February WTI is near $77.00.  US LNG firm but within the $3.50-$4.00 range, while European (Dutch) is extending yesterday's dramatic gain (31.6%). Asia Pacific While China has moved quickly to impose lockdowns where cases of the virus appear, the tech sector is off to a poor start.  The Heng Seng Tech Index fell 4.6% today, the most since July, and the third consecutive drop.  Tencent is reducing its investments, and this took a toll on companies it backed.  Some link Tencent decision to Beijing's push against anti-competitive practices.  The NASDAQ Golden Dragon Index, which tracks Chinese lists companies fell 4.3% yesterday.  The tech sell-off was also clear in the US where the NASDAQ shed 1.3%.   Japan's "Mothers" gauge weighted toward small and medium-sized software and technology companies fell 5% to its lowest level since May 2020.  In the last hours of trading, after HK tightened social restrictions, the equity loss intensified.   Japan reported that December auto sales were 10.2% lower than a year ago.  Yesterday, the US reported disappointing December auto sales.  Auto sales were expected to have risen to their best level since August but instead fell to a 12.44 mln unit annual pace.  It was the lowest since September and reflects a 23.6% decline from December 2020.  Last year, US auto sales averaged 14.93 mln a month compared with 14.41 mln in 2020 and 16.91 mln in 2019.  Although supply is argued to be a bigger problem than demand, some producers, like GM, have reported a substantial rebuilding of inventories.   The dollar closed above JPY116.00 yesterday but has failed to sustain the upside momentum.  It peaked near JPY116.35 and is approaching support at the previous resistance around JPY115.50.  A break of JPY115.00, which seems unlikely ahead of the US jobs data on Friday, would lend credence to the idea that it was a false breakout.  The Australian dollar is firm near $0.7250 after recovering from the dip below $0.7200.  Still, it needs to resurface above $0.7275-$0.7280 to be notable.  We suspect the Aussie will pullback in North America and see initial support around $0.7220.  Outside of the dramatic year-end session, the Chinese yuan continues to trade quietly in a well-worn range.  The dollar continues to trade mostly between CNY6.3660 and CNY6.3830.  The PBOC set the dollar's reference rate at CNY6.3779.  The (Bloomberg) survey found a median expectation for CNY6.3773.  Note that offshore yuan (CNH) swaps/forward points are at their lowest level since April 2020 amid reports that overseas branches of state-owned banks are continuing to lend out CNH.  Lastly, we note that the China Securities Journal plays up the possibility that the PBOC eases policy ahead of the Spring Festival holiday (January 31).   Europe The main economic news from the eurozone today is the final reading of the December service and composite PMI.  The takeaway is that it is a little softer than the preliminary estimate.  On the aggregate level, the service PMI eased to 53.1 from 53.3 flash estimate and 55.9 in November.  The composite eased from 55.4 in November to 53.4 preliminary estimate and 53.3 final.  It is the lowest since March and is the fourth decline in five months.  While the German services PMI was revised higher, it remains below 50 boom/bust (48.7) and this coupled with the weakness in manufacturing saw the composite revised to 49.9 from 50.0 initially and 52.2 in November.  It is the weakest composite reading since June 2020.   France's service PMI slipped to 57.0 from the 57.1 flash reading and 57.4 in November.  The composite was revised higher to 55.8 from 55.6.  It stood at 56.1 previously.  Italy and Spain disappointed with readings of both the service and composite below expectations.  The Italian composite stands at 54.7 down from 57.6.  Spain's composite is at 55.4 from 57.6 in November.   Intervention by the Swiss National Bank draws attention as the euro traded at six-year lows at the end of last year.  Sight deposits rose by CHF3.37 bln in December after CHF2.27 bln and CHF2.57 bln in November and October, respectively.  Overall, sight deposits rose by CHF18.85 bln in 2021 after surging CHF119.3 bln in 2020.  Denmark also anchors its monetary policy in the exchange rate peg to the euro.  Its central bank sold DKK47 bln (~$7.1 bln) in December to defend the peg.  It was the largest intervention in seven years.  Although inflation is running a little below 4%, there is some speculation that the Danish central bank may have to cut rates as its next defense of the peg.   The euro is trading inside yesterday's (~$1.1270-$1.1320) range.  It is difficult for bulls or bears to find much to like with it hovering around the middle of the two-cent range that has confined it for nearly two months.  The 480 mln euro option at $1.1290 that expires today has likely been neutralized, but there are options at $1.1275 for 1.3 bln euros that expires tomorrow that may be in play still.  Sterling is steady at the upper end of yesterday's range when it briefly poked above $1.3555.  It is the highest it has been since November 10.  An option for GBP375 mln at $1.3505 expires tomorrow.  Initial support is seen near $1.3520, and a break could test support in the $1.3480-$1.3500 area.   America ADP 's private sector jobs estimate is the early feature in the US today.  The median estimate (Bloomberg survey) is for an increase of 410k after 534k in November.  The final PMI will likely draw little attention.  The FOMC minutes from last month's meeting, at which officials announced the acceleration of tapering will be looked upon for insight into the Fed's balance sheet and any signal that it may allow maturing issues to roll-off soon.  Besides the rate hikes, for which the market has priced in three this year, the balance sheet is quickly emerging as the new focus.   Also, on tap today is the EIA inventory data.  The API reportedly showed a large rise in gasoline inventories but another drop (6.4 mln barrels) in crude stocks.   Canada's build permits are not typically a market mover.  Tomorrow it reports the November trade balance, and the highlight is Friday's jobs data.  It is difficult to envision a report as strong as November’s nearly 154k increase.  Proportionately, it would be as if the US nonfarm payrolls rose by around 1.7 mln.  Mexico reports December domestic auto sales.  In November, its auto sales were off about 13.5% year-over-year.  The highlight of the week is Friday's CPI figures.  The year-over-year pace is expected to have edged up from 7.37% in November.   The US dollar is trading inside yesterday's range against the Canadian dollar (~CAD1.2665-CAD1.2765), which was inside Monday's range (~CAD1.2630-CAD1.2780).  It is trading around CAD1.2720 near midday in London.  The intraday technical indicators seem to favor a retest of the greenback's highs.  The US dollar's performance against the Mexican peso is similar.  It is inside yesterday's range, which was inside Monday's range (~MXN20.41-MXN20.65).  The US dollar looks soft and could test the December 31 low near MXN20.33.   The 200-day moving average is near MXN20.27 and the greenback has not traded below it in a little more than two months.    Disclaimer
Quiet Start to New Year

Quiet Start to New Year

Marc Chandler Marc Chandler 03.01.2022 14:10
January 03, 2022  $USD, autos, Canada, China, Currency Movement, Inflation, jobs, Mexico, PMI, Trade Overview:  The New Year begins slowly.  Japan, mainland China, Australia, New Zealand, and the UK markets remain closed.  While Hong Kong shares traded heavily, Taiwan, South Korea, and India moved higher.  Led by consumer discretionary and staple sectors, Europe's Stoxx 600 is up about 0.6%.  US futures are 0.4%-0.6% higher.  European yields have drifted lower, with the periphery doing bettter than the core.   The US 10-year yield will begin the local session at 1.51%.  The dollar is mostly firmer, after weakening broadly at the end of last year.   The Norwegian krone and New Zealand dollar are the most resilient,  while the Canadian dollar is off nearly 0.3% to pare the year-end gains, followed by the euro, which is in the middle of its $1.1335-$1.1380 range.  The greenback is holding above JPY115.00.  Emerging market currencies are mixed but mostly softer.  Higher than expected inflation is weighing on the Turkish lira. The South Korean won leads the other softer EM currencies. It is off about 0.25%.  The South African rand (~0.7%) and Russian ruble (0.5%) lead the advancers.  The JP Morgan Emerging Market Currency Index rose by about 2.5% in the last two weeks of 2021 and is slightly firmer today (~0.2%).  Iron ore is higher for the third consecutive session and rallied more than 45% from the middle of November through Xmas, before falling 5.3% last week.  Copper has a four-week 4.6% rally in tow but is slightly softer today.  Gold is stalling near $1830, the (61.8%) retracement of its sell-off from $1880 mid-November high.  Oil rallied for the last two weeks, with February WTI gaining about 6.2%.  OPEC+ meets tomorrow and WTI is up a nearly 1.5% to push above $76.  US natural gas gained slightly more than 1% in the past two weeks and is hovering around little changed level.  Recall that diverted shipments from the US and Asia to Europe saw natural gas prices collapse from above 180 euros on December 21 to 65.5 euros at the end of last week.   Asia Pacific China's property developers remain in the spotlight. Bloomberg estimates that the sector's debt servicing costs, including deferred wages, and maturing obligations are at $197 bln this month.  Evergrande shares were suspended in Hong Kong.  When the problems, bubbling below the surface for some time, emerged last September, global risk appetites were shaken, and many observers made comparisons to the Great Financial Crisis.  However, so far, the problems seem localized and unlike the US and Europe, new lending has not frozen.   The macro data highlights include China's Caixin PMI after the official one surprised on the upside. The preliminary PMIs for Australia and Japan steal the thunder from the final report. Japan's weekly MOF report on portfolio flows may be noteworthy. Foreign investors have been on a buying spree, buying the most Japanese bonds over the first three weeks of December in at least 20 years.   The dollar has risen for the past four weeks against the Japanese yen.  It closed the last two sessions slightly above JPY115.00 and remains above it today.  Recall, last year's high, set in late November, was near JPY115.50.  Today's high thus far is about JPY115.35.  The market may be reluctant to push the dollar much higher before Tokyo returns.  The Australian dollar advanced almost 2% in the second half of December.  It is stalling near the (50%) retracement of its decline from around $0.7555 in late October, found close to $0.7275.  Support is ahead of $0.7200.  Thin trading on New Year's Eve saw the dollar plunge to its low for the year near CNY6.34 before settling slightly above CNY6.3560.  Chinese officials have signaled their desire to avoid further yuan appreciation. If the divergence of monetary policy and higher fx reserve requirements are not sufficient, investors must be wary that other tools can be deployed.   Europe The uptick in Germany's December manufacturing PMI was revised away, leaving it unchanged from November at 57.4.  The flash estimate put it at 57.9.  In contrast, the French reading was revised up to 55.6 from 54.9.  This pared the decline from 55.9 in November.   Italy's manufacturing PMI held in better than expected, slipping to 62.0 from 62.8, the post-Covid high.  Spain, on the other hand, disappointed, with its manufacturing PMI falling to 56.2 from 57.1, its lowest since last February.  The net result was the flash aggregate estimate of 58.0 was sustained (58.4 in November).   The final Eurozone aggregate PMI is of passing interest. The main takeaway from the preliminary estimate continues to resonate:  the economic activity was slowing. The flash estimate put the composite at 53.4 (down from 55.4), the lowest since March. It has risen once in the last five months. More notable for the market will be the preliminary estimate of December inflation. Consumer prices are expected to have stabilized after reaching 4.9% year-over-year in November (2.6% core).   The Turkish government has tried to absorb the currency-risk that it has unleashed by forcing the central bank to cut key interest rates by 500 bp since mid-September.  It managed to spur a powerful short-covering squeeze in the lira, which saw the dollar fall from around TRY18.36 on December 20 to nearly TRY10.25 on December 23.  The greenback recovered to nearly TRY14.00 today, its sixth consecutive advance.  Today's CPI report blew away expectations.  Just in the month of December, Turkish consumer prices jumped nearly 13.6%.  This sent the year-over-year rate to almost 36.1%.  The core rate rose about 31.9% year-over-year.  Short covering helped lifted the euro a little more than 1.1% over the past two weeks.  It reached about $1.1385 on New Year's Eve.  It has not traded above $1.14 since mid-February.  Ahead of this week's two key economic reports (EMU CPI and US employment), the market may not have the conviction necessary to extend its year-end gains.  Sterling gained about 2.1% in the last two weeks.  It reached $1.3550 at the end of last week, its best level since mid-November.  It is little changed today.  The $1.3575 area corresponds to the (50%) retracement of its sell-off from $1.3835 area in late October.  Initial support is seen in the $1.3455-$1.3465 area.   America The US economic diary is jammed packed to begin the New Year. The highlight is the jobs report at the end of the week. The median forecast (Bloomberg survey) calls for a 400k increase after being disappointed with the 210k increase in November. The unemployment rate is expected to ease to 4.1% from 4.2%, and average earnings growth likely moderated. At the end of last year, an article in the Financial Times made two important observations. First, the uniqueness of the covid-impact renders seasonal adjustments suspect. The response rate was less than two-thirds, the lowest for the month of November in more than a decade. In November, the raw establishment survey showed a 778k gain in nonfarm payrolls, but the BLS adjustment cut a record 568k. Second, also complicating the data is the participation by businesses. The response rate was less than two-thirds, the lowest for the month of November in more than a decade.   The monthly auto sales report seems under-appreciated as a broad economic indicator. The supply chain disruptions depressed auto production and, in turn, auto consumption (not just in the US). However, late in the year, there seemed to be some improvement. The median forecast (Bloomberg survey) December US auto sales (seasonally adjusted annual rate) at 13.1 mln, which would then be the most since July. Elsewhere, the preliminary goods trade balance, like the flash PMI, is the real new news. The final reading tends not to be very meaningful. In any event, the trade deficit will widen considerably. The goods deficit widened to a record $97.8 bln from $83.2 bln.   Lastly, the FOMC minutes will be looked at especially for clues about the timing of the first hike. March? It is unreasonable to expect Canada to match the nearly 154k job increase reported for November. The median forecast is 25k. Canada also reports November trade figures. Canada's trade balance has steadily improved since March 2020, and the 12-month moving average through October was the highest in around six years. The swaps market has a little more than half of the first hike (25 bp) priced in at the January 26 Bank of Canada meeting.   Mexico's data highlights include worker remittances, which could be the most important source of private capital inflows. Without meaningful fiscal support and in the face of tightening monetary policy, the economy lacks much momentum. The December CPI is expected to have edged higher toward 7.5%. Monetary policy is where the drama will be as the new central bank governor takes the reins (Rodriguez). The 50 bp hike in December lifted the overnight target to 5.5%. If the market is concerned about a policy mistake or possible erosion of its independence, you would not know it from looking at the peso. It was the strongest currency in the world in December, rising almost 4.5% against the dollar.   The Canadian dollar rallied about 2% over the past two weeks.  This saw the US dollar retrace half of its rally from the mid-October low below CAD1.23 that peaked on December 20 by CAD1.2965.  That retracement came it near CAD1.2625.  The momentum indicators are still headed down, but the greenback is recovering today.  Initial resistance is seen around CAD1.2700.  A move above CAD1.2750 warns that a low may be in place.  The Mexican peso has rallied for the past five weeks, and despite the poor close at the end of the year, it is bid today.  The US dollar was sold from near MXN20.55 to MXN20.45 in the European morning but has found a bid near midday.  The low from New Year's Eve was set around MXN20.3070 and the 200-day moving average is closer to MXN20.27.    Disclaimer
No Turnaround Tuesday for Equities?

No Turnaround Tuesday for Equities?

Marc Chandler Marc Chandler 14.12.2021 15:01
December 14, 2021  $USD, Canada, Chile, Currency Movement, EMU, Hungary, Japan, Mexico, UK Overview:  Activity in the capital markets is subdued today, ahead of tomorrow's FOMC meeting conclusion and the ECB meeting on Thursday.  The MSCI Asia Pacific equity index fell for the third consecutive session.  European bourses are heavy after the Stoxx 600 posted an outside down day yesterday. Today would be the fifth consecutive decline. Selling pressure on the US futures indices continues after yesterday's losses.  Australia and New Zealand bonds played catch-up to the large drop in US Treasury yields yesterday, while European benchmark yields are edging higher.  The 10-year US Treasury yield is around 1.43%.  The dollar is mixed against the major currencies.  The Canadian and Australian dollars and Norway are softer, while the Swiss franc and euro lead with around a 0.25%-0.35% gain.  Most emerging market currencies are little changed, though the Turkish lira is paring yesterday's intervention-fueled gains.  Led by the Hungarian forint ahead of the outcome of the central meeting, and helped by a firm euro, central European currencies lead the emerging markets.  The JP Morgan Emerging Market Currency Index is off for a second session after breaking a four-week slide last week.  Gold continues to consolidate and is within yesterday's range ($1782-$1791).  Oil is also trading quietly, with the January WTI contract in a $70.50-$72.00 range.  European (Dutch) natural gas is rising for the sixth session of the past seven, during which time it has increased by nearly a third.  US natgas has fallen by almost 30% in the past two weeks and is off for about 4.4% this week already.  Iron ore is paring yesterday's 6.5% gain, while copper is drifting lower and is extending its loss into the fourth consecutive session.   Asia Pacific Year-end pressures are evident in Japan's money markets, and the BOJ responded by arranging an unscheduled repo operation for the second consecutive session.  Yesterday's overnight operation was for JPY2 trillion (~$17.5 bln) after the repo rate rose to two-year highs.  The repo appeared to have been lifted by dealers securing funding for bill purchases.  Today the BOJ offered to buy JPY9 trillion of bonds under the repo agreement.   The US has offered to lift the steel and aluminum tariffs on Japan on similar terms as the deal struck with the EU.   A certain amount, based on some historical market share, can be shipped to the US duty-free, but over that threshold, a levy will be imposed.  Unlike the EU, Tokyo did not impose retaliatory tariffs.  Estimates suggest that Japan shipped around 5% of its steel to the US, though some might have made its way through Mexico.   The regional highlights for the week still lie ahead.  Tomorrow, China reports November retail sales, industrial production, new home prices, investment, and the surveyed jobless rate.  Retail sales are expected to have slowed, while industrial output may have firmed.  Investment in property and fixed assets may have stalled.  Japan has its tertiary index (October) tomorrow, a November trade balance on Thursday (it nearly always deteriorates from October), and the Friday BOJ meeting.  The BOJ is expected to extend some of its emergency facilities.  Australia reports its November jobs data first thing Thursday morning in Canberra.  After three months of job losses, a strong report is expected as social restrictions were lifted.   Today, the dollar is confined to about a quarter of a yen range above JPY113.50.  It has not traded above JPY114.00 this month so far.  Nor has it traded below JPY113.20 since last Monday.  An option for $760 mln at JPY1113.85 rolls off today.  The Australian dollar tested the session high near $0.7135 in the European morning but met a wall of sellers, perhaps, related to the nearly A$600 mln option at $0.7130 that expires today. It has traded down to a five-day low around $0.7090, which is the halfway point of last week's rally.  The next retracement (61.8%) is near $0.7065. The dollar continues to struggle to sustain upticks against the Chinese yuan. It is trading heavily today, its seventh loss in the past eight sessions.   Still, the greenback held above yesterday's low (~CNY6.3580).  It was unable to poke above CNY6.37.   The PBOC's dollar fixing was set at CNY6.3675, while the market (Bloomberg survey) anticipated CNY6.3666.   Europe The UK reported solid employment data.  The November claimant count rate eased to 4.9% from a revised 5.0% (initially 5.1%), representing a nearly 50k decline after the October decline was revised to 58.5k from -14.9k.  The pace of earnings growth slowed to 4.9% from 5.9% (three-month, year-over-year).  Employment rose by nearly 150k (three months) after a 247k increase previously.  Tomorrow, the UK sees November CPI and PPI.  Both are expected to have quickened from October.  Nevertheless, the BOE is now seen on hold until February.   Hungary's central bank is set to hike the base rate today.  A 40 bp increase would follow last month's 30 bp hike.  Today's move would be the sixth in a row.  The base rate began the year at 60 bp, and today's hike would lift it to 2.50%.  On Thursday, Hungary likely hiked the one-week deposit rate.  It has been hiked for the last four weeks.  It had been at 75 bp until June, when it was hiked by 15 bp.  It was lifted by 30 bp in July and again in August.  It reverted to 15 bp increases in September and October.  The one-week deposit rate was raised several times last month to 2.90%.  It is up another 40 bp so far this month, and it is expected to be lifted by another 20 bp this week.   In October, industrial output in the euro area rose 1.1% after a 0.2% decline in September.  The preliminary PMI will be reported on Thursday, ahead of the ECB meeting.  Activity likely slowed. The focus of the ECB meeting is on the guidance about bond-buying next year.  The emergency facility is expected to wind down at the end of Q1, but given that it will still be buying bonds, tapering may not be as necessary or pronounced as, say, with the Federal Reserve.  The ECB staff will also update forecasts, including a sharp upward revision to next year's while extending the projections to 2024.  There is also interest in what the ECB will do about its long-term loans (TLTRO).    The euro has firmed in the European morning but remains mired in a narrow range.  Indeed, the range over the past five sessions is a little less than a cent (~$1.1260-$1.1355). There is an option for nearly 500 mln euros at $1.1330 that expires today.  For the past month, the euro has been in a $1.12-$1.14 trading range, with the notable exception on November 24, when the low for the year was recorded (~$1.1185).   Sterling slipped below $1.32 in late Asian turnover but found bids lurking there, and Europe has extended its recovery toward $1.3235.  Resistance is seen in the $1.3260-$1.3275 area. Sterling has not traded above $1.33 since December 3, yet a move above there is necessary to lift the technical tone.   America The US reports November producer prices today.  The headline rate is expected to push above 9%, while the core rate pokes through 7%.  The market is understandably more sensitive to consumer prices than producer prices.  Tomorrow, ahead of the FOMC statement, the November retail sales (softer than the 1.7% headline increase in October) and the December Empire manufacturing survey will be released.   Although the Senate is expected to maneuver to lift the debt ceiling today, the Treasury is planning a large bill pay down (~$175 bln) to ensure it would have the space to settle the coupon auctions.  That said, the supply of bills is likely to improve through Q1 22, according to estimates.  By most accounts, the Treasury has overfunded itself, and this will allow it to cut back further on new supply, just as the Federal Reserve is expected to accelerate its tapering.   The Bank of Canada was told its inflation target remains 2% but that it can overshoot to support "maximum sustainable employment."  The central bank's language is important.  It said it would "continue" to support the labor market objective, suggesting that yesterday's adjustment to the mandate will have a minor operational impact.  In fact, with inflation (October CPI 4.7%, an 18-year high), Governor Macklem quickly indicated that this was not the situation when it could probe for the maximum sustainable employment.  Still, the new mandate requires that the central bank explain when it is using its new flexibility and how labor market outcomes are incorporated into monetary decisions.  Separately, Canada is proposing alternatives to the US proposed tax incentives for electric vehicles in the Build Back Better initiative.  Canada and Mexico claim that it violated the USMCA and throws a wrench in the 30-year auto integration.  The EU trade commissioner has also expressed concerns about whether the legislation would break the WTO rules too.   Late today, Chile's central bank is expected to deliver a 125 bp rate hike, the same as in October.  The overnight target rate began the year at 50 bp.  It was hiked by 25 bp in July and 75 bp in August.  With today's hike, it will stand at 4%.  More work is needed as November CPI was at 6.7%.  Chile holds the run-off presidential election this weekend.  In the first round last month, the conservative Kast drew 28% support while the left candidate Boris garnered 26%.  Chile's innovation during Covid was to allow people to withdraw funds from their pensions (yes, like a farmer eating their corn seed).  Three withdrawals were granted, but a fourth effort was rebuffed earlier this month.  The World Bank and the IMF expressed concern about the pension fund industry, which had been among the best in the region.  The Chilean peso is among the worst-performing emerging market currencies this year.  It has fallen nearly 15.5% and has only been "bested" by the Argentine peso (~17.3%) and the Turkish lira (-48%).   The Canadian dollar's retreat is being extended for the fifth consecutive session.  The greenback has largely held above CAD1.2800 and is drawing near the high seen after the employment reports on December 3 (~CAD1.2855).  We usually see the exchange rate is driven by 1) general risk appetite, 2) commodity prices, and 3) rate differential.  Here we note that Canada's 2-year premium has fallen from about 60 basis points at the start of last month to around 27 bp now.  Over the same time, the 10-year premium has wholly disappeared.  It was almost 20 bp on November 1 and currently is trading at a four basis point discount.  Meanwhile, the greenback is consolidating against the Mexican peso. For the fifth consecutive session, it has been mainly chopping in a MXN20.85-MXN21.08 range.   On Thursday, Banxico is expected to hike its overnight rate by 25 bp.  We continue to think it is more likely to hike by 50 bp than standpat.  Since June, it has lifted the target rate by 100 bp to 5%.   November CPI stood at 7.37%.     Disclaimer
Dollar Starts the Week Bid ahead of the FOMC

Dollar Starts the Week Bid ahead of the FOMC

Marc Chandler Marc Chandler 13.12.2021 13:44
December 13, 2021  $USD, Australia, Canada, China, Currency Movement, FOMC, Japan, Mexico, South Korea, Switzerland, Turkey, UK   Overview: Equities, bonds, and the dollar begin the new week on a firm note.  Japanese, Chinese, Australian, and New Zealand equities advanced in the Asia Pacific region.  Europe's Stoxx 600 is snapping a three-day decline, and US futures are 0.25%-0.35% higher.  The US 10-year yield is a little softer at 1.48%. European benchmark yields are mostly 1-2 bp lower, and near 0.71%, the UK Gilt's yield is at a three-month low.  The dollar is rising against all the major currencies and is 0.3%-0.45% higher against most.  The Canadian dollar and sterling are the most resilient.  Among emerging market currencies, the Chinese yuan continues to defy official signals to eke out a small gain.  The Turkish lira is off more than 2%, after having dropped 4% initially. Intervention at the end of last week failed to have a lasting impact, and the central bank is expected to cut rates again later this week.  The JP Morgan Emerging Market Currency Index is giving back last week's 0.2% gain plus more today.  It was the first weekly gain in five weeks.  Gold is quiet in the upper end of the pre-weekend range, holding above $1780.  January WTI is firm but capped near the 20-day moving average (~$72.80).  US natgas is firm after falling 5% last week.  Dutch gas is up 8% to new two-month highs.  It has a six-week rally in tow, during which time it has gained a little more than 60%.  Industrial metals are higher too.  Iron ore snapped a three-day air pocket and gained it all back and more with its 6.5% rally today.  Copper has steadied after falling almost 2.5% in the last two sessions.   Asia Pacific The results of Japan's Tankan survey were in line with the talk we have picked up that while the new government, vaccination efforts, and fiscal stimulus are helping fuel the economic recovery, businesses are not yet convinced that significant change is taking place.  Sentiment among large manufacturers was steady at 18, and the outlook ticked lower.  The improvement in sentiment among the large non-manufacturers was more pronounced (9 vs. 2). However, the outlook was subdued at 8 (from 3).  Capex plans from the large businesses were softer than expected at 9.3% (from 10.1%).  Sentiment among the small companies improved, but the diffusion index and the outlook remained negative.  South Korea reported strong traded numbers for the first ten days of December (exports 20.4% and imports 42.3% year-over-year).  Seoul was busy.  Its foreign minister met with high Japanese counterpart on the sidelines of the G7 meeting and struck a cooperative tone. South Korea's President Moon met with Australia's Prime Minister Morrison and struck a A$1 bln weapon deal for self-propelled howitzers (which have already been purchased by other countries, including India and Turkey).  South Korea, however, will not be participating in the diplomatic boycott of the Winter Olympics, citing the need for Beijing's cooperation to denuclearize the peninsula.   The US dollar remains within its recent range against the Japanese yen (~JPY113.20-JPY113.95).  The 20-day moving average is at the top of the range, and it has not traded above it this month yet.  An option for almost $400 mln at JPY114.00 expires today.  It is the fifth session that the dollar has not traded below JPY113.20.  The Australian dollar's rally stalled near $0.7185 last week and is testing the lower end of its three-day range (~$0.7130) in the European morning.  Support is seen in the $0.7090-$0.7115 area.  The highlight of the week is the November jobs report, which is expected to show a strong bounce after three months of Covid-related declines.  More problems among China's property developers and activity in the manufacturing hub in Zhejiang were suspended due to an outbreak of the virus that failed to trigger a retreat in the yuan.  The dollar spent most of the local session below the pre-weekend low (~CNY6.3615).  The PBOC set the dollar's reference rate at CNY6.3669.  The market (Bloomberg survey) expected CNY6.3649.   Europe The UK appeared to make two concessions over the weekend.  First, it signaled that it was no longer seeking to exclude a role for the European Court of Justice in enforcing the Northern Ireland protocol.  Second, new fishing licenses were made available to the EU and French fishers. Jersey and the UK issued another 23 licenses, and although Paris was seeking more, it seemed sufficient to de-escalate the situation.   The UK government is under pressure from many sides.  The "partygate" scandal is a culmination of miscues by the Prime Minister, who has struggled with a Peppa Pig speech and a Kermit the Frog speech at the UN.  Several petty sleaze scandals have also marred the government.  Recent polls put Labour ahead of the Conservatives. This Thursday, the special election could see the Tories defeated in a traditional stronghold (ie Lib-Dems a protest vote for disenchanted Tories?).  The UK's stance toward the EU and the risk to the Good Friday Agreement have estranged the US government to some extent, which has not lifted Trump's steel and aluminum tariffs and put much energy into a free-trade agreement between the two special allies.   Turkey reported a large than expected October current account surplus ($3.16 bln) current account surplus.  While the currency's sharp depreciation would be expected to help the trade account, it also scares international investors.  It reported a net outflow of $2.2 bln portfolio capital in October.  Industrial output surprised on the upside in October, rising by 0.6%.  Economists (Bloomberg survey) expected a 0.1% decline after a 1.5% fall in September.  Turkey appeared to intervene in the foreign exchange market at the end of last week.  The dollar held below TRY14 but jumped to almost TRY14.76 today before pulling back.  The Swiss National Bank also looks like it intervened last week.  The euro held above CHF1.04 after having been sold to about CHF1.0375 earlier this month, its lowest level since July 2015.  Swiss domestic sight deposits rose by CHF1.12 bln, the biggest increase in three weeks.  Note that after buying euros against the franc, the SNB is believed to sell euros for dollars to maintain the allocation of its reserves.  The euro peaked last week near $1.1355.  It has been sold to a four-day low of $1.1260 today.    There is an option for 1.44 bln euros at $1.1250 that expires today.  The low for the year was set on November 24 near $1.1185, while last week's low was slightly below $1.1230.  With diverging impulses expected from the Fed and ECB this week, the euro looks vulnerable.  Sterling closed on its highs before the weekend and is on the defensive today.  The market appears to be absorbing bids that might be related to the expiration of a couple of options today (~GBP500 mln at $1.3235 and ~GBP560 mln at $1.3200).  The low for the year was set last week (December 8) near $1.3165, but initial support today is around $1.3220.  The odds of a BOE rate hike later this week have fallen to less than a 1 in 5 chance.   America The highlight of the week is the FOMC meeting.  Nearly everyone expects the Fed to accelerate its tapering and for individual forecasts to shift, matching the more hawkish rhetoric seen since the October CPI print jumped above 6% (November 10).  November's CPI, reported at the end of last week, accelerated to 6.8%.  Before we get to the FOMC meeting, though, this US reports PPI (the heading is expected to accelerate above 9% and the core above 7%) and November retail sales (a solid gain is anticipated of around 0.8% but off the heady 1.7% pace seen in October).  After the mid-week FOMC meeting conclusion, the US reports November housing starts, industrial production, and the Philly Fed's December survey.  The preliminary December PMI estimates are also due Thursday.  The week's data highlight for Canada is the mid-week estimate of November CPI.  Prices may have edged up by 0.2% on the month, but the year-over-year rate is expected to be little changed from the 4.7% pace seen in October.  The underlying measures may have edged up a little.  Price pressures are elevated but do not appear to be accelerating, as seen in the US.  Tomorrow, the new central bank mandate will be announced.  The mandate is reviewed every five years.  The press reports that the 2% inflation target will be retained, but the mandate may include a component of the labor market as it takes what is expected to be a small step toward a dual mandate like the Fed's.   Mexico's central bank meets on Thursday.  It is widely expected to lift the overnight rate target by 25 bp to 5.25%. In Bloomberg's survey of  17 economists, three forecast a 50 bp hike.  It would be the fourth hike in the cycle that began in August.  Chile and Colombia's central banks also are expected to hike rates this week.  Chile, which hiked by 125 bp in October after a 75 bp increase in August, is expected to make another 125 bp adjustment tomorrow.  It would lift the policy rate to 4%. It holds the second round of its presidential election on December 19.  Colombia's central bank meets on December 17.  A 50 bp increase would lift the repo rate to 3.0%.  The first increase in the cycle was 75 bp in October (to 2.5%).  November's CPI was a little above 5.25%.   The US dollar is rising against the Canadian dollar for the fourth consecutive session.  It is poking above CAD1.2750 in the European morning, where an option for almost $450 mln expires today (and another for $515 mln expires tomorrow).  A convincing move above CAD1.2760 could retarget the month's high (~CAD1.2855).  The market has 125 bp of hikes discounted over the next 12 months, but little new encouragement from the central bank.  The greenback fell against the peso in four of last week's five sessions.  It is little changed today, trading above the pre-weekend low (~MXN20.8430).  The next support area is seen closer to MXN20.70.  Still, the market is likely to be cautious extending short US dollar positions ahead of the Fed.   Disclaimer
Can Dollar Bears Resist the Fed? Can Yuan Bulls Shrug-Off the PBOC?

Can Dollar Bears Resist the Fed? Can Yuan Bulls Shrug-Off the PBOC?

Marc Chandler Marc Chandler 13.12.2021 10:56
December 12, 2021  $USD US yields and the dollar softened after the release of the November CPI figures before the weekend.  The data were in line with expectations showing the headline rate accelerated to 6.8% and the core rate to 4.9%.  The price action likely reflected positioning rather than a reassessment of the outlook for next week's FOMC meeting.  Nearly everyone recognizes the likelihood that the pace of tapering is quickened, and the individual forecasts reflect a more aggressive tightening path than anticipated in September.  With the diverging monetary policy impulses are evident in the shifting two-year interest rate differentials in the US favor, it is increasingly expensive to resist a stronger greenback.  A critical part of the backdrop is that market participants feel more comfortable that the Omicron variant may not be as disruptive as feared in Europe and the US (where the current surge is notable in its own right). As a result, those major currencies that tend to do well when risk appetites are strong, namely the dollar bloc and Scandis, are outperforming.  At the same time, the traditional funding currencies, the yen, and Swiss franc, were out of favor.  The euro falls in the latter camp.  A return to working from home, the evaporation of speculation that the BOE would raise rates in the week ahead, and a disappointing October GDP report pinned sterling in its trough.   It is difficult to see the market getting significantly more aggressive about the next year's outlook for the Fed.  The futures market is pricing in two hikes entirely and around two-thirds of a third hike.  A similar logic has turned us more cautious about the Canadian dollar.  There the market has discounted 125 bp of hikes over the next 12-months, which seems too aggressive.   Dollar Index:  The Dollar Index has been moving broadly sideways, though it rose for the seventh consecutive week.  For the first eight sessions of December, it has traded within the range set on November 30 (~95.50-96.65).   The momentum indicators have trended lower but appear to be stabilizing near mid-range.  The next big target is slightly below 97.75, which is the high from June-July 2020, and the (61.8%) retracement target of the decline since the March 2020 high near 103.00.   Euro:  The single currency briefly traded below the November 30 low (~$1.1235) last Tuesday before short-covering lifted it to the week's high ($1.1355) the following day.  It finished the week on a firm note after wobbling initially after the US CPI report.  With a brief exception, the euro has chopped between $1.12 and $1.14 since mid-November.   The broad sideways movement has seen the momentum indicators correct from over-extended territory.  Since November 10, when the US reported the jump in CPI to 6.2%, the US 2-year premium over Germany rose by roughly 18 bp to 1.40%,  to set the year's high.  It stalled.  The consolidative phase may continue ahead of the FOMC meeting.  Given what the market is pricing in, it may be difficult for the Fed to get ahead of market expectations for next year when it meets on December 15.   Japanese Yen: After testing support near JPY112.55 to start last week, the dollar recovered to almost JPY114.00 in the middle of the week before moving sideways.  It continued to track the movement of US 10-year yields.  As yields rose in the first part of the week, the dollar traded higher against the yen, and when yields slipped min the second half of the week, so did the greenback.  The MACD has flatlined, while the Slow Stochastic is trending higher.  A break of JPY113.00 retargets the lows.  On the topside, the JPY114.00-JPY114.30 area offers nearby resistance. British Pound:  Little is going sterling way.  Support for the Prime Minister has fallen, and polls show Labour opening its largest lead in years.  It has opted for "Plan B," with people returning to working from home, though no new government support was offered.  The economic growth slowed more than expected in October, which was before the Covid wave intensified and the Omicron variant was detected.  The rate hike that looked so likely in November now seems off the table until at least February.  Meanwhile, the fishing row and the attempt to change the Northern Ireland Agreement remain unresolved but causing enough consternation to deter the US from lifting the steel and aluminum tariffs that Trump imposed, let alone discussing a free-trade agreement.  Sterling made a marginal new low for the year last week (slightly below $1.3165, which met the (38.2%) retracement objective of the rally from the March 2020 low.  The next retracement (50%) is around $1.2830.  The momentum indicators are not generating a strong signal presently.  It finished last week on a firm note but a move above $1.3300-$1.13350 is needed to signal anything important.   Canadian Dollar:  The Canadian dollar's recovery fizzled after the central bank failed to provide fresh encouragement to the market, with 125 bp of hikes priced into the swaps market over the next 12 months.  The US dollar, which had rallied and closed above CAD1.28 on December 3 despite the diverging jobs reports, fell nearly CAD1.26 before catching a good bid.  Ahead of the weekend, it had recovered to the middle of the week's range (~CAD1.2730).  A move above the CAD1.2760 area could signal another run at the highs. The MACD pulled back, but it looks like it may try turning higher, while the Slow Stochastic is still falling.  The five-day moving average is set to slip below the 20-day moving average for the first time in a month.  Canada reports November CPI figures on December 15, and the year-over-year pace is set to accelerate from the 4.7% 12-month clip seen in October.  Inflation is also likely rising even faster this month.   Australian Dollar: The Australian dollar rose almost 2.5% last week to end a five-week slide that shook a nickel from it.  The Aussie recovered from the year's low slightly below $0.7000 (December 3), the measuring objective of the potential head and shoulder pattern traced out in H1 21. However, the recovery stalled shy of $0.7190.  The initial retracement of the leg lower that began in late October was closer to $0.7210. Still, the anticipation of a strong employment report (December 15) could help underpin the Aussie.  Provided it holds above the $0.7120 area, the Australian dollar can work its way higher.  The MACD and Slow Stochastic are trending higher.   Mexican Peso: While the Australian dollar was the strongest of the major currencies, the Mexican peso led the emerging market currencies a nearly 2% gain.  Last week, Latam provided three of the four strongest emerging market currencies (Colombian peso +1.25%) and the Brazilian real (0.95%).  The Thai baht was in third place with a 1.25% gain.  Banixco meets on December 16.  It is widely expected to hike by another 25 bp.  The central bank of Chile meets on December 14 and is expected to hike 125 bp to 4.0%.  The last move in October was also for 125 bp.    The Colombian central bank meets on December 17.  Most anticipate a 50 bp hike to 3.0% after initiating the tightening cycle with a 75 bp move in October.  Mexico's central bank appears to be a laggard in this cycle, but the peso's 4.5% loss this year makes it the top performer in the region.  The US dollar fell to a new three-week low slightly below MXN20.85 before the weekend.  The momentum indicators are trending lower, and the five-day moving average crossed below the 20-day for the first time since mid-November.  Initial support is seen in the MXBN20.70-MXN20.75 band. Chinese Yuan:  Chinese officials have delivered verbal warnings and cautioned banks and businesses to adopt good foreign exchange hedging practices and avoid a one-way market.  It signaled displeasure as the yuan rose to new three-year highs against the dollar by setting the daily reference rate.  It cut reserve requirements ahead of the expected FOMC decision next week to accelerate its tapering and bring forward its first rate hike.  The PBOC also raised the reserve requirement for foreign currency deposits.  Yet, the yuan rose in all but one session last week and eked a small gain on the week.  This month, the dollar's high was set ahead of the weekend near CNY6.3835,  but the positive greenback momentum was not sustained.  The dollar finished around CNY6.3700.  In the grand scheme of things, these are small moves, yet this is where the lines are being drawn.  Some observers have argued that state-owned banks in China have operated on behalf of the central bank (stealth intervention).  If this is true,  one must ask what happened to them now or why is that channel not working?  Still, with policy divergence on the PBOC's side, the risk-reward does not seem to favor fighting it now.  If the PBOC wants to drive home its message, the dollar needs to rise above CNY6.40.  Portfolio inflows and the large trade surplus need to be offset by increased capital outflows if officials want to remove the upside pressure on the currency.  That said, if there is an escalation ladder here, officials dominate nearly every rung.  In the long game, officials cannot be seen as losing, and if the carrots do not work, the will appears to be there to use the stick.   Disclaimer
Markets Turn Cautious Ahead of Tomorrow's US CPI

Markets Turn Cautious Ahead of Tomorrow's US CPI

Marc Chandler Marc Chandler 09.12.2021 12:34
December 09, 2021  $USD, Brazil, Canada, China, Currency Movement, Germany, Japan, Portfolio flows, UK Overview: The euro has come back offered after its seemingly inexplicable advance yesterday.  The dollar is firmer against most major currencies today, with the yen an exception after JPY114.00 held on yesterday's advance.  Most emerging market currencies are also softer, with a handful of smaller Asian currencies proving a bit resilient.  Most large bourses advance in the Asia Pacific region, except Japan and Australia.  Europe's Stoxx 600 is steady after retreating late yesterday while US futures are pointing to a softer opening.  After rising for the past three sessions (~18 bp), the yield of the 10-year US Treasury is consolidating by hovering a little below 1.5%.  European yields are 3-5 bp softer.   Gold is little change.  This week's quiet tone contrasts with the sharp moves in Bitcoin and Ethereum.  Oil is consolidating after the three-day advance that lifted January WTI by around 8.5%.  US and European natural gas is also softer after the rally over the last few days.  Iron ore, which rallied over 10% in the first two sessions this week, edged lower yesterday and is off 3% today.  Copper's three-day rally is in jeopardy.   Asia Pacific The number of countries participating in a diplomatic boycott of the Beijing Winter Olympics is growing.  In addition to the US, Lithuania, Australia, New Zealand, Canada, and the UK have joined.  While it may annoy Chinese officials, it is symbolic.  Given Chinese quarantine protocols, many diplomats were not going to attend in the first place.  Also, the impact on China's human rights will likely be negligible.  The moral righteousness is signaling to domestic constituencies.  Yet, treatment of the Peng Shuai and the jailing of reporters needless antagonized the already precarious situation.  China's consumer inflation rose less than expected while producer prices rose more.  Owing to a jump in vegetable prices (30.6%), November CPI rose 2.3% from a year ago. The median forecast (Bloomberg survey) was for a 2.5% increase.  It is the fastest pace since August 2020. The decline in pork prices (-32.7% year-over-year) is slowing.  Excluding pork, the CPI would have risen by 3%.  Service prices remain soft.  Excluding food and energy, the core CPI is up 1.2% over the past year (1.3% previously).  Producer price inflation slowed from 13.5% in October to 12.9% in November.  Economists had forecast a 12.1% pace.  Recall officials moved to boost supplies, including coal, helping to ease the strong upside pressures.   Officials have moved to a more pro-growth stance, which means that inflation will not stand in the way of further easing monetary policy (via reserve requirements even if not interest rates) next year. Meanwhile, Evergrande and the Kaisa Group have formally missed debt-servicing payments on dollar obligations. Still, unlike the end of the property bubble in the US and Europe, China is forcing banks to continue to lend. This keeps the proverbial treadmill going.   The lending figures for November, released today, illustrate it.  New yuan loans, which track bank lending, rose by 50%+ to CNY1.27 trillion from CNY826 bln in October.  Aggregate financing, which adds shadow banking activity to bank lending, rose to CNY2.61 trillion from CNY1.59 trillion.  Note that just before publishing this report, the PBOC announced a two percentage point hike in the reserve requirement for foreign currency deposits.  This will likely weigh on the yuan, initially.    Japanese weekly portfolio flows were unusually large last week.  Data from the Ministry of Finance showed that Japanese investors were large sellers of foreign bonds for the second consecutive week.  The JPY1.18 trillion in sales followed the divestment of JPY1.34 trillion the previous week. It was the most selling in a two-week period since February.  From a high level, most of the selling last week did not require net yen buying as Japanese investors essentially shifted into foreign equities, snapping up JPY1.2 trillion.  This is the most since the time series began in 2005.  Separately, foreign investors bought JPY2.0 trillion of Japanese bonds, which appears to be the second-highest on record (after the JPY2.57 trillion bought in early July).   For the third consecutive week, foreign investors were small sellers of Japanese shares.  The dollar approached JPY114.00 yesterday and was turned back, falling to JPY113.35 today.  The JPY114 area is "defended" by a $2.2 bln option at JPY114.10 that expires today and a $1.15 bln option at JPY114.25 that expires tomorrow.  A break of JPY113.25-JPY113.35 could signal a test on JPY113.00, but the market will likely be cautious ahead of tomorrow's US CPI report.  The Australian dollar's recovery faltered earlier today slightly above $0.7185, the 20-day moving average, which it has not traded above since November 4.  The first retracement (38.2%) of this week's bounce is near $0.7115, but initial support is seen in the $0.7140 area.  The greenback edged slightly lower against the Chinese yuan (~CNY6.3430) before steadying and turning marginally higher.  It is caught between two large options expiring today.  One set is for around $2.5 bln at CNY6.34, and another set is for about $950 mln at CNY6.35.  The PBOC's reference rate for the dollar today (CNY6.3498) was the largest gap with the median projection (Bloomberg, CNY6.3467) since the middle of October.   Europe Germany's October trade figures are maybe too dated to have much market impact, but the growth of imports and exports is a constructive development.  The 4.1% rise in exports, the most since July 2020, were well above expectations, as was the 5% jump in imports (most since August 2020).  For Germany, it translates into a smaller than expected trade surplus (12.8 bln euros).  The monthly average surplus this year through October is 15.5 bln euros, which is a little above the average for the same period last year (14.4 bln euros), but off average in 2019 (through October) of 19 bln euros.   On the heels of "party-gate," UK Prime Minister Johnson has announced Plan B in the face of the new infection surge that calls for people to work from home again.  It has created much furor. Businesses have called for more government support, and unions want the furlough program to be re-instituted.  Any lingering ideas of a rate hike next week by the Bank of England have faded.  The short-sterling interest rate futures contract expiring shortly is implying the lowest yield (11 bp) in three months.   Short-covering appeared to lift the euro to $1.1355 yesterday, and it settled above its 20-day moving average for the first time since November 3.  However, this was not a harbinger of a breakout, and the euro's gains are being pared today. Initial support is seen around $1.13 and then $1.1275 area.  Sterling recorded new lows for the year yesterday slightly below $1.3165, the (38.2%) retracement of the rally since March 2020 low.  Today, it is in less than a quarter-cent range capped near $1.3215.  It is consolidating weakly.  There are options at $1.32 that expire today (~GBP370 mln) and tomorrow (GBP600 mln) that are likely neutralized.   America The US reports weekly initial jobless claims, wholesale trade and inventories, and Q3 household net worth. These are not market movers, especially today. Instead, investors' focus will likely be on equities as it waits for tomorrow's CPI.  US inflation is still accelerating, and the headline CPI is likely to move closer to 7%, setting the stage for a hawkish FOMC meeting next week.  An acceleration in tapering and more officials will likely see the need for more hikes.  Recall that in September, the last time officials updated their forecasts, half did not see a need to hike rates next year.  The market has done much of the heavy lifting for the Federal Reserve.  The implied yield of the December 2022 Fed funds futures contract has risen around 50 bp since the September FOMC meeting.  The Bank of Canada left policy on hold yesterday, as widely expected.  However, the market was disappointed that it did not upgrade its forward guidance to reflect the strong data.  The swaps market is pricing in five hikes over the next 12 months, and the central bank said nothing to encourage such an aggressive stance.  This leaves the Canadian dollar somewhat vulnerable, we think.   Brazil did not disappoint.  The central bank hiked the Selic rate by 150 bp for the second consecutive month and signaled another hike of the same magnitude in February when it meets again.  It has lifted the Selic rate by 750 bp this year.  It is being driven by rising inflation, and the economy contracted in Q2 and Q3.  The Selic rate stands at 9.25%.  The IPCA inflation measure is due tomorrow, and it is expected to have risen to 10.9% (Bloomberg survey) from 10.67% in October.   Peru is expected to hike its reference rate by 50 bp to 2.5%. It would be the third 50 bp in a row.   Its November CPI, reported at the start of the month, is slightly above 5.6%.   Mexico reports its November CPI figures today.  It is expected to rise from about 6.25% to 7.25% and set the stage for another 25 bp rate hike next week in the overnight rate to 5.25%.   The US dollar is trading firmly against the Canadian dollar, and the heavier equities may be helping it.  While initial resistance is seen near CAD1.2700, we suspect there is scope toward CAD1.2730-CAD1.2750.  The greenback fell to almost MXN20.8860 yesterday, its lowest level since November 23, and the five-day moving average crossed below the 20-day moving average for the first time since early last month.  The move appears to have exhausted itself, but the dollar needs to resurface above the MXN21.05 area to boost confidence that a low is in place.  Disclaimer
Markets Calmer, Awaiting Fresh Incentives

Markets Calmer, Awaiting Fresh Incentives

Marc Chandler Marc Chandler 08.12.2021 13:51
December 08, 2021  $USD, Bank of Canada, Currency Movement, Germany, India, Japan, Poland, Russia Overview:  The capital markets are calmer today, and the fear that was evident at the end of last week remains mostly scar tissue. Led by gains in Japan, China, Australia, New Zealand, and India, the MSCI Asia Pacific Index extended yesterday's gains.  Europe's Stoxx and US futures are firm.  The US 10-year yield is softer, around 1.43%, while European yields are mostly 1-2 bp lower.  The Norwegian krone and euro lead major currencies higher against the greenback, but the New Zealand dollar and sterling are underperforming. Most of the emerging market currencies are enjoying an upside bias. The Turkish lira is giving back a little more than half of yesterday's 2.25% bounce.  Gold is edging higher and is near the 200-day moving average (~$1792).  January WTI is off $1 around  $71 after rallying around 8% in the past two sessions.  API reported a three million barrel drawdown in inventories but a big jump in Cushing.   US natural gas is consolidating and paring Monday's 11.5% drop.  Europe (Dutch) natural gas prices are rising for the third consecutive session and around 10% this week.  Iron ore has extended this week's rally and is at the highs since October.  Copper is flat.   Asia Pacific Australia has joined the US in the diplomat boycott of the winter Olympics in Beijing.  South Korea and Japan have not formally decided yet.  China's quarantine policies made it difficult for many diplomats to attend in any event, and many apparently will not attend.  Beijing threatens unspecified retaliation.   Japan reported an increase in its October current account, rising to JPY1.18 trillion from JPY1.03 trillion in September.  The swing in the trade balance from a JPY230 bln deficit to a JPY167 bln surplus more than accounted for it.  Japan also revised Q3 GDP to a 0.9% contraction (from -0.8%).  The composition changed.  Consumption was a greater drag (-1.3% quarter-over-quarter rather than -1.1%), and inventories contributed less (0.1% vs. 0.3%) and net exports were flat (rather than contribute 0.1 percentage points).  Business investment was less a drag (-2.3% vs. -3.8%).  Still, there is reason to be more optimistic about the outlook for the world's third-largest economy.  Social restrictions have eased, the vaccination rate is among the best, and the government is providing fresh stimulus.  The Kishida government is expected to finalize its fiscal efforts toward the end of the week. A key issue is the tax incentive (subsidy) for companies that boost wages by 3%, which has not happened since 1997.   India left its key rate corridor on hold today.  The repo rate is 4%, and the reverse repo rate is 3.35%.  Some observers saw the possibility of a hike in the reverse repo rate.  The monetary policy committee voted unanimously to keep the repo rate steady.  The reverse repo rate is a broader issue decided by the central bank, not the MPC.  The emergence of Omicron may have encouraged the central bank to maintain a steady hand, while the cut in the excise duty and VAT for petrol and diesel may help ease price pressures.  It made some technical changes in its liquidity management, which some see as a prelude to a hike in February 2022, when the central bank meets again.   The dollar is consolidating in a narrow 30-point range above JPY113.35 against the Japanese yen.  Yesterday's high was just below JPY113.80.  An option for about $550 mln will roll off today at JPY114.25, while there is a nearly $1.5 bln option at JPY114.00 that expires tomorrow.  The JPY114 area also holds the 20-day moving average, which the dollar has not closed above since November 25. The Australian dollar began the week flirting with the $0.7000 area.  It is rising for its third consecutive session and has reached almost $0.7145 today.  Last week's highs were set a little above $0.7170.  Despite words of caution by Chinese officials and the cut in reserve requirements, the yuan continues to march higher.  It is at new three-year highs today.  The dollar has been sold down to almost CNY6.3455.  Local dollar bonds and bonds below investment grade have rallied as officials signal a focus on supporting the economy.  Today the rate for re-lending to rural and small businesses was cut by 25 bp.  The PBOC has also been generous with its liquidity provisions.  The reference rate for the dollar was set at CNY6.3677, a little firmer than expected (CNY6.3665, Bloomberg survey).    Europe An era is formally over today as Germany's new government takes office.  The challenges it faces are profound.  The virus was surging even before the Omicron variant was detected.  The economy has been hobbled.  Inflation is high (6% on the harmonized measure in November) and without the fiscal stimulus seen in the US, where CPI is up 6.2% from a year ago (October).  This year, the German deficit is estimated to be about 5.8% and seen falling to 2.5% next year.  The US deficit is around 12.5% this year and is expected to fall to around 6.5% in 2022. Russia is amassing troops, and fears that it will invade Ukraine early next year are running high.  Germany reportedly will nix the controversial Nord Stream II pipeline if Russia carries through with its threat as part of the economic sanctions being considered.  Italy's Draghi has had a bit of a honeymoon, but that will change.  Two of the three largest unions will strike on December 16 to protest Draghi's budget, which must be passed by the end of the month.   Moreover, the selection of a new Italian president in January may mark the beginning of the political process that will lead to a new parliamentary election by the middle of 2023.  The president of Itlay is chosen by the Italian Parliament and regional representatives.  The current president, Mattarella, has declined to run for a second term.  Draghi does lead any political party, but the latest surveys show the center-left Democratic Party is in first place, polling a couple percentage points higher than it got in the last election at 21.4% support.  The Brothers of Italy on the right are in second place with slightly less than 20% support.  The Five Star Movement has seen its fortunes slip to about 15%.  Poland's central bank is set to hike its base rate today.  It will be the third consecutive increase.  The base rate was slashed from 1.50% last year to 10 bp.  It was hiked by 40 bp in October and 75 bp last month to stand at 1.25%. The headline CPI surged from 2.4% at the end of last year to 7.7% in November. Czech and Hungary have been more aggressive in raising rates.  Last month, Czech's central bank delivered a 125 bp increase to lift its key two-week repo rate to 2.75%.   It was at 25 bp to start the year.  Its CPI is near 6%.  Hungary has raised its base rate every month since June and taken it from 60 bp to 2.10%.  It has also taken its one-week deposit rate from 75 bp to 3.10%, with 130 bp delivered in the past three weeks. Earlier today, it reported that CPI rose to 7.4% last month from 6.5%.  Most look for a 50 bp increase from Poland's central bank today.   The euro briefly dipped below $1.1230 yesterday but recovered in the North American afternoon.  It is extending the recovery today and traded $1.1300 in the European morning.  The $1.1310-$1.1320 offers nearby resistance.  The UK government is being embarrassed by reports about its holiday party a year ago in violation of the social restrictions in place at the time.  It adds to the sleaze factor that has weakened it.  The latest polls show that the Labour Party is extending its lead.  Also, ideas that the BOE could raise rates next week have diminished and been pushed into next February.  Sterling is heavy, near $1.3200.  We have warned of near-term risk toward $1.3165, the (38.2%) retracement objective of the rally from the March 2020 low near $1.14.   America A deal appears in the works to lift the US debt ceiling.  The maneuver requires 60 votes to allow the debt ceiling to pass with a simple majority.  The Republican leadership appears willing to go along with this.  It will likely set a new precedent that will be used and possibly expanded when control of Congress changes.  PredictIt.Org shows that the Republicans are favored to win control of both houses in next year's mid-term election.   The US calendar today features the JOLTS report on job openings.  The week's highlight, the November CPI, is out on Friday, and both the headline and core rates are expected to accelerate.  Fed officials are in the blackout period ahead of next week's FOMC meeting.  Today's North American feature is the Bank of Canada meeting.  No one expects a change in rates.  It is more about the rhetoric.  Despite the uncertainty surrounding the Omicron variant, Bank of Canada officials are likely to be more confident about the strength of the recovery.  Last week's jobs data adds to the positive impulses.  Moreover, the government is providing more fiscal support.  The biggest challenge is that the market has discounted five hikes over the next 12 months.  This is aggressive and difficult for the central bank to get ahead of market expectations. Even after the strong Canadian jobs data at the end of last week, the US dollar closed firmly above CAD1.28, showing the Loonie's vulnerability to the risk-off wave.  However, as cooler heads have prevailed, the Canadian dollar has bounced back.  The US dollar closed below the 20-day moving average yesterday (~CAD1.2670) for the first time in a month and was sold to about CAD1.2620 today. The (38.2%) retracement of the greenback's rally since the October 21 low (below CAD1.23) is found near CAD1.2640. The next retracement (50%) is around CAD1.2570.  Initial resistance now is likely by CAD1.2680.  The greenback also closed below its 20-day moving average against the Mexican peso yesterday for the first time since November 9.  It has slipped below MN21.00 today for the first time in about two-and-a-half weeks.  With today's loss, the US dollar has retraced (61.8%) of its rally from November 9 low (~MXN20.2750). The move seems exaggerated, and consolidation is likely.  Nearby resistance is seen in the MXN20.05-MXN20.10 area.  Disclaimer
Animal Spirits Roar Back

Animal Spirits Roar Back

Marc Chandler Marc Chandler 07.12.2021 16:47
December 07, 2021  $USD, Canada, China, Currency Movement, Germany, Hungary, Japan, Mexico, RBA, Russia, US Overview:  A return of risk appetites can be seen through the capital markets today, arguably encouraged by ideas that Omicron is manageable and China's stimulus.  Led by Hong Kong and Japan, the MSCI Asia Pacific rose by the most in three months, while Europe's Stoxx 600 gapped higher, leaving a potentially bullish island bottom in its wake.  US futures point to a gap higher opening when the local session begins.  The bond market is taking it in stride.  The US 10-year Treasury is slightly firmer at 1.44%, while European yields are 1-3 bp higher.  The dollar-bloc currencies and Norway are leading the move higher among most major currencies.  The yen and euro are softer.  Sterling struggles to sustain upticks. Among emerging markets currencies, the Turkish lira is bouncing, while most central European currencies are being dragged lower by the weaker euros.  The JP Morgan Emerging Market Currency Index is slightly higher after four consecutive losses.  Gold is trading within yesterday's narrow range.  Oil continues to recover, and the January WTI contract is up around 2.5% (after yesterday's 4.9% advance) and is above $71.50 a barrel.  US natgas prices dropped 11.5% yesterday and have come back firmer today, while the European benchmark (Dutch) is up 7% today (~+0.5% yesterday) to near last week's highs.  Iron ore prices jumped 7.7% today after 2.5% yesterday, perhaps encouraged by strong Chinese import figures.  Copper prices are also firm.    Asia Pacific The Reserve Bank of Australia stuck to its stance. It may take two years to reach the 2-3% inflation target, and the uncertainties surrounding the Omicron variant also favor a cautious approach. This was in line with expectations.  The swaps market still has about 75 bp of higher rates discounted next year.   The Australian dollar's gains reflect the risk-on mood.   Japan's economy is on the mend.  Household spending rose 3.4% month-over-month in October.  Paradoxically, outlays on medical care actually fell (-5.7%) year-over-year in October.  Meanwhile, Labor cash earnings rose by 0.2% year-over-year, the same as in September, but less than expected.  Households headed by a worker rose 0.5% year-over-year.   China's trade surplus fell to $71.7 bln in November from $84.5 bln in October.  The US accounted for a little more than 50% of the surplus (~$37 bln).  Exports rose by 22% year-over-year, less than the 27.1% increase in October.  But, what really stood out were China's imports.  They surged, jumping 31.7% from a year ago after a 20.6% increase in October.  Commodity imports were robust.  The 35 mln tons of coal imported was the most this year. Oil imports were at three-month highs.  Iron ore imports reached a 13-month high,  Gas purchases were the highest since January.  Copper imports appear to be a record.  Separately, China reported that the value of its foreign exchange reserves rose by a minor $4.7 bln to $3.222 trillion.  Economists (Bloomberg survey median) had expected around an $11 bln decline.   The dollar has forged what appears to be a solid base now around JPY112.55.  So far, today is the first session since November 26 that the greenback has held above JPY113.00.  It has been confined to a narrow range between JPY113.40 and JPY113.75.  The dollar looks poised to move higher but may stall around JPY114.00, where an option for around $865 mln expires today.  The Australian dollar rose about half of a cent yesterday and is up around another half-cent today to test $0.7100.  An option for A$1.04 bln expires today there ($0.7100).  It is also the (61.8%) retracement objective of last week's drop.  A move above there would target the $0.7130 area and possibly $0.7200.  The reduction in Chinese banks' reserve requirements and the divergence with the direction the Fed appears headed did not deter the yuan from strengthening.  The dollar held CNY6.38 yesterday and is near CNY6.3660 now.  The low for the year was set at the end of May near CNY6.3570.  The dollar's reference rate was set at CNY6.3738, a touch higher than the models (Bloomberg survey) projected of CNY6.3734.   Europe According to the proverb, for want of a nail, a kingdom was lost.  US intelligence warns that Russia is poised to invade Ukraine.  Beijing continues to act as a bully in the South China Sea.  US President Biden is hosting a "Summit for Democracy" December 9-10.   Reportedly 110 countries will be represented, even Taiwan, which the US officially does not recognize as a country.  All of the EU members have been invited but Hungary.  Hungary, like Poland, is in a serious fight with the EC over the rule of law.  It is being fined for failing to comply with the European Court of Justice over its harsh treatment of asylum seekers.  Poland, which is invited to the summit, is also being fined a record 1 mln euros a day for deviations from the EU standards of the rule of law.   Yet Hungary's exclusion is needlessly antagonistic.  Hungary will hold parliamentary elections in April (though possibly May), and the opposition is united behind the center-right Marki-Zay.  Most polls show him ahead of Orban.   It is an insult to the EU, and Orban used his veto to block the EU from formally participating and prevented it from submitting a position paper.  It is a vulnerable position for the US to be the judge and jury about democracy and the rule of law.   Laura Thorton, director of the Alliance for Securing Democracy of the German Marshall Fund of the United States, expressed shock and dismay in a recent Washington Post op-ed over developments in Wisconsin. She wrote, "If this [where the GOP is seeking to replace the bipartisan oversight of elections with just its party's control] occurred in any of the countries where the US provides aid, it would immediately be called out as a threat to democracy.  US diplomats would be writing furious cables, and decision-makers would be threatening to cut off the flow of assistance."  Separately, the US embassy in Tokyo warned Japan about "racially profiling incidents" following the closure of its borders to new foreign entries into the country.   The US response to the Russian aggression in Georgia in 2008 and the annexation of Crimea in 2014 was soft.  Despite bringing NATO to Russia's door in the Baltics, the US recognized by its actions that it is difficult to defend what Russia calls its near-abroad. Ukraine is different.  When Ukraine gave up its nuclear weapons, the Budapest Memorandum  (1994), Russia, the US, and the UK committed to respecting its independence and territorial integrity.  Russia clearly violated the agreement, but the US says it is not legally binding.  Nevertheless, reports indicate that the Biden administration is contemplating new sanctions against Russia and Putin's inner circle.  Reportedly under consideration is removing Russia from the SWIFT payment system and new sanctions of Russia's energy companies, banks, and sovereign debt.  In late April, the European Parliament approved a non-binding resolution to exclude Russia from the SWIFT if it attacked Ukraine.  Russia is a heavy user of SWIFT, as few foreign banks, including the Chinese, are willing to use Russia's own payment system.  After a dismal factory orders report, the market had been prepared for a poor industrial output report today.  Instead, Germany surprised with its strongest gain for the year.  Industrial output surged 2.8% in October.   It is only the third monthly gain this year.  Moreover, September's decline of 1.1% was halved to 0.5%.  It appears auto production (capital goods) may be behind the improvement in activity.  Separately, the ZEW survey was mixed.  The expectations component was stronger than expected, but still, at 29.9, lower than November's 31.7 reading.  The assessment of the current situation deteriorated sharply to -7.4 from 12.5.  It has been declining since September, but this is the lowest since June.  On November 30, the euro spiked higher and has subsequently worked its way lower.  Today, it reached almost $1.1250, its lowest level since November 30, low near $1.1235. The 20-day moving average (~$1.1320) continues to block the upside.  It has not closed above it for a little more than a month.  The low for the year so far was recorded on November 24 near $1.1185.  For its part, sterling remains in its trough. The low for the year was set on November 30, slightly below $1.32.  Before the weekend, it was in a roughly $1.3210-$1.3310 range and remains well within that range yesterday and today.  It has been blocked ahead of $1.3300.  There is an option for about GBP450 mln at $1.3250 that expires today.   America The US is expected to report that productivity fell in Q3 by 4.9% rather than the 5% that was initially reported.  Productivity increased by 2.4% in Q2 and 4.3% in Q1.  It averaged 2.6% last year and 2.3% in 2019.  Unit labor costs are the most holistic measure, including wages, benefits, and output.  Looking at a four-quarter moving average, unit labor costs rose 1.6% in 2018 and 1.45% in 2019.  They jumped to 6.25% last year and fell by an average of 0.85% in H1 21.  The initial estimate for Q3 was an 8.3% surge.   The US also reports the October trade balance.  The preliminary goods balance signaled a likely improvement from the $80.9 bln deficit in September.  The median forecast (Bloomberg) sees a deficit of slightly less than $67 bln.  Through September, the monthly average was nearly $71 bln, up from $53.3 bln in the same period last year and less than a $50 bln average in the first nine months of 2019. Late in the session, the US reports October consumer credit, and another substantial increase is expected.  It jumped almost $30 bln in September.  It has averaged $20.275 bln a month through September.  Last year was too distorted, but in the first three quarters of 2019, consumer credit rose by an average of $15.3 bln a month.    Canada reports its October merchandise trade figures today, ahead of the Bank of Canada meeting tomorrow  The median forecast in Bloomberg's survey call for a C$2.08 bln surplus, which, if accurate, would the be third largest surplus since 2008.  The June surplus was larger at C$2.26, as was the December 2011 surplus of C$2.12 bln.   Canada's goods trade balance through September swung into surplus with an average of C$703 mln.  In the same period in 2020, the monthly deficit averaged C$3.1 bln and  C$1.4 bln in 2019.  The merchandise surplus may be sufficient to lift the current account too.  Canada has been running a current account deficit since 2009.   The OECD forecasts a surplus this year of 0.3% of GDP and projects it to be in balance next year.  Canada and Mexico have expressed concerns about the credits for electric vehicles in the Build Back Better US initiative.  They claim it violates the USMCA.  Europe has expressed similar problems, and the EU Trade Commissioner Dombrovskis has reportedly sent a formal letter warning that the Biden administration's efforts may also violate WTO rules.  Meanwhile, there is talk that the initiative may be blocked this year.  If this is the case, the odds of passage next year seem even slimmer.  On a different front, Mexico's controversial energy reforms, which expand the state sector, over some objections by US energy companies, look to be delayed due to lack of support.  The US dollar posted an outside up day against the Canadian dollar before the weekend, despite Canada's strong employment report.  There was no follow-through yesterday, and the greenback recorded an inside day and settled on its lows.  The US dollar has been sold to around CAD1.2700 today.  Initial support is around CAD1.2675, but the more significant test is near CAD1.2640.  A break would strengthen the conviction that a high is in place.  Meanwhile, the greenback continues to consolidate against the Mexican peso.  It remains within the range set last Wednesday (~MXN21.1180-MXN21.5150).  Thus far today, it is holding above yesterday's low (~MXN21.1720), which was- above the pre-weekend low (~MXN21.1625).            Disclaimer
Semblance of Stability Returns though Geopolitical Tensions Rise

Semblance of Stability Returns though Geopolitical Tensions Rise

Marc Chandler Marc Chandler 06.12.2021 12:39
December 06, 2021  $USD, China, Currency Movement, EU, Hungary, Italy, Russia Overview:  The absence of negative developments surrounding Omicron over the weekend appears to be helping markets stabilize today after the dramatic moves at the end of last week.  Asia Pacific equities traded heavily, and among the large markets, only South Korea and Australia escaped unscathed today.  Europe's Stoxx 600 is trading higher, led by energy, financials, and materials.  US futures are narrowly mixed.  Similarly, Asia Pacific bonds played a little catch-up with the large Treasury rally ahead of the weekend.  The US 10-year had approached 1.30% but is now up almost four basis points to almost 1.39%.  European yields are also a little firmer, though Italian bonds are outperforming after the pre-weekend credit upgrade by Fitch. The dollar is mixed.  The yen and Swiss franc are the heaviest, while the Scandis lead the advancers.  Among the emerging market currencies, most liquid and freely accessible currencies are higher, while India, Indonesia, and Turkey are trading lower.  The JP Morgan Emerging Market Currency Index has a four-week drop in tow and is starting the new week with a small gain.  Gold initially moved higher but is now little changed.  Iron ore and copper remain firm.  January WTI is trading firmly within the pre-weekend range, while natural gas, which collapsed by 24% in the US last week, extended its sell-off today.  European natural gas (Dutch benchmark) is trading lower after rising for the past five weeks.   Asia Pacific As tipped by Chinese Premier Li last week, the PBOC cut reserve requirement by 0.5%.  This frees up an estimated CNY1.2 trillion.  Many market participants had anticipated the timing to help banks pay back borrowing from the Medium-Term Lending Facility.  Banks owe about CNY950 bln on December 15 and another CNY500 bln on January 15.   Separately, several property developers have debt serving payments due and Evergrande is at the end of a grace period today.  Lastly, the US and a few other countries are expected to announce a diplomatic boycott of the Winter Olympics.  This is seen as largely symbolic as few diplomats were going to attend due to the severe quarantine imposed by Chinese officials.   China needs bargaining leverage if it is going to influence US policy.  It might come from an unexpected source.   While recent press reports focused on China's attempt to project its power into Africa, they have missed a potentially more impactful development.  Consider the Caribbean, which the US often acts as if it is theirs.  Barbados became a constitutional republic last week, though it is still a member of the UK Commonwealth.  The left-of-center government is friendly toward Beijing.  Under the Belt Road Initiative, Barbados and Jamaica have received several billion dollars from China.  Moreover, a recent US State Department report found that the two countries have voted against the US around 75% of the time at the UN last year.   This week, the regional highlights include the Reserve Bank of Australia (outcome first thing tomorrow in Wellington) and the Reserve Bank of India (December 8).  The RBA may revise up its economic outlook, yet, it is likely to continue to push against market expectations for an early hike.  The derivatives market appears to have the first hike priced in for late next summer.    India is expected to be on hold until early next year but could surprise with a hike.  China is expected to report trade figures tomorrow and the November CPI and PPI on Wednesday.  Lending figures may be released before the weekend.  Japan's highlights include October labor earnings and household spending tomorrow, the current account, and the final Q3 GDP on Wednesday.   The dollar's range against the yen on November 30 (~JPY112.55-JPY113.90) remains dominant.  It has not traded outside of that range since then.  The rise in US yields and equities has helped the dollar regain a toehold above JPY113.00.  The pre-weekend high was near JPY113.60, which might be too far today.  The Australian dollar traded below $0.7000 before the weekend and again today, but the selling pressure abated, and the Aussie has traded to about $0.7040. A band of resistance from $0.7040 to $0.7060 may be sufficient to cap it today.   The dollar has been in essentially the same range against the Chinese yuan for three sessions (~CNY6.3670-CNY6.3770).  If the dollar cannot get back above CNY6.38, a new and lower range will appear to be established.  The PBOC set the dollar's reference rate at CNY6.3702.  The market (Bloomberg median) had projected CNY6.3690.   Europe Germany's new government will take office in the middle of the week.  It has three pressing challenges.  First is the surge in Covid, even before the Omicron variant was detected.  Second, the economy is weak.  Last week's final PMI reading picked up some deterioration since the flash report and the 0.2 gain in the composite PMI more than 10.0 point fall in the previous three months. Third, today Germany reported dreadful factory orders.  The market had expected a slight pullback after the 1.3% gain in September.  The good news is that the September series was revised to a 1.8% gain.  However, this is more than offset by the 6.9% plummet in October orders.  If there is a silver lining here, it is that domestic orders rose 3.4% after falling in August and September.  Foreign orders plunged 13.1%, and orders from the eurozone fell by 3.2% (after falling 6.6% in September).  Orders outside the euro area collapsed by 18.1%.  The sharp drop in factory orders warns of downside risk to tomorrow's industrial production report.  Industrial output fell by 3.5% in August and 1.1% in September. Before today's report, economists were looking for a 1% gain.  Germany also reports the December ZEW survey tomorrow. Again, sentiment is expected to have deteriorated.  The third issue is Russia.  Reports suggest the US has persuaded Europe that Russia is positioned to invade Ukraine early next year.  US intelligence assessment sees Russia planning a multifront offensive.  Putin and Biden are to talk tomorrow.  Meanwhile, Putin makes his first foreign visit today in six months.  He is in India.  India is buying an estimated $5 bln of Russian weapons, including the S-400 anti-aircraft system that Turkey purchased to the dismay of Washington, which banned it from the F-35 fighter jet program.  India is a member of the Quad (with the US, Japan, and Australia), a bulwark against China.  A Russian official was quoted in the press claiming India sent a strong message to the US that it would not tolerate sanctions against it.  The regional alliances are blurry, to say the least. The US maintains ties with Pakistan.  India has had border skirmishes with China.  Russia and China have joint military exercises.   Before the weekend, Fitch upgraded Itay's credit rating one notch to BBB.  It cited the high vaccination rate, increased public and private spending, and confidence in the Draghi-led government's ability to spend the 200 bln euro funds from the EC prudently.  Recall that last week's composite PMI rose to 57.6 to snap a two-month decline.  The market (Bloomberg median) sees the Italian economy as one of the strongest in Europe this year, expanding around 6.3%.  The IMF sees it at 5.8%. The euro has been confined to about a quarter-cent range on both sides of $1.1300.  It is within the pre-weekend range (~$1.1265-$1.1335).  It was offered in Asia and turned better bid in the European morning.  Still, the consolidative tone is likely to continue through the North American session.  A move above the 20-day moving average (~$1.1335), which has not occurred for over a month, would help lift the technical tone.  Sterling tested $1.3200 before the weekend, and it held.  The steadier tone today saw it test the $1.3265 area.  It will likely remain in its trough today, though a move above the $1.3280-$1.3300 area would be constructive.   America Today's US data includes the "final" look at Q3 productivity and unit labor costs.  These are derived from the GDP and are typically not market-movers.  The US also reported that the October trade balance and improvement have been tipped by the advance merchandise trade report.  October consumer credit is due late in the session, and another hefty rise is expected ($25 bln after nearly $30 bln in September.  Consumer credit has risen by an average of $20.3 bln this year.  It fell last year and averaged $15.3 bln in the first nine months of 2019.  No Fed officials speak this week, and the economic highlight is the November CPI report at the end of the week.   Canada reports October trade figures and IVEY survey tomorrow.  The highlight of the week is the Bank of Canada decision on Wednesday.  It is not expected to do anything, but officials will likely be more confident in the economic recovery, especially after the very strong jobs report before the weekend.  The Canadian dollar's challenge is that the market has five hikes already discounted for the next 12 months.  Mexico reports November vehicle production and exports today.  The economic highlights come in the second half of the week.  November CPI on Thursday is expected to see the headline rate rise above 7%.  Last month alone, consumer prices are projected to have risen by 1%.  On Friday, Mexico is expected to report that industrial output rose by 0.9% in October after falling 1.4% in September.  Brazil reports its vehicle production and exports today and October retail sales on Thursday before the central bank meeting.  A 150 bp increase in the Selic rate, the second such move in a row, has been tipped and will put the key rate at 9.25%.  Ahead of the weekend, the IPCA measure of inflation is due.  It is expected to have ticked up closer to 11% (from 10.67%).  Lastly, we note that Peru is expected to deliver another 50 bp increase to its reference rate on Thursday, which would lift it to 2.5%.   The US dollar posted an outside up day against the Canadian dollar ahead of the weekend.  The risk-off mood overwhelmed the positive implications of the strong jobs data.  There has been no follow-through selling of the Canadian dollar today.  The pre-weekend US dollar low near CAD1.2745 is key.  Last Wednesday's range remains intact for the greenback against the Mexican peso (~MXN21.1180-MXN21.5150).  So far today, it has been confined to the pre-weekend range.   Initial support is seen near MXN21.16.  The cap around MXN21.50 looks solid.  Meanwhile, the US dollar closed above BRL5.60 for six consecutive sessions coming into today.   Disclaimer
The Greenback Finds Traction ahead of the Jobs Report

The Greenback Finds Traction ahead of the Jobs Report

Marc Chandler Marc Chandler 03.12.2021 12:19
December 03, 2021  $USD, Australia, Canada, China, Currency Movement, EMU, FOMC, Inflation, Japan, jobs, UK Overview:  The Omicron variant has been detected in more countries, but the capital markets are taking it in stride.  Risk appetites appear to be stabilizing.  The MSCI Asia Pacific Index rose for the third consecutive session, though Hong Kong and Taiwan markets did not participate in the advance today.  Europe's Stoxx 600 is struggling to hold on to early gains, while US futures are narrowly mixed.  The US 10-year yield is a little near 1.43%, down around six basis points this week.  European yields are slightly softer. Core yields are off 5-6 bp this week.  The dollar is firm ahead of the jobs data.  The Antipodeans and Swedish krona are the heaviest, falling around 0.6% through the European morning.  The Swiss franc and euro are up about 0.1% and are the most resilient so far today.   The JP Morgan Emerging Market Currency Index is trading lower for the third session and is set to extend its losing streak for the fourth consecutive week.  Accelerating inflation is the latest drag on the Turkish lira.  The 0.6% decline today brings the week's drop to around 10.5%.  Gold is little changed within yesterday's range.  Last week, it settled a little above $1802.  Now it is below $1775  Oil is extending yesterday's recovery. Although OPEC+  unexpectedly stuck with plans to boost output by 400,000 barrels a day next month, it warned it could change its collective mind at any point.  January WTI recovered from around $62.40 yesterday to close at $66.50.  It is trading close to $68.20 before US markets open.  US natural gas fell nearly 25.5% over the past four sessions but is bouncing by around 3.7% today. European gas (Dutch) is stabilizing after yesterday's 5.6% decline.  Still, it is posting gains for the fifth consecutive week and is up more than 35% over the run.  Iron ore and copper prices are little changed.   Asia Pacific At the same time that Chinese officials are cracking down on the "variable interest entity" form of offshore listings for domestic companies, the US SEC is moving to enforce the 2002 laws that require foreign companies to allow greater scrutiny by US regulators.  Didi, the ride-hailing service, which listed in the US over local official objections, is now in the process of reversing itself.  The press reports that China and Hong Kong companies are the only ones to refuse to acquiesce to US demands.  This seems to be another facet of the decoupling meme.  Note that the NASDAQ Golden Dragon Index that tracks 98 Chinese companies listed in the US has fallen for five consecutive sessions coming into today, for a cumulative loss of about 10%.  China's Caixin service PMI was weaker than anticipated at 52.1, down from 53.8.  This, coupled with the softer manufacturing reading, shaved the composite to 51.2 from 51.5.   In contrast, Japan and Australia's flash service and composite PMIs were revised higher.  In Japan, the service PMI was revised to 53.0 from 52.1 and 50.7 in October.  The composite was revised to 53.3 from 52.5, to rise for its third consecutive month.  Australia's service PMI stands at 55.7, up from the flash reading of 55.0 and 51.8 in October.  The composite PMI is at 55.7, its third consecutive monthly rise as well.  Japan and Australia's PMI contrasts with the disappointment in China and Europe, and the US. This is because they are recovering from the long emergency (Japan) and lockdowns (Australia).   Trading remains choppy, and market confidence is fragile.  The dollar remains in the range set against the yen on Tuesday((~JPY112.55-JPY113.90).  Today's high has been just below JPY113.50, where options for $520 mln expire today.   Options for around $1.3 bln at JPY113.00 also will be cut today.  The greenback settled last week slightly below JPY113.40.  The Australian dollar has been sold to new lows for the year a little lower than $0.7050.  We have noted that this area corresponds to the (38.2%) retracement of the Aussie's rally from the March 2020 low near $0.5500.  The next area of support is seen around $0.7000.  It is the fifth consecutive weekly decline that began in late October above $0.7500.  The US dollar's two-day rise against the Chinese yuan is ending with a minor loss today. Similarly, the greenback posted gains for the past two weeks and has given it all back this week.  The PBOC set the dollar's reference rate at CNY6.3738, just below the median (Bloomberg survey) projection of CNY6.3740.   Offshore investors appear to have bought the most Chinese stocks today via the connect-link in a couple of weeks.  Also, note that China extended the tax exemption for foreign institutional investors from the interest tax through the end of 2025.    Europe German and French PMIs were revised lower, while Spain and Italy surprised on the upside.  The revisions shaved the gains initially reported for the service and composite PMIs.  Still, the German composite rose for the first time in four months to stand at 52.2 from 52.0.  The French composite PMI stands at 56.1, up from 54.7.  It is the first increase since June.  Separately, France reported a 0.9% rise in October industrial output, which is better than expected, but the September contraction was revised to -1.5% from -1.3%.   Spain's service PMI rose to \59.8 from 56.6 and was well above expectations.  The composite reading is 58.3, up from 56.2.  It is the first gain in five months and is the highest since August.  Italy's service PMI rose to 55.9 from 52.4.  Economists had expected something closer to 54.5.  The composite rose to 57.6 from 54.2.  It has softened in September and October, and the November reading is the best since August.   The UK's service and composite PMI were revised to show a slightly larger decline than initially seen in the flash report.  The service PMI slipped to 58.5, from 58.6 preliminary estimate and 59.1 in October.  The composite PMI was shaved to 57.6 from the 57.7 initial estimate and 57.8 in October.  The November weakness was disappointing after rising in September and October to snap a three-month decline.  The December short-sterling interest rate futures consolidated in a choppy activity this week after the implied yield fell for eight consecutive sessions previously.  The market is discounting about a 1 in 3 chance of a hike at the BOE meeting on December 16.  The euro slipped to a three-day low slightly above $1.1280 in late Asian turnover before resurfacing the $1.1300 area in the European morning.  Still, we suspect the upside is limited.  The 20-day moving average is near $1.1350, and the single currency has not traded above it since November 9.  The euro remains within the range set on Tuesday (~$1.1235-$1.1385).  Given the divergence of monetary policy, resistance looks stronger than support.  For its part, steering is holding barely above its three-day low near $1.3260.  It, too, remains within Tuesday's range (~$1.3195-$1.3370).  Recall that the $1.3165 area corresponds to the (38.2%) retracement objective of the rally from the March 2020 low near $1.14.  Meanwhile, the euro is pressing below CHF1.04.  It has not closed below there in six years.   America Fully cognizant of the irony here, but barring a shockingly poor report, today's US employment data may have little last impact on the market.  If there was any doubt about it before, since Federal Reserve Chair Powell spoke, there isn't.  The Fed has shifted from helping to facilitate recovery to preventing inflation expectations from getting entrenched.  That means that even a mediocre report today will be overshadowed by next week's CPI, which will likely show that inflation is still accelerating.  Conventional wisdom holds that the White House prefers doves at the Fed, but that does not hold now.  President Biden's public approval rating is low, and the Vice President's is lower still. Polls suggest that inflation is a knock against the administration.  When Biden announced the re-nomination of Powell and Brainard's nomination to Vice-Chair, both candidates reaffirmed their commitment to combat inflation.  What is true of the employment data also holds for the final services and composite PMI, factory orders, and the service ISM.  There may be headline risk but little implication for policy.  The Senate passed the stop-gap measures to keep the federal government funded through February 18.  Meanwhile, the debt ceiling is expected to hit between December 21 and late January.   Canada's labor market has recovered quicker than the US.  Today's another constructive report will likely solidify expectations that the Bank of Canada may hike rates in the March-April period.  The Bank of Canada meets next week.  Of course, it may be cautious with the unknowns surrounding the Omicron variant, but the economic recovery is solid after the weakness in Q2.  Trade tensions with the US are rising.  The US doubled its anti-dumping and countervailing tariffs on Canadian softwood imports (almost 18%).  US January lumber prices were limit up ($45) Wednesday and yesterday and have risen by more than 19% so far this week to reach five-month highs. There is a dispute over Canadian potato exports as well.  There are also disputes over some US initiatives' "Buy American" thrust, including electric vehicles.   The US dollar is at its best level against the Canadian dollar since late September.  It is pushing near CAD1.2840. The September high was closer to CAD1.29, and the late August high, which is also the high for the year, was near CAD1.2950. Barring a reversal, this will be the sixth consecutive week of the greenback's gains.  The swaps market has the first hike discounted for March 2022.  The US dollar began the week with a seven-day advance against the Mexican peso in tow.  It ended with a 1%+ pullback on Monday and again on Tuesday.  It consolidated Wednesday and fell another 1%+ yesterday.  It is little changed today near MXN21.29.  Next week, the November CPI will be reported.  It looks set to accelerate from about 6.25% to around 7.25%.  The central bank meets on December 16, after the FOMC meeting.  A 25 bp rate hike is the consensus, but an argument can be made for a 50 bp increase from the current 5.0% target.   Disclaimer
December Monthly

December Monthly

Marc Chandler Marc Chandler 02.12.2021 15:00
December 01, 2021  $USD, Macro The pandemic is still with us as the year winds down and has not yet become endemic, like the seasonal flu.  Even before the new Omicron variant was sequenced, Europe was being particularly hard hit, and social restrictions, especially among the unvaccinated, were spurring social strife.  US cases, notably in the Midwest, were rising, and there is fear that it is 4-6 weeks behind Europe in experiencing the surge.  Whatever herd immunity is, it has not been achieved.  Moreover, despite plenty of vaccines in high-income countries, inoculation efforts in many low-income countries won't begin in earnest until next year.   That said, the new variant has injected a new element into the mix, and it is with a heightened degree of uncertainty that we share our December outlook.  Given the unknowns, policymakers can choose the kind of error they are willing to make. They are trying to minimize their maximum regret.  The utmost regret is that the mutation is dangerous and renders the existing vaccines and treatment significantly less effective.  This will leave them vulnerable to accusations of over-reacting if the Omicron turns out to be a contagious but less deadly variation.   Meanwhile, there has been some relief to the supply chain disruptions.  Covid-related factory closures in Asia, the energy shortage, and port congestion are easing. Large US retailers have stocked up for the holiday shopping season, some of which chartered their own ships to ensure delivery. There are also preliminary signs that the semiconductor chip shortage may be past its worst.  Indeed, the recovery of the auto sector and rebuilding of inventories will help extend the economic expansion well into next year, even though fiscal and monetary policy are less supportive for most high-income countries.  The flash November US manufacturing PMI saw supplier delivery delays fall to six-month lows.   We assume that the US macabre debt ceiling ritual will not lead to a default, and even though it distorted some bill auctions, some resolution is highly probable.  The debate over the Build Back Better initiative, approved by the House of Representatives, will likely be scaled back by moderate Democratic Senators and Republicans.  Besides assessing the risks posed by the new variant, the focus in December is back on monetary policy.  Four large central banks stand out.  The Chinese economy has slowed the People's Bank of China quarterly monetary report modified language that signals more monetary support may be forthcoming.  Many observers see another reduction in reserve requirements as a reasonable step.  Unlike in the US and Europe, which saw bank lending dry-up in the housing market crisis (2008-2009), Beijing is pressing state-owned banks to maintain lending, including the property sector.   The Federal Reserve meets on December 15.  There are two key issues.  First, we expect the FOMC to accelerate the pace of tapering to allow it to have the option to raise rates in Q2 22.  The Fed's commitment to the sequence (tapering, hikes, letting balance sheet run-off) and the current pace of tapering deny the central bank the needed flexibility.  The November CPI will be reported on December 10.  The headline will likely rise to around 6.7%, while the core rate may approach 5%.  Second, the new "Summary of Economic Projections" will probably show more Fed officials seeing the need to hike rates in 2022.  In September, only half did.  The rhetoric of the Fed's leadership has changed.  It will not refer to inflation as transitory and is signaling its intention to act.  The European Central Bank and the Bank of England meet the day after the FOMC.  The ECB staff will update its forecasts, and the key here is where it sees inflation at the end of the forecasting period.  In September, it anticipated that CPI would be at 1.5% at the end of 2023.  Some ECB members argued it was too low.   It may be revised higher, but the key for the policy outlook is whether it is above the 2% target.  We doubt that this will be the case.  While the ECB will likely announce that it intends on respecting the current end of the Pandemic Emergency Purchase Program next March, its QE will persist. The pre-crisis Asset Purchase Program is expected to continue and perhaps even expand in Q2 22.  The "modalities" of the post-emergency bond-buying program, size, duration, and flexibility (self-imposed limits) will be debated between the hawks and doves.  With eurozone inflation approaching 5% and Germany CPI at 6%, the hard-money camp will have a new ally at the German Finance Ministry as the FDP leader Linder takes the post.  On the other hand, the Social Democrats will name a Weidmann's replacement at the head of the Bundesbank, and nearly anyone will be less hawkish.   While we correctly anticipated that the Bank of England would defy market expectations and stand pat in November, the December meeting is trickier.  The decision could ultimately turn on the next employment and CPI reports due 1-2 days before the BOE meeting.  The risk is that inflation will continue to accelerate into early next year and that the labor market is healing after the furlough program ended in September.  On balance, we suspect it will wait until next year to hike rates and finish its bonds purchases next month as planned.   Having been caught wrong-footed in November, many market participants are reluctant to be bitten by the same dog twice. As a result, the swaps market appears to be rising in about a 35% chance of a 15 bp move that would bring the base rate up to 25 bp.  Sterling dropped almost 1.4% (or nearly two cents) on November 4, the most since September 2020 when the BOE failed to deliver the hike that the market thought the BOE had signaled.   The combination of a strong dollar and the Fed tapering weighed emerging market currencies as a whole.  The JP Morgan Emerging Market Currency Index fell by about 4.5% in November, its third consecutive monthly decline, bringing the year-to-date loss to almost 10%.  It fell roughly 5.7% in 2020.  Turkey took the cake, though, with the lira falling nearly 30% on the month.  It had depreciated by 15% in the first ten months of the year.  This follows a 20% depreciation last year.  Ten years ago, a dollar would buy about 1.9 lira.  Now it can buy more than 13 lira.  The euro's weakness was a drag, and the geopolitical developments (e.g., Ukraine, Belarus) weighed on central European currencies. The central bank of Hungary turned more aggressive by hiking the one-week deposit rate by 110 bp (in two steps) after the 30 bp hike in the base rate failed to have much impact.  The forint's 3.1% loss was the most among EU members.   Colombian peso was the weakest currency in Latam, depreciating by almost 5%. It was not rewarded for delivering a larger than expected 50 bp rate hike in late October.  Bannockburn's GDP-weighted global currency index (BWCI) fell by nearly 1% in November, the largest monthly decline since June.  It reflected the decline of the world's largest currencies against the dollar.  Three currencies in the index proved resilient  On the GDP-weighted basis, China has immense gravity, with a 21.8% weighting (the six largest EM economies, including China, account for a 32.5% of the BWCI). It appreciated by about two-thirds of a percent. The Brazilian real managed to rise (~0.25%) too.  Since the day before the Omicron variant was sequenced, the Japanese yen gained a little more than 2%, reversing the earlier decline that had brought it to four-year lows.  It rose by  0.7% in November, making it the strongest currency in the index.  Among the major currencies, the Australian dollar fell the most, declining about 5.2%.  The Canadian dollar was next, with around a 3% loss.   As it turns out, the dollar (Dollar Index) recorded its low for the year as shocking events were unfolding in Washington on January 6.  The bottomed against the yen and euro the same day.   The greenback did not bottom against the Australian dollar until February, but it took it until early June to put in a low against sterling and the Canadian dollar.  The BWCI peaked in early June and, by the end of last month, had retreated by about 2.7%.  We suspect it may decline by another 2%, which would return it the levels of late 2019.  That, in turn, implies the risk of a stronger dollar into the first part of next year.     Dollar:  The jump in US CPI to above 6%, and a strong sense that it is not the peak, spurred speculation that the Federal Reserve would likely accelerate the pace of tapering at the December meeting. Several Fed officials seemed sympathetic, including San Francisco President Daly, who is perceived to be a dove. The minutes of the November meeting underscored the central bank's flexibility over the pace of tapering.  At the same time, most of the high-frequency data for October came in stronger than expected, lending credence to ideas that after a disappointing Q3, the world's largest economy is accelerating again in Q4.  The divergence of monetary policy and the subsequent widening interest rate differentials is the primary driver of expectations for dollar appreciation against the euro and yen.  The market had been leaning toward three rates hikes in 2022 before news of the new Covid mutation emerged and trimmed the odds.  Powell was renominated for a second term at the helm of the Federal Reserve, Brainard was nominated to be Vice-Chairman.  There is still the Vice-Chair for supervision and an empty governor seat for President to Biden to fill.  In addition to the changes in leadership, the rotation of the voting members of the FOMC brings in a somewhat more hawkish bias next year.   Euro:  In contrast with the US, eurozone growth is set to slow in Q4. After two quarters that growth exceeded 2% quarter-over-quarter, growth is likely to moderate to below 1% in Q4 21 and Q1 22.  Food and energy are driving inflation higher.  The EC continues to negotiate with the UK over changes to the Northern Ireland Protocol.  The dispute over fishing licenses and migrant crossing of the channel are also unresolved sources of tension with the UK. Tensions between the EC and Poland/Hungary over the rule of law, judicial independence, and civil liberties have also not been settled.  As was the case in the spring, Russia's troop and artillery movement threatened Ukraine, though the tension on the Poland/Belarus border has eased.  The ECB's leadership continues to maintain the price pressures are related to the unusual set of circumstances but are ultimately temporary.  Its December 16 meeting, the last one before Bundesbank President Weidmann steps down, is critical. In addition to confirming the end of the Pandemic Emergency Purchase Program in March 2022, and the expansion of the Asset Purchase Program, the ECB staff will update its inflation forecasts.  The focus here is on the 2023 CPI projection of 1.5%.  There was a push back against it in September, and a slight upward revision is likely. Nevertheless, it will probably remain below the 2% target.  The swaps market is pricing in a 25 bp hike in 2023.   (November indicative closing prices, previous in parentheses)   Spot: $1.1335 ($1.1560) Median Bloomberg One-month Forecast $1.1375 ($1.1579)  One-month forward  $1.1350 ($1.1568)    One-month implied vol  7.1%  (5.1%)         Japanese Yen:  Japan has a new prime minister who has put together a large fiscal stimulus package that will help fuel the economic recovery that had begun getting traction since the formal state of emergency was lifted at the end of September.  After a frustratingly slow start, the inoculation efforts have started bearing fruit, with vaccination rates surpassing the US and many European countries.  Unlike most other high-income countries, Japan continues to experience deflationary pressures.  Food and energy prices may be concealing it in the CPI measure, but the GDP deflator in Q2 and Q3 was  -1.1%. However, the BOJ does not seem inclined to take additional measures and has reduced its equity and bond-buying efforts.  The exchange rate remains sensitive to the movement of the US 10-year note yield, which has chopped mostly between 1.50% and 1.70%. With a couple of exceptions in both directions, the greenback has traded in a JPY113-JPY115 range.  The emergence of the new Covid mutation turned the dollar back after threatening to break higher.  A convincing move above the JPY115.50 area would likely coincide with higher US rates and initially target the JPY118 area.    Spot: JPY113.10 (JPY113.95)       Median Bloomberg One-month Forecast JPY113.30 (JPY112.98)      One-month forward JPY113.00 (JPY113.90)    One-month implied vol  8.2% (6.4%)   British Pound:  Sterling never fully recovered from disappointment that the Bank of England did not hike rates in early November.  Market participants had understood the hawkish rhetoric, including by Governor Bailey, to signal a hike.  The implied yield of the December 2021 short-sterling interest rate futures plummeted by 30 bp by the end of the month, and sterling has not seen $1.36, let alone $1.37, since then.  Indeed, sterling chopped lower and recorded new lows for the year in late November near $1.3200.  Growth in the UK peaked in Q2 at 5.5% as it recovered from the Q1 contraction.  It slowed to a 1.3% pace in Q3 and looks to be slowing a bit more here in Q4.  The petty corruption scandals and ill-conceived speeches by Prime Minister Johnson have seen Labour move ahead in some recent polls.  An election does not need to be called until May 2024, but the flagging support may spur a cabinet reshuffle.  The next important chart point is not until around $1.3165 and then the $1.30 area, which holds primarily psychological significance.       Spot: $1.3300 ($1.3682)    Median Bloomberg One-month Forecast $1.3375 ($1.3691)  One-month forward $1.3315 ($1.3680)   One-month implied vol 7.5% (6.8%)      Canadian Dollar:  The Canadian dollar appreciated by almost 2.4% in October and gave it all back, plus some in November.  Indeed, the loss was sufficient to push it fractionally lower for the year (-0.4%), though it remains the best performing major currency against the US dollar.   The three major drivers of the exchange rate moved against the Canadian dollar last month.  First, its two-year premium over the US narrowed by 17 bp, the most in four years.  Second, the price of January WTI tumbled by around 18.2%.  Commodity prices fell more broadly, and the CRB Index snapped a seven-month rally with a 7.8% decline.  Third, the risk appetites faltered is reflected in the equity markets. The Delta Wave coupled with the new variant may disrupt growth.  Still, the swaps market has a little more than two hikes discounted over the next six months.   The government is winding down its emergency fiscal measures, but the spring budget and election promises mean that the fiscal consolidation next year will be soft.     Spot: CAD1.2775 (CAD 1.2388)  Median Bloomberg One-month Forecast CAD1.2685 (CAD1.2395) One-month forward CAD1.2770 (CAD1.2389)    One-month implied vol 7.2% (6.2%)      Australian Dollar:  The Australian dollar fell by more than 5% last month, slightly less than it did in March 2020.  It did not have an advancing week in November after rallying every week in October.  Australia's two-year premium over the US was chopped to less than 10 bp in November from nearly 28 bp at the end of October.  The Reserve Bank of Australia pushed back against aggressive rate hike speculation.   The unexpected loss of jobs in October for the third consecutive month took a toll on the Australian dollar, which proceeded to trend lower and recorded the low for the year on November 30, slightly below $0.7065.  A break of $0.7050 would initially target $0.7000, but convincing penetration could spur another 2-2.5-cent drop.  The 60-day rolling correlation between- changes in the Australian dollar and the CRB commodity index weakened from over 0.6% in October to below 0.4% in November. The correlation had begun recovering as the month drew to a close.       Spot:  $0.7125 ($0.7518)        Median Bloomberg One-Month Forecast $0.7195 ($0.7409)      One-month forward  $0.7135 ($0.7525)     One-month implied vol 9.7%  (9.1%)        Mexican Peso:  The broadly stronger US dollar and the prospects of more accelerated tapering weighed on emerging market currencies in November, but domestic considerations also weighed on the peso.   The Mexican peso fell by around 4.1%, the most since March 2020.  The economy unexpectedly contracted by 0.4% in Q3.  There is little fiscal support to speak of, while monetary policy is becoming less accommodative too slowly compared with some other emerging markets, such as Brazil.  Price pressures are still accelerating, and the bi-weekly CPI rose above 7% in mid-November. The swaps market discounts nearly a 25 bp hike a month for the next six months.  The government's policies, especially in the energy and service sectors, are not attractive to investors.  President AMLO dealt another blow to investor confidence by retracting the appointment of former Finance Minister Herrera for his deputy to head up the central bank starting in January.  This is seen potentially undermining one of the most credible institutions in Mexico.  Lastly, Mexico's trade balance has deteriorated sharply in recent months and through October has recorded an average monthly trade deficit of nearly $1.2 bln this year.  In the same period, in 2020, it enjoyed an average monthly surplus of almost $2.5 bln, and in the first ten months of 2019, the average monthly trade surplus was a little more than $150 mln.     Spot: MXN21.46 (MXN20.56)   Median Bloomberg One-Month Forecast  MXN21.23 (MXN20.42)   One-month forward  MXN21.60 (MXN20.65)     One-month implied vol 14.9% (9.6%)      Chinese Yuan:  The Chinese yuan has been remarkably stable against the US dollar, and given the greenback's strength, it means the yuan has appreciated sharply on a trade-weighted basis.  Going into the last month of the year, the yuan's 2.6% gain this year is the best in the world.  Chinese officials have signaled their displeasure with what it sees as a one-way market.  At best, it has orchestrated a broadly sideways exchange rate against the dollar, mainly between CNY6.37 and CNY6.40. The lower end of the dollar's range was under pressure as November drew to a close.   Even though the Chinese economy is likely to accelerate from the near-stagnation in Q3 (0.2% quarter-over-quarter GDP), it remains sufficiently weak that the PBOC is expected to consider new stimulative measures.  It last reduced reserves requirements in July, and this seems to be the preferred avenue rather than rate cuts.  Yet, given the interest rate premium (the 10-year yield is around 2.85%), record trade surpluses ($84.5 bln in October), portfolio inflows, and limited outflows, one would normally expect a stronger upward pressure on the exchange rate.    Spot: CNY6.3645 (CNY6.4055) Median Bloomberg One-month Forecast  CNY6.38 (CNY6.4430)  One-month forward CNY6.3860 (CNY6.4230)    One-month implied vol  3.5% (3.5%)    Disclaimer
Fragile Calm Returns and Powell's Anti-Inflation Rhetoric Ratchets Up

Fragile Calm Returns and Powell's Anti-Inflation Rhetoric Ratchets Up

Marc Chandler Marc Chandler 01.12.2021 14:08
December 01, 2021  $USD, China, Currency Movement, EMU, Federal Reserve, Japan, PMI, South Korea, UK Overview:  Into the uncertainty over the implications of Omicron, the Federal Reserve Chairman injected a particularly hawkish signal into the mix in his testimony before the Senate.  These are the two forces that are shaping market developments.  Travel restrictions are being tightened, though the new variant is being found in more countries, and it appears to be like closing the proverbial barn door after the horses have bolted. Equities are higher.  The MSCI Asia Pacific Index, led by South Korea, and India, rose for the first time in four sessions, and Europe's Stoxx 600 is recouping more of yesterday's loss.  US futures are trading more than 1% higher.  Benchmark yields are higher.  The 10-year US Treasury yield is up four basis points though is still below 1.50%.  European yields are mostly 3-5 bp higher, though Italy's benchmark is 8 bp higher near 1.05%.  The dollar remains the fulcrum of the see-saw, but the funding currencies (yen, Swiss franc, and euro) are lower, and the dollar bloc is higher.  The dollar is pulling back against the Turkish lira after approaching TRY14 yesterday, even though President Erdogan's rhetoric about pushing for even lower rates seemed to have ratcheted up.  Emerging market currencies are more broadly mixed, but the JP Morgan Emerging Market Currency Index is up for the third consecutive session to match the longest advance in nearly three months.  Gold posted an outside down day yesterday, but there has been no follow-through selling today, and the yellow metal is consolidating inside yesterday's range.  January WTI slipped below $65 yesterday and is pushing above $69 today ahead of the OPEC meeting.   Dutch natural gas prices are firm, recouping most of yesterday's loss.  Iron ore and copper prices are also retracing yesterday's weakness.   Asia Pacific China's Caixin manufacturing PMI unexpectedly slipped below the 50 boom/bust level, albeit barely (49.9).  It was expected to be unchanged at 50.6.  It had eased below 50 in August (49.2).  Recall that the world's second-largest economy nearly stagnated in Q3 (0.2% quarter-over-quarter), and it appears to be accelerating here in Q4. Still, many look for the PBOC to provide more stimulus, perhaps in the form of a cut in reserve requirements, as it did this past July.  Separately,  officials seem to be cracking down harder on the "variable interest entity" structure that characterizes offshore listings, especially in the US.   Japan's November manufacturing PMI was revised to 54.5 from 54.2.  It stood at 53.2 in October.  The world's third-largest economy is recovering.  Australia reported Q3 GDP contracted by 1.9%, less than the 2.7% contraction economists had projected (Bloomberg median).  Its economy also is recovering.  The November manufacturing PMI was confirmed at 59.2, up from 58.2 previously.  House prices in Australia and New Zealand rose last month but sequentially at a slower pace.  To round out this regional overview, note that South Korea's exports in November were stronger than expected, pointing to robust foreign demand.  Exports rose 32.1% year-over-year.  Economists (Bloomberg median) expected a 27.2% pace after 24.1% in October.   It is the strongest pace since August.  Imports jumped 43.6% year-over-year, which was also more than expected, and follows a 37.7% increase previously.   The dollar is firm after being sold to its lowest level against the yen yesterday since October 11 (~JPY112.55).  It stalled near JPY113.60 in late Asia, which is slightly lower than the high seen in the US yesterday in response to the Fed's Powell hawkish pivot. However, barring fresh negative impulses, the JPY113 area may offer support again.  The Australian dollar is firm near yesterday's highs after falling to a new low for the year yesterday.  That low (~$0.7065) approached the (38.2%) retracement objective of the Aussie's rally from the March 2020 low near $0.5500.  A move now above $0.7080 would lift the technical tone and target the $0.7120-$0.7150 area.  The greenback initially fell to nearly CNY6.36, just ahead of the year's low recorded in May near CNY6.3570, before recovering to around CNY6.3720.  Resistance may be seen in the CNY6.3750-CNY6.3800 area.  The PBOC set the dollar's reference rate CNY6.3693.  The market (Bloomberg survey) had anticipated CNY6.3682.   Europe Covid was surging in several parts in Europe, including Germany, before the sequencing of the Omicron variant, and things have gotten worse.  The economic impact is beginning to be evident.  Germany's October retail sales, which economists had expected to recover after falling by 1.9% in September, disappointed with a 0.3% decline. The final November manufacturing PMI was revised to 57.4 from the flash 57.6 (and 57.8 in October).  It is the fourth consecutive decline.  The French manufacturing PMI was revised to 55.9 from the preliminary estimate of 54.6 (53.6 in October).  It is the first gain since May.  Economists hoped that Spain's manufacturing PMI was going to rise after falling for two months through October.  Instead, it fell again (51.1 vs. 57.4) to stand at its lowest level since March.  Italy is the standout.  Its manufacturing PMI was stronger than expected, jumping to 62.8 from 59.7, representing a new cyclical peak.  The aggregate for the eurozone as a whole edged up to 58.4 from 58.3 in October, but slower than the 58.6 flash estimate.  Still, it managed to eke out its first gain since June.  The UK's November manufacturing PMI stands at 58.1, down slightly from the preliminary estimate (58.2).  It was at 57.8 in October.  It is the second consecutive monthly gain after falling from June through September.  The UK economy grew by 1.3% in Q3 and is expected to slow to 1.1% this quarter.  The implied yield of the December 2021 short-sterling interest rate futures fell for eight sessions coming into this week.  It has been choppy so far this week, and net-net, the yield is about 1.5 bp higher than at the end of last week.  The overnight index swaps imply about a 40% chance of a hike next month.   The euro traded on both sides of Monday's range yesterday and closed above Monday's high.  However, there has been no follow-through buying today, and a consolidative tone has emerged.  A move above $1.1400 is needed to lift the tone, and it most likely won't happen today.  A 1.2 bln euro option is struck there that expires today.  The focus is on the downside. So far, it has held above $1.13, and support is seen around $1.1290.  Sterling recorded the low for the year yesterday, a little below $1.3200.  It stopped shy of our $1.3165 target, the (38.2%) retracement of cable's recovery from the March 2020 low. Its bounce off yesterday's lows fizzled out near $1.3330. Note that there is a GBP600 mln option at $1.33 that expires tomorrow.   America We have argued that the US October CPI surprise (6.1%) was a pivot point for Fed officials, even a reputed dove like San Francisco's Daly.  We also detected a change in rhetoric, and this point was driven home by Fed Chair Powell yesterday.  He clearly brandished his anti-inflaton credentials. Powell declared that the Fed would use its tools to step inflation from becoming entrenched.  At the same time, he recognized that it cannot assess Omicron now, though it clearly poses a risk.  Still, the next FOMC meeting is two weeks away, and by then, more information will be known.  Powell confirmed that the Fed would discuss the pace of tapering.  While the Fed will stop referring to inflation as transitory, Powell echoed Yellen's recent assessment that price pressures are projected to ease in H2 22.  Of note, the short end of the coupon curve sold off, but the long end remained firm.  The 30-year bond yield slipped to its lowest level since January, and the 2-10 year curve flattened 13 bp to below 90 bp, the flattest in 10 months.   The North American economic calendar is jammed today.  The US sees ADP's private-sector jobs estimate. Around 525k jobs are expected to have been filled, down from 571 in October.  In the last three months, the ADP estimate has undershot the official measures by an average of 23k.  Year-to-date, the average under-estimate is a little more than 50k.  November auto sales are expected to have risen for the second consecutive month after falling from May through September.  The final manufacturing PMI will also be reported.  The flash reading was the first increase since July.  The ISM manufacturing survey will also be published.  It has been a bit more resilient than the PMI.  Late in the session, the Beige Book will be released.  Canada reports October building permits (expected softer after the 4.3% gain in September) and the manufacturing PMI (57.7 in October).  Mexico reports its manufacturing PMI and IMEF surveys.  The central bank's inflation report is also due.  Mexico reports October worker remittances today.  They have averaged $4.15 bln a month this year through September.  The average for the same period in 2020 was $3.33 bln, and in 2019 $3.03 bln.  Note that the average trade deficit this year (through October) is almost $1.2 bln.   After reaching almost CAD1.2840 yesterday, its highest level since the September FOMC meeting, the greenback has come back offered today. It briefly and marginally traded below yesterday's CAD1.2730 low.  It needs to convincingly break below CAD1.2720 to be of any technical significance.  Initial resistance now may be seen near CAD1.2780.  The dollar peaked against the Mexican peso at the end of last week near MXN22.1550.  It is moving lower for the third consecutive session, and found initial support around MXN21.27 today.  The MXN21.20 area is the halfway mark of last month's range.  A move above  MXN21.40 may signal the dollar's downside correction is over.   Disclaimer
Sentiment Remains Fragile

Sentiment Remains Fragile

Marc Chandler Marc Chandler 29.11.2021 14:08
November 29, 2021  $USD, Covid, Currency Movement, Federal Reserve, Inflation, Japan Overview: The fire that burnt through the capital markets before the weekend, triggered by the new Covid mutation, burned itself out in the Asian Pacific equity trading earlier today. A semblance of stability, albeit fragile and tentative, has emerged. Europe's Stoxx 600 is up about 1%, led by real estate, information technology, and energy.  US index futures are trading higher, with the NASDAQ leading.  Benchmark 10-year yields are firmer.  The US 10-year Treasury yield has risen about six basis points to 1.53%.  European yields are mostly 1-2 basis points higher, while the UK Gilt yield is up four basis points. The dollar remains, as we say, at the fulcrum of the major currencies, but in an opposite way, with the funding currencies that rallied strongly before the weekend seeing their gains pared today, while the dollar bloc and Scandis trade firmer.  Among the emerging market currencies, the liquid and freely accessible currencies, such as the South African rand, Russian rouble, and Mexican peso are leading the recovery.  The Turkish lira and central European currencies, perhaps dragged down by the softer euro, underperform.  The JP Morgan Emerging Market Currency Index is slightly firmer after falling around 0.4% before the weekend.  Gold held support near $1780 but has been unable to resurface above $1800.  January WTI jumped by about 5% after the 13% drop at the end of last week.  Iron ore surged 6.5%, recouping in full the 5.6% decline in the last session to approach its recent highs.  Winter weather is beginning to be experienced in Europe, and natural gas (Netherlands) is up 7.75% after falling 4.8% ahead of the weekend.  Copper is recouping a little less than half of last Friday's nearly 4% fall.   Asia Pacific Faced with much unknown about the new mutation, several Asia Pacific countries are opting to close their borders to foreign travelers.  Initially, countries limited the travel ban to a handful or so of countries from Southern Africa.  It does appear that the omicron variant has been around before being sequenced in South Africa, and it is has been found in several countries. However, the origin is still not clear.  While some reports from South Africa suggest mild symptoms, there is good reason for the World Health Organization's caution.  If a new vaccine is needed for the variant, reports suggest it could take around 100 days.  Recall that Japan has lifted its formal emergency in late September, and the economy is rebounding as anticipated.  Today's data showed retail sales rose for a second month in October.  The 1.1% increase lifted the year-over-year rate to 0.9%.   Purchases of clothing and food surged by 9.2%.  Auto sales, still hampered by supply chain disruptions, was the only category that fell.  After a frustratingly slow start, Japan's inoculation efforts have been successful, and the vaccination rate is above 75%.   Before news of the new variant broke, the dollar was around JPY115.50.  It fell to nearly JPY113.00 before the weekend.  It recovered in early dealing to almost JPY113.90 before the weakness of the regional equities contributed to its push lower.  Bloomberg pricing data showed it recorded a JPY112.99 low near midday in Tokyo.  It bounced to almost JPY113.65 in late dealings and has been consolidating in the European morning.  The option for $350 mln at JPY113.40 that expires today has likely been neutralized.  The market appears to be waiting for a new development to push it out of the JPY113-JPY114 range.  The Australian dollar held the pre-weekend low slightly below $0.7115 and is making session highs late in the European morning near last Friday's high (~$0.7155).  Nearby resistance is seen in the $0.7180-$0.7200 area. Recall that last week's 1.55% decline was the fourth consecutive weekly loss and the largest in three months.  The greenback gave up its pre-weekend gain against the Chinese yuan and a bit more today.  It did not even trade above CNY6.39 today, settling above it at the end of last week.  As we have noted, it remains within the range set on November 16 of roughly CNY6.3670-CNY6.3965. The PBOC set the dollar's reference rate at CNY6.3872 and continued to set it above expectations (CNY6.3858, via Bloomberg).   Two issues seem to be receiving attention today.  First are the prospects of easing by the PBOC in the face of continuing weakening of the economy. The November PMI will be released starting first thing tomorrow.  Second, China's property developers have an estimated $1.3 bln in debt servicing next month, following $2 bln this month.   Europe Outside of the virus, two issues dominate investors' attention in Europe today.  First are the November inflation reports from Spain and Germany ahead of the preliminary aggregate figures tomorrow.  The other is the increasingly bellicose rhetoric between the UK and France over the channel crossings and fishing.   Spain's harmonized November CPI rose by 0.3% to lift the year-over-year rate to 5.6%.  It is the fastest pace since 1992.  It follows October's 1.6% increase and 5.4% 12-month rate.  Food and energy were the main drivers.  The increase was in line with forecasts.  In September, the central bank's chief economist had anticipated that November could be the peak in inflation and anticipated it falling back below the 2% target in 2022.  German states are reporting their November CPI figures, and the country's measure will be reported late today.  The states' measures are consistent with forecasts calling for the nation's harmonized measure to fall around 0.2%.  However, the year-over-year pace is projected to accelerate to 5.5% from 4.6% due to the base effect.  The EMU aggregate preliminary CPI is forecast (Bloomberg median) to be flat on the month for a 4.5% year-over-year pace (up from 4.1% in October).  The core rate is projected to climb to 2.3% from 2.0%.  The euro poked slightly above $1.1330 at the end of last week and settled just above $1.1315.  It traded near $1.1260 in late Asia/early Europe and caught a bid that brought it back to about $1.1290.  There is a 1.7 bln euro option at $1.13 that expires today.  The intraday momentum indicators are getting stretched, warning of the downside risk in early North American activity.  Sterling recorded a new low for the year ahead of the weekend, near $1.3280. It is trading in about a quarter-cent range today, around $1.3335, and staying within last Friday's range.  The pre-weekend high was closer to $1.3365.   After an eight-day rally, the December short-sterling interest rate futures contract is trading slightly heavier today.  The market expectations have shifted from a good chance of a hike next month to a bit more than a third of a chance.   America The US auto sales and jobs highlight this week, but Fed officials are out in force too.  Today Powell, Williams, and Hasson speak at an innovation conference, and Bowman discusses the central bank and indigenous economies. Tomorrow, Powell and Yellen testify before a Senate committee on the CARES Act.  Their prepared remarks are expected to be released later today that may also work for the testimony on Wednesday on the same topic before a House committee.    Tuesday, Clarida discusses the Fed's independence, while Williams will speak on food security.  The Beige Book, in preparation for next month's FOMC meeting, is due Wednesday too.  No fewer than five Fed officials speak in the second half of the week.  Our initial bias continues to be for faster tapering at the December FOMC meeting. It still seems to be the prudent course to maximize the Fed's ability to respond to a broad range of probable economic outcomes.  The US pending home sales and the Dallas Fed manufacturing survey, due today, are not typically market movers.  And today is unlikely to be an exception.  Canada reports its Q3 current account surplus (expected to be around C$5.7 bln, up from C$3.6 bln in Q2.  It also reports raw material and industrial prices for October.  The week's highlight is tomorrow's September and Q3 GDP, followed by Friday's employment report.  Mexico reports October unemployment figures (median forecast in Bloomberg's survey calls for a 4.07% rate, down from 4.18% in September). Concerns about President AMLO's appointment to the central bank lingers even though the peso may benefit from the correction to the 1.6% pre-weekend drop.   The US dollar spiked to almost CAD1.28 before the weekend.  It fell to nearly CAD1.2720 today.  The pullback was seen in Asia, and it has been consolidating since then.  Still, the greenback looks vulnerable to a further retracement of the pre-weekend gains. Initial potential extends toward CAD.2680-CAD1.2700.   The broader risk appetites may be the key today for both the Canadian dollar and Mexican peso.  The greenback jumped to MXN22.1550 amid the pre-weekend turmoil.  This now marks the high for the year.  It pulled back initially to MXN21.6850 in Asia, but the selling pressure eased, and it traded in an MXN21.7630-MXN21.9000 range in Europe.  We suspect the combination of the trajectory of US monetary policy plus the concerns about the central bank of Mexico boosts the chances that the peso underperforms generally.  Moreover, rising price pressures and a weak economy put officials in a difficult position, especially given AMLO's reluctance to deploy fiscal measures to support the economy.   Disclaimer
The Dollar Moves Back to the Fulcrum between the Funding and Higher Beta Currencies

The Dollar Moves Back to the Fulcrum between the Funding and Higher Beta Currencies

Marc Chandler Marc Chandler 29.11.2021 10:46
November 28, 2021  $USD The new covid variant injected a new dynamic into the foreign exchange market.  The World Health Organization cautioned against the need to impose travel restrictions, but policymakers, by and large, do not want to be bitten by the same dog twice.  To err on the side of caution is to minimize one's biggest regret.  The risk is that the uncertainty is not lifted quickly but lingers, which would likely unpin volatility.   US and European benchmark 10-year yields fell sharply ahead of the weekend.  In the US, the market unwound some of its aggressive pricing in of Fed policy.  This is reflected in the commensurate drop at the short-end.  In Europe, the decline in 10-year yield reflected a slowing of growth/inflation as its short-end was largely unchanged.   There are three areas in which market participants cannot be as confident as they were in the middle of last week.  First, the odds of a Bank of England hike next month were diminishing and fell further at the end of last week.  Second, an acceleration in the Fed's tapering seemed increasingly likely given the strength of recent data and the jump in price pressures.  However, the emergence of this new strain makes an aggressive rate hiking campaign less likely.  Third, the prospects for stronger world growth diminished on the margins.  This undermines risk appetites and weakens those currencies that often appear to do better in robust growth phases (e.g., dollar bloc, Scandis, and most emerging market currencies).   Dollar Index:  The Dollar Index put in a new high for the year on November 24, slightly below 97.00. It was confined to a narrow range when the US markets were closed on November 25 and sold off on news of the new variant and imposition of travel controls by several countries.  The setback was sufficient to turn the MACD lower from over-extended territory, though the Slow Stochastic hasn't and remains stretched.  If we assume a correction has begun, a key question is what move is being retraced.  A conservative but logical assumption is that the last leg up, since the November 10 CPI, is in play.  The first (38.2%) target is near 95.75, and then the (50%) retracement is around 95.40.  A break of 95.00 could signal another cent decline.  Euro:  Interest rate differentials and the surge in delta variant cases had sent the euro to almost $1.1185 in the middle of the last week, the lowest since July 2020.  When news of the new variant broke, what appears to be a short-covering rally lifted the euro to almost $1.1325.  The (38.2%) retracement of the leg down since November 10 is near $1.1340.  A more formidable resistance area is in the $1.1375-$1.1400 band.  As was the case with the Dollar Index, the MACD is turning, but the Slow Stochastic is lagging.  Initial support now is seen near $1.1260. With the old and now new variant, the surge accelerated inflation expected to be reported next week may not be the fodder for the ECB has that some anticipated.   Japanese Yen:  We have suggested that the dollar was in a JPY113-JPY115 range.  Earlier this month, it had dipped briefly below JPY112.75 and snapped back.  Indeed, in the first part of last week, it was fraying the upper end of the range and traded slightly through JPY115.50.  However, the pre-weekend turmoil saw the greenback drop back to the lower end of the range (~JPY113.05).  The trendline connecting the August low and the two November lows, found near JPY114.10 ahead of the weekend, was taken out with determination. The MACD is turning down but never recovered from the mid-October-mid-November decline.  The Slow Stochastic is edging back into over-extended territory. British Pound:   As the December short-sterling futures contract rallied, implying a less likely chance of a BOE hike before year-end, the pound fell.  The interest rate futures contract will begin next week with a seven-day rally intact.  Sterling, itself has fallen for six sessions, and a new low for the year was set near  $1.3320 before the weekend.  Here, both the MACD and Slow Stochastic are falling while being over-extended on the downside.   A move above $1.3350 would help stabilize the tone,  but it requires a push above $1.3400 to be notable.  On the downside, we continue to see a risk of a test on the  $1.3165, the first retracement (31.8%) of sterling's rally since Mach 2020.     Canadian Dollar:  Talk about trending currencies; the Canadian dollar fell for the fifth consecutive week following a five-week rally.  Net-net,  it is little changed.  The US dollar settled near CAD1.2765 on September 17, which was between the Bank of Canada meeting and the FOMC.  The greenback reached CAD1.28 ahead of the weekend before settling back near CAD1.2760.  There is little chart resistance until closer to CAD1.29.  As one would expect, the momentum indicators are stretched and frayed the upper Bollinger Band (~CAD1.2770).  It requires a break of the CAD1.2630-CAD1.2640 area to be meaningful.   Australian Dollar:  In the pre-weekend carnage, the Australian dollar came within a whisker of the year's low set in August near $0.7100.  The Aussie, like the Canadian dollar, has been streaking.  Its four-week decline comes are a four-week rally.  The move was underway before the new variant was announced.  The next target is around $0.7050, the (38.2%) retracement of the rally from the March 2020 low (~$0.5500).  Below there is the $0.7000 area, which caught the lows in September and October 2020.   The MACD continues to fall, while the Slow Stochastic has begun to flatline in the trough.  The 25 bp hike by the Reserve Bank of New Zealand, which was fully expected, and disappointed those that looked for a larger move, did little to support the New Zealand dollar.  Indeed, it was the worst-performing major currency last week, losing about 2.5%, more than twice as much as the Canadian dollar and two-thirds more than the Australian dollar.  It also tested the year's low set in August (~0.6800). A break would open the door to steeper losses, but the next area of support may be found in the $0.6760-$0.6780 area.   Mexican Peso:  The peso was the second weakest currency in the world last week (after the Turkish lira), falling around 4.3% to a new low for the year.  It had three strikes against it last week.  First, emerging market currencies broadly are out of favor.   The JP Morgan Emerging Market Currency Index has fallen for 10 of the past 12 weeks.  Second, the new variant and the dramatic risk-off saw the peso's losses accelerate.  Third are domestic considerations.  AMLO's nomination to head the central bank starting next year did not bolster the market's confidence, which was on the heels of the Turkish debacle.  Also, domestic economic conditions have worsened.  The data have been softer than expected, including a downward revision in Q3 GDP showing a contraction of 0.4% rather than 0.2%. At the same time, the bi-weekly CPI rose above 7%.   Ahead of the weekend, the dollar rose to MXN22.1550, and although it pulled back, it found support above the previous session's high (~MXN21.60).  Nearly all the emerging market currencies fell against the dollar (The Brazilian real was a notable exception.  It eked out ~0.5% gain).  However, Mexico seems particularly vulnerable.  The credibility of the central bank may be called into question.  The economic challenge of surging inflation and weak economic activity would seem to require fiscal support, for which AMLO shows little interest.  In April 2020, the greenback reached nearly MXN25.7850, and the MXN22.47 area corresponds to the halfway mark of its subsequent decline.   Chinese Yuan:  Chinese officials appear to have expressed mild displeasure with the foreign exchange market, cautioning against a one-way market and checking prop positions.  Officials would seem to think that the banks are short dollars, while many outside observers, trying to reconcile the large current account surplus with little currency movement and stable reserves, think the large banks are accumulating dollars ostensibly on behalf of officials (hence the talk of stealth intervention). In fact, the one-way market has been broken.  On November 16, the dollar traded between CNY.3670 and CNY6.3965 and has not moved out of that range.  We suspect the risk is for an upside break for the dollar and initially see a move toward CNY6.42.   Disclaimer
Covid Strikes Back

Covid Strikes Back

Marc Chandler Marc Chandler 26.11.2021 12:44
November 26, 2021  $USD, Covid, Currency Movement, Hungary, Mexico, South Korea Overview: Concerns that a new mutation of the Covid virus has shaken the capital markets.  Equities are off hard, and bonds have rallied.  In the foreign exchange market, the Japanese yen and Swiss franc have rallied.  While there may be a safe haven bid, there also appears to be an unwinding of positions that require the buying back of the funding currencies, which is also lifting the euro.  The currencies levered from growth, the dollar-bloc and Scandis are weaker.   Oil has been knocked back by around  6.7%, with January WTI trading near $73. Led by 2%+ losses in Japan, Hong Kong, and India, and 1%+ losses in South Korea, and Taiwan, the MSCI Asia Pacific Index has slumped to its lowest level since July.   Europe's Stoxx 600 gapped lower and is off around 2.4% near midday.  US futures are sharply lower (1.25%-2.5%).  The US 10-year yield has dropped around 12 bp to nearly 1.50%.  While UK Gilts have kept pace with US Treasuries, continental benchmark yields are off 6-8 bp.  The US 2-year yield is about 15 bp lower (~0.49%), while European 2-year yields are mostly 2-5 bp lower.  The 2-year Gilts yield has shed about 12 bp, as the market unwinds some of the chances of a rate hike next month.   Key Development: A new variant of the Covid virus was found.  It is thought to have the most mutations to date.  The EU, UK, Israel, and Singapore have quickly banned travel from South Africa and five neighboring countries.  This is coming on top of and is separate from the outbreak in Europe, where Germany has reported a record number of new cases and several other countries have introduced new restrictions.  Almost a third of Shanghai flights were canceled as three local cases were found.  US infections are also on the rise.  Asia Pacific  As widely expected, South Korea hiked its key 7-day repo rate by 25 bp to 1.0% yesterday.   It follows a 25 bp hike in August.  Consumer inflation rose 3.2% year-over-year in October, while the core rate rose 2.8%.  Growth in Q3 was 4.0%.  With today's roughly 0.3% decline, it brings this year's loss to almost 9%.  Only the yen (~-9.4%) and the Thai baht (~-11%) have performed worse in the region.   Australia reported stronger than expected October retail sales.  The 4.9% month-over-month surge was more than twice the Bloomberg median forecast (2.2%) and follows September's 1.3% gain.  It underscores the recovery that is taking place. The preliminary PMI showed the recovery continuing into November.  The composite rose to 55.0, its highest reading since June.   The dollar was fraying the upper end of the range we anticipated against the yen, pushing against JPY115.50.  The momentum looked to have been at risk of stalling when the news struck.  The dollar was sold to almost JPY113.65.  An option for $710 mln at JPY113.70 expires today.  The price action appears to be stabilizing a bit in the European morning, and the greenback is hovering around JPY114.00.    The trendline connecting the September and the previous two November lows comes in today near there today.  The JPY114.50 area looks to offer initial resistance.  The Australian dollar had been leaking through $0.7200, and the risk-off move sent it slightly through $0.7115, just above the low for the year set on August 20, closer to $0.7105.  A break could spur a move toward $0.7050, which is the (38.2%) retracement of the Australian dollar's recovery since March 2020, when it hit a low near $0.5500.  The $0.7140 area may provide the initial cap for the bounce.   The Chinese yuan is a rock.  It has hardly moved despite the broader developments.  The greenback is slightly (less than 0.05%) firmer and still a little below CNY6.39.  The PBOC set the dollar's reference rate at CNY6.3936, a touch above the CNY6.3934 median projection (Bloomberg survey).   Europe Part of the limited reaction short-end of the European debt market derives from the fact that investors had not expected a change in ECB's monetary policy until the very end of next year, at the earliest.  The surge in the delta strain had already emerged as a weight on the euro.  We had put emphasis on the divergence with the US and saw it captured in the two-year interest rate differential between the US and Germany.  The US premium had risen from around 90 bp in mid-September to 140 bp in the middle of this week.  It has fallen back to about 128 bp today.  Some observers had focused on the year-end adjustments of European banks and the shifting of liquidity through the cross-currency swap basis.   The new German coalition has been announced, and it will have its work cut out.  A record number of new cases have been reported in Germany, and many countries are introducing new social restrictions.  Portugal will try something a bit different.  It is set to require people to work from home in early January for a week to avoid a spike in the virus after the holidays.   Hungary was more aggressive than expected yesterday.  It raised its one-week deposit rate by 40 bp to 2.90%.  Recall that on November 18, it had hiked the one-week deposit rate 70 bp to 2.50%.  Two days earlier, it lifted the base rate 30 bp to 2.10%.  The forint had fallen to a record low against the euro on November 23.   The euro's high was just shy of HUF372, and it fell back to about HUF364.80 yesterday before jumping back to almost HUF369.50 today.  It has steadied around HUF368 in the European morning.   The euro's downside momentum had begun easing as bids below $1.12 were being filled.  The virus developments have spurred what appears to a be short-covering rally that has lifted the single currency thought $1.1280, where a 460 mln euro option expires today.  Nearby resistance is seen near $1.1300 and then last week's high near $1.1375.  Sterling recorded a new low for the year near $1.3280 in late Asian turnover before finding support.  It recovered to about $1.3335 so far.  A move above yesterday's high (~$1.3355) could spur a move to $1.3400-$1.3425.    America The dollar's rally has been fueled by the prospect of a divergence of monetary policy that favored the Fed over the ECB and BOJ.  Indeed, since the November 10 surprise jump in the October CPI to above 6%, we had emphasized the likelihood that the Fed would have to taper quicker to give it the flexibility to lift rates earlier if needed.  Since then, 4-5 Fed officials and several large banks have also underscored this possibility. However, this scenario is being called into question today, which is evident in the swaps markets and the Fed funds futures.  The implied yield of the June 2022 Fed funds futures contract is 7.5 basis points lower, and the December 2022 contract implied yield is down 14.5 bp.  The US dollar rallied to CAD1.2775, its highest level since late September.  It tests a downtrend line connecting the August (~CAD1.2950) and September (~CAD1.2900) highs. A convincing break of the trendline would signal a test on those earlier highs.   We are inclined to see it hold but cannot be confident until CAD1.2720 yields.   The Mexican peso was trampled before today amid concerns about the implications of President AMLO pulling Herrera's nomination for central bank head.  Herrera is a seasoned hand, and although he worked closely with AMLO from the finance ministry, his appointment did not seem to jeopardize the independence of the central bank.  Perhaps the market has been influenced by developments in Turkey, but the nomination of a less experienced and less known candidate has weighed on sentiment.  The dollar, already bid, jumped to MXN22.1550, at its best level since September 2020.   It has pulled back to around MXN21.83, which leaves it up around 1.2%.  This would be the seventh consecutive decline in the peso.  Support is seen around MXN21.60.  Disclaimer
Turkey gets a Reprieve before US Thanksgiving, but Capital Strike may not be Over

Turkey gets a Reprieve before US Thanksgiving, but Capital Strike may not be Over

Marc Chandler Marc Chandler 24.11.2021 14:28
November 24, 2021  $USD, Currency Movement, Germany, Japan, Mexico, RBNZ, Turkey Overview:  The dramatic collapse of the Turkish lira was like an accident one could not help look at, but it was not an accident, but the result of a disregard for the exchange rate and compromised institutions.  The lira was off around 15% at its worst yesterday, before settling 11.2% lower.  After falling for 11 sessions, it has steadied today (~2.7%)  but the capital strike may not be over.  On the other hand, the Reserve Bank of New Zealand delivered the 25 bp rate hike and seemed to give hawkish guidance, and yet the New Zealand dollar was sold and the worst-performing of the major currencies, off 0.65% through the European morning.  The tech losses on Wall Street yesterday weighed on Asia Pacific equities today, where the large markets fell but in China.  Europe's Stoxx 600 is less tech sensitive and is trying to snap a four-day air pocket, but early gains have been reversed. The US futures point to around a 0.5% lower opening.  The greenback has a firmer bias ahead of the full economic calendar ahead of tomorrow's holiday.  The yen is the notable exception.  The greenback rose to a new multi-year high near JPY115.25 but has come back offered and is straddling the JPY115 level in late morning turnover in Europe.  Emerging market currencies are mixed, though the JP Morgan Emerging Market Currency Index is firmer after six consecutive down sessions.  Gold is steadying after a four-day drop that took it from around $1870 to about $1782. Oil extended yesterday's recovery after the concerted agreement to release strategic reserves from six countries but is struggling to sustain the upside momentum.  The market was unimpressed with the new supply and had it (and more?) discounted.  European (Dutch) gas rose 8% yesterday and remains firm today.  Iron ore prices are higher for the fourth session, during which time it has risen by around 20%.  Copper is also firmer for the second session.  It is up about 4.5% from the middle of last week's low.   Asia Pacific The Reserve Bank of New Zealand hiked its cash rate 25 bp to 0.75%.  It was widely expected, and many had leaned to a 50 bp move.  The forward guidance saw the cash rate at 2.0% at the end of next year.  The swaps market had this nearly priced in as well.  This might help explain the profit-taking on the New Zealand dollar.  The 2-year yield fell 14 bp, and the 10-year yield eased by 5.5 bp.  New Zealand stocks defied the regional pressure and rose by about 0.6%.   Japan's economy is recovering. The economy contracted by 0.8% in Q3, but after a slow start, the vaccination program has been successful.  It has allowed a re-opening of the economy.  This is evident in the flash PMI report.  The manufacturing PMI rose to 54.2 from 53.2, and the services PMI improved to 52.1 from 50.7.  The composite new stands at 52.5 (from 50.7) and represents a new cyclical high.  Recall that it bottomed in August at 45.5.  The fiscal support being offered by the supplemental budget is pro-cyclical; it will accelerate the recovery.   The break of JPY115.00 has seen limited follow-through dollar buying.  It peaked near JPY115.25 in Asia and fell to around JPY114.80, where it has found a bid in European dealing.  The nearly $950 mln option that expires today at JPY115 has likely been neutralized (hedged/offset), and the one at JPY115.50 for $1.2 bln may be too far away to be impactful.  Our idea of a JPY113.-JPY115 range is being tested, but recall that earlier this month, the dollar has slipped to almost JPY112.70.  The range is not carved in stone, and some fraying is inevitable.  Still, a move above JPY115.50 would suggest that this consolidation since mid-October is over, and a new and higher range is likely.  Next:  JPY118-JPY120, maybe.  The Australian dollar leaked lower and briefly dipped below $0.7200 for the first time since October 1.  There is an option that is expiring today there for about A$355 mln.  It steadied after early Asia Pacific trading and approached the nearby cap near $0.7230.  A move above here would help the technical tone.  Officials appear to have broken the one-way trading in the yuan.  It has been alternating between gains and losses this week, but the movement has been small, and the yuan is virtually unchanged this week.  The reference rate was set at CNY6.3903, slightly more than the market expected (Bloomberg) of CNY6.3898.   Lastly, we note that South Korea is widely expected to hike the seven-day repo by 25 bp tomorrow, following a similar hike in August.   Europe It has taken the better part of the two months, but the new German coalition appears to have been agreed upon.  However, what the soon-to-be Chancellor Scholz is inheriting is a mess.  The Bundesbank warned recently that the economy may be stagnating this quarter (though the flash PMI yesterday did not confirm this), and inflation may be approaching 6%.  Moreover, the covid infection rate has reportedly doubled in the past two days.  The US CDC put Germany (and Denmark) on a heightened travel advisory.   As one would expect, this is taking a toll on sentiment.  The IFO investor survey showed this.  The current assessment fell to 99.0 from 100.2.  The expectations component eased to 94.2 from 95.4.  The assessment of the overall business climate stands now at 96.5, down from 97.7. After falling for the fifth consecutive month,  it is at the lowest level since April.   The euro's losses were extended to almost $1.12.  The weakness seems most pronounced in Europe, which lends credence to ideas that European financial firms are key sellers, which some related to year-end adjustments.  However, the three-month cross-currency basis swap has steadied since Monday, and pressure on the euro remains.   We note that the two-year US-German interest rate differential rose for the fourth consecutive session yesterday to reach 135 bp, the most since last March, but is steadying today.  Since the convincing break of $1.13, we do not see strong chart support until closer to $1.10.  Sterling made a margin new low for the year yesterday near $1.3345.  It remains stuck near there in quiet turnover.  The $1.3400 area offers nearby resistance.  Here we see little technical support until around $1.3165.  America The US holiday tomorrow is forcing a heavy data release schedule today.  Not all the data is of equal importance.  Of the first set of reports, the weekly jobless claims will command attention.  They have fallen for the past seven weeks and are at their lowest level since the pandemic (268k).  The November national employment report is due at the end of next week, and another 500k jobs were thought to have been filled.  The October trade balance and durable goods orders are notable.  Nearly all the October data has been reported better than expected.  Growth differentials warn of the risk of a wider trade shortfall.  The revisions to Q3 GDP (likely higher) are unlikely to capture much attention as it is too backward-looking.   The second batch of data may see a bigger market reaction, especially in the debt market.  The US is expected to report a jump in personal spending (consumption needs to accelerate if the economy strengthens this quarter).  Income is likely to recover a bit from the 1.0% drop reported in September.  The market may be most sensitive to the deflators.  Here inflation is set to accelerate.  The headline is projected to rise above 5%, while the core should peak above 4%.   Lastly, new homes sales surged 14% in September and maybe lucky to sustain those higher levels in October.  Late in the session, when many in the US may be winding down ahead of the holiday, the FOMC minutes from this month's meeting will be released.  The current focus is on the possibility that the Fed accelerates its tapering next month, and anything that sheds light on this could shape the market's reaction.    The US dollar reversed lower yesterday after reaching CAD1.2745.  It settled near its lows (~CAD1.2670), but there has been no follow-through selling, and the five-day moving average, which it has not closed below since November 15, held (~CAD1.2660). Initial resistance is seen now around CAD1.2700-CAD1.2720.  We note that Canadian bonds are under some pressure, and the 10-year yield is above 1.80%, the highest level since April 2019.  The dollar rose to MXN21.30 yesterday and remains firm, even if off the high today.  News that Mexico's President pulled the nomination of Herrera, the former finance minister, as the next central bank governor, injected some volatility into the peso.  Reports suggest that Herrera's nomination was retracted a few months ago but was kept confidential.  It is not clear what happens next.  Some suspect Herrera may still get the nomination.  It does not appear that any official statement or clarification has been provided.  The median seems to be playing up the likelihood of some announcement in the coming days.  Meanwhile, Mexico reports its bi-weekly CPI figures, and inflation is still accelerating.  Tomorrow's final Q3 GDP is expected to confirm that the economy contracted.  The dollar recorded the high for the year against the peso in March near MXN21.6360.   Disclaimer
Tech Sell-Off Continues

Tech Sell-Off Continues

Marc Chandler Marc Chandler 23.11.2021 22:41
November 23, 2021  $USD, EMU, Federal Reserve, Oil, OPEC+, SPR, UK, US Overview:  The markets are unsettled.  Bond yields have jumped, tech stocks are leading an equity slump, and yesterday's crude oil bounce reversed.  Gold, which peaked last week near $1877, has been dumped to around $1793.  The tech sell-off in the US carried into the Asia Pacific session, and Hong Kong led most markets lower.  The local holiday let Japanese markets off unscathed, though the Nikkei futures are off about 0.4%.  Australia and India managed to post minor gains as the MSCI Asia Pacific Index fell for the fourth time in five sessions.  Europe's Stoxx 600 has slid around 1.5% today, its fourth consecutive decline, but has clawed back nearly half the gains.  It is the longest retreat in two months.  US futures are lower, with the NASDAQ leading the move.   Near 1.64%, the US 10-year yield is at the upper end of this month's range.  Last month it reached 1.70%.  European bond yields are mostly 4-6 bp higher, and peripheral spreads have widened a little.  The dollar is sitting in the middle of the major currencies.  The dollar bloc, sterling, and the Norwegian krone, which are the risk-on, levered to growth currencies, are weaker.  The euro, yen, and Swiss franc are little changed but firmer.  The dollar briefly traded above JPY115.00 in Asia, without Tokyo,  before being pushed back. The steady euro has taken some pressure off most of the regional currencies.  The Turkish lira has been in a virtual freefall following President Erdogan's spirited defense of his efforts to drive down rates.    There was around 10 lira to the dollar in the middle of November.  Today, at its peak, there is about 12.48 lira to the dollar.   Asia Pacific Over the weekend, Japan expressed willingness to cap its strategic reserves.  Press reports indicated yesterday that India is amenable to coordinating a release of some of its oil stocks.  South Korea may also participate.  It has been under consideration for a couple of weeks, at least, in the US, and China appears willing to repeat September's release of crude from its reserves.  However,  it seems naive to have expected OPEC+ to simply standby.  January WTI posted a bearish outside down day ahead of the weekend by trading on both sides of the previous day's range and settling below the previous session's low.  Follow-through selling yesterday took it down about $1.20 from the close, but when OPEC+ announced that a coordinated release of the oil could prompt it to reconsider its own plans.  It is to meet next week to review its strategy. Through yesterday's low, January WTI had retreated by nearly 11% from the October 25 higher near $83.85.   A band of resistance is seen between $78 and $80.   OPEC+ had previously agreed to boost output by 400k barrels a day per month to restore pre-pandemic output levels.  That said, not all the members can produce their quota, leading to a shortfall.  OPEC+, the IEA, and EIA all seem to agree that supply-demand considerations shift in next year, and the market will once again be in oversupply.  Moreover, OPEC+ argues that the real dislocation is not with oil as its with gas.   The US imports about 2.9 mln barrels a day, India, about 4.2 mln, and Japan, about 3.1 mln barrels a day.  South Korea imports around 2.5 mln barrels a day.  Together it is around 12.7 mln barrels a day of imports.   If together, 100 mln barrels are released, about eight days of imports would be covered.  This is a high estimate.  India, for example, has indicated it may release 5 mln barrels.   Australia's flash November PMI was better than expected.  Manufacturing edged up to 58.5 from 58.2, while services rose to 55.0 from 51.8.  This produced a 55.0 composite reading, a gain from 52.1 in October.  Recall, the pandemic and lockdown led to weakness in the economy in the May-August period.  The composite PMI bottomed in August at 43.3.  It has risen for three months but remains well off the peak in April of 58.9.  Separately, New Zealand real retail sales were hit in Q3 by the social restrictions, but the drop was not quite as bad as feared.  Reall retail sales fell 8.1% after a 3.3% increase in Q2.  Economists (Bloomberg median) had anticipated a 10.5% pullback.  The RBNZ meets the first thing tomorrow and is widely expected to hike 25 bp, to lift the cash rate to 0.75%. There is still a slight bias toward a larger move in the swaps market.   The dollar briefly traded above JPY115.00 for the first time since March 2017.  We note that Japanese dealers were on holiday and did not participate in the move.  As risk-off sentiment took over, the dollar was sold back to JPY114.50.  Resistance in Europe has been found near JPY114.80.  Note that there is an option for about $980 mln at JPY115.50 that expires tomorrow.  The Australian dollar initially edged lower to almost $0.7210, its lowest levels since October 1 before steadying. A break of $0.7200 signals a retest of the late September low near $0.7170.  Initial resistance is seen in the $0.7230-$0.7250 area.  The PBOC is sending plenty of verbal signals that it does not want to see strong yuan gains, and today's fixing underscores that point.  The dollar's reference rate was set at CNY6.3929, wider than usual above the market expectation (Bloomberg) for CNY6.3904.  The greenback is firm inside yesterday's range.  Caution is advised here as the PBOC could escalate its disapproval.   Europe The flash EMU November PMI was better than expected.  The aggregate manufacturing PMI rose to 58.6 from 58.3.  The market anticipated a decline.  The service PMI rose to 56.6 from 54.6, also defying expectations for a sequentially weaker report.  The composite snapped a three-month slide and rose to 55.8 from 54.2.   The cyclical peak was in July at 60.2.    A flash release is made for Germany and France.    German manufacturing slowed slightly (57.6 from 57.8) and held up better than expected (Bloomberg median 56.9).  Services actually improved (53.4 from 52.4).  The composite rose to 52.8 from 52.0 to end a three-month downdraft after peaking in July at 62.4.  French numbers were even better.  The manufacturing PMI rose to 54.6 from 53.6.  The service PMI rose to 58.2 from 56.6.   The composite improved to 56.3 from 54.7 to snap a four-month fall.  Recall that yesterday the Bundesbank warned that the German economy may practically stagnate this quarter and that inflation may approach 6% this month.   The UK's flash PMI was more mixed.  The manufacturing PMI had been expected to have slowed but instead improved for the second consecutive month (58.2 from 57.8).  Services were nearly as weak as anticipated slipping to 58.6 from 59.1.  The composite eased slightly to 57.7 from 57.8, ending a two-month recovery from the June-August soft patch.  Meanwhile, Prime Minister Johnson's rambling speech yesterday hurt people's ears, and in terms of substance,  the changes to social care funding that may result in lower-income people having to sell homes to pay for support did not go over well.  It is spurring talk of a possible cabinet reshuffle.  The euro has edged to a new low for the third session today, slipping to almost $1.1225 before catching a bid that lifted it back to $1.1275.  There is an option for around 765 mln euros at $1.1220 that expires today.  The nearby cap is seen in the $1.1290-$1.1310 area.   The euro may struggle to sustain upticks ahead of tomorrow's US PCE deflator report (inflation to accelerate).    Sterling met new sellers when it poked above $1.3400. It has ground lower in the European session, and sterling fell to almost $1.3355.  Note that the low for the year and month was set on November 12, slightly above $1.3350.  We see little chart support below there until closer to $1.3165.   America We suspect many pundits exaggerated the link between the renomination of Powell for a second term and the sell-off in US debt and technology shares.  First, it was not a surprise.  Second, it assumes a substantive difference in the conduct of monetary policy between Powell and Brainard.  There isn't.  The difference was on regulatory issues and on the role of climate change.  Third, the idea that the Fed may accelerate its bond purchases next month was sparked by the high CPI reading on November 10.  Yesterday, Bostic joined fellow Fed President Bullard.  Two governors (Clarida and Waller) also seem to be moving in that direction (Waller may be faster than Clarida). The fact or the matter, nearly all of the high-frequency data for October, including employment, auto sales,  retail sales, industrial production, and inflation, came in higher than expected.  The US sees the preliminary November PMI today.  It is expected to have risen for the second consecutive month after fall June-September.   The reception to yesterday's US two- and five-year note auctions was relatively poor.  The higher yields (compared with the previous auctions) did not produce better bid-cover ratios.  Today the Treasury comes back with $55 bln seven-year notes and re-opens the two-year floater.  Many observers see the debt ceiling constraint being likely an early 2022 problem rather than this year.  Still, tomorrow's sale of the four-week bill may be the test.  Recall that at last week's auction, the 4-week bill yield doubled to 11 bp.   Europe's virus surge and social restrictions became a market factor last week.  Many think that the US is a few weeks behind Europe.  The seven-day infliction rate in the US rose 18% week-over-week.  Several states, including Colorado, Minnesota, and Michigan, are being particularly hard hit.  Nationwide 59% of Americans are reportedly fully vaccinated. However, it leaves about 47 mln adults and 12 mln teens unvaccinated.  The risk-off mood and the drop in oil prices are helping the US dollar extend its gains against the Canadian dollar.  The greenback, which started the month below CAD1.24, is now pushing close to CAD1.2750 to take out last month's high.  A move above here would target CAD1.28 and then the September high near CAD1.2900.  Still, the market is getting stretched, and the upper Bollinger Band is slightly below CAD1.2730.  The risk-off mood does not sit right with the Mexican peso either.  The dollar settled above MXN21.00 yesterday, its highest close in eight months.  The same forces have lifted it to MXN21.1250 today. However, the anticipated gain in September retail sales (0.8% Bloomberg median after a flat report in August) may not give the peso much support if the risk-off continues. The high for the year was set on March 8 near MXN21.6360.   Disclaimer
Market Shrugs Off Chinese Signals and Keeps the Yuan Bid

Market Shrugs Off Chinese Signals and Keeps the Yuan Bid

Marc Chandler Marc Chandler 22.11.2021 13:35
November 22, 2021  $CHF, $USD, BOE, China, Currency Movement, FOMC, Japan, Philippines, Russia Overview:  The US dollar has come back bid from the weekend against most currencies following the talk by a couple of Fed governors about the possibility of accelerating the tapering at next month's FOMC meeting.  The weekend also saw protests against the social restrictions being imposed by several European countries in the face of a surge in Covid cases.  The Swedish krona, yen, and sterling are the weakest, while the dollar-bloc currencies are resisting the greenback's tug. Most of the freely accessible and liquid currencies among emerging market currencies, including Russia, Hungary, South Africa, and Mexico, are heavy. At the same time, the Turkish lira recoups a little of the ground lost last week, and the Chinese yuan shrugged off apparently warnings from the PBOC to post its first gain in three sessions.  Equity markets in the Asia Pacific area mostly fell, though China and South Korea were notable exceptions.  Europe's Stoxx 600 snapped a six-week advance last week but has begun the news week with a small gain through the European morning.  US futures are trading higher.  The bond market is heavy, with the 10-year US Treasury up about three basis points to around 1.58%.  European benchmark yields are 2-3 bp higher.  Gold finished last week on a softer note and edged lower today to trade below $1840 for the first time since November 10.  Resistance is around $1850.  News that Japan may join the US to release oil from reserves saw January WTI slip below $75 but recover back above $76.  It met the (38.2%) retracement of the rally from the late August low near $60.75.  European natural gas (Netherlands) is lower for the fourth consecutive session, during which time it has fallen around 11%.   Iron ore extended the 5.6% gains before the weekend with another 4% gain today.  On the other hand, copper rose 3.3% in the past two sessions and has come back offered today.  Lastly, the CRB Index eased less than 1% last week and is off two of the past three weeks.  Its seven-month rally is at risk.   Asia Pacific Despite China's economic success, it remains clumsy and heavy-handed.   As the US and some other countries were considering a symbolic diplomatic boycott of the winter Olympics in Beijing, the tennis star Peng Shuai is being censored or worse for allegations against a former Politburo member.  Meanwhile, at the end of last week, three Chinese coast guard vessels launched water cannons against two Filipino boats sent to resupply a garrison on the Second Thomas Shoal (Ayungin Shoal), which is within the Philippines' Kalayanan Island Group.  The aggressive harassment brought a rebuke by the US, which reminded Beijing of its mutual defense agreement with Manila.   The Philippines will attempt to bring provision again this week.  Separately, note that after being notified by the US of the military nature of the Chinese construction project in the UAE, the project has been halted.   With the yuan at six-year highs against a trade-weighted basket, Chinese officials have begun expressing more concern about the one-way market.  The FX Committee, composed of industry participants, wants members to do a better job monitoring prop trading, and it follows the PBOC works of caution about risk management at the end of last week.  In its quarterly monetary review, the PBOC made a few tweaks that suggest it could ease policy.   Japan's Prime Minister Kishida acknowledged that releasing oil from its strategic reserve was under discussion.  China indicated it would tap its reserves last week for the second time since September, while it is still under review in the US.  Currently, Japan keeps reserves that are intended to last 90 days, while the private sector must hold reserves to last 70 days, according to reports.  Japan is considering selling oil and using the funds to subsidize the rising gasoline prices.  It may also reduce the duration of the reserves.   The dollar is straddling the JPY114.00 level as its hugs the pre-weekend range (~JPY113.60-JPY114.55).  The JPY114.30 area offers initial resistance, while the focus in early North America may be on the downside.  Still, it appears to be going nowhere quickly.   The Australian dollar finished last week at its lowest level since early October.  That low, just below $0.7230, held, and momentum traders covered shorts, helping lift the Aussie back to session highs near $0.7260.  A move above here allows gains into the $0.7270-$0.7290 area.  The PBOC set the dollar's reference rate at CNY6.3952 today.  The market (Bloomberg survey median) had projected a CNY6.3931 fix.  Although the dollar is softer today, it held above last week's lows as consolidation is evident.  It remains within the range set last Tuesday (~CNY6.3670-CNY6.3965).   Europe With the Swiss franc appreciating to six-year highs against the euro, it would not be surprising to see the SNB intervene.  The first place to look for it is in the weekly domestic sight deposits.  They rose by CHF2.58 bln, the second-most in the past three months.  Recall the mechanics.  The SNB buys euros but just sitting on them distorts the allocation strategy.  So it needs to either sell some euros for dollars or Swiss francs for dollars.  If it does the latter, its overall level of reserve growth accelerates.  Many suspect it will do the former, i.e., sell some euros for dollars.   The US continues to warn that Russia's troop and equipment movement is consistent with a rapid large-scale push into Ukraine from multiple spots simultaneously.  The suggestion, according to reports, is that the operation could take place early next year.  Both Ukraine and Georgia are seeking more US assistance.  Recall Russia invaded Crimea in February 2014.   Bank of England Governor Bailey has toned down his rhetoric, though he blames the market for misconstruing his remarks last month.  He warns now that next month's decision is finely balanced and that the price pressures are emanating primarily from supply-side disruptions for which monetary policy is less directly effective.   The implied yield of the December 2021 short-sterling interest rate futures contract is slipping for the fourth consecutive session.  Today's yield of about 21 bp is the lowest since early October.  The yield peaked in mid-October near 62 bp.  Lastly, while progress on the UK-EU talks has been reported, the two sides are still far apart.  Talks between Frost and Sefcovic will resume at the end of this week.   The prospect that a new German government could be announced this week has not helped the euro very much.  The single currency, which was sold through $1.14 and $1.13 last week, is struggling to find a base.  It has held above the pre-weekend low near $1.12560 but only barely (~$1.1260), and the attempt to resurface above $1.1300 was rebuffed. A move above $1.1320 may suggest some near-term consolidation, perhaps ahead of Wednesday's US PCE deflator report.  That said, tomorrow's flash PMI composite reading for the eurozone is expected to have weakened for the fourth consecutive month.  Sterling could not rise 15 ticks from its pre-weekend close (~$1.3450).  The downside was also limited (~$1.3420).  It caught a bid in the European morning that could extend into the US morning.  Still, the $1.3460-$1.3480 band may be a sufficient cap.  The market does not appear inclined to see trigger the $1.3395 option that expires today for about GBP425 mln.   America President Biden's announcement on the Fed's leadership could come as early as tomorrow, as he is set to deliver a speech on the economy tomorrow.  But it probably would be a separate announcement.  Given the expiration of the terms of the two vice-chairs, changes among a few of the regional presidents, and the challenging situation, President Biden is likely to follow Treasury Secretary Yellen's recommendation to re-appoint Powell.  Moreover, a tradition goes back to Volcker of one party making the initial nomination and the other party approving of another term.  This helped "depoliticize" monetary policy.  Trump broke with that tradition, and as Biden has done in a number of other areas, is restoring some traditions.  Lastly, we suspect that if Bernanke or Yellen, or Brainard were at the helm of the Fed, there would not be substantive monetary policy differences.   Vice-Chair Clarida and Governor Waller joined regional Fed President Bullard to suggest that Fed may consider accelerating the pace of tapering at next month's FOMC meeting.  We suspect others will be sympathetic after this week's October PCE and deflator news.  The economy is rebounding in Q4 from the disappointing 2% annualized pace in Q3 (which is likely to be revised higher on Wednesday), and a critical part is consumption.  Personal consumption expenditures are expected to rise by 1% after a 0.6% increase in September.  The headline PCE deflator, which the Fed targets 2% on average, which Governor Brainard reportedly helped devise, is expected to jump above 5% from 4.4% in September.  The core rate is expected to exceed 4%.  No Fed officials are slated to speak this week, but the minutes from the November 3 FOMC meeting will be released on November 24.   El Salvador caught the crypto world's attention again.  It is the first country to make Bitcoin legal tender.  It announced plans to issue a $1 bln bond, and half the proceeds will be used to buy Bitcoin (~2000 coins).  The other half will be used to fund infrastructure projects to build the infrastructure of more Bitcoins.  It will offer a 6.5% coupon, which is lower than current dollar issues.  It looks like one pays a lot for BTC exposures.  El Salvador is rated BB+ of the equivalent by the top three rating agencies.  This makes El Salvador bonds risky, to begin with, and adding Bitcoin on top of that would seem to preclude most retail and institutional investors.  It seems like a desperate act that only an impoverished country can try.  The idea that other countries will quickly follow seems to be a stretch.  There is a good reason why Tesla had few corporate followers to buy Bitcoins with reserve funds.  The same principle would seem to apply to countries.   The economic calendar for North America begins off slowly this week.  Today's main feature is the US existing home sales report.  A pullback after September's heady 7% gain is expected, the strongest in a year.  After a weak start to the year, existing home sales have recovered.  They averaged 5.66 mln (seasonally adjusted annual rate) last year and have averaged more than 6.0 mln for the past three months.  The Canadian dollar has weakened for the past four weeks.  It briefly poked above CAD1.2660 ahead of the weekend to reach its best level since early October.  The greenback is in about a 15-tick range on either side of CAD1.2645 today.  Support is seen in the CAD1.2600-CAD1.2620 area, but it may take a break of CAD1.2585 to boost confidence that a high is in place.  The US dollar rose 1.5% against the Mexican peso last week.  It was the third weekly gain in the past four weeks.  The greenback is trading above last week's high (~MXN20.89) and looks set to test the high set earlier this month near MXN20.98.  Lastly, the Chilean presidential election will go to a run-off next month, as widely expected between the far-right and far-left candidates.   The dollar snapped a five-week pullback against the Chilean peso last week, rising 3.6%, the most in three months.  Year-to-date, the peso is off nearly 14.25%.   Disclaimer
The Telegraph Publishes Misleading Story about Omicron

Covid Surge Compounds Monetary Divergence to give the Euro its Biggest Weekly Loss in Five Months

Marc Chandler Marc Chandler 22.11.2021 09:39
Strong US consumption and production figures kept the greenback well supported last week on the heels of the jump in CPI to 6.2%.  Meanwhile, the surge of Covid cases in Europe underscores the divergences with the US, sending the euro to new lows for the year.   At the same time, oil prices headed south for the fourth consecutive week, matching the longest decline in more than two years.  It did not favor the Norwegian krone, the weakest of the majors, with a 2.15% drop.  It brought this year's loss to almost 3.5%, despite it being the first G10 central bank to hike rate, with another likely next month.   The prospects of a Bank of England rate hike next month were lifted by the strong inflation and retail sales figures.  Sterling was the best performing major currency, rising a little more than 0.25% against the dollar.  It also traded at its best level against the euro since March 2020.  At the end of the week, the euro also broke down against the Swiss franc, trading below CHF1.05 for the first time since July 2015.   Japan's October CPI showed that excluding fresh food and energy, the world's third-largest economy has still not broken free of deflation's grip (-0.7% year-over-year).  A weaker yen is not a problem for Japanese policymakers or corporates.  Japan has averaged a monthly trade surplus this year through October of about JPY7.8 bln a month, hardly the stuff that should excite protectionists.  The BIS estimates that eurozone inflation would be closer to 1.5% than the 4.1% reported in October without the supply chain disruptions. The weakness of the euro does not appear problematic for the ECB either.  With the Fed already slowing the pace of its monetary accommodation, a stronger dollar reinforces the policy thrust. Even though net exports shaved Q3 growth by about 1.1 percentage points, it has yet to spur criticism, and September was a record shortfall.   Dollar Index:  The Dollar Index rose for the fourth consecutive week.  It met the (50%) retracement objective of its slide from March 2020 (~103.00) to the January 6 low (~89.20), which is found near 96.10.  DXY stalled ahead of the weekend, just shy of the high set in the middle of the week near 96.25. A move above there targets the next retracement (61.8%), which is close to 97.75.    The MACD is over-extended but still headed higher, while the Slow Stochastic appears to be turning lower.  Support is seen around 95.50.  The market seems to have discounted much of the good news for the dollar and Fed policy.  We note that the US 2-year yield fell almost six basis points last week.  That leaves it off about 4.5 bp this month, despite the strong CPI reading, robust retail sales, and industrial output figures. Euro: The divergence of monetary policy has been the critical weight on the euro, but at the end of last week, it seemed that surge in Covid cases in Europe helped drive the single currency to new lows. It fell to $1.1250 ahead of the weekend to take out the mid-week low near $1.1265.  The weekly loss of about 1.3% is the biggest in five months.  Recall that the $1.1290 area represented the (61.8%) retracement of the rally that began in March 2020.  The momentum indicators are stretched, but a possible bullish divergence is appearing in the Slow Stochastic. A cap seems to be forming around $1.1375.  After repeated tests, and much to the chagrin of the Swiss National Bank, the euro was sold through CHF1.05 ahead of the weekend for the first time since July 2015.  Given its modus operandi, the SNB is likely resisting.  There is little on the charts ahead of CHF1.0250.  In the second half of last week, the euro found support near GBP0.8385, its lowest level since March 2020.  Support is seen close to GBP0.8275-GBP0.8300.  Lastly,  the euro found support near JPY128.00, which has more or less withstood several tests since moving above there in February.   Japanese Yen:  The greenback recorded a new four-year high against the yen, less than a handful of pipis from JPY115 in the middle of last week.  It reversed lower and settled ever so slightly below the previous session's low to leave a key reversal in its wake.  It recorded the week's low ahead of the weekend near JPY113.60.  Since the dollar pushed above JPY112 early last month, we have suggested a JPY113-JPY115 trading range.  It did trade to about JPY112.75 on November 10 and 11 but snapped back into the range.  The US 10-year note futures (December contract) posted a key reversal in the middle of last week, too, and also ended the week at eight-session highs, which, of course, means lower yields.  The dollar-yen exchange rate still seems to be a range-bound creature, more the most part, and heavily influenced by external factors, like US 10-year yield and broader risk appetites.  British Pound:  Sterling outperformed the other major currencies last week, but the 0.3% gain is nothing to write home about.  It remained within the previous week's range. It was unable to sustain the upside momentum after approaching the (50%) retracement objective of the decline since the month's high and outside down day on November 4 (BOE meeting).  That retracement stands at $1.3525.  The strong CPI report on November 17 helped lift sterling to the week's high near $1.3515.  However, the underlying strength of the dollar proved too much, and ahead of the weekend, sterling traded a little below $1.3410.  The momentum indicators have turned higher, and as long as $1.3400 holds, sterling looks attractive.  However, the market appears to have a 15 bp hike at next month's meeting fully discounted.  While it remains a distinct possibility, if not a likelihood, but 100% confidence may leave sterling vulnerable to a reassessment.  Canadian Dollar:  The US dollar rose for the fourth consecutive week against the Canadian dollar, matching the longest advance since early last year.  With the pre-weekend gain, the greenback met the  (61.8%) retracement objective of decline since CAD1.29 was approached on September 20, found near CAD1.2665. The US dollar's broad strength, coupled with the stock market wobble (a proxy for risk), and the drop in crude prices by around 4.25%, the fourth consecutive weekly decline shaved about 0.75% off the Canadian dollar.  The implied yield of the June 2022 Banker Acceptances fell last week and is now about 10 bp lower than at the end of last month.  The MACD is headed up though over-extended, while the Slow Stochastic has flatlined at extreme levels and has not yet confirmed the new highs.  The US dollar continues to hug the upper Bollinger Band, which will begin the new week near CAD1.2650. Australian Dollar:   The Aussie fell for the third straight week, and ahead of the weekend, approached $0.7225, last seen in early October.  As seen with some of the other currency pairs, the MACD is still warning of currency weakness, while the Slow Stochastic is flatlining but over-extended.  The trendline connecting the August and September lows initially held last week. It (~$0.7240) yielded ahead of the weekend, but the Aussie managed to close back above it.   It needs to resurface above $0.7300 to be anything meaningful.  Softer than expected, wage growth may have reinforced the RBA's message to the markets, and the yield of the June 2022 T-bill futures fell seven basis points last week and is now down 31 bp on the month.   Mexican Peso:  Emerging markets currencies remain out of favor in a strong dollar environment.  The JP Morgan Emerging Market Currency Index slumped by more than 2% last week, the most since June.  The Turkish lira collapsed by nearly 11%.  The Indian rupee rose by 0.3%, the strongest in the EM space.  The greenback made a new marginal high in two-and-a-half weeks before the weekend, slightly below MXN20.89.  The momentum indicators are constructive for the dollar, but it is at the upper end of its recent range (~MXN20.12-MXN21.00).  The high for the year was set in March near MXN21.64, and it will come into view when the greenback rises above MXN21.15.   Chinese Yuan:   By shadowing the dollar so tightly, the yuan is dragged higher on a trade-weighted basis in the stronger greenback environment. The yuan is at six-year highs on the basket the PBOC tracks (CFETS).  The PBOC reportedly stressed the importance of exchange risk management ahead of the weekend, and it may be a warning that its willingness to tolerate a stronger yuan is limited.  The yuan slipped an inconsequential 0.12% against the dollar last week.  For nearly the past five weeks, the exchange rate has been mostly confined to a CNY6.38-CNY6.40 range.  It is a fuzzy range and allows for around a big figure in both directions. The index of Chinese companies listed in the US (NASDAQ Golden Dragon Index) fell about 5.7% last week.  The major benchmarks in China, including the CSI 300, posted small gains.  The Hang Seng fell 1.1% last week, and most of that was before the weekend on disappointing earnings from Alibaba (-10.3% in HK).     Disclaimer
Covid Wave Knocks Euro Down and to new 6-year Lows Against the Swiss Franc

Covid Wave Knocks Euro Down and to new 6-year Lows Against the Swiss Franc

Marc Chandler Marc Chandler 19.11.2021 13:58
Overview:  Concerns about the virus surge in Europe cut short the euro's bounce and sent it back below $1.1300 and are also weighing on central European currencies, including the Hungarian forint, despite yesterday's aggressive hike of the one-week deposit rate.  Austria has reintroduced a hard 20-day lockdown.  Germany's health minister warned that the situation deteriorated and vaccines were not enough to break the wave.  He was explicit that a lockdown cannot be ruled out.  The US dollar is trading broadly higher.  Only the yen is resilient on the day, but sterling is the only major currency that has edged higher this week.  The Scandis and euro are off more than 1%.  Speculation that Turkey may announce measures over the weekend to stabilize the lira may be helping to deter new sales today after yesterday's rout.  In the nine-day drop through today, it is depreciated by almost 15%.  The JP Morgan Emerging Market Currency Index is off for the fourth consecutive session to bring this week's loss to more than 2%, the most in five months.  Equities do not know of the consternation in the foreign exchange market.  Disappointing Alibaba results weighed on the Hang Seng (~-1%), while most other large regional bourses but Taiwan and India closed the week on an up note.   Europe's Stoxx 600 snapped a six-day advance yesterday. It was only the second loss since October.  It began firmer today but has reversed lower, putting at risk the six-week rally.   US futures are mixed, with the NASDAQ outperforming.  Bond markets are in rally mode as well.   The US 10-year yield is off three basis points to approach the week's low near 1.53%.  European bonds are off mostly 3-5 basis points, even in the UK, where retail sales surprised on the upside.  Gold is steady, finding support near $1850.  Oil initially extended yesterday's recovery but is reversing lower, leaving the January WTI contract set to test yesterday's low near $76.45.  This is the fourth consecutive weekly fall in crude oil.  European natural gas (Netherlands benchmark) is off 4.4% today, the third drop in a row, and pares the week's gain to almost 19%.  In Singapore, iron ore prices jumped 5.7% to break a five-week slide that saw prices tumble by about 28%.   Copper is firmer and paring this week's loss to around 2%.   Asia Pacific There were two developments in Japan to note.  First, October CPI was largely in line with expectations.  Surging gasoline prices (seven-year highs) helped keep the headline rate positive for the second month (0.1% year-over-year).  Excluding fresh food, the core rate was steady at 0.1%.  However, the deflationary forces are evident when fresh food and energy are removed.  The measure deteriorated to -0.7% from -0.5%, the most since June (-0.9%).    Second, Prime Minister Kishida unveiled an overall package of JPY78.9 trillion (~$690 bln). It is larger than the previous two pandemic packages. "Fiscal measures" refer to spending, investment, and loans, and this is seen worth about JPY55.7 trillion.  It is not clear yet, how much represents new spending as opposed to the reallocation of funds from earlier budgets that were not used. However, it appears to be about JPY32 trillion of new spending.   The Chinese yuan, up a modest 2.1% for the year, is the strongest currency.   Against a trade-weighted basket (CFETS), the yuan is pulling back from a six-year high set earlier this week as the euro recovers a cent.  Consider that the yuan has appreciated by more than 9% against the euro and 11.5% against the yen this year.  That means that investment in China has the same tailwind as the dollar and is compensated a bit for the relative lack of transparency and liquidity.  The Financial Times estimates that foreign holdings of Chinese bonds and stocks rose to around $1.1 trillion at the end of September, about a 13% increase this year.  China's stock market has underperformed this year, and the CSI 300 is off around 7% this year.  On the other hand, China's bonds have fared well.  It is the only 10-year bond that has not weakened this year.  China's figures show foreign direct investment has risen by almost 18% this year through October to nearly $142 bln.   The dollar is posting an outside down day against the Japanese yen by first rising above yesterday's high before reversing and taking out yesterday's low. It is approaching the week's low near JPY113.75 in the European morning.  Below there, support is seen around JPY113.60.  A break would warn of a return to JPY113.00.  The Australian dollar has been sold to its lowest level since October 6, when it recorded a low of almost $0.7225.   It has broken the trendline that connected the August and September lows (~$0.7250).  The September low was around $0.7170 and maybe the next important technical target.  The dollar is trading with a firmer bias against the Chinese yuan, but the greenback remains in the range set on Tuesday (~CNY6.3670-CNY6.3965).  The dollar gained on the yuan four sessions this week, the most since July, but the net gain of less than 0.2% still shows an extraordinarily steady exchange rate.   With the yuan near six-year highs against its trade-weighted basket (CFETS), the PBOC warned against one-way moves and encouraged financial institutions to bolster fx risk management.  It set the dollar's reference rate at CNY6.3825, slightly above expectations (Bloomberg survey) for CNY6.3822.   Europe The stronger than expected October retail sales capped the week's data that points to a rebounding economy and boosts the chances of a rate hike next month.  A strong jobs report was followed by a larger than expected rise in CPI and PPI.  Retail sales jumped 0.8% in October, and the September series was revised to flat from -0.2%. It was the first increase since April.  Pre-Xmas sales were reported.  Separately, the UK government reported that the cost of servicing the national debt has risen more than three-fold over the past year, leaving the budget deficit higher than anticipated.  It appears that the swaps market is pricing in a 15 bp hike at the December 16 BOE meeting, though some are talking about a bigger move.    Several ECB officials, including President Lagarde, have successfully pushed back against expectations of a 20 bp rate hike next year that had appeared discounted by the swaps market earlier this month. The market has pushed it into early 2023.  The implied yield of the December 2022 Euribor futures contract has fallen 20 bp this month.  The December 2022 Eurodollar futures contract is moving in the opposite direction.  The implied yield has risen by about 4.5 bp this month.  The net result is the US premium has increased to over 125 bp, the highest since last March.  In late 2019, the premium was around 180 bp.  This is recognized as a factor helping lift the dollar against the euro, and it appears to have become more salient recently.   The euro's bounce yesterday, its first gain in seven sessions (since the US CPI shocker), stalled near $1.1375, where a 780 mln euro option expires today.   The euro traded quietly in Asia before being sold aggressively as news of the virus hit the wires.  The euro traded through $1.1285 before catching a bid.  Resistance now will likely be encountered around $1.1320.  The euro is posting its first back-to-back weekly of more than 1% since March 2020.  Sterling is also sliding back toward the week's lows, just above $1.3400.  A break could signal a test on the $1.3350 area, but it appears stretched on an intraday basis.  While the euro-sterling cross is practically flat, the euro has punched below CHF1.05 for the first time in six years.  It would not be surprising to learn that the SNB has been intervening.  There appears to be little chart support until closer to CHF1.0250. America The nonpartisan Congressional Budget Office offered its evaluation of the Biden administration's Build Back Better initiative.  It sees $1.636 trillion in spending over the next decade and almost $1.27 trillion in revenue.  That leaves a deficit of $367 bln.  A notable difference between it and the administration is how much more revenue will be generated by increasing the number of IRS agents.  Even if it passes the House of Representatives, it will likely be marked up in the Senate.  The jockeying for position and spin around it will likely dominate the session, which sees no US economic reports outside of the rig count later today.  The Fed's Clarida and Waller speaker today.  It seems that most market participants still see the Fed behind the curve and disagree with our idea that to secure the ability to respond to a wide range of possible outcomes, the Federal Reserve may accelerate its tapering starting in January.   It is not clear exactly when the debt ceiling will be reached, but it is being played.  The Democrats do not want to lift it through the reconciliation process, though they have forced the Republicans to do so in the past.  The Republicans appear to have the discipline and will to oppose.  No one seems to think the US will really default, and getting even this close seems undignified.  Yet, the desire to avoid being caught out encouraged investors to demand a high yield on the four-week bill sold.  Yesterday's auction saw the yield more than double to 11 bp (annualized).  It is the highest yield since July 2020.  In contrast, the eight-week bill, which is thought to be beyond the shenanigans, yield slipped to 4.5 bp from six previously and a higher bid-cover ratio.   Canada reports September retail sales figures today.  After a 2.1% rise in August, some weakness is expected.  Ahead of it, the Canadian dollar is trading at new lows for the week, though it is faring better than the other dollar-bloc currencies.  The US dollar is approaching the (61.8%) retracement objective of the decline since the CAD1.29 level was tested on September 20.  The retracement level is near CAD1.2665, and a break would target CAD1.2700-CAD1.2750.  The upper  Bollinger Band is found near CAD1.2655 today.   The Mexican peso is also under pressure.  It, too, has fallen to a new low for the week today.  The greenback looks set to test the eight-month high set earlier this month near MXN20.98.  Note that the central bank's Deputy Governor warned that inflation was accelerating, and it could rise to 7% this month and 7.1%-7.3% next month.  In October, the CPI stood at 6.24% year-over-year.  Banxico meets next on December 16, the day after the FOMC meeting.  Lastly, we note that the Brazilian real is off for four consecutive sessions coming into today.  The dollar closed above its 20-day moving average against it yesterday and looks poised to probe above BRL5.60 today. The high for the month was closer to BRL5.70.   Disclaimer
Euro Bounces Back, but The Turkish Lira Remains Unloved

Euro Bounces Back, but The Turkish Lira Remains Unloved

Marc Chandler Marc Chandler 18.11.2021 15:17
Overview:  The US dollar's sharp upside momentum stalled yesterday near JPY115 and after the euro met (and surpassed) a key retracement level slightly below $1.1300.  Led by the Antipodean currencies today, the greenback is mostly trading with a heavier bias.  Among the majors, helped by a steadying of US yields, the yen is soft.  In the emerging market space, the Turkish lira continues its headlong plunge while the yuan softened and the Mexican peso is off.  Hungary's central bank surprised with a 70 bp hike in the one-week deposit rate.  The JP Morgan Emerging Market Currency Index is posting a small gain through the European morning.  Disappointing tech results in China (Baidu and Bilibili) weighed on Chinese shares, but most markets in the region fell but Australia and Taiwan.  Europe's Stoxx 600 is struggling to extend the six-day advance.  US futures are also a little firmer.  After yesterday's four basis point pullback, the US 10-year yield is little changed near 1.58%.  European yields are 1-2 bp lower.  Gold remains within Tuesday's range (~$1850-$1877), but the moment seen earlier last week has faded, and the yellow metal is trading choppily in a consolidative phase.  The prospect of a coordinated sale of oil after China's announced it would tap its reserves for the second time saw the January WTI contract fall to $76.45, its lowest level since early October. Still, the price has stabilized in the European morning around $77 a barrel.  The benchmark European natural gas contract (Netherlands) has extended yesterday's pullback.  It settled a little below 75 euros last week, and after two days of declines, it is above 92 euros.  Iron ore is also falling for a second session and is now lower on the week.  Note that it settled October a little above $104 and is now around $86.40. Copper is lower for the fourth consecutive session.  It is trading around $424, off $20.5 this week.   Asia Pacific  Japan is expected to unveil the much-awaited supplemental budget tomorrow.  Prime Minister Kishida will get one bite of the proverbial apple, and he is expected to go big.  Talk of the size of the overall package has risen in recent days.  The Nikkei seemed to suggest a JPY79 trillion (~$690 bln) effort, while others report something on the magnitude of JPY56 trillion.  Still, it is recognized that part of the budget will include funds that were earmarked under previous budgets, which have not been spent.  The clear water is seen around JPY32 trillion.  Japan is one of the few countries that will provide new fiscal support.   New Zealand's central bank meets next week.  It is widely expected to hike rates for the second time in the cycle.   The swaps market has 200 bp of tightening priced in for the next 12 months.  The cash rate stands at 50 bp.  Earlier today, the central bank reported that the two-year inflation expectations (business survey)  rose to 2.96% in Q4 from 2.27% in Q3.  It is the highest in a decade.  The one-year expectation rose to 3.7% from 3.02%.  Still, with other countries slower to raise rates, a 50 bp move may not be necessary.  The Kiwi rose almost 4% last month and has given back nearly half so far in November.  Separately, the Philippines and Indonesia central banks met and left rates steady as expected.   The dollar posted a key reversal against the yen yesterday.  It made a new high for the move, a few pips below JPY115.00, and proceeded to sell-off and close (slightly) below Tuesday's low.  However, follow-through selling has been limited, and the greenback is trading firmly but may be absorbing sales related to the $1.34 bln in options in the JPY114.20-JPY114.25 area that expire today.  The Australian dollar initially extended its losses to almost $0.7250, where a A$575 mln option expires today. However, since early in the Asian session, it has posted corrective upticks and looks set to challenge yesterday's high and five-day moving average a little above $0.7300.   The Chinese yuan appears to have begun consolidating.  It remains in the range set on Tuesday that saw the dollar trade roughly between CNY6.3670 and CNY6.3965.  The small gain is the third this week.  The PBOC fix was at CNY6.3803, a bit firmer compared with expectations (CNY6.3786 in the Bloomberg survey) than seen recently.  Note that there is a $1 bln option at CNY6.3830 that expires today.   Europe The auto industry in Europe remained under pressure last month, though the US reported its first increase in sales in six months.  New car registration in Europe, including the UK, is a proxy for sales.  They tumbled by slightly more than 30% year-over-year in October.  This is considerably weaker than expected and is the poorest since May 2020.  The shortage of semiconductors is the likely culprit, and there are some signs of improvement.  The EC will propose modest tweaks in rules about how funds outside of its borders (UK) can be managed while avoiding more dramatic changes.   Draft proposals call for at least two full-time senior managers in the EU and for regulators to be notified when most of their assets are managed outside the EU.  These seem quite minor and unlikely to disrupt the UK fund business.  Earlier this month, the EU Commissioner for Financial Services indicated that temporary waivers would be granted to allow EU banks and money managers to clear trades in the UK. Meanwhile, the dispute over fishing appears to be worsening (Denmark complaining, not just France), and the UK continues to threaten to invoke Article 16.  Former Prime Minister Blair says he will propose a solution to the dispute over the Northern Ireland Protocol in the coming days.  Hungary delivered a 30 bp hike in the base rate earlier this week, which now stands at 2.10%.  It warned that it could make a separate decision on its one-week deposit rate.  It did so today, hiking it 70 bp to 2.50%.  It is a hawkish move that sent the forint higher.  Separately, as widely expected, the Central Bank of the Republic of Turkey cut the one-week repo rate 100 bps to 15%. As a result, the lira is weaker for the eighth consecutive session.  The lira's weakness not only fuels inflation but also will challenge companies and banks with foreign exchange exposure.  The dollar finished last month near TRY9.60 and after the rate hike, pushed above TRY10.97 before stabilizing.   The euro overshot the (61.8%) retracement target of the rally that took it from near $1.0640 in March 2020 to high on January 6, around $1.2350.  That retracement target was about $1.1290, and the euro fell to around $1.1265 yesterday. It recovered to new session highs early in North America yesterday (~$1.1330), leaving bullish hammer candlestick, and follow-through buying lifted it to $1.1345 today.  The combination of higher inflation and stronger retail sales this week have helped sterling to recover.  It had traded near $1.3350 at the end of last week and has barely traded below $1.34 this week.  Indeed, sterling is rising today for the fifth consecutive session, the longest advance in nearly seven months.  It poked above $1.35, where an option for about GBP345 mln will expire today.  A convincing move above $1.3515 could signal another cent advance.  The euro slipped to below GBP0.8385 today before recovering.  It is testing the GBP0.8400, which holds options for 1.1 bln euros that also expires today.   America Leave aside the gaffes by President Biden over Taiwan.  Bloomberg counts four such verbal blunders that have required official walk back or explanation or clarification.  Reports indicate that Biden probed Xi about oil sales.  China has intervened in the commodities (industrial metals) and crude oil market recently.  Today it indicated it will provide more oil from its strategic reserves.  The September is action 7.1 mln barrels, according to reports, and privately sold more.  It is unclear whether today's sales were planned or grew out of the "virtual summit."  Still, it puts the ball back into the US court.  If the US does not sell or lend oil from its strategic reserves, it will look bad after China's move.  On the other hand, its own agency (EIA) projects that it may not be needed as oil will be in oversupply shortly.  Moreover, the pain for consumers is coming from gasoline prices, not oil per se.  Drawing down strategic reserves may not help the gasoline market.  Apparently, Japan has been approached by the US about coordinating the release of oil, though Europe was not.  The US reports weekly initial jobless claims today.  They have fallen for six consecutive weeks, and at 267k, it is the lowest since the pandemic struck.   That said, at the end of 2019, there were below 220k.  The Philadelphia and Kansas City Feds publish their November survey results.  Both surprised last month, with the former on the downside and the latter on the upside.  This time it may be the other way around, with the Philly survey showing strength and the KC survey softer.  Canada reports its monthly portfolio flow data ahead of tomorrow's retail sales report.  Mexico and Brazil have light economic calendars.   Canada's Prime Minister Trudeau and Mexico's President AMLO visit Washington today for the North America's Leaders Summit.  There is tension among the "three amigos."  The Build Back Better US initiative contains several elements that favor American producers. A key one is that substantial tax break for Americans buying electric vehicles if they are made in the US.  This would seem to put Canada and Mexico at a disadvantage, given the integration of the auto sector on a continental basis. Mexico and Canada are also concerned that the Biden Administration's interpretation of the domestic content requirement in the USMCA treaty is also narrow and puts them at a disadvantage.   Canada is also concerned about the pipelines after Biden nixed the Keystone Pipeline in one of his first acts in office, and the Line 5 pipeline is being challenged by Michigan.  The US, and to a less extent, Canada, is worried about the efforts by AMLO to increase the power of the state sector energy companies (oil and electricity), deterring private sector efforts.  The US may try pressing against this on environmental grounds.  Climate and immigration are reportedly on the top of today's agenda.  The US dollar reversed higher against the Canadian dollar on Tuesday, posting an outside up day.  Follow-through buying yesterday lifted the greenback a little above CAD1.2620.  It ticked ever so slightly higher today but has come back offered.  Support is seen in the CAD1.2555-CAD1.2575 area.  The $1.04 bln option at CAD1.25 that expires today is too far away to be impactful. Meanwhile, the US dollar remains within Tuesday's range against the Mexican peso (~MXN20.56-MXN20.85).  This range looks set to hold today.   Disclaimer
European Gas Jumps, while the Euro and Yen Slump

European Gas Jumps, while the Euro and Yen Slump

Marc Chandler Marc Chandler 17.11.2021 15:31
Overview: The prospects that the 6.2% CPI will prompt the Fed to move quicker continue to underpin the dollar.  The euro fell to about $1.1265, its lowest level since last September, and the Japanese yen slumped to a fresh four-year low.  The JP Morgan Emerging Market Currency Index tumbled 1% yesterday, the largest decline since February.  A more stable tone is evident in Europe, as the euro has recovered above $1.13, and the JP Morgan Index is paring yesterday's losses.  The dollar is holding just below JPY115.00.  Asia Pacific equities did not fare well.  Only China and Taiwan markets, among the large regional markets, managed to rise.  Europe's Stoxx 600 is edging higher for the sixth consecutive session.  Recall it has fallen only once since October 27.  US futures are narrowly mixed. The bond market is quiet, with the US 10-year hovering around 1.62%.  European yields are a little softer.  Gold slid below $1850 yesterday but has snapped back today to test the $1860 area.  Crude oil is heavy, with the January WTI contract around $78.80, unable to resurface above $80 amid talk that the US and China may coordinate the release of strategic holdings.  Gas prices are up another 7% in Europe today after surging 16% yesterday and 9% on Monday. Due to "unplanned maintenance," a Belarus pipeline to Poland has been shut down, which may last three days.  Iron ore prices are giving back around half of yesterday's 1.2% gain, for the third loss in four sessions.  Copper is off for a third session, losing after dropping 2.2% in the past two sessions.   Asia Pacific Japan's October trade data disappointed.  Exports and imports were weaker than expected, and this resulted in a smaller deficit. Exports slowed to 9.4% year-over-year, down from 13% in September, defying expectations for a small double-digit increase.  Imports were up 26.7% from a year ago, off the heady 38.2% pace seen in September and below the 31.8% projected.  The resulting trade deficit of JPY67.4 bln was about a fifth of what economists anticipated (Bloomberg survey).  It is the third consecutive monthly deficit.  In the first seven months of the year, Japan recorded two deficits.  A year ago, Japan recorded a JPY840 bln surplus.   Reports suggesting that the possibility that the US and China coordinate the drawdown of strategic oil reserves are light on details, but the suggestion itself is enough to weigh on prices.  Still, the International Energy Agency yesterday echoed the broad assessment of America's EIA in anticipating that the tightness of the oil market could ease shortly.   Increased output in the US, Saudi Arabia, and Russia may account for half of the 1.5 mln barrel a day anticipated increase in supply. Nevertheless, the acting head of the EIA warned tapping the US Strategic Petroleum Reserve would have a short-term impact, for which other dynamics would quickly overshadow it.  Separately, note that the API estimated a slight build of 655k barrels in US stocks this past week, while gasoline inventories fell.   In other regional developments, Australia's wage price index rose a modest 0.6% in Q3 for a year-over-year pace of 2.2%.  This was in line with expectations.  It would seem to support the RBA's argument that it need not be in a hurry to raise rates.  The June 2022 T-bill yield settled last month at 69 bp and is now near 40 bp.  Separately, China appears to be allowing "high quality" property developments to return to the asset-backed securities market to raise capital after a three-month hiatus. Lastly, reports suggest Beijing is moving ahead with its import substitution plans to reduce dependency on foreign technology.    The dollar approached JPY115.00, where an option for almost $610 mln expires today.  The dollar has not traded above there since March 2017.  Since the dollar broke above JPY112.00, we have suggested that JPY114.50-JPY115.00 may mark the top of the new range.  While this has worked for the past month, the risk is on the upside.  A convincing break of around JPY115.50 would target the JPY118.00 area.  Initial support is now seen near JPY114.70.  Note that the upper Bollinger Band is slightly below JPY114.80.  The Australian dollar is trading near its lowest level since October 6, near $0.7265.  It is holding above a trendline connecting the August and September lows, which is found near $0.7250 today, but little stands in the way of a test on the $0.7200 in the coming days.  An option for a little more than A$800 mln at $0.7300 is set to expire today.  After posting a key upside reversal yesterday, the US dollar consolidated against the Chinese yuan today, and no follow-through buying materialized.  Instead, it seemed that the local market took advantage of the pop above CNY6.39 to sell the greenback, which is straddling CNY6.38 in late dealings.  The reference rate was set at CNY6.3935, just below the bank projections (CNY6.3936, according to the median in the Bloomberg survey).  We note that the yuan is also at its best level since 2015 against the trade-weighted CFETS basket the PBOC uses.   Europe On the heels of a strong employment report, the UK reported a larger than expected increase in the October CPI.  The preferred measure, which includes owner-equivalent housing costs, jumped to 3.8% from 2.9%.  The older measure rose to 4.2% from 3.1%.  On the month, consumer prices rose 1.1% rather than the 0.8% economists forecast (Bloomberg median). Flattered by increasing gas and electricity prices.  Core prices rose 3.4% year-over-year, accelerating from 2.9% in September and defying forecasts for a 3.1% pace.  Separately, producer prices, both input and output, also rose more than expected.  Lastly, UK house prices rose 11.8% year-over-year in September, up from a revised 10.2% in August.  The recent peak was 12.6% in June, which was the highest since 2004.    European gas prices are at one-month highs.  Belarus has stopped its pipeline to Poland, claiming unplanned maintenance issues, while the border tensions and earlier threats raise suspicions of a political move.  Separately, the German regulator suspended the certification process of the controversial Nord Stream 2 pipeline as corporate assets are rearranged.  Separately, a German court yesterday dismissed an environmental challenge to the pipeline.  Lastly, we note that the virus flare-up continues in Europe, and Germany and the Czech Republic reported a record number of cases. The euro surpassed our $1.1290 Fibonacci target and did not find bids until the $1.1265 area in Asian turnover.  The single currency has been in a tight range in Europe, holding above $1.1300.  Initial resistance is seen around $1.1330 now.  A move above yesterday's high, near $1.1385, is needed to lift the tone. We suspect the near big target is closer to $1.10.  Sterling slipped to a three-day low, slightly below $1.34, but shot up to the session high near $1.3375 on the inflation news. However, the momentum was not sustained, and sterling is little changed in late morning European turnover near $1.3430. The euro briefly traded below GBP0.8400 for the first time since March 2020 but snapped back.  An 840 mln euro option at GBP0.8445 expires today and another for about 620 mln euros at GBP0.8450 expires tomorrow.   America US retail sales surged last month, and the 1.7% rise was the best since March.  After slowing in Q3, consumption is off to a strong start in Q4.  Industrial production was also much stronger than expected, rising 1.6% compared with the 0.9% gain anticipated by economists (median, Bloomberg survey).  The US reports October housing starts today, and they are expected to have recovered from the 1.6% decline seen in September. Housing starts fell in Q3 but are seen rising in Q4, encouraged by an easing of some supply chain issues.   In fact, on several fronts, there are preliminary signs that the disruptions are dissipating.  Some reports suggest that the shortage of semiconductor chips may be passed, and US auto sales rose in October for the first time in six months.  Both the EIA and IEA have forecast a more balanced oil market, and some measures of shipping costs have moderated. The Los Angeles port has reportedly reduced the number of empty containers by around a quarter this month as six new sweeper ships have been brought into operation.  In addition, we note that the re-opening of US borders means immigrant workers may begin returning.  There is still much debate, of course, on the extent that the elevated price pressures are the result of supply chain disruptions.  A report by the Bank for International Settlements estimates that without the supply problems, US inflation would be closer to 2.5% and eurozone inflation near 1.5%. President Biden is expected to make his Fed announcements in the next few days, according to reports, but it could slip into early next week.  Powell is still the favorite, and he has Treasury Secretary Yellen's in support.  Yellen warns that action is needed soon on the debt ceiling.  Her efforts may be exhausted early next month.  Lastly, San Francisco Fed President Daly opined she was more bullish on the economy than a year ago.  This seems backward to us.  A year ago, the vaccine was announced, and fiscal stimulus was anticipated after the US election. Going forward, there will be less monetary and fiscal stimulus.  The pent-up demand ("excess savings") is projected to be exhausted by early next year, and, as we have noted, the doubling of the price of oil has preceded the last three recessions in the US. We suspect that there is sufficient stimulus and need to rebuild inventories to sustain reasonably strong growth for the next few quarters, but by the second half of next year, sub-3% growth will return as the norm.  Canada reports October CPI figures today.  The headline is likely to rise to 4.7% from 4.4% in September (Bloomberg median).  However, the base effect points to a further rise this month and December, when in 2020, the CPI rose 0.1% and fell 0.2%, respectively.   The underlying core rates are also increasing.  The Deputy Governor of the Bank of Canada cautioned about the high degree of uncertainty around potential structural shifts in the labor market that make it challenging to gauge full employment with any degree of confidence.  He pointed to economic areas that still show slack.  The market is expecting the first hike next March/April.  Note that tomorrow, the "Three Amigos" (Biden, Trudeau, and AMLO) meet in the US amid concern that the US "Build Back Better" has strong nationalistic elements, including for electric vehicles.     The US dollar posted an outside up day against the Canadian dollar yesterday, and follow-through buying has lifted it to around CAD1.2585.  At the end of last week, the high set was slightly above CAD1.2600, which close approximates the (50%) retracement of the greenback's decline since the September 20 high near CAD1.29.  The next retracement (61.8%) is found by CAD1.2665.  Still, we expect that a firm CPI report will lend the Loonie some support.  The session low, set in late Asia, near CAD1.2540, may be protected a CAD1.2545 option for $600 mln that expires today.  The greenback is consolidating against the Mexican peso today after rallying yesterday from about MXN20.56 to nearly MXN20.85.  The high from earlier this month was near MXN20.98.  It has not been above MXN21.00 since March.  Initial support is seen around MXN20.60.   Disclaimer
Biden-Xi "Summit" Leaves Markets Unmolested, While Bailey Continues to Blame Investors for Misunderstanding Him

Biden-Xi "Summit" Leaves Markets Unmolested, While Bailey Continues to Blame Investors for Misunderstanding Him

Marc Chandler Marc Chandler 16.11.2021 14:03
Overview: The much-heralded Biden-Xi meeting left little impression on the capital markets.  Equities in the region were mixed, and China's main markets fell, alongside Australia, South Korea, and India.  European equities continue their upward market, with the Stoxx 600 gaining for a fifth consecutive session. US futures are softer.  The bond market is quiet, with the US 10-year yield softer slightly below 1.60%.  European benchmark yields are 1-2 bp lower and the periphery is outperforming the core.  Encouraged by a strong employment report, sterling is the strongest of the majors, gaining about a third of one percent.  Most major currencies are trading with a heavier bias, and the euro is pinned near 19-month lows.  The dollar is gaining against most emerging market currencies.  The Turkish lira is off more than 1.5% as the market prices in a 100 bp cut on Thursday.   Hungary's disappointing Q3 GDP (0.7% vs. 1.0% forecasts) may limit the aggressiveness of the central bank today.  A 30 bp hike after two 15 bp moves was expected.  Gold is extending its rally and has taken out the downtrend drawn off the January and June highs (found ~$1872 today).  The next target is around $1900.  Oil is firm, and the January WTI contract is straddling the $80-level.  European natural gas is rising as new supplies are low, and there is a further delay in the certification process of the Nord Stream 2 pipeline.   Yesterday's 9% advance has been extended by another 8% today.  Iron ore has steadied, while copper is struggling after falling 1% yesterday.   Asia Pacific There is not much to say about the Xi-Biden "virtual summit."  The call reportedly lasted three hours.  The one concrete thing to emerge is that US business executives will have an easier/quicker time entering China.  Separately, Hong Kong's Chief Executive used her regular briefing to justify the decision to allow JP Morgan's CEO to skip the city's 21-day hotel quarantine because of the size of the bank's operations.  This speaks to the difference between the rule of law and the rule by law that some observers make.  Returning to regular meetings between the senior officials from both countries seems to be the logical way forward, but both sides appear to draw domestic benefits from demonizing the other.  In the US, the Biden administration uses the threat of China to justify building a 21st-century infrastructure. At the same time, Beijing plays the nationalistic chords to strengthen the loyalty to the Communist Party even as its delivery of improved living standards slows or stalls.   The minutes from the recent Reserve Bank of Australia meeting contained no surprises.  The exit from the yield curve control policy seems clumsy, but the RBA seems adamant that a rate hike next year is unwarranted.  The market remains convinced officials are wrong.  The swaps market has about 75 bp discounted over the next 12 months, with the hikes and risks increasing beginning in late H1 22. In a speech after the minutes were released, Governor Lowe referred to a hike in 2024 as "still plausible," but this seemed like a slight climb down from it being the "central case."  On the other hand, elevated price pressures and border controls have driven the unemployment rate to 3.4%, its lowest level since 2008, and lifted the participating rate to match record highs. The Reserve Bank of New Zealand will likely hike rates again next week.  The swaps market is pricing in nearly 50 bp of tightening by the RBNZ over the next three months and almost 140 bp in the following nine months.  It is difficult to see a more hawkish outlook.  The five basis point jump in the US 10-year yield helped lift the greenback to JPY114.30, matching its best level since November 1 (JPY114.45).  There is an option for $1.6 bln at JPY114.30 that expires today.   The four-year high was set on October 20 near JPY114.70.  The Japanese economy is recovering after a larger than expected contraction in Q3.  A large supplemental budget is expected as early as the end of the week but before month-end in any event.  As if confirming the lack of new insight from the RBA minutes, the Australian dollar is trading within yesterday's range (~$0.7320-$0.7370).  A break of the $0.7300 area would weaken the technical tone, while a move above $0.7380 signals a stronger recovery after finishing last month near $0.7550.  The Chinese yuan rose to new five-month highs today before pulling back.  The dollar fell to CNY6.3670 and rebounded to a new session high slightly above yesterday's high near CNY6.3850.  The PBOC set the dollar's reference rate at CNY6.3924, a little above the (Bloomberg survey) median projection of CNY6.3920. Ironically, the yuan's high was recorded as the Biden-Xi call got underway.  It trended lower through the rest of the session.   Separately, the PBOC boosted its liquidity injection via seven-day repos to CNY50 bln from CNY10 bln on Monday and rolled off its full medium-term lending yesterday, easing technical pressure in the money market.   Europe The UK's employment data is especially important in light of the BOE concerns about the labor market now that the furlough program has ended.  Around one million workers were on the program when it ended. The BOE surprised the market by not raising rates at the meeting earlier this month. Governor Bailey continues to blame the market for misconstruing his remarks and expressing his unease with the "inflation situation."  He said he wanted to see what happens now that the furlough program ended before hiking, but it is not clear that today's data is sufficient.  However, the preliminary indications suggest the UK labor market is normalizing quickly.  October payrolls rose by 160k. Jobless claims fell by nearly 15k after a revised decline of almost 86k in September (initially estimated at -51.1k).  In the three months through September, the UK employment rose by 247k, and the ILO measure of unemployment fell to 4.3% from 4.5%.  Of note, the next employment report will be issued two days before the next MPC meeting (December 16).     Governor Bailey acknowledged that his decision not to hike rates earlier this month was close.  The swaps market has a little more than a 55% chance of a hike in December and has it fully priced it in for the first meeting next year (February 3). The central bank's chief economist, Pill, said there was no evidence yet that higher inflation was seeping into general pay levels.  Starting salaries appear to be increasing, but it may not be lifting the pay for existing workers.  Separately, a technical glitch with an internet-based order system caused the BOE to postpone a bond purchases operation until Thursday.  The QE operations take place three times a week at a pace of slightly more than GBP3 bln a week, with an eye toward finishing them by year-end.   There is another twist to the saga of the controversial Nord Stream 2 pipeline.  Hopes that the completed pipeline could become operational soon were dealt a fresh blow by the German regulator, who suspended the certification process.  The technical issue was a change in the legal form of the operating company.  Nord Stream 2 AG established a subsidiary that would own and operator the German section of the pipeline.  There is some thought that after this delay, the corporate reorganization could expedite the eventual approval.   Coronavirus deaths spiked in Germany to the six-month highs, and the government is debating how to control the fourth pandemic wave. Ironically, Japan now has the highest inoculation rates among the G7. It reported the lowest number of new infections in 18 months. The euro was sold below $1.1400 yesterday and has been unable to resurface above there.  Since the $1.15 level broke, we have suggested the next target is near $1.1290-$1.1300. The ECB's dovish rhetoric contrasts with the prospect of a more hawkish posture by the Federal Reserve.   We continue to see an acceleration of the Fed's tapering as the most likely outcome of the December FOMC meeting, while next month's ECB meeting is more about extending the bond-buying after the Pandemic Emergency Purchases Program ends next March.  The prospects of a rate hike next month lifted sterling to four-day highs near $1.3475, but there does not look like there is the interest to test the $1.35 area, which holds a GBP407 mln option that expires today.  Initial support is now seen in the $1.3400-$1.3420 area. The euro is sliding for the third consecutive session against steering and looks poised to test the year's low near GBP0.8400 in the coming days. The UK reports October CPI figures tomorrow, and they are expected to have accelerated.    America The US economic growth is improving this quarter after the disappointing 2% annualized pace in Q3.  It will be reflected in the consumption and production data.  Today sees October retail sales, a little more than 40% of overall consumption, and industrial production, including factories and utilities, mining, and drilling.  Headline retail sales will likely be lifted by the first increase in auto sales in six months.  The core components, which exclude autos, gasoline, building materials, and food services, are forecast (Bloomberg, median) to rise a solid 0.9%.  It would be the third consecutive monthly gain, the first since Q3 20.  Consumer spending rose 2% at an annualized rate in Q3 and is expected to grow closer to 5% this year, having peaked in Q2 at 6.7%.  Industrial production fell in August and September but is expected to have snapped back in October as the recovery from Hurricane Ida took hold.  The median forecast (Bloomberg survey) is for a 0.8% gain.  The rig count rose by 23, matching the most since January.  According to the recent jobs report, manufacturing employment rose by 60k in October.  Few have noted it, but if confirmed, it would be the largest monthly increase since August 1998.  That said, the Markit manufacturing PMI and ISM manufacturing index fell.   The Biden administration's $1.75 trillion "Build Back Better" bill is in the balance.  Some argue that the surge in inflation has been spurred by the government's spending and transfer payments and are opposed to new large-scale spending.  However, the bill's defenders argue that it has been scaled back, and much of the expenditures will be covered by new revenue.  The non-partisan Congressional Budget Office, the arbiter of such scoring, will publish its full cost estimate on Friday.  Meanwhile, expectations that an announcement will be made shortly on the Fed's leadership were fanned by comments from the Senate Banking Chairman (Brown), who said he was told a decision was "imminent."  It was widely expected before the end of next week.  Reports suggest that Treasury Secretary Yellen has opined that Brainard would be a credible pick, but she is recommending Powell, emphasizing continuity and avoiding the politicization of the post.   Meanwhile, the Fed's Bullard, Barkin, and Daly speak today.  Note that Daly was interviewed for a Board of Governor slot but appears to have turned it down. Canada reports October housing starts today ahead of the October CPI figures tomorrow.  The headline rate is expected to approach 5% though the underlying measures are lower.  The market is positioned for a hike in the March-April period next year.  Recall that the jump in US CPI sent the greenback up from just below CAD1.2400 to slightly above CAD1.2600 at the end of last week.  It reversed lower before the weekend and slipped briefly below CAD1.2500 today, roughly the (50%) retracement of the CPI-inspired gains, before rebounding. Initial resistance is seen in the CAD1.2535-CAD1.2560 area.  Mexico's economic diary is light, and the movement of the peso may reflect broader forces.  For the past three sessions, the dollar has been consolidating in a broad range against the peso (~MXN20.45-MXN20.72). Within that range, initial support may be in the MXN20.55 area.   Disclaimer
The Greenback Slips at the Start the New Week

The Greenback Slips at the Start the New Week

Marc Chandler Marc Chandler 15.11.2021 12:19
Overview:  While the Belarus-Poland border remains an intense standoff, there have been a couple other diplomatic developments that may be exciting risk appetites today.  First, Biden and Xi will talk by phone later today.  Second, reports suggest the UK has toned down its rhetoric making progress on talks on the implementation of the Northern Ireland Protocol.  Equities in the Asia Pacific region were mostly firmer, with China a notable exception among the large markets, even though the October data was generally stronger than expected.  Europe's Stoxx 600, which has fallen only once this month, is edging higher to new records, while US futures are enjoying a firmer bias.  Benchmark 10-year yields are 1-2 bp lower, which puts the Treasury yield near 1.55%.  The European periphery is outperforming the core.  The dollar is soft.  The Scandis and Antipodeans lead the move, while the euro, yen, and British pound are little changed.  Emerging market currencies are also mostly stronger.  Here the Philippine peso is notable as it falls the most in seven weeks as corporates bought dollars.  After falling by 0.65% last week, the JP Morgan Emerging Market Currency Index is edging higher today.  Gold is snapping a seven-day rally, stalling near $1868.  Support is seen in the $1842-$1845 area.  January WTI  was sold again as it poked above $80.  It is pinned near last week's lows (~$78.65) as the US response is awaited.  European natural gas futures are firm as the capacity auction results are awaited, and Europe faces its first cold snap of the season.  Iron ore and copper prices are posting small losses.   Asia Pacific Japan's Q3 GDP disappointed, but it is old news and will likely spur Prime Minister Kishida to support a large supplemental budget, which could be unveiled by the end of the week.  Economic growth in the world's third-largest economy contracted for the fifth quarter in the past eight.  The 0.8% loss of output in Q3 was more than the 0.2% expected by the median forecast in Bloomberg's survey.  Consumption (-1.1%), business spending (-3.8%), and public investment (-1.5%) did the most damage.  The GDP deflator was unchanged from Q2 at -1.1%.  The Japanese economy is recovering here in Q4.  Talk of the size of the supplemental budget has increased to around JPY40 trillion (~$350 bln) from JPY30 trillion.  It is expected to include a cash payment for 18-year olds and younger, a tax break for companies that boost wages, a new subsidy for domestic travel, snd pay hikes for caregivers. China's October data was stronger than expected but does not shake off concern that the world's second-largest economy is struggling.  The year-over-year pace of retail sales rose for the second consecutive month in the face of expectations for a decline.  The 4.9% increase follows the 4.4% gain in September and 2.5% in August. In October 2020, it rose 4.3% year-over-year.  Industrial output rose 3.5% from a year ago. It was the first increase since March. Last October, it had increased by 6.9%. The surveyed joblessness was steady at 4.9%.  Fixed asset investment and property investment slowed.  Chinese officials have not addressed the economic slowdown with large-scale fiscal or monetary initiatives.   We have suggested that the dollar-yen exchange rate has entered a new range after trending higher from mid-September through mid-October.  That new range is likely JPY113-JPY115, and to find the floor, the dollar briefly traded below JPY112.80 last week. After spiking back to JPY114.00 on the US CPI surprise, the greenback continues to hover around there, the middle of the range.  Tomorrow's expiring options ($830 mln at JPY113.40 and $1.6 bln at JPY114.30) may mark the near-term range.  The Australian dollar is building on its pre-weekend recovery.  It saw a low slightly above $0.7275 on Friday and settled on its highs (a little above $0.7330).  It has risen to $0.7365, and the intraday momentum is getting stretched.  Look for resistance near $0.7375.  The greenback edged slightly lower against the Chinese yuan to record a new six-month low (~CNY6.3785) before recovering within a narrow range.  It is trading slightly above CNY6.3830 in late dealings. The PBOC set the dollar's reference rate at CNY6.3896, a little below the median forecast of CNY6.3896 (Bloomberg survey).  The PBOC rolled over in full the policy loans (CNY1 trillion) coming due this month, and the overnight repo rate fell by seven basis points to 1.78%, the lowest in three weeks.   Europe Tensions between the UK and EU appear to have taken a step away from the brink.  A deal on medicine supplies from other parts of Great Britain to Northern Ireland may have been the critical catalyst.  Reports suggest a de-escalation of UK rhetoric threatening to invoke Article 16, which allows for unilateral over-riding of the Northern Ireland Protocol under certain circumstances of serious economic, environmental, or societal risks.  Separately, two polls have begun showing Labour is edging ahead of the Tories. The Opinium poll (published in the Guardian) gave Labour a one percentage point lead, the first since January.  The Savanta Com Res poll (for the Daily Mail) put Labour ahead by six percentage points at 40%.  The main issue appears to be Prime Minister Johnson's handling of several ethics issues.  His personal support has also waned.    The US was warning at the end of last week that Russian may be preparing to invade Ukraine. Moscow seems to be acting out of fear, fear of the US and Europe creeping presence in Ukraine.  If Ukraine is going to remain independent, Russia insists it can only be a (weak) buffer state.  US rhetoric seemed aggressive in Moscow.  Last month US Defense Secretary Austin argued that no third country [i.e., Russia] has a veto over NATO membership decision[i.e., Ukraine].    Poland, Lithuania, and Latvia are considering formally requesting NATO consultations, while the EU is expected to announce new sanctions on Belarus later today.  Separately, we note reports that India has begun taking delivery of the S-400 air defense missile system from Russia (part of a $5.5 bln deal), which is the same that earned Turkey American sanctions.   The euro edged above the pre-weekend high, but the tone remains fragile, and for the third consecutive session has been unable to resurface above old support at $1.1500.  Since the US CPI report in the middle of last week, it has fallen, and the sideways movement could alleviate the overextended technical condition.  Sterling extended its pre-weekend recovery to reach $1.3440 before sellers reemerged to knock it to the session low of almost $1.3400.  We suspect it can move higher in North America today and target the $1.3480 area.   America The US seems more eager for the Biden-Xi call than Beijing  Expectations should be low, and with no actionable outcome likely (not even a statement), there appears to be little reason to spin it as a virtual summit. The top officials and the senior staff of the two largest economies should talk.  Previously, there were high-level meetings regularly.  Since their last call, a new US-UK-Australian alliance was announced that will result in Australia acquiring nuclear-powered submarines, and it was confirmed that the US has had military personnel in Taiwan since last November.  China continues with its intimidation campaign of repeatedly entering Taiwan's air-identification zone. China's assessment of the US is unlikely to have changed.  Beijing sees the same thing many others do.  Biden's approval rating has fallen to near 41%, and less than that has a favorable view of his handling of the economy.  At the end of last week, the Univerity of Michigan's consumer sentiment measure (preliminary November) fell to its lowest in a decade.  Surveys continue to point to the likelihood that the Democratic Party will lose both houses of Congress in next year's mid-term.  And to underscore the pressure on Biden, the US Court of Appeals (5th Circuit) sustained a block on OSHA's ordered vaccine mandate (or weekly test).  With the sixth plenum over,  Xi has, by all accounts, confirmed his ascendancy and domination of Chinese politics for years to come.   The week's economic calendar for the US begins off slowly.  The November Empire State manufacturing survey is on tap.  It has been in a sawtooth pattern, alternating between gains and losses for the past five months.  It fell sharply (19.8 from 34.3) in October and is expected to have turned up in November.  The US reports October retail sales and industrial production figures tomorrow. Fed officials begin taking to the public stage starting tomorrow.  Over the course of the week, around 11 officials are scheduled to speak.  In addition to US bills, the Treasury Dept sells 20-year bonds, whose auctions have been among the most challenging for coupons, and 10-year TIPS at the end of the week.   Canada reports September manufacturing and wholesale sales today, but the October existing home sales may be more important.  Tomorrow Canada reports housing starts, but the highlight of the week is Wednesday's October CPI.  Price pressures are accelerating in Canada, and the headline CPI is likely to move toward 5% (4.4% in September).  The swaps market is pricing in about 65 bp of tightening in six months.  This week, Mexico has a light economic diary after last week's higher than expected CPI (6.24%) and Banxcio's 25 bp rate hike (to 5%).  Brazil also has a light economic calendar this week.  Last week featured a further rise in (IPCA) CPI (10.67% vs. 10.25%) and weak September retail sales (-1.3% vs. -0.6% median forecast in Bloomberg's survey after a revised -4.3% fall in August). Last week's US CPI shocker saw the greenback jump from around CAD1.24 to slightly above CAD1.26, roughly the 50% retracement of the slump from CAD1.2900 on September 20.  It settled last week on a soft note, and some follow-through selling has seen the US dollar eased to about CAD1.2525.  A break here sees CAD1.2500 and then possibly CAD1.2470.  Since last September, the greenback has moved into a new and higher range against the Mexican peso.  It has not traded much below MN20.12.  Nor has it spent much time above MXN20.90.  It is in the pre-weekend range (~MXN20.45-MXN20.72).  Look for the consolidative day to continue through the local session.  The Brazil real was the strongest emerging market currency last week, rising almost 1.6% against the US dollar.  The US dollar found support around BRK5.40. Trendline support (from June, August, and September lows) and the 200-day moving average are near BRL5.36.   Disclaimer
MSFT, Johnson&Johnson and More Companies With Reports to be Released shortly

Weekly S&P500 ChartStorm - 14 November 2021

Marc Chandler Marc Chandler 15.11.2021 11:20
The S&P500 ChartStorm is a selection of 10 charts which I hand pick from around the web and post on Twitter. The purpose of this post is to add extra color and commentary around the charts. The charts focus on the S&P500 (US equities); and the various forces and factors that influence the outlook - with the aim of bringing insight and perspective. Hope you enjoy! p.s. if you haven’t already, subscribe (free) to receive the ChartStorm direct to your inbox, so you don’t miss out on any charts (you never know which one could change the whole perspective!) Subscribe Now 1. Vacciversary: Can you believe, an entire year has passed since the Pfizer vaccine announcement. Markets had a strong immediate reaction, and since then have chalked up some 34% in gains. Of course a bunch of other factors are also at play, and we also had delta along the way, but you have to think at some level if there were no vaccine that the ride in markets might have been a little rougher. Source: @LarryAdamRJ 2. Investor Movement Index: The IMX moved down slightly in October - this continues the pattern of movement downwards from the peak in optimism of a few months ago. This is typically not a healthy sign for sentiment indicators i.e. reaching an extreme and then leveling off. Source: TD Ameritrade 3. Investment Manager Index: On the other hand, the Markit IMI rebounded further in November with risk appetite surging to multi-month highs and expected returns reaching a new (albeit short history - newish survey) high. Source: @IHSMarkitPMI 4. Euphoriameter: Even my own Euphoriameter composite sentiment indicator has ticked higher so far in November as valuations and bullish surveyed sentiment remain high and volatility lulls back towards complacency. Source: @topdowncharts 5. Investor Sentiment vs Consumer Sentiment: But not all sentiment indicators are at the highs: consumer sentiment has been decidedly less optimistic. I mentioned in a recent video that the UoM consumer sentiment indicator was perhaps overstating the extent of the decline, but the other 2 consumer confidence indicators I track for the USA have also started to drop off recently. This has left quite the divergence between consumer sentiment and investor sentiment. A large part of this is probably down to the inflationary shock that is currently facing the global economy due to pandemic disruption to the global supply chain *and* unprecedented monetary + fiscal stimulus (remember: supply shortages/backlogs and the associated inflation surge don’t exist if there is no demand —> demand has been boosted by stimulus —> and stimulus helps stocks ——> gap explained). Source: @takis2910 6. Real Earnings Yield: Another effect of the surge in inflation has been a plunge in the real earnings yield: again this can be squared up by noting that stimulus has been a key driver of the inflation shock and a key driver of the surge in asset prices —> surging asset prices (stock prices) leads to a lower nominal earnings yield (again: gap explained). So is this a problem? Perhaps, but one way or the other it will probably be transitory (if you can read between the lines a little there!!). Source: @LizAnnSonders 7. Valuations: Valuations rising = risks rising... but then again it's a bull market, so POLR is higher (for now). n.b. “POLR” = path of least resistance: basic notion that in markets and life when a force is set in motion an object will not change its motion/trajectory unless another force acts on it... That means a bull market will carry on until something changes e.g. a crisis, monetary policy tightening, recession, regulations/politics, (or a combination of all of those!). Source: @mark_ungewitter 8. Household Financial Asset Allocations: We all know by now that equity allocations by households is at/near record highs. But one surprise: cash holdings have jumped and are apparently on par with debt (bonds etc) ...even as cash rates suck (and are even suckier when you consider the real interest rate). Probably an element of booking gains, stimulus payments, and precautionary savings. Recall though: the job of cash is preservation of capital (and optionality) vs generating returns, as such. Source: @MikeZaccardi 9. S&P500 Constituents Return Distribution: I thought this was interesting - especially the tails of the distribution - a lot of heavy lifting being done at the tails. But also that ”s” — tails (i.e. big dispersion between left and right tails). Source: @spglobal via @bernardiniv68 10. The Five Biggest Stocks: The bigness of the biggest stocks in the index is biggening more bigly. Serious though: the market is increasingly lop-sided, this means diversification may be diminishing as systematic risk will be increasingly driven by specific risk. Source: @biancoresearch Thanks for following, I appreciate your interest! !! BONUS CHART: Leveraged ETF trading indicator >> Click through to the ChartStorm Substack to see the bonus chart section https://chartstorm.substack.com/p/weekly-s-and-p500-chartstorm-14-november Follow us on: Substack https://topdowncharts.substack.com/ LinkedIn https://www.linkedin.com/company/topdown-charts Twitter http://www.twitter.com/topdowncharts
CPI Shocker Lifted the Greenback, which now needs to Take a Breath

CPI Shocker Lifted the Greenback, which now needs to Take a Breath

Marc Chandler Marc Chandler 15.11.2021 10:14
The jump in US headline CPI above 6% crossed some Rubicon and injected dynamic into the process.  The dollar rallied, and new highs for the year were recorded against the euro and sterling.  The dovish tapering announcement by the Fed on November 3 was completely unwound as the December 2022 Fed funds futures returned to the high-yield mark of 66 bp ahead of the weekend.   The two-year yield rose from about 39 bp at the start of the last week to almost 55 bp.  The volatility of the bond market (the equivalent of the VIX for the S&P 500) surged back to the year's high (above 78%).   Ultimately, the idea that R-star, the real short-term interest rate when the US economy is at full capacity and inflation stable, has continued to trend lower will likely cap nominal rates.  Equities wobbled, and the S&P 500 snapped an eight-day advance, and the NASDAQ's 11-day rally stalled.  US equities stabilized and posted modest gains in the past two sessions.   The rise in price pressures requires the Federal Reserve to be more flexible to address a range of possible outcomes.  The pace of the tapering is the main constraint on policy.  The FOMC statement committed the Fed to reduce the bond-buying by $15 bln in November and December.  While it anticipated that the pace would continue, it reserved the right to adjust the rate.  This is likely to be the focus in the run-up to the mid-December meeting.  To finish QE in March, as St. Louis Fed's Bullard, a noted hawk, has argued, the Fed would need to double its pace of tapering to $30 bln a month starting in January.  What is at stake is when the Fed's rate hike cycle can begin, not the terminal rate, which is expected to be below 2%.   Dollar Index:  The CPI saw the Dollar Index surge to convincingly surpass the (38.2%) retracement target of the decline from the March 2020 high (~103) to the January 6 low (~89.20).  That retracement (~94.55) had been penetrated briefly before, but it did not stick.  This time, the Dollar Index rose to new highs for the year, slightly above 95.25.  The next retracement (50%) is found a little above 96.00, and the (61.8%) objective is almost 97.75.   The momentum indicators suggest a high is not yet in place, but the move since the mid-week CPI shocker, above the upper Bollinger Band (~95.00) warns against chasing it.  That said, initial support is likely in the 94.60-94.75 area.   Euro:  The euro was driven below $1.15 after the US CPI report and failed to resurface above this previous floor, which now acts as resistance.  A low near $1.1435 was recorded ahead of the weekend.  Neither the MACD nor Slow Stochastic is over-extended, but, as we saw with the Dollar Index, the exchange rate is outside the Bollinger Band (slightly below $1.1465) and settled below it for the third consecutive session ahead of the weekend. There is little chart support until the $1.1290-$1.1300 area is approached.  Moreover, if the euro has carved out some kind of topping pattern, the risk may extend toward $1.10.   Japanese Yen:  From around mid-September through mid-October, the dollar broke out of the old JPY109-JPY111 range to reach JPY114.70 on October 20.  It consolidated at lower levels and approached JPY112.70 on November 9.  The jump in the US CPI reported the following day lifted the greenback to JPY114.00, and it reached JPY114.30 before the weekend.  We often experience the dollar-yen exchange rate as a pair often rangebound.  We had anticipated a JPY113-JPY115 range and would allow about a half a yen range or so violation. The MACD has flatlined, while the Slow Stochastic has turned higher.  Although the fit is not perfect, we still look at US yields for directional cues.   British Pound:  Sterling had been turned lower on November 4 from $1.37 by the BOE, who caught the market leaning too far over its skis, arguably encouraged to do so by official rhetoric.  Its attempt to recover was stalled near $1.36, and the US inflation jump set it to new lows for the year.  The low ahead of the weekend was slightly below $1.3355.  The MACD is entering oversold territory, while the Slow Stochastic, which leveled off, seems to be slipping into over-extended territory as well.  After closing for two sessions below the lower Bollinger Band, it finished the week back above it (~$1.3355).  A close above $1.3400 would suggest a consolidative phase lies ahead.  Last December, sterling recorded lows $1.3135-$1.3185, and the risk is for this area to be tested.   Canadian Dollar:  Since the US CPI surprise, the Canadian dollar has been the weakest of the major currencies, falling around 0.75% against the greenback.  It was the third consecutive weekly decline for the Loonie, which was preceded by a five-week advance.  The US dollar posted an outside up day in the middle of last week on the back of the CPI news.  It rallied from slightly below CAD1.2390 to a little above CAD1.25.  On Thursday, when US and Canadian banks were closed for holidays, the dollar rose to almost CAD1.2600 and made a marginal new high ahead of the weekend.  This met the (50%) retracement of the US dollar's decline since the CAD1.29 level was approached a couple of days before the September 22 FOMC meeting.  The Slow Stochastic is over-extended, though the MACD has more scope to run.  Here too, the market moved quickly, and the greenback settled the past two sessions above the Bollinger Band (~CAD1.2555). The CAD1.2480 area may offer initial support.   Australian Dollar:  The Australian dollar recorded the low for the year on August 20, near $0.7100.  It recovered into early September (~$0.7480) before being turned back to $0.7170 by the end of the month. The Aussie launched another advance last month that carried to around $0.7555 and the 200-day moving average.  It has come under new pressure this month and fell to nearly $0.7275 ahead of the weekend, meeting the (61.8%) retracement target of the overall rally since August 20.  It closed on a firm note above $0.7300.  The Slow Stochastic is over-extended and could turn up next week.  The MACD is still pointing lower.  After settling out the Bollinger Band on Wednesday and Thursday, the Aussie moved back into it (~$0.7300) ahead of the weekend.  Initial resistance is seen in the $0.7335-$0.7355 band.   Mexican Peso:  The US CPI boosted the dollar by nearly 1.6% against the peso, the most in five months.  It was the only advance of the week, but it was sufficient for the greenback to close around 0.6% stronger.  The high for the week (~MXN20.7225) was recorded in the hours after the central bank delivered its fourth quarter-point rate hike.  Banxico showed no appetite to increase the pace, unlike other regional central banks, even though CPI is still accelerating.  Still, the greenback slightly exceeded the (61.8%) retracement target (~MXN20.70) of its decline from the November 3 high (~MXN20.98) to the November 9 low (~MXN20.2515) before retreating ahead of the weekend.  Support is seen around the 20-day moving average (~MXN20.42).  Among emerging market currencies, the Brazilian real (~2.3%) and the Chilean peso (1.6%) fared best.  The Hungarian forint (~-2.9%) and the Turkish lira (-2.75) saw the largest losses.  The JP Morgan Emerging Market Currency Index fell by about 0.40% last week, the eighth weekly decline in the past ten.   Chinese Yuan:  One would not know it by reading much of the free financial press, but the Chinese yuan is the strongest currency in the world this year.  Its 2.3% advance eclipses the Canadian dollar, the only major currency stronger against the US dollar on the year (~1.3%).  The tensions in Europe and the pullback in oil prices saw the Russian rouble tumble almost 2.3% last week.  It was knocked from its perch as the top performer, allowing the yuan to pull ahead.  The dollar settled last week, slightly under CNY6.38, its lowest close since May 31, when it recorded a three-year low (~CNY6.3570).  The trend line connecting the 2014 dollar-low and 2018 low is frayed in May and June but essentially held.  It is now being violated more convincingly.   Sentiment toward investment in China has become in fashion again.  The NASDAQ Golden Dragon Index that tracks Chinese companies that trade in the US rallied nearly 7% last week.  China's 10-year yield of 2.80% may not sound particularly exciting, but it is the only benchmark that has not sold off this year.  The yield has fallen 20 bp.    Disclaimer
Half a Dozen Things You Should Know about FX

Half a Dozen Things You Should Know about FX

Marc Chandler Marc Chandler 12.11.2021 13:11
1.  The market is still digesting the implications of Wednesday's CPI shock. The dollar has strengthened, yields have risen, the stock market wobbled after a long advancing streak, and in any event, stabilized in light trading during the US and Canadian holidays. However, given the low year-ago reading, there is a significant risk that inflation (including the core rate) will accelerate over the next few months. As a result, the Federal Reserve needs greater flexibility to raise rates sooner than it has envisioned.   The main restraint now is the pace of tapering.  The FOMC committed to reducing its bond-buying by $15 bln in November and December.  Its statement indicated that it anticipated maintaining the rate afterward, but the FOMC also reserved the right to adjust the pace if necessary. Thus, accelerating the tapering is the most likely course of action.  Bullard had suggested completing the tapering by the end of Q1.  If this is to become the majority view, there may be some effort to prepare the market.   Recently a rally in US bonds was attributed to talk that Governor Brainard could replace Powell as Fed chair.  The argument was that Brainard was more dovish.  Is this really relevant now?  Does it count as a strike against her?  With Yellen's apparent support, Powell is most likely to get re-appointed, and given that CPI is at 30-year highs, conventional thinking favors maintaining a stable hand at the helm. 2.    The dollar's gains accelerated since the higher than expected CPI report.  The euro was in a $1.15-$1.17 range last month and broke out on Wednesday.  Follow-through selling Thursday brought to about $1.1445.  We have suggested the next target is a little below $1.1300.   The jump in yields helped lift the greenback from below JPY112.80 above JPY114.00.  The five-year high set on October 20 was around JPY114.70, while we project the upper end of the likely range closer to JPY115.00. 3.  Disappointing economic data contributed to the losses of sterling and the Australian dollar.   Economists (Bloomberg survey) expected Australia to have created 50k jobs in October, but, instead, it lost 46.3k jobs for the third consecutive monthly decline.  The bulk of the loss (40.4k) were full-time positions, which reversed the 26.7k increase reported in September.  The unemployment rate jumped to 5.2% from 4.6%, the highest since April.  The Australian dollar peaked near $0.7550 in late October and fell below $0.7300 on Thursday, for the first time in a month.  The next target is around $0.7240-$0.7260.   The UK reported a significant slow down in Q3 GDP to 1.3% from 5.5% in Q2. Expectations for a 1.5% quarter-over-quarter expansion  (Bloomberg survey) seemed on the high side.  However, the September monthly GDP rose 0.6%, and the better than expected rise was offset but a reduction in the August GDP to 0.2% from 0.4%. The industrial output contracted in September. The trade deficit deteriorated after a dramatic revision in the August balance (to -GBP1.880 bln from -GBP3.716 bln, while services accelerated (0.7% from a revised 0.1% gain that had initially reported at 0.3%).  Sterling, which had been pushing near $1.36 before the Bank of England's meeting and slipped to a marginal new low for the year on Wednesday but still held above $1.34 (barely).  It fell to $1.3360 on Thursday. The next chart support area is seen around $1.3165-$1.3185. 4.  The joint US-China statement at COP-26 is promising.  It was the key to the Paris Agreement in 2015.  There was a commitment to boost efforts to cut emissions and illegal deforestation.  The gap between current policies and what is necessary was acknowledged, and there appeared to be an agreement in principle to reach an agreement on climate finances and rules for a carbon market.  The joint statement must have been in the works even as Biden criticized Xi for the lack of commitment for not attending COP-26.  There is still much speculation about a "virtual summit," which is supposed to signal something more than two phone calls the leaders have held this year.  The environment was also recognized where cooperation was possible.  Still, Beijing refused to join the US-EU commitment to cut methane admissions and opted for its own plan.   The geopolitical competition is unaffected by the joint statement. Meanwhile, the more pressing geopolitical threat is coming from the movement of Russian forces to the Ukraine border.  Reports suggest the US has briefed Europe on a possible Russian invasion of Ukraine.  Hostilities are said to have escalated recently.  Recall that Russia had amassed forces (~100k soldiers, tanks, and aircraft) in the Spring too.  It triggered a flurry of talks, and Moscow removed (redeployed) its forces.  Russia defended the troop movement within the country as an internal affair but has accused the US of provocation for sailing warships into the Black Sea, close to its territory last week.  Putin also reportedly was critical of Ukraine's alleged use of drones, which violated a previous agreement.  Meanwhile, tensions on the Polish-Belarus border remain tense.  Merkel sought Putin's help recently to defuse the situation, but he refused.   Belarus is thought to be instigating a migration crisis and has threatened to shut down a critical gas pipeline to the EU if Poland keeps its border closed.  These developments may have contributed to some pressure on the euro.   5.  The Mexican peso fell by around 0.5% after the central bank lifted the overnight rate to 5.00%. It is the third quarter-point move in the cycle that began in June.   The swaps market has nearly 90 bp of tightening discounted over the next three months and almost 220 bp in the next 12 months.  Banxico lifted its Q4 inflation forecast to 6.8% from 6.2%.  The one dissent (Esquivel, again) was to stand pat.  There was no vote for a 50 bp move, which contributed to the dovish read of the rate hike.  October CPI, reported earlier this week, is at 6.24% year-over-year,  6.   Friday's economic calendar is light.  Little new data from the large Asia Pacific and European countries.  The North American calendar is minimal.  The US JOLTS report on job openings and the University of Michigan's preliminary estimate of November sentiment and inflation expectations.   NY Fed's Williams is the lone speaker from the central bank and may not address monetary policy directly.  There are three sets of chunky options that expire tomorrow that may be relevant:  1.23 bln euros at $1.1460, $1.75 bln at JPY114.00, and GBP690 mln at $1.3320.   Disclaimer
Considering Portfolios In Times Of, Among Others, Inflation...

Profit-Taking on Dollar Longs after Better than Expected Jobs Report Sets Stage Until CPI

Marc Chandler Marc Chandler 08.11.2021 09:57
The US dollar turned in a solid week's performance, rising against most currencies and recording a marginal new high for the year against the euro.  Sterling and the Australian dollar competed for the worst performer.  Both central banks pushed against market expectations for aggressive near-term tightening.  The central banks triggered a short squeeze in the bond market, where 10-year benchmark yields from 10 bp in the US to 34 bp in Italy.  UK 10-year Gilts and French Oats yields fell nearly 22 bp.  Germany lagged with an almost 18 bp decline.  The speculative market had its largest net short Treasury note futures position since March 2020.  It has swung from its largest net long position in four years (~181k contracts) in early October to a net short position of almost 270k as of November 2.  The macro focus shifts back to inflation next week with American and Chinese reports.  Rising inflation in the world's two largest economies may arrest the rally in the bond markets. We anticipated the dollar to move broadly higher this month, and the move we envision does not appear over.  However, important support has been approached in a sharp thrust that has penetrated Bollinger Bands, suggesting some patience may be needed.  The dollar did close relatively softly, especially given the stronger than expected employment report.   Dollar Index: A new high for the year was recorded after the employment report was slightly above 94.60.  The momentum indicators are trending higher, and the five-day moving average crossed back above the 20-day moving average.  Recall that the 94.50 area is (38.2%) retracement of the sell-off since the March 2020 peak (~103).  The high from last September was closer to 94.75, but above there, nothing stands out until the 95.70-96.10 band. Yet ahead of the weekend, it finished poorly and formed a potential bearish shooting star candlestick.  Initial support is seen around 93.80.   Euro:   The single currency was virtually flat last week, but it does not hide the fact that a new low for the year (~$1.1515) was recorded.  The MACD and Slow Stochastic are moving lower, and the price action has been poor.  The $1.1490 area corresponds to the (50%) retracement objective of the rally from the March 2020 low (~$1.0635).  The next retracement (61.8%) is found a little below $1.13.  The euro finished on a firm note near session highs, suggesting scope for some corrective gains at the start of the new week. The new momentum shorts are frustrated with the lack of follow-through and maybe in weak hands.  A close above $1.1620 would lift the technical tone.  Japanese Yen:  The Japanese yen was the strongest of the major currencies, gaining an inconsequential 0.25% against the dollar.  The decline in US rates helped drag the dollar lower against the yen.  In terms of market positioning, short-yen carry trades had become momentum trades, too and the unwind was also supportive of the yen.   The dollar-yen exchange rate continues to track US 10-year yields.  The 10-year yield fell below 1.50% for the first time in a month ahead of the weekend, and the dollar made a new low for the week near JPY113.30.  Recall that in the big picture, we have suggested a range-trading affair between around JPY113.00 and JPY114.50-JPY115.00.  That still seems reasonable.  However, we note the dollar's momentum is flagging, and the five-day moving average slipped below the 20-day for the first time since late September.   The Slow Stochastic and MACD are trending lower.  A break of JPY113.00 signals the next leg down into the JPY112.00-JPY112.50 band.  British Pound: After the Bank of England confounded market expectations, sterling was spanked, falling more than 1% for only the second time this year (the other was on September 28, which arguably was more of a dollar move).  Expectations, partly facilitated by official comments, for tighter monetary policy spurred a roughly 4.3-cent rally in sterling last month.  If the BOE is saying, "sorrow about the mate, you misunderstood the conditionality and our job," it seems only fitting that sterling return to the late-September low near $1.3400.  It did so ahead of the weekend to $1.3425.  Ahead of the weekend, it settled below the lower Bollinger Band for the second consecutive session.  The momentum indicators are still falling. However, it managed to close near session highs, and a potential hammer candlestick may have been formed.  However, if $1.34 does not hold, it is difficult to find much chart support ahead of the $1.3165-$1.3200 area should $1.3400 be convincingly broken.  Canadian Dollar:  The Canadian dollar fared better than the other dollar-bloc currencies but still lost about 0.5% against the US dollar.  Since meeting the head and shoulders objective near CAD1.23, the US dollar has been consolidating and forming a rounded bottom.  The five-day moving average crossed back above the 20-day for the first time in a month.  The greenback finished the week bumping against the 200-day moving average (CAD1.2480), while the momentum indicators suggest there is more to come.  A retracement (38.2%) of the greenback's slide since September 20 high (~CAD1.29) is found near CAD1.2520, and the next retracement (50%) is slightly below the neckline of the head and shoulders pattern (~CAD1.2600).     Australian Dollar:  The Australian dollar's pullback has been more profound than the other majors.  It dropped almost 2.6% from the late October higher (~$0.7555), which was its best level since early July, and retraced half of last month's rally at the pre-weekend low (~$0.7360).  The momentum indicators are still falling, and the five and 20-day moving averages have crossed for the first time in nearly a month.  The next (61.8%) retracement target is closer to $0.7315.  Still, it closed firmly and with a possible bullish hammer candlestick, suggesting a bounce early next week is likely. The $0.7430-$0.7450 area may be the first important hurdle.  The Reserve Bank of Australia, like many other central banks, is emphasizing labor market developments in their forward guidance. Given the gap between what the RBA is saying (no hike likely until 2024) and what the market is saying (the swaps market implies nearly 70 bp of tightening over the next 12 months), next week's October jobs data may have greater impact.  Australia lost almost 285k jobs in August and September amid the lockdown.  A modest recovery is expected. In fact, the worst was probably in August. Full-time positions increased by almost 27k in September.   Mexican Peso:   The peso staged a brilliant recovery last week, but only after first falling to its lowest level since March.  The fall in US rates helped take pressure off the peso and emerging markets more broadly.  The strong US employment report bolstered risk appetites and lifted the JP Morgan Emerging Market Currency Index, which had been lower on the week, ahead of the data.  The dovish FOMC tapering announcement saw the dollar record a key downside reversal against the peso by reversing lower after making new highs and closing below the previous session's low.  Modest follow-through selling pushed the dollar through the (61.8%) retracement objective (~MXN20.46) of the rally that had begun in late October (from ~MXN20.21), ahead of the FOMC meeting and jobs report.  Before the weekend, it settled at the lows for the week (~MXN20.30).  Initial support is seen near MXN20.20.  The central bank meets next week (November 11).  Most expect a 25 bp hike, but an acceleration in CPI last month ( to be reported on November 9) may boost the risk of a 50 bp move.   Chinese Yuan:  The yuan's 2% gain this year puts it in third place globally, behind the Russian ruble (4.5%) and the Canadian dollar (2.3%).  The yuan has drifted higher in recent weeks.  It has risen for the past three months for a cumulative gain of a little less than 1%.  For the past several weeks, the PBOC consistently set the dollar's reference rate above market expectations (median projection in Bloomberg's survey) but did not do so ahead of the weekend.  Last week the dollar traded quietly within the range seen in the past two weeks.  The dollar recorded four-month lows in October in front of CNY6.38.  Given the official penchant for stability, the issue now is the upper end of the range, and it seems to be CNY6.40-CNY6.41.  Since late September, the dollar has not settled above the 20-day moving average (~CNY6.4075), the middle of the Bollinger Bands.  China's 10-year bond yields peaked in mid-October near 3.05% and last week finished below 2.90% for the first time in several weeks. It is the only country whose 10-year yield has fallen this year (~25 bp).  The October inflation gauges are the market's focus, but trade and lending figures may generate more insight into the economic drivers.   Disclaimer
Inflation Is Not The Only Consequence Of The Russian Invasion

And the Dollar Bounces Back, While BOE is in Focus

Marc Chandler Marc Chandler 04.11.2021 11:30
Overview:  The Federal Reserve announced tapering and, like the Reserve Bank of Australia earlier in the week, did not validate expectations for an aggressive rate hike.  Now the focus is on the Bank of England, where several officials seemed to goad the market into lifting short-term rates. The S&P 500 and NASDAQ rallied to new record highs yesterday and helped raise global shares today.  Among the large markets in the Asia Pacific region, only Taiwan and India did not participate in today's dance.  In Europe, the Stoxx 600 is extending its advance for the sixth consecutive session and nine of the past ten.  US futures are trading firmer.  The market is trimming yesterday's 5.5 bp rise in the US 10-year yield. It is about 3 bp lower near 1.57%.  European yields are 1-3 bp lower. The dollar, which slipped lower after the FOMC meeting, is back with a vengeance today.  It is gaining against all the majors, with the euro bearing the brunt, off about 0.5% to return toward the week's lows below $1.1550.  The yen is the most resilient and is flattish.  Emerging market currencies are also mostly lower.  The Chinese yuan is the strongest emerging market currencies today with about a 0.15% gain, recouping its losses of the past two sessions.  The Polish zloty is the weakest, off 0.6%, despite the larger than expected 75 bp hike yesterday.  Gold was tarnished by 1% yesterday, its biggest loss since mid-October, but is steadied today, up around 0.4% near $1777.  December WTI extended its pullback from $85 seen at the start of the week to dip briefly below $80.  It has firmed back above $81 in the European morning ahead of the OPEC+ meeting outcome.  Cooper prices have stabilized after tumbling 1% yesterday.   Asia Pacific  The final reading of Japan's service and composite PMI was unchanged from the preliminary estimate, with both at 50.7. The services component was the first above the 50 boom/bust level since January 2020.  The composite is at the highest since April.  The virus and formal emergency hobbled the economy, but the economy is on the mend, though out of sync with the other major economies.  Japan intends to use fiscal policy in a pro-cyclical fashion.  Prime Minister Kishida is preparing a large stimulus budget, and it is expected to be unveiled around the middle of the month.  Australia is also emerging from a soft economic period.  Real retail sales fell 4.4% in Q3, faring a little better than economists expected.  Separately, it reported its September trade surplus in line with expectations of about A$12.2 bln.  However, how it got, there was a bit different than anticipated.  First, the August trade surplus was shaved to A$14.7 bln from A$15.1 bln as imports were revised to show a 2% gain instead of a 1% loss. Second, exports fell 6% in September, twice the decline expected, but this was offset by a 2% decline in imports, rather than a 1% gain.  First thing tomorrow, the central bank issues its monetary policy statement, which is hoped to shed more light on the RBA's intent.  The US dollar is straddling the JPY114.00 area.  It reached a three-day high slightly below JPY114.30 and has held above JPY113.90.  Two large options expire today, but they have likely been neutralized.  The first is for nearly $2 bln at JPY114.00, and the other is for $1.8 bln at JPY114.30.  The Australian dollar extended yesterday's recovery to reach $0.7470 before meeting a wall of sellers, which drove it back to almost $0.7425.  Yesterday's low was set near $0.7410.  A break of $0.7400 could signal a test on the $0.7365 area.  The greenback finished yesterday at its best level against the Chinese yuan in almost three weeks, but it continues to be sold on moves above CNY6.40.  Today's yuan gain has nearly recouped the past two session's decline.  Meanwhile, the PBOC continues to set the dollar's reference rate slightly above where bank models project.  Today's fix was at CNY6.3943, while the median (Bloomberg) had it at CNY6.3926.  The PBOC has been relatively generous with its money market provisions.  New fiscal spending this month and next is expected to provide more liquidity.   Europe Before the Bank of England's last meeting (September 23), the December short-sterling interest rate futures implied a yield of 13 bp.  It is now yielding 46 bp.  The market appears to have a 15 bp hike discounted, but economists are split.  A hawkish hold could be delivered if the BOE signaled its intention to raise rates shortly while ending its bond-buying operations early.  With weak retail sales (down five months in a row through September), softer than expected September CPI, and no employment data since the furlough program, is the urgency exaggerated?   The eurozone flash services PMI was shaved lower to 54.6 from 54.7, and this led to the paring of the composite reading to 54.2 from 54.3.  It was the third consecutive decline in the composite PMI.  German and French preliminary estimates were confirmed.  Spain surprised on the upside with a service reading of 56.6.  Economists had expected a 55.8 report after 56.9 in September.  The smaller than expected decline saw a 56.2 composite, down from 57.0, but not as soft as expected.  Italy disappointed.  The services PMI fell to 52.4 from 55.5.  The median forecast was 54.5.  The composite stands at 54.2, down from 56.8.   Germany's September factory orders showed a muted response after August's revised 8.8% drop (initially reported as a 7.7% decline).  The 1.3% gain was less than expected and solely a function of foreign orders (6.3%).  Moreover, the foreign orders were from outside the euro area.  They rose by 14.9%, offsetting August's 14.7% fall.  Domestic orders fell by 5.9%.  It is the third consecutive month domestic orders declined.   The euro has been pushed below $1.1550, where a 1.1 bln euro option expires today.  It initially tried extending yesterday's post-Fed gains but stalled a little above $1.1615.  That area now looks like formidable resistance.  Support is seen in the $1.1525-$1.535 area, but note that the $1.1490 level corresponds to the (50%) retracement objective of the euro's rally from March 2020 lows.  A break of that targets the $1.13 area.  Similarly, sterling's advance yesterday was marginally extended but stopped in front of $1.3700, which is also below the 20-day moving average.  It has been sold in the European morning ahead of the BOE outcome. It has found support in front of $1.3600. Below there, the $1.3575 area marks the (61.8%) retracement target of the rally from the late September low near $1.3410.  Sterling's retreat has left the intraday momentum indicators stretched, warning of the risk of a bounce after the BOE.   America By announcing it would reduce its bond-buying starting this month by $15 bln (a month), the Federal Reserve delivered as expected. The Fed's statement was modified slightly, saying that the elevated prices are "expected" to be transitory.  There was no hawkish surprise, and Chair Powell's tried to thread the proverbial needle by acknowledging that price pressures are likely to continue well into next year.  Treasury Secretary Yellen suggested a similar scenario recently.  The dollar softened, and stocks rallied on the news.   Separately, we note that recently President Biden said he would soon make an announcement about the Fed Chair, whose term expires next February.  Yellen has defended Powell on two issues--financial market regulation and the officials trading/investing--suggests that if Biden does not re-nominate Powell, he would likely have to overrule his Treasury Secretary.   Powell cited the dramatic rise in the Employment Cost Index at yesterday's press conference.  Today, the US reports a more holistic measure of labor costs:  unit labor costs, which incorporates productivity.  The fact of the matter is that unit labor costs fell in H1. However, they are volatile quarter-to-quarter, and unit labor costs likely rise sharply in Q3.  It appears that many employers thought to get by over the summer, waiting for the end of the extra federal unemployment compensation and the re-opening of schools to free up labor without having to pay up for it.  Indeed, Q3 non-farm payroll growth averaged 488k a month, the lowest three-month average since February. This is because the employers preferred to have the existing workers do more overtime than hire.  However, the end of the benefits and re-opening of schools so far proved insufficient.  Another factor that Powell could have cited was the loss of immigrant workers. Pre-pandemic immigrants accounted for one-in-five manufacturing workers and closer to one-in-four in some industries like semiconductors, medical equipment, and food processing.  This squeeze end around November 8 as the border will be re-opened with work visas.  The US has lobbied OPEC+ to boost output faster.  Part of the problem is that some OPEC+ members, like Nigeria and Angola, have been unable to increase production, leaving OPEC+ short of the 400k barrels a day they were going to add last month.  Separately, the US reportedly will join new talks with Iran later this month.  The prospect of Iranian oil also weighed on prices.  In addition, some of the large shale producers have indicated plans to boost output. The US also reports the September trade balance.  A record shortfall is expected of a little more than $80 bln.  Weekly jobless claims pale in comparison to tomorrow's national employment report.  Canada reports September's merchandise trade balance.  Through August, Canada has reported an average monthly surplus of $700 mln.  In the first eight months of 2020, the average deficit was a little more than C$3 bln and in the same period, in 2019 recorded an average deficit of C$1.5 bln. The US dollar spiked to almost CAD1.2460 yesterday but reversed lower and settled on its lows near CAD1.2390.  It is consolidating and straddling CAD1.2400 today.  There is an option for nearly $800 at CAD1.2420 that expires today and one for $515 mln at CAD1.2375 that expires tomorrow.  The intraday momentum indicator suggests limited upside in early North America.  The greenback posted a potential key reversal against the Mexican peso yesterday by first making a new high for the move (~MXN20.98) and then selling off to close below the previous session's low.  Yesterday's low (~MXN20.5150) has held so far today as the dollar consolidates mostly below MXN20.60.  An option for $430 mln at MXN20.55 expires today.  A break of MXN20.50 sees nearby support around MXN20.47 (the 20-day moving average ) and MXN20.44 (the 6.18% retracement objective of the dollar's rally from late last month).  Disclaimer
November Monthly

November Monthly

Marc Chandler Marc Chandler 03.11.2021 15:17
Three main forces are shaping the business and investment climate:  Surging energy prices, a dramatic backing up of short-term interest rates in Anglo-American countries, and the persistence of supply chain disruptions.  The US and Europe have likely passed peak growth.  Fiscal policy will be less accommodative, and financial conditions have tightened. Japan appears to be getting a handle on Covid and after a slow start.  Its vaccination rate has surpassed the US.  The lifting of the formal state of emergency and a hefty dose of fiscal stimulus is expected to be delivered in the coming months. Many developing economies have already lifted rates, some like Brazil and Russia, aggressively so.  They will likely finish earlier too.      US light sweet crude oil rose nearly 12% last month, even though US inventories rose last month for the first time since April.   The price of WTI rose almost 10% in September.  Statistically, the rise in oil prices is strongly correlated with the increase in inflation expectations.  OPEC+ will boost supplies by another 400k barrels a day at the start of November and is committed to the same monthly increase well into 2022.   At the same time, new Covid infections in several Asia-Pacific countries, including China, Singapore, and Australia, warn of the risk of continued supply-chain disruptions.  In Europe, Germany and the UK recently reported the most cases since the spring. Belgium is tightening curbs.  Bulgaria is seeing a rise in infections, and Romania was at full capacity in its intensive care facilities.  The fact that Latvia lags the EU in vaccination at about 50% leaves it vulnerable.  The US may be lagging behind Europe, and the next four-six weeks will be critical.  Roughly 40% of Americans are not fully vaccinated.   The rise in price pressures and the gradual acknowledgment by many central bankers that inflation may be more persistent have helped spur a significant backing up of short-term rates in the Anglo-American economies. The ultimately deflationary implications of the surge in energy prices through demand destruction and the implications for less monetary and fiscal support still seem under-appreciated. Yet, the market has priced in aggressive tightening of monetary policy over the next 12 months.   The focus of the foreign exchange market seems squarely on monetary policy.  From a high level, the central banks perceived to be ahead in the monetary cycle have seen stronger currencies. The likely laggards, like the Bank of Japan, the Swiss National Bank, and the ECB, have currencies that underperformed.  Norway and New Zealand have already raised rates and are expected to do so again in November.    Of course, as you drill down, discrepancies appear.  In October, the Australian dollar was the top performer among the major currencies with a 4% gain.  It edged out the New Zealand dollar and the Norwegian krone, whose central banks are ahead of the Reserve Bank of Australia.  The RBA has pushed against market speculation that has 90 bp of tightening priced into 12-month swaps.  The Australian dollar outperformed sterling by about 2.5% in October even though the Bank of England has been so hawkish with its comments that the market had little choice but to price in a high probability of a hike as early as the November meeting.  In fact, the market has the UK's base rate above 50 bp by the end of Q1 22.  This is important because in its forward guidance that BOE has identified that as the threshold for it to begin unwinding QE by stopping reinvesting maturing issues.  Interestingly enough, when the BOE meets on March 17 next year, it will have a sizeable GBP28 bln maturity in its portfolio.   In an unusual quirk of the calendar, the Federal Reserve meets before the release of the October jobs report.  All indications point to the start of the tapering process.  It is currently buying $120 bln a month of Treasuries ($80 bln) and Agency Mortgage-Backed Securities.  The pace of the reduction of purchases is a function of the duration, and the Fed has clearly indicated the tapering will be complete around mid-year. That suggests reducing the purchases by about $15 bln a month.  Chair Powell indicated that unlike the Bank of England, the Fed will stop its bond purchases before raising rates. A faster pace of tapering would be a hawkish signal as it would allow for an earlier rate hike.  The gap between when the tapering ends and the first rate hike does not appear predetermined. Powell has talked about the economic prerequisites, which emphasize a full and inclusive labor market in the current context. The Fed funds futures entirely discount a 25 hike in July, with the risk of a move in June.  Comments by several officials hint that the Fed may drop its characterization of inflation as transitory, which would also be understood as a hawkish development.   Partly owing to the extended emergency in Japan, it is marching to the beat of a different drummer than the other high-income countries. Inflation is not a problem.  In September, the headline rate rose to 0.2% year-over-year, the highest since August 2020.  However, this is a function of fresh food and energy prices, without which the consumer inflation stuck below zero (-0.5%).  In December 2019, it stood at 0.9%.  In addition, while fiscal policy will be less accommodative in Europe and the US, a sizeable supplemental budget (~JPY30 trillion) is expected to be unveiled later this year.   After expanding by 1.3% quarter-over-quarter in Q2, the Chinese economy slowed to a crawl of 0.2% in Q3, which was half the pace expected by economists. Some of the decline in economic activity resulted from the virus and natural disasters (floods). Still, some of it stemmed from an effort to cut emissions in steel and other sectors.  The problems in China's property development space, accounting for a large part of its high-yield bond market,  unsettled global markets briefly.  Talk of a Lehman-like event seems a gross exaggeration. Still, given the sector's importance to China's economy (30% broadly measured) and the use of real estate as an investment vehicle, it may precipitate a structural shift in the economy.   The Communist Party and the state are reasserting control over the economy's private sector and the internet and social network.  It has also weighed in on family decisions, like the number of children one has, how long a minor should play video games, the length of men's hair, what kind of attributes entertainers should have, and appropriate songs to be played with karaoke.   It seems to be reminiscent of part of the Cultural Revolution and a broader economic reform agenda like Deng Xiaoping did in the late 1970s and Zhu Rongji in the 1990s.  At the same time, Beijing is wrestling with reducing emissions and soaring energy prices, which also dampen growth. Even though consumer inflation is not a problem in China (0.7% year-over-year in September), Chinese officials still seem reluctant to launch new stimulative fiscal or monetary initiatives. Moreover, new outbreaks of the virus could exacerbate the supply chain disruptions and delays fuel inflation in many countries.  The aggressiveness in which investors are pricing G10 tightening weighed on emerging market currencies in October.  The JP Morgan Emerging Market Currency Index fell by almost 0.8% last month after falling 2.9% in September, the largest decline since March 2020.  The continued politicization of Turkey's monetary policy and the aggressive easing saw the lira tumble nearly 7.5% last month, which brings the year-to-date depreciation to 22.5%.   On the other hand, Brazil's central bank has aggressively hiked rates, and the 150 bp increase in late October brought this year's tightening to 575 bp and lifting the Selic to 7.75%.  Yet, it is still below the inflation rate (10.34% October), and the government has lost the confidence of domestic and international business.  The Brazilian real fell nearly 3.5% last month to bring the year-to-date loss to almost 7.8%.   Our GDP-weighted currency basket, the Bannockburn World Currency Index, snapped a two-month decline and rose by 0.35%.  The rise in the index reflects the outperformance of the currencies against the dollar.  The currencies from the G10 countries, including the dollar, account for about two-thirds of the index, and emerging markets, including China, the other third.  The yen was the weakest of the majors, falling 2.3%.  It has a weighting of 7.5% in the BWCI.   Among the emerging market currencies in our GDP-weighted currency index, the Brazilian real's 3.4% decline was the largest, but its 2.1% weighting minimizes the drag.  It was nearly offset by the Russian rouble's 2.5% advance.  It has a 2.2% weighting in our basket.  The Chinese yuan, which has a 21.8% share, rose by 0.6%.      Dollar:   The market is pricing in very aggressive tightening by the Federal Reserve.  As recently as late September, only half of the Fed officials anticipated a hike in 2022.  The December 2022 Fed funds futures are pricing in a little more than two hikes next year. More than that, the market is discounting the first hike in June next year, implying a transition from completing the bond-buying to raising rates with no time gap.  The disappointing 2% Q3 GDP exaggerated the slowing of the world's largest economy.  We note that the supply-side challenges in vehicle production halved the growth rate.  Growth is likely to re-accelerate in Q4, but we continue to believe that the peak has passed.  While inflation is elevated, the pace of increase slowed in Q3.  Consider that the PCE deflator that the Fed targets rose at an annualized rate of 4.0% in Q3 after a 5.6% pace in Q2.  The core rate slowed to an annualized pace of 3.3% last quarter, half of the speed in the previous three months.  The infrastructure spending plans have been reduced, and some of the proposed tax hikes, including on corporations, appear to be dropped as part of the compromise among the Democratic Party.   Euro:  For most of Q3, the euro has been in a $1.17-$1.19 trading range.  It broke down in late September, and was unable to recapture it in October.  Instead, it recorded a new low for the year near $1.1525.  A convincing break of the $1.1500 area could signal a move toward $1.1300. The single currency drew little support because growth differentials swung in its favor in Q3:  the Eurozone expanded by 2.2% quarter-over-quarter while the US grew 2% at an annualized pace.  The ECB is sticking to its analysis that the rise in inflation is due to transitory factors while recognizing that energy prices may prove more sticky.  That said, news that Gazprom may boost gas sales to Europe after it finishes replenishing Russian inventories after the first week in November, natural gas prices fall at the end of October.  After the Pandemic Emergency Purchase Program ends next March, decisions about the asset purchases next year will be announced at the December ECB meeting along with updated forecasts.   (October indicative closing prices, previous in parentheses)   Spot: $1.1560 ($1.1580) Median Bloomberg One-month Forecast $1.1579 ($1.1660)  One-month forward  $1.1568 ($1.1585)    One-month implied vol  5.1%  (5.1%)         Japanese Yen:  The dollar rose 2.3% against the yen in October to bring the year-to-date gain to nearly 9.5%.  The Bank of Japan will lag behind most high-income countries in the tightening cycle, and the higher US yields are a crucial driver of the greenback's gains against the yen.  Japan's headline inflation and core measure, which only excludes fresh food, may be rising, but they are barely above zero and, in any event, are due to the surge in energy prices. In response to the weakening yen, Japanese investors appear to have boosted their investment in foreign bonds, while foreign investors increased their holdings of Japanese stocks.  The LDP and Komeito maintained a majority in the lower chamber of the Diet. A sizeable stimulus supplemental budget is expected to help strengthen the economic recovery now that the formal emergencies have been lifted.  In Q3, the dollar traded mainly between JPY109 and JPY111.  It traded higher in the second half of September rising to nearly JPY112.00.  The dollar-yen exchange rate often seems to be rangebound, and when it looks like it is trending, it is frequently moving to a new range.  We have suggested the upper end of the new range may initially be the JPY114.50-JPY115.00.  The four-year high set last month was about JPY114.70.  A move above JPY115.60 could target the JPY118.50 area.     Spot: JPY113.95 (JPY111.30)       Median Bloomberg One-month Forecast JPY112.98 (JPY111.00)      One-month forward JPY113.90 (JPY111.25)    One-month implied vol  6.4% (5.6%)   British Pound:  Sterling rallied around 4 1/3 cents from the late September low near $1.34.  The momentum stalled in front of the 200-day moving average (~$1.3850).  After several attempts, the market appeared to give up.  We anticipate a move into the $1.3575-$1.3625 initially, and possibly a return toward the September low. The implied yield of the December 2021 short-sterling interest rate futures rose from 22 bp at the end of September to 47 bp at the end of October as the market.  It was encouraged by Bank of England officials to prepare for a hike at the meeting on November 4, ostensibly while it is still providing support via Gilt purchases.  If there is a surprise here, it could be that, given the unexpected softening of September CPI and the fifth consecutive monthly decline in retail sales, rising Covid cases, that the BOE chooses to take the more orthodox route.  This would entail ending its bond purchases, as two MPC members argued (dissented) at the previous meeting and holding off lifting rates a little longer.        Spot: $1.3682 ($1.3475)    Median Bloomberg One-month Forecast $1.3691 ($1.3630)  One-month forward $1.3680 ($1.3480)   One-month implied vol 6.8% (7.1%)      Canadian Dollar:  The three drivers for the exchange rate moved in the Canadian dollar's favor in October and helped it snap a four-month slide against the US dollar.  First, the general appetite for risk was strong, as illustrated by the strength of global stocks and the record highs in the US.  Second, the premium Canada pays on two-year money more than doubled last month to almost 60 bp from 25 bp at the end of September.  Third, commodity prices in general and oil, in particular, extended their recent gains.  The CRB Index rose 3.8% last month, the 11th monthly increase in the past 12, to reach seven-year highs.  The Bank of Canada unexpectedly stopped its new bond purchases and appeared to signal it would likely raise rates earlier than it had previously indicated.  The swaps market is pricing 125 bp of rate hikes over the next 12 months, with the first move next March or April.  Still, the US dollar's downside momentum stalled near CAD1.2300.  There is scope for a corrective phase that could carry the greenback into the CAD1.2475-CAD1.2500 area.     Spot: CAD1.2388 (CAD 1.2680)  Median Bloomberg One-month Forecast CAD1.2395 (CAD1.2580) One-month forward CAD1.2389 (CAD1.2685)    One-month implied vol 6.2% (6.9%)      Australian Dollar:  The Aussie's 4% gain last month snapped a four-month, roughly 6.5% downdraft.  Despite RBA Governor Lowe's guidance that the central bank does not anticipate that the condition to hike rates will exist before 2024 is being challenged by the market.  Underlying inflation rose above 2% in Q3. The central bank's failure to continue defending the 10 bp target of the April 2024 bond spurred speculation that it would be formally abandoned at the November 2 policy meeting.  The RBA's inaction unsettled the debt market.  The two-year yield soared almost 70 bp last month, and the 10-year yield rose nearly 60 bp.  Although the RBA could have handled the situation better, New Zealand rates jumped even more.  Its two-year yield jumped 80 bp while the 10-year yield surged by 58 bp.  Last month, the Australian dollar's rally took it from around $0.7200 to slightly more than $0.7550, where it seemed to stall, just in front of the 200-day moving average.  We suspect the October rally has run its course and see the Aussie vulnerable to a corrective phase that could push it back toward $0.7370-$0.7400.  The New Zealand dollar has also stalled ($0.7220), and we see potential toward $0.7050.       Spot:  $0.7518 ($0.7230)        Median Bloomberg One-Month Forecast $0.7409 ($0.7290)      One-month forward  $0.7525 ($0.7235)     One-month implied vol 9.1  (9.0%)        Mexican Peso:  The peso eked out a minor gain against the dollar last month.  However, the nearly 0.4% gain understated the swings in the exchange rate last month.  The dollar's recovery seen in the second half of September from almost MXN19.85 to nearly MXN20.40 at the end of the month was extended to a seven-month high around MXN20.90 on October 12.  It then proceeded to fall to almost MXN20.12 before the greenback was bought again.  A move above the MXN20.60 area now would likely signal a test on last month's high and possibly higher. Recall that the dollar peaked this year's peak set in March was near MXN21.6350. The economy unexpectedly contracted in Q3  by 0.2% (quarter-over-quarter).  Nevertheless, with the year-over-year CPI at 6% in September, Banxico will see little choice but to hike rates at the November 11 meeting. The market expects a 25 bp increase.  A 50 bp hike is more likely than standing pat.       Spot: MXN20.56 (MXN20.64)   Median Bloomberg One-Month Forecast  MXN20.42 (MXN20.41)   One-month forward  MXN20.65 (MXN20.74)     One-month implied vol 9.6% (11.0%)      Chinese Yuan: Our starting point is the yuan's exchange rate is closely managed.  The fact that the yuan rose to four-month highs against the dollar and a five-year high against the currency basket (CFETS) that the PBOC tracks imply a tacit acceptance.  While it is tempting for observers to link the appreciation to securing an advantage as it secures energy supplies and other commodities, we note that the yuan's gains are too small (0.6% last month and less than 2% year-to-date) to be impactful.  We suspect that the dollar's recent weakness against the yuan will be unwound shortly.  The US government continues to press its concerns about the risk for investors in Chinese companies listed in the US and American companies operating in China. At the same time, the FTSE Russell flagship benchmark began including mainland bonds for the first time.  China's 10-year government bond is the only one among the large bond markets where the yield has declined so far this year (~16 bp).  On the other hand, Chinese stocks have underperformed.  That said, some investors see this underperformance as a new buying opportunity.  The NASDAQ Golden Dragon Index that tracks Chinese companies listed in the US fell by 30% in Q3 and gained 5% in October, its best month since February.  Lastly, the Central Committee of the Chinese Communist Party meets November 8-11 this year, a prelude to the important National Party Congress in 2022 that is expected to formally signal the third term for President Xi.     Spot: CNY6.4055 (CNY6.4450) Median Bloomberg One-month Forecast  CNY6.4430 (CNY6.4470)  One-month forward CNY6.4230 (CNY6.4725)    One-month implied vol  3.5% (3.4%)    Disclaimer
What Might it Take for the Fed to Deliver a Hawkish Tapering Announcement?

What Might it Take for the Fed to Deliver a Hawkish Tapering Announcement?

Marc Chandler Marc Chandler 03.11.2021 14:43
Overview: With the FOMC's decision several hours away, the dollar is trading lower against nearly all the major currencies.  The Antipodeans and Norwegian krone are leading.  The euro, yen, and sterling are posting minor gains (less than 0.1%).  Most of the freely liquid and accessible emerging market currencies are also firmer.  The Turkish lira is a notable exception.  The decline in the core inflation and a smaller than expected rise in the headline pace embolden officials for another rate cut when the central bank meets on November 18.  The JP Morgan Emerging Market Currency Index is rising for the second consecutive session after falling in the previous four sessions.  Equities are lower.  The MSCI Asia Pacific Index fell for the fifth session in the past six.  Among the large markets, Taiwan and Australia bucked the trend.  The four-day advance of the Stoxx 600 in Europe is at risk, and US futures are weaker.   Benchmark 10 year yields are mostly two-four basis points lower across most high-income countries today.  That puts the US 10-year Treasury yield near 1.52%.  Australia's two-year yield fell almost 10 bp to 0.55%.  It had peaked above 0.71% last week.   The three-year yield is off nearly 30 bp in recent days.  Gold continues to chop within the range set last Friday (~$1772-$1801).  Ahead of the OPEC+ meeting tomorrow amid talk that the US may seek to coordinate sales for a coalition of strategic reserves and a build of US inventories reported by API weigh on oil prices.  December WTI has approached the 20-day moving average (~$82), which has not closed below since late August. Base metals are higher as iron ore snapped a five-day slide during which it lost over 20%.  Copper is also recovering after forging a base in the $432-$433 area.  It is up around 1.5% today.  If sustained, it would be the largest gain in three weeks.   Asia Pacific China's Caixin services unexpectedly rose to 53.8 from 53.4 in September.  Recall that the manufacturing reading had improved to 50.6 from 50.0.  The net effect was that the composite edged up to 51.5 from 51.4.  The composite has converged with the "official" PMI, which stands at 50.8.  Separately, note that China is experiencing a broad spread of the virus into a dozen provinces, and the number of new cases is the highest in a couple of months. Inter-provincial travel has been restricted, and new social protocols are being introduced.  According to reports, the government advised households to stock up in necessities and ensure adequate food supplies for local authorities.  Australia's service and composite PMI shows the recovery was not quite as strong as the preliminary data suggested.  The service PMI rose to 51.8, not 52.0  from 45.5.  The composite stands at 52.1 rather than 52.2.  It was at 46 in September.   Tomorrow Australia reports Q3 real retail sales, but it will still be picking up the weakness of the lockdown.  September trade figures will also be reported.  Weaker exports and stron