Started by PocketOption, Sep 20, 2023, 06:43 am
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Overview: Ahead of the flurry of central bankmeetings, starting with the Federal Reserve and Brazil tomorrow, the dollar islargely consolidating in narrow ranges. The euro, sterling, and yen are tradingslightly heavier, while the dollar bloc and Scandis enjoy a firmer bias. TheCanadian dollar stands out as is trades at its best level since mid-Augustahead of its CPI report and despite a diplomatic dispute with India and thefailure of negotiations to prevent an autoworkers strike starting today. Emergingmarket currencies are mixed, but of note, the yuan is flat, and the Mexicanpeso has come back better bid after yesterday's fall.
Japan's Topix and Hong Kong'sHang Seng managed to post small gains, but the other large bourses in theregion traded heavily. Europe's Stoxx 600 is slightly firmer today afterfalling 1.1% yesterday, its largest decline since early August. US indexfutures also enjoy a firmer bias. The 10-year JGB yield is edging to new highs(~0.71%), while European benchmark 10-year yields are slightly lower. Italy andGreek 10-year yields are off more than two basis points, and Gilt yield is offnearly four basis points. The 10-year US Treasury yield is firmer at 4.31% andthe two-year is steady near 5.05%. Gold is firm and around $1935 it is at itsbest level in two weeks, extending is rebound slightly from the low near $1900last week. Crude oil is reaching new highs. November WTI reached nearly $91.70.Recall that is settled last month slightly below $83. Average retail USgasoline prices has edged up from $3.81 at the end of August to $3.88 yesterday.
Chinese banks set the loanprime rates first thing tomorrow. Even though the benchmark one-year Medium Term Lending Facility(MLF) rate was left unchanged at 2.50% last week, it is possible that the primeloan rates are shaved. Recall what happened last month. The MLF rate wasreduced by 15 bp, but the one-year prime rate as pared by only 10 bp (to3.45%), while the five-year prime rate was left unchanged at 4.20%. The yuan'sweakness has not prevented the PBOC from easing monetary policy by lower ratesand cutting reserve requirements. We think this is consistent with Beijingtrying to moderate the yuan's decline, not reverse it. Many observers talkabout the increased role of the yuan, but do not seem to appreciate it cutsboth ways. Like the Japanese yen, it may be an attractive funding currency. In72 of the past 100 sessions, the yen and yuan move in the same directionagainst the dollar and this year, the two have risen and fallen together about64% of the time (last year, the co-movement was ~55%).
Japan's external sector keptthe economy from contracting in Q2, but this may not be the case in Q3. The August trade figures will be reportedearly tomorrow, and the trade deficit is set to deteriorate. Consider that inQ2, the deficit averaged almost JPY600 bln a month (~$4.1 bln), a little morethan a third of the average deficit in Q1. Exports fell in July year-over-yearfor the first time since February 2021. Weakening global demand is offset theimpact of the under-valued currency. Imports are likely to have fallen(year-over-year) for the fifth consecutive month. This seems to reflect lowerprices (but this may be ending as energy and commodity prices are rising again).
While Tokyo was on holidayyesterday, the market was content to consolidate the dollar in a narrow 1/3 ofa yen range above JPY147.55. It has been largely confined to that range today. At JPY147,there are about $730 mln of options that expire today. While position-adjustingahead of the outcome of the FOMC meeting is possible, we suspect continuedconsolidation is more likely. The Australian dollar also looks poised tocontinue consolidating. Support has been found near $0.6415. There areoptions for A$450 mln at $0.6395 that expire today. The market rejected thepush toward $0.6475 before the weekend and held below $0.6450 yesterday. Today,it edged up to $0.6460, in quiet turnover. The US dollar recovered froma pre-weekend low near CNY7.2465 to a high yesterday around CNY7.2975 and todayreached CNY7.2985. Resistance is seen in the CNY7.3150-75 area. The year'shigh was set on September 8 slightly below CNY7.35. The PBOC set the dollar'sreference rate at CNY7.1733, slightly lower than yesterday. The averageprojection in Bloomberg's survey was for CNY7.2843. Note that Beijing hadimposed curbs on some banks' importation of gold last month. It seemed that thepurpose was like other measures aimed at easing the pressure on the yuan. However,it instead widened the premium for gold trading in China. Calculations by theFinancial Times indicated it widened to a little more $120 an ounce. Reportsindicate that China lifted the curbs and the premium fell back to almost $75yesterday. The PBOC has been on a gold buying spree since last November. Someobservers argue China is diversifying its reserves away from the dollar and theTIC data showed another drop in China's Treasury holdings (-$13.6 bln), but itsdeclared gold holdings account for less than 1.5% of its $3.16 bln reserves.
The terms of trade shockthat weighed on the euro last year is normalizing and the drag on the euro hasshifted (to diverging economies). Consider that the average monthly current account surplus inH1 23 to 13.9 bln euros. In H1 22, the average monthly deficit wasnearly 3.2 bln. The July surplus was 20.9 bln euros. Last July, it recordeda deficit of 22.2 bln euros. The eurozone's trade surplus inJuly was 6.5 bln compared with 36.3 bln deficit. The averagemonthly trade surplus this year is almost 380 bln euros compared with a deficit of26.9 bln euros in the Jan-July 2022 period. Separately, August CPI was revisedlower but not materially. It rose 0.5% not 0.6% in August, to produce ayear-over-year rate of 5.2% rather than 5.3%. The core was unrevised at 5.3%.
The UK reports August CPItomorrow before BOE's decision on Thursday. Headline CPI is expected to jump by 0.7%,which would lift the year-over-year rate to 7.0% from 6.8% (July). That will bethe first increase in the year-over-year rate since February. Still, note thata 0.7% increase month/month brings the three-month annualized rate to about 1.6%.In the previous three months, the annualized rate was over 10%. The core ratemay slip slightly. Deflationary forces continue to be evident in producerprices, but it appears to be coming to end, given the base effect, and thefirmer monthly readings expected.
The euro's recovery off thelast week's low slightly above $1.0630 stalled near $1.0700 yesterday and today.Sentiment still seemsnegative, and above $1.07, resistance is likely in the $1.0750-70- area. Themomentum indicators are, as one would suspect, given the nine-week drop,stretched, and although they look to be basing, there is nothing compellingyet. However, the two-year rate differential between the US and Germany peakedin late August near 207 bp. It briefly traded below 180 bp yesterday beforeclosing back above it and it is straddling that area today. It has not settledbelow 180 bp since early August. Sterling initially extended its slideyesterday, reaching $1.2370. It stabilized but was unable to make muchheadway above $1.2400. Today, it is holding yesterday's low, but has not beenable to rise above $1.2400. Options for GBP625 mln at $1.2350 expire tomorrow.
Ahead of the outcome of theFOMC tomorrow, the US reports August housing starts today. After a 3.9% increase in July, a smallpullback is expected. Still, the 1.440 mln (seasonally adjusted annual rate) ofthe median forecast in Bloomberg's survey compares with 1.505 mln starts inAugust 2022. Permits are seen little changed for the third consecutive month. Thefutures market sees practically no chance of a Fed hike tomorrow and slightlymore than a 30% chance of a hike in November.
Although the Canadianeconomy unexpectedly contracted by 0.2% in Q2, it appears to be off to a betterstart in Q3, with an increase in aggregate hours worked and a smaller thanexpected trade deficit. Attentionturns back to inflation today and the August CPI. The year-over-year pace isexpected to rise for its second consecutive month, with the median forecast inBloomberg's survey of 3.8% (from 3.3%). Canada's headline inflation bottomed at2.8% in June. It finished last year at 6.3%. Unlike the US experience, theunderlying core measures are not expected to fall. The swaps market sees analmost 50% chance that the Bank of Canada hikes rates before the end of year.The cash target rate is 5.0%. Separately, note that the Canadian auto workerscontract expires. The union is threatening to strike against Ford. The goal isto reach a deal with Ford that GM and Stellantis would be under pressure toaccept. Separately, a diplomatic dispute has opened between Canada and India. TheCanadian government accuses India's government of having killed a Canadian Sikha few months ago in Canada.
The US dollar fell by nearly0.85% against the Canadian dollar last week, the most in three months. The losses were extended to almostCAD1.3470 yesterday, the sixth decline in seven sessions. Although it held the support,we noted near CAD1.3465 (retracement objective and 200-day moving average),today it has been sold to nearly CAD1.3440, its lowest level in a month. Thenext important chart area is CAD1.3375-CAD1.3400. That said, the intradaymomentum indicators are stretched. Initial resistance is seen in theCAD1.3470-80 area. The greenback posted a bullish outside up dayagainst the peso, trading on both sides of the pre-weekend range and settlingabove its high. There are reports that try to link the peso's weakness withAMLO's fiscal expansion (after being relatively tight fisted through Covid) andforeign selling of Mexico's peso bonds. Still, the dollar trended lower againstthe peso last week after the budget details were known and bonds were underpressure. The greenback turned high yesterday after approaching MXN17.03. Itreached a high slightly above MXN17.18, but it has come back offered today andis trading back to around MXN17.08 in the European morning. Here, too, theintraday momentum is stretched, and we look for the dollar to find support inearly North American activity above MXN17.06.
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