Started by PocketOption, Sep 22, 2023, 07:09 am
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Overview: The Federal Reserve's hawkish hold, whichincluded 50 bp less of cuts next year than it had signaled in June, has liftedthe dollar against most currencies today. The notable exception is the Japaneseyen. The greenback did extend its advance to new highs for the year before themarket turned cautious ahead of the outcome of the Bank of Japan meetingtomorrow. The Swiss franc is the weakest of the G10 currencies after the SwissNational Bank defied economists' expectations and left rates unchanged. The Swedishkrona and Norwegian krone are little changed after their central banksdelivered a quarter-point hike. Attention turns to the Bank of England whichwill announce its decision shortly. Ahead of it, sterling has traded below$1.23 for the first time in five months.
Rising rates have weighedon equities. Most of the large bourses in the Asia Pacific region fell by morethan 1%. Europe's Stoxx 600 has given back yesterday's 0.9% advance, and USindex futures are trading modestly lower. The yield of the 10-year JGB rose toa new high near 0.73%. European benchmark 10-year rates are mostly 4-5 bphigher, though Gilts and Italian and Greek yields are up a little more than sixbasis points. The 10-year US Treasury yield is near 4.43%, up a couple of basispoints, while the two-year yield is off a couple of basis points to 5.15%. Theprospect of higher rates for longer and a strong US dollar has seen gold returnto around $1922 after approaching $1950 yesterday. November WTI reversed loweron Tuesday after reaching almost $92.45. It has been sold to a five-day lowtoday near $88.35, where it is trying to steady.
Ahead of tomorrow's Bank ofJapan meeting, Japan will report August CPI. Just like the US CPI tends to give a good preview of thePCE deflator, which the Fed targets, and the preliminary EMU CPI is a goodestimate of the final report, Tokyo's CPI, which precedes the national reportby a few weeks, contains most of the new information. Hence, we can bereasonably sure that headline and core CPI slipped a little in August, whilethe measure that excludes both fresh food and energy was steady or nearly so. Theweekly MOF portfolio flow report will also be released. Recall that last week'sreport showed that Japanese investors bought the most amount of foreign bondsin three years (~JPY3.6 trillion, or ~$24.5 bln). That brought the year-to-datepurchases to about JPY17.4 trillion (~$126.5 bln). This underscores animportant point we have tried to make. The doubling of cap on the 10-year JGBlast December and again at the end of July has not prompted Japanese investorsto repatriate funds as conventional wisdom argued. It means that the backing upof US and European bond yields cannot be attributed to Japanese investors. Aheadof the BOJ meeting outcome, the preliminary September PMI will be reported. Althoughmanufacturing has been contracting (below 50) since last October with oneexception (May), services have held in better, and the composite has held above50.
Judging from the priceaction, the market does not think BOJ intervention is imminent. After being sold to session lows, slightlybelow JPY147.50, in the hour before the FOMC meeting concluded, the dollarrebounded to new session and year high around JPY148.35 and to nearly JPY148.50in early Asia Pacific turnover. The next technical area of note is closer toJPY148.85, the secondary high after the multiyear peak was set last October(~JPY152). Support was found around JPY148.15 in the European morning. Themarket may turn cautious ahead of the outcome of the BOJ meeting. Inthe pre-FOMC position squaring, the Australian dollar pushed above $0.6500 forthe first time in nearly three weeks. After the FOMC is reversed andtumbled to new session lows near $0.6445. Follow-through selling saw itapproach $0.6400 today. Further selling would signal the risk of a return tothe year's low seen earlier this month close to $0.6355. Initial resistance nowis around $0.6425. The dollar is trading at eight-day highs against theChinese yuan and is trading near CNY7.3060 in late dealing. It is poisedfor the highest close since the year's high was recorded on September 8. Thefix was set at CNY7.1730, continuing the slightly lower (than previous day)reference rate. The average in Bloomberg's survey was CNY7.3024. The gapbetween the two also appears to be a record. The greenback is allowed to trade2% above the reference rate, which caps it near CNY7.3165 today. The offshoremarket most often respects the onshore band, but today, the dollar traded toCNH7.3215.
Both Sweden's Riksbank andNorway's Norges Bank hiked key lending rates to 4.00% and 4.25% respectively. The Riksbank's future guidance suggestedthe door is ajar for another move, but it sees the peak at 4.10%. However, italso indicated it would sell a quarter of its reserves (~$8 bln and 2 blneuros) after the krona fell to record lows against the euro yesterday. Thesales ae set to start on September 25 and take four-six months to complete. Wehad thought the Norway was a closer call, but the central bank signaled that itwas likely to hike rates again by a quarter-of-a-point in December. Itsprojections put the lending rate at 4.44% in Q1 24 and Q2 24. Economiststhought the Swiss National Bank would also hike 25 bp, but the swap market didnot. We favored the market over economists. The SNB stood pat, and the Swissfranc weakened by the most in six months against the euro and to its lowestlevel since mid-July.
The Bank of England is next. Yesterday's softer thanexpected UK August CPI made many doubt the Bank of England would hike ratestoday. The swap market has slightly less than half discounted. This seems likean overreaction and hike, arguably, remains the most likely scenario. Moreover,the BOE may also announce it would reduce is balance sheet at a quicker pacefrom the current GBP80 bln this fiscal year. Top officials have suggested GBP100 blnwould be max, so the prudent thing to do is increase it to GBP90 bln. If theBOE does not hike rates, sterling will likely be sold. But as we saw last weekwith the euro, a hike does not necessarily prevent a further decline.
The euro posted a bearishoutside day. It rose to afour-day high slightly above $1.0735 before selling off hard after the FOMC meetingand settling below Tuesday's lows. Follow-through selling today took it belowlast week's three-month low ($1.0635) to almost $1.0615. The $1.0610 areacorresponds to the (38.2%) retracement of the euro's rally since lastSeptember's multiyear low. There are 1.8 bln euro options at $1.06 that expiretoday. A break of $1.06 would initially target $1.05 and possibly $1.04.Sterling was the weakest of the G10 currencies yesterday, falling by about 0.5%.Unlike the euro, it could not muster the strength to rise above Tuesday'shigh, and in the dollar's post-FOMC surge, sterling tumbled to almost $1.2330,a new four-month low. Today, it has been sold through $1.2300. Some of theselling pressure may be options related. There were two clusters of sterlingoptions expiring today: GBP475 mln at $1.2330 and GBP700 mln at $1.2300.The next target is near $1.2200 and could be seen if the BOE stands pat. Thatsaid, the short-term market is ill-prepared for a hawkish hike by the Bank ofEngland today, where it hikes, does not rule out another hike, and boosts thepace of the unwinding of its balance sheet. Note that despite the sustaineddecline in the euro and sterling, the speculators in the futures market arestill net long.
Consensus expectations weremet by the Federal Reserve that a delivered a hawkish hold. The Fed funds target range was held steady5.25%-5.50%. The median GDP projection for this year was raised to 2.1% from1.0% (0.4% in March) and next year to 1.5% (from 1.1%). The median projectionof unemployment was shaved by 0.3% this year and next (to 3.8% and 4.1%,respectively). The median forecast for the PCE deflators was tweaked up to 3.3%from 3.2%, but next year was left at 2.5%. The core deflator was reduced to3.7% from 3.9%), with next year's left unchanged 2.6%. In terms of policy, 12officials anticipate another hike this year, while seven think the Fed is done.That said, the median dot now looks for two cuts next year rather than four. Thetakeaway is the Fed's forecasts are full-throated endorsement of the softlanding, which also means the Fed expects rates to remain higher for longer. Therisk is that headwinds are accumulating impact of elevated rates, thetightening of credit conditions, the drawdown in the previous build-up ofsavings, resumption of student loan debt servicing, the UAW strike, and therisk of a partial government shutdown next month.
With the FOMC meeting behindus, attention turns to today's US high-frequency reports. The current account deficit does nottypically draw much attention from the markets, though it is interesting tonote that assuming a Q2 shortfall of around $221 bln, the deficit in H1 23would be about $440 bln. It has largely been covered by portfolio flows. TheTreasury's International Capital (TIC) report shows a net inflow of near $360bln in the first half. In the half of last year, the US recorded a currentaccount deficit of about $532 bln and net portfolio capital inflows of about$690 bln. Initial weekly jobless claims cover the week of the monthly jobssurvey. The median forecast in Bloomberg's survey is for a small increase fromthe previous week's 220k initial claims, which is a bit lower than the surveyweek last month and the four-week moving average is also a bit lower. Still,the early call is for nonfarm payroll growth to slow to around 155k from 187kin August. The September Philadelphia Fed survey is expected to deterioratefrom the 12.0 reading in August. Existing home sales fell 2.2% in July but areexpected to have stabilized in August. Lastly, the index of Leading EconomicIndicators most likely extended their decline, which has been uninterruptedbeginning April 2022. The six-month annualized decline has begun subsiding. Itbottomed at -9% in March and was a -7.8% in July. It may have remained there inAugust, which are levels which in the past have been seen duringrecessions.
Mexico reports July retail salesand repeating the 2.3% monthly gain in June is highly unlikely. The average monthly gain in H1 was 0.4%compared with an average of 0.7% in H1 22. The median forecast in Bloomberg'ssurvey sees a 0.2% increase. Tomorrow, Mexico reports CPI for the first half ofSeptember. The year-over-year rates of both the headline and core are seenextending their normalization. The central bank meets next week and no changein the 11.25% target rate is expected. Still, with price pressures falling, thereal rate is increasing. Nevertheless, the market has pushed out into next yearthe first cut. Separately, as expected, Brazil's central bank cut the Selicrate by 50 bp yesterday to 12.75%. It also signaled that it was prepared to cutby another 50 bp at both the November and December meetings.
The US dollar was confinedto Tuesday's range against the Canadian dollar. But for the second consecutivesession, the market bought the greenback on a dip below CAD1.3400. It finishedabove previous support around CAD1.3465. It looks like the leg lower from thehigh near CAD1.37 is complete. It has been flirting with CAD1.3500 in Asia andEurope and a convincing break targets the CAD1.3575-CAD1.3600 area. Yesterday,the greenback briefly traded below MXN17.00 for the first time since September1, but the broad post-FOMC dollar recovery saw it return to session highs alittle below MXN17.10. The high so far today is about MXN17.1480. Initialresistance is seen around MXN17.18. Except for that brief foray below MXN17.00yesterday, the dollar has been confined to Monday's range(~MXN17.03-MXN17.1820). The dollar tested the lower end of its range againstthe Brazilian real yesterday (~BRL4.84). The seems to be scope for the dollarto rise toward BRL4.90 today.
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