Dollar Stabilizes After Extending Gains

Overview: The dollar's gains were initially extended before a consolidative tone emerged. The euro has been sold to $1.0460 and has returned to almost $1.05. Sterling fell to nearly $1.2060 and has recovered though has stopped short of $1.2100. The dollar edged close to JPY150 but stalled near JPY149.95 and has held above JPY149.65. The Australian dollar was near $0.6300 and the greenback rose to CAD1.3725.

Benchmark 10-year yields are firm, though a well-received 10-year JGB auction was well received and the 10-year JGB yield slipped slightly. European yields are 1-5 bp firmer, with yields rising more in the periphery than the core. UK 10-year Gilt yield is bucking the trend nearly two basis points lows at 4.55%. The 10-year US Treasury yield is up a couple of basis points to push against 4.70%. Equities are struggling. Japan and Australian markets fell by more than 1% and the Hang Seng was greeted with a 2.7% drop as it returned from the long holiday weekend. Europe's Stoxx 500 has yet to find solid footing after falling a little more than 1% yesterday. US index futures are little changed. Gold's losses were extended to nearly $1,815 today, the lowest since March. It has stabilized but it is still sporting a small loss, the seventh consecutive session with a higher close. November WTI extended its drop to almost $87.75 today, the lowest level since mid-September, but it has come back a bit in Europe to trade near $89.00.

Asia Pacific

The Bank of Japan's efforts to slow the yield rise underscores the wider differential with the US. The 10-year differential is above 390 bp. Last year's high was near 400 bp. The US premium has not been above there since 2001. The US two-year premium is over 500 bp. It peaked around 515 bp last month, the highest since 2000. Separately, the correlation between changes in the exchange rate and the Japanese stocks is around 0.22, about half of the year's peak in early July. Still, the rising yields saw firm demand at today's 10-year JGB note auction. Perhaps a bigger challenge will be the JPY900 bln (~$6 bln) 30-year bond sale on Thursday, though the yield reached a new high today, a little more than 1.77%. Yesterday, the BOJ announced an extra bond-buying operation tomorrow.

As widely expected, the Reserve Bank of Australia kept its overnight cash target rate at 4.10% at new Governor Bullock's first meeting. It has been there since the hike in June (from 3.85%). The futures market downgraded the chances to 40% from 50% of a 25 bp hike before the end of the year. The Reserve Bank of New Zealand meets first thing Wednesday. Its cash target rate is at 5.50%. Year-over-year CPI in Q2 was 6.0%, the same as Australia. The swaps market sees practically no chance of a hike this week but does have a nearly 60% chance of a hike at the next meeting at the end of November. Year-to-date, the Aussie and Kiwi have performed similarly, losing 7.3% and 7.0% against the US dollar respectively, though last month, NZD was the strongest in the G10, up about 0.5%. The Aussie is off about 0.75%.

The market does not think that Japan can have it both ways in the current environment: cap the 10-year bond yield and prevent yen weakness. With the announcement of more BOJ bond purchases announced for Wednesday, the market lifted the dollar closer to JPY150 (~JPY149.95). Today's low in late Asian turnover was near JPY149.65. The Australian dollar met a wall of sellers at the end of last week near $0.6500, the upper end of the range that goes back to mid-August. It was sold slightly through $0.6365 yesterday and settled on its lows. It made a new low for the year today near $0.6305. The measuring objective of the dollar top (June and July near $0.6900 and neckline around $0.6600) is $0.6300. There may be support near $0.6270, but last year's low near $0.6170 will draw increasing attention. The greenback is pushing higher against the offshore yuan. Since the close of the mainland markets, the dollar has traded between CNH7.2810 before the weekend to CNH7.33 today, which was slightly above last week's high (CNH7.3270). This year's high was set on September 8 near CNH7.3680.

Europe

The news stream is light and sentiment remains poor. We remain struck by the discrepancy between the talk of de-dollarization and its continued strong showing in the foreign exchange market. Instead, whether looking at SWIFT volumes or share of the world's GDP, rather than de-dollarization, it is de-Europeanization. Or the rise of China is eroding Europe's position more than the US. The euro has not closed higher on a weekly basis since mid-July, an 11-week losing streak. It settled slightly below $1.0575 last week. Sterling has fallen for the past four weeks but has risen in two weeks since mid-July. Since July 14, the euro has fallen by about 6.5% and sterling has tumbled by around 7.4%, which roughly matches the yen's losses over the same period.

The euro looks headed for $1.04, which is the (50%) retracement of the rally from the multiyear low set at the end of last September near $0.9535. Below there, the next retracement (61.8%) is near $1.02. The momentum indicators are overextended but have been so for more than a month. The euro slipped below $1.0480 in late North American dealings yesterday and follow-through selling today took it to $1.0460. Before feeling comfortable picking a bottom to the euro, we want to see some climactic sell-off and/or a reversal pattern of some sort. Sterling has met the (38.2%) retracement of its rally from last September's record low near $1.0350. It is found near $1.2075, and today's low is about $1.2060. The head and shoulders target is $1.20. Sterling finished yesterday's North American session below $1.21. A month ago, it was fraying $1.26. The (50%) retracement of its recovery was closer to $1.1750 and the low for the year was set in early March slightly above $1.1800.

America

Many continue to see weakness in the US economy below the surface, but the surface data continues to be in stark contrast with other high-income economies. The September manufacturing PMI final reading was 49.8, up from the flash reading of 48.9 and 47.9 in August. Even though it is still below the 50 boom/bust level, it is the highest since April. The manufacturing ISM was also stronger than expected at 49.0 (47.6 in August). Employment was strong and new orders (49.2 vs. 46.8) are the strongest since August 2021. Construction spending rose 0.5%, as expected in August, but the July series was revised to 0.9% from 0.7%. If the economy were re-accelerating, isn't this what it would look like? The Atlanta Fed's GDP tracker (4.9%) suggests that is what happened in Q3. The median forecast in Bloomberg's monthly survey sees Q3 growth at 3%, the fastest pace in seven quarters. The real issue is what happens going forward. The headwinds have been well broadcast: tightening of credit conditions, and bite of high rates, extended credit card balances, the resumption of student loan servicing, higher energy prices, low savings, the expanding UAW strike, and rising debt-stress metrics. Yet, until the data begins reflecting these headwinds, the trend in interest rates and the dollar may continue. For today, the JOLTS is expected to slow a little, and September auto sales. August auto sales fell and are expected to have bounced around half back in September to about 15.4 mln vehicles (SAAR), which is roughly the year's average through August (13.6 mln in the first eight months last year).

Weaker Canadian manufacturing PMI (47.5 vs. 48.0) and softer Mexican data (manufacturing PMI 49.8 vs. 51.2 and $5.56 bln worker remittance vs. $5.65 bln) provided added weight to their respective currencies amid the greenback's broad gains. The US dollar extended its pre-weekend surge against the Canadian dollar, reaching CAD1.3680 (~CAD1.3380 last Thursday). Follow-through activity today lifted the greenback to CAD1.3715, taking out last month's high (CAD1.3695). The trend line from the 2020 high (~CAD1.4670), the October 2022 high (~CAD1.3975), and the March 23 high (~CAD1.3865) is found now near CAD1.3735. The momentum is strong, perhaps too strong as the US dollar frays the upper Bollinger Band (~CAD1.3705). The greenback tested MXN17.35 support before the weekend and traded above MXN17.69 yesterday. It reached nearly MXN17.7230 today before pulling back. Initial support may be around MXN17.58. Still, there is little standing in the way of another run at last week's high (MXN17.8170) and the 200-day moving average, a little over MXN17.83. The US dollar marginally managed to take out last week's high against the Brazilian real as it rose to almost BRL5.08. It was the fourth consecutive session that the dollar settled above its 200-day moving average (~BRL5.02). The dollar is at its highest level since the end of May spiked to about BRL5.1275 and settled at its highest level since April.

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