Greenback Bought On Pullback

Overview

The dollar was bought after yesterday's pullback spurred by Japanese and Chinese comments and the tighter capital controls from Beijing requiring permission to buy more than $50 million. The economic and monetary policy divergence continues to underpin the greenback. It is firmer against all the G10 currencies and is mostly inside yesterday's ranges. Most emerging market currencies are lower, led by central European currencies. The Chinese yuan is steady. Equities are mostly heavier, but the Japan, Taiwan, and Australian markets rose today. Europe's STOXX 600 is a little lower, and US index futures are off around 0.25%.

The Japanese benchmark 10-year yield edged slightly higher and rose to 0.70%. European benchmark yields softer by as much as two basis points. Despite the rise in average weekly earnings in the UK, the 10-year Gilt yield is off almost five basis points to 4.42%. The 10-year yield is off about 1.5 bp to almost 4.27%. The US will sell $35 billion of the 10-year note today (re-opening). Gold is trading in a narrow $1918.6-1924.5 range today. The 200-day moving average is about $1920 today. October WTI is firm near yesterday's $88.15 high ahead of OPEC and EIA monthly market reports due today. The IEA's assessment will be released tomorrow.

Asia-Pacific

BOJ Governor Ueda's weekend comments, suggesting that ending negative policy rate by year-end is possible if wages continue to rise, boosted the yen and Japanese rates yesterday. The on-the-run 10-year yield is at 0.70%, while the generic 10-year yield rose to 0.72%, the highest level since 2013. Some argue that Ueda's comments were part of the stepped-up verbal intervention campaign aimed at slowing the yen's descent. Yet, Ueda also noted that price stability target is still "some distance away," which seemed soften the blow of the threat to raise rates at the end of the year. The first bond auction since Ueda's comments, (JPY2.5 trillion of five-year notes) saw strong bid-cover and a slightly lower yield than expected. Tomorrow, Japan sells 20-year bonds. It reports August PPI tomorrow and the July tertiary industry index ahead of the weekend. These do not often elicit much of a market reaction.

The dollar briefly traded below JPY146 yesterday and peaked in early North American trading near JPY147.00, which is around where it opened after Ueda's comments on Saturday. The JPY145.75 area corresponds to a (61.8%) retracement of the gains from the September 1 low (~JPY144.45). The inability to take this out and yesterday's close above the 20-day moving average (~JPY146.30) suggests the dollar bullish sentiment has not been broken. The greenback is consolidating in a narrow range today (~JPY146.45-149.95). We suspect it can trade toward JPY147.20 in North America today. The Australian dollar reached the session high near $0.6450 early in the North American morning yesterday and spent the bulk of the session consolidating in a narrow range mostly between $0.6425 and $0.6440. The range extended on the downside to support near $0.6415 today. Provided the $0.6400 area holds, it can work its way back up to $0.6480-0.6500. August employment data is due early September 14, and a recovery is anticipated after jobs were lost in July. The yuan snapped a five-day slump yesterday with more efforts to stem the yuan's drop and strong gains in the yen. A trend line from connecting the late July, early August and early September lows comes in today around CNY7.2670. The month's low was set on September 1 near CNY7.24. The PBOC set the dollar's reference rate at CNY7.1986, compared with the average yuan estimate in Bloomberg's survey for CNY7.2852. It is the narrowest gap in several days. The fix implies a range today of CNY7.0546-7.3426.

Europe

The EC shaved this year's GDP forecast for the eurozone to 0.8% from 1.1%. Next year's forecast was reduced to 1.3% from 1.6%. Germany, which had been forecast to grow this year by 0.2%, is now expected to contract by 0.4%. Italy's growth is now seen at 0.9% rather than 1.2%, and the Dutch outlook was cut even more. It is seen expanding by 0.5%, not 1.8%. On the other hand, upward revisions were made to France's GDP (1% vs. 0.7%) and Spain (2.2% from 1.9%). The ECB's economic forecasts will be updated. In June, it put this year's GDP at 0.9% and 1.5% next year. As we noted, the risk is that the ECB's forecasts are also reduced. In this context, the deterioration of German investor sentiment should not be surprising. While the German economy disappoints, the external surplus is recovered smartly this year. The average monthly trade surplus has risen to 15.9 billion euros a month this year from an average of 6.1 billion in the January-July 2022. The broader measure, the July current account, is due today. Meanwhile, the ZEW survey showed continued deterioration in the current assessment (-79.4 vs. -71.3) but a small improvement in expectations (-11.4 vs. -12.3).

The UK labor market slowed. August payrolls fell by 1k, and the 97k increase in July was revised to -4k. It is the first back-to-back loss since 2020. The number of jobless edged up slightly (0.9k, the third consecutive monthly increase). The unemployment rate for the three months through July ticked up to 4.3% from 4.2%. It was at 3.6% in July 2022 and 3.7% as recently as January. However, average weekly earnings accelerated to a new high of 8.5%, and the June pace was revised to 8.4% from 8.2% (three months, year-over-year) in July. It stood at 5.2% last July, and the low this year was in February (5.8%). Tomorrow, the UK reports July GDP (and details). The median forecast in Bloomberg's survey sees a 0.2% contraction.

The euro reached almost $1.0760 in North America yesterday to record the session high, amid the broader position adjustment. Its settlement was the highest in five sessions. There was a marginal extension in the Asia-Pacific turnover to $1.0770 before hitting a wall of sellers that drove it back down to almost $1.0710. Bid emerged in early European activity, and initial resistance is seen in the $1.0730-40 area. The US CPI and ECB meeting are less than 24 hours apart and could make for some volatile activity. The market appears to have settled with a hawkish hold from the ECB. The indicative pricing in the swaps market is consistent with around a 40% chance of a hike but around a 75% chance of a hike before the end of the year. Sterling's showing was more impressive than the euro. It settled above its five-day moving average (~$1.2510) for the first time this month and set a three-day high near $1.2555. However, it is heavier now and back below $1.2500 in the European morning. The employment and wage data did not alter the swaps market stance of about a 75% chance of a quarter-point hike next week and a little less than a 50% chance of another hike before year-end.

America

The market sees practically no chance of a Fed hike next week. However, tomorrow's August CPI may threaten the idea that the Fed cycle is over. The futures market has less than a 50% chance of a hike at one of the last two meetings of the year. Owing mostly to a rise in energy prices, the month-over-month headline increase is projected (median in Bloomberg's survey) to be greater than the previous three months combined. The year-over-year rate will accelerate for the second consecutive month. It was perhaps due to the uncertainty about the Q4 outlook for the Fed that last week's four- and eight-week T-bill auctions ($150 billion in total) saw a below-average bid-cover. Reception at yesterday's three- and six-month bill auctions ($131. billion in total) were a little bit better than the previous auction. The $44 billion sale of three-year notes (a $2 billion increase this month on top of a similar increase last month) went off at a higher yield (4.66% vs. 4.40%, the highest since 2007) but at a lower bid-cover (2.75 vs. 2.90) and a decline in indirect buying (57.7% vs. 74%). Dealers were left with the highest percentage (a little more than 20%), the most since last November. Today, the US sells $35 billion 10-year notes and $60 billion of a 42-day cash management bill. On Wednesday, $20 billion of 30-year bond will be sold and probably $50 billion four-month bills. Moreover, there looks like a rush of corporate issues ahead of next week's FOMC meeting. The auctions may be watched a bit closer than usual given the increased supply and some concern about the resiliency of demand in the current environment.

The US dollar pulled back to CAD1.3560 yesterday, a six-day low. It met a (61.8%) retracement of the rally from the September 1 (US employment report) low near CAD1.3570 and settled slightly below the 20-day moving average (~CAD1.3575). Canada has a light economic calendar this week, leaving the loonie at the mercy of the broader dollar movement. The US dollar recovered to almost CAD1.3595 today but is confined to a narrow range and has not traded below CAD1.3570. The heavy tone of the greenback and stronger-than-expected Mexican industrial output (0.5% vs. 0.3%) helped the peso trade higher. The dollar reached almost MXN17.7080 last week and was sold to MXN17.2725 in late dealings yesterday. It slipped a little more today (~MXN17.2470). It met a (38.2%) retracement of the rally sparked by the unwinding of the central bank's forward currency hedge facility. The next retracement (50%) is a little below MXN17.21. The daily momentum indicators are stretched and look to be turning lower. This is the kind of price action we were looking for that boosts the chances that the dollar's short squeeze against the peso is over.

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