In Uncoordinated Steps, Japan And China Help Slow Greenback's Rally

Overview

The Bank of Japan Governor Ueda hinted the world's third-largest economy may exit negative interest rates before the end of the year. This sparked the strongest gain in the yen in a couple of months and lifted the 10-year yield to nearly 0.70%. In an uncoordinated fashion, Chinese officials stepped up their rhetoric and indicated that corporate orders to sell $50 million or more will need authorization. This helped arrest the yuan's slide. The Australian dollar is up the most among the G10 currencies and is often particularly sensitive to Chinese developments. All the major currencies are firmer against the dollar today. The same is true for emerging market currencies, where only the Indian rupee, Philippine peso, and Turkish lira are nursing minor losses.

Outside of Japan, Hong Kong, and Taiwan, the largest bourses in the Asia-Pacific rose today. The MSCI Asia Pacific Index is snapping a four-day fall. Europe's STOXX 600 ended a seven-day slide before the weekend and is extending its gains by about 0.5% today. US index futures are trading higher after they also settled higher before the weekend. Benchmark 10-year yields are mostly 2-3 basis points higher, which put the 10-year US Treasury a little below 4.30%. Gilts are underperforming, and the 10-year yield is up nearly five basis points. A weaker dollar but firmer interest rates has allowed limited gains in gold. A base has been formed in recent sessions around $1915-1917. It briefly traded above $1930. This month's high was set slightly above $1950. October WTI continues to consolidate. It remains in last Tuesday's range (~$85-$88).

Asia-Pacific

We may never know why China's Xi did not attend the G20 meeting. Several reasons have been suggested. Some argued that on the heels of the BRICS summit, it was a snub at the G20, but sending a premier for the first time in 11 gatherings and actively participating in the shaping of the final statement, much to the US' chagrin, does not exactly seem an insult. Others framed it as a snub of India's Modi, but, of course, Modi was at the BRICS summit too. There have been reports that Xi faced domestic pressure from the elites, and in recent weeks, several of Xi's appointments have disappeared or been replaced, though Chinese politics is often inscrutable from the outside. Others have noted Xi's graying hair and raised questions about his health. In any event, the G20 summit is seen as a success despite Xi and Putin's absence, and a joint statement was agreed upon. It managed to sidestep some controversy by forging unanimous support around the UN principles of territorial integrity and opposition to the use of force. The statement declared that countries that use or threaten to use nuclear weapons are "inadmissible," which seemed like a thinly veiled knock on Russia. That said, compromises included a milder reference to the "war in Ukraine" rather than the "war on Ukraine," and it was somewhat less ambitious on de-carbonization. Also, since by 2026 all the members would have held the rotating presidency, the cycle begins anew with the US in 2026. China objected but seemingly relented.

Much of the focus on the Bank of Japan's monetary policy has been on the Yield Curve Control. The BOJ doubled the cap on the 10-year bond to 0.50% at the end of last year and doubled it again to 1% in late July. We have noted that rather than sell foreign bonds, Japanese investors have been replacing the ones sold last year. Getting away from YCC and looking at the very long end of the sovereign curve, the 30-year yield has risen by about six basis points this year. The 40-year bond yield has fallen by less than five basis points, and that is after rising more than 40 bp since the end of June. While expectations for a change at the September 22 BOJ meeting are low, a year-end meeting may be a different story. BOJ Governor Ueda suggested that by then a decision about the need for negative policy rate (currently -0.10%) could be made. He seemed to suggest a new phase of monetary policy. The Yield Curve Control adjustment was aimed to "change the balance between the effects and side effects" of monetary easing measures. Now, the focus is on "a quiet exit," seeking to minimize the market impact.

After settling last week on its high for year, closing slightly north of JPY147.80, the greenback opened sharply lower (~JPY147.05) in response to Ueda's comments. Friday's low was near JPY146.60 and the dollar took it out, dipping briefly below JPY146.00, a six-day low. The JPY145.75 area corresponds to a (61.8%) retracement of this month's gains. Since the low was recorded, the dollar has bounced to about JPY146.50. The 20-day moving average is near JPY146.30, and the dollar has not closed below it since late July. The Australian dollar settled near its lows before the weekend, little changed on the session, near $0.6375. It opened around $0.6410 and slipped back a little below $0.6380, before surging to almost $0.6445. It has steadied shy of resistance in the $0.6465 area. The intraday momentum in indicators has already turned down. A close below $0.6420 would be disappointing. Chinese lending last month surged after being depressed in July. Aggregate financing rose to CNY3.12 trillion from CNY528.2 billion, well above the projected CNY2.69 trillion. While bank loans rose (CNY1.36 trillion from CNY346 billion), the jump in lending was driven by non-banks. However, the yuan's sharp recovery sparked by the tightening of controls, as the PBOC reportedly will require permission to buy $50 million or more. The PBOC also issued a statement threatening action to counter one-sided moves and claimed that speculation needed to be extinguished. According to media reports, state-owned banks were dollar sellers today, but it is not clear if they were acting on their own account, executing customer business, or acting on behalf of officials. The PBOC set the dollar's reference rate at CNY7.2148 compared with the average estimate in Blomberg's survey for CNY7.3391. That would cap the dollar to trade at CNY7.3590. Against the offshore yuan, where the onshore band is mostly honored, the dollar traded as high as CNH7.3635. The dollar fell to almost CNY7.27 before stabilizing and returning to almost CNY7.30.

Europe

Greece's 10-year bond yields about 3.95%, more than 30 bp below the 10-year US Treasury. The yield has fallen by more than 55 bp this year, while the German yield has risen by around five basis points. DBRS, one of the four rating agencies recognized by the ECB, upgraded Greece's debt rating late last week to investment grade (BBB). The ECB takes the highest rating among the four companies, and DBRS's move means that Greek bonds will no longer be subject to the higher haircut (larger discount) in the ECB's refinance operations. Moody's will announce the results of its review at the end of the week. Its Ba3 (= BB-) rating seems out of line. It has a positive outlook. S&P's BB+ rating will be review next month, while Fitch (BB+) will announce the result of its review on December 1. Separately, Fitch lifted its outlook for Turkey from negative to stable.

The euro opened firmer but remains well within the pre-weekend range. Before the weekend, it had been squeezed higher in late European activity but ran out of steam a little ahead of the resistance we identified near $1.0750. Today's high has been above $1.0740. Last week's low was about $1.0685. There are options for nearly 1.25 billion euro at $1.0665 that expire tomorrow. The net speculative long euro position in the futures market was cut for the sixth week in the past seven, but this has more to do with new shorts being established rather than longs being cut. In fact, the bulls have added to the gross long euro position for three of the past four weeks for a cumulative add of about 8k contracts. Over the past four reporting weeks, the gross short position has risen by over 21k contracts. Sterling is holding above the low set at the end of last week ($1.2445-50). It reached $1.2515 before the weekend and reached $1.2530 today, a three-day high. A move above the $1.2560 area may be needed to suggest anything more than some sideways consolidation. The net speculative sterling position in the futures market is little changed over the past several weeks. In the week ending August 1, the net long position was about 49.6k contracts. At the end of the week to September 5, it stood at 46.4k contracts. The gross longs are virtually unchanged, and the gross shorts have risen a little.

America

The de-dollarization and the de-globalization memes have sucked most of the oxygen from other broad discussions and obscures key geopolitical developments. On the sidelines of the G20 meeting, the US, India, Middle East, and the EU signed a deal to build a network of rails and sea routes: The India-Middle East-Europe Economic Corridor. It will integrate ports and rail from India to Europe, through the UAE, Saudi Arabia, Jordan, and Israel. The project is ambitious and will develop energy infrastructure, facilitate the production and transport of green hydrogen, and includes a new undersea cable boosting telecom and data transfers. Separately, the EU and US are also supporting a new initiative in Africa, the "Lobito Corridor," a trans-African project to boost transport connections between the Democratic Republic of Congo, Zambia, to the Lobito Port in Angola.

Seemingly less appreciated, a US initiative with Iran appears to be yielding favorable results. The most Iranian oil in five years is hitting the market and might be another reason the Saudis and Russians extended their oil cuts. The US has relaxed the enforcement of sanctions. Iran appears to be slowing the production of weapons-grade uranium, which was the conclusion of the UN watchdog's report, as well as some other measures to build trust. There has been secret diplomacy between Washington and Tehran, which involved some prisoner releases and freeing up frozen funds. Lastly, the US and India reaffirmed the agreement for the "maintenance and repair of forward-deployed US Navy assets and other aircraft and vessels." This follows recent commercial agreements, such as GE's partnership with an Indian aeronautics company to make jet engines in India and Micron's (MU) deal to build a $2.75 billion semiconductor fabrication and testing plant in India.

Canada August employment and wage data keeps the Bank of Canada in the picture, and the swaps market reflected a slightly greater chance of a hike in one of the last two meetings of the year. While the rise in wages caught the attention of many observers, the rise of total hours (0.5%), the most in six months, suggests a rebound in economic momentum. The greenback has pushed through the pre-weekend low near CAD1.3600, where options for around $665 million expire today. A break of the CAD1.3570 area, and ideally a close below it, would boost confidence that a near-term high may be in place. The dollar has risen nearly 2.9% against the Mexican peso last week after a 2% gain the previous week. The high last week was near MXN17.7080. The low since the high was about MXN17.4235. Since we do not think the macro drivers have changed, we look for price action itself to boost the chances that the short squeeze has run its course. So far today, the peso is sidelined. The dollar is in a narrow MXN17.4965-17.5940 range, well inside the range seen in recent days. A close below MXN17.3950 would be a preliminary sign that the dollar's recovery is ending.

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