Started by PocketOption, Sep 20, 2023, 05:28 pm
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Overview: Softer than expected UK CPI has drawnattention ahead of the key event of the day, the FOMC meeting. The UK's CPI hasspurred a dramatic rally in Gilts and saw sterling initially extend its recentlosses, falling to new four-month lows before stabilizing. The swaps marketsees less than a 50% chance of a hike by the Bank of England tomorrow. Meanwhile,even though US Treasury Secretary Yellen suggested conditions in whichintervention by Japan would be understandable, the market has little fear ofintervention today ahead of the FOMC meeting and took the dollar to new highsfor the year above JPY148.00. The greenback is mixed with the dollar-bloccurrencies firmer. Among the emerging market currencies, central Europeancurrencies and the Mexican peso are among the best performers.
The large bourses in the AsiaPacific region fell today except South Korea's Kospi. It is the thirdconsecutive losing session for the MSCI Asia Pacific Index. Europe's Stoxx 600is up about 0.5% after falling nearly 1.2% over the past two sessions. US indexfutures are trading with a slightly firmer bias. European 10-year yields aremostly 1-2 bp lower. The two standouts today are the UK Gilts, where the10-year yield is off 10 bp (to ~4.24%) and Greek bonds, where the yield hasfallen by eight basis points (to ~4.0%). The 10-year US Treasury yield is alittle softer near 4.34% and the two-year yield is off a couple of basis pointsto 5.07%. Gold is consolidating in about a two-dollar range on either side of$1930. November WTI reversed lower yesterday after reaching almost $92.45. Follow-throughselling today has seen in slip briefly below $89 before stabilizing.
Japan recorded its firstmonthly trade surplus in two years in June (~JPY39.2 bln) but it was littlemore than a statistical fluke. It returned to deficit in July (~JPY66.3 bln) and earlier today,Japan reported a JPY930 bln deficit in August. Net exports more than offset theweakness of the domestic economy in Q2 but its contribution looks likely tobecome a drag this quarter. Exports fell on a year-over-year basis in August(-0.8%). It was the first back-to back decline since late 2020. The decline inimports accelerated. In August, they were nearly 18% lower than a year ago, andin August 2022, they had risen by almost 50% from August 2021, when they werenearly 45% higher over the previous 12 month. This likely reflects highercommodity prices and a weaker yen. Separately, Prime Minister Kishida's recentcabinet shuffle has not generated stronger public support. A poll by MainichiShimbun found that the approval rating slipping one percentage point to 25%over the past month. It was the third consecutive decline. The disapprovalrating was unchanged at 68%.
Over the weekend, US GeneralMilley, the chair of the Joint Chiefs of Staff said on national television thatafter a thorough investigation, the intelligence community has concluded withhigh confidence that the Chinese balloon over US airspace seven months ago wasnot collecting intelligence. Recall that US Secretary of State Blinken's trip to Chinawas canceled (postponed). The balloon was shot down a on February 4. Milleyconcluded: I would say it was a spy balloon that we know with a high degree ofuncertainty got no intelligence and did not transmit any intelligence back toChina.
US Treasury Secretary Yellenindicated that intervention to smooth out volatility could be understandableand Japan's FX boss Kanda said that he was in day-to-day contact with his UScounterparts. He warnedthat excessive moves were undesirable and would not rule out any steps tocounter it. Still, ahead of the FOMC meeting outcome, intervention is unlikely,and the dollar has been bid to new highs above JPY148.00. Today is the sixthconsecutive session that the dollar has remained above JPY147. One-monthimplied yen volatility fell to three-month lows yesterday near 8.6%. It is alittle firmer today near 8.8%. To boost the chances of successful intervention,as was the case last October, it would help to pick a top to US yields too. US10-year yield made a new high for the year yesterday (like the dollar) near4.37%. As was the case before the weekend, the Australian dollar was cappedjust in front of $0.6475 yesterday. Still, it posted its highest close intwo weeks. More formidable resistance is seen in the $0.6500-25. In the biggerpicture the Aussie has stopped falling even if it is not making much headwayhigher. Note that it is higher on the month and has risen in two of the pastthree weeks. The yen's weakness makes it more difficult for Beijing tomanage the yuan's descent. It is not simply because of the mechanism bywhich the currency is managed and the CFETS basket. For some market segments,the yen, and yuan (offshore) share a common characteristic: extremepolicy divergence, low interest rates, attractive candidate for fundingcurrency (for carry trades or other financial structures). Chinese banks kepttheir loan prime rates steady after not passing through fully last month's cutin the one-year Medium-Term Lending Facility rate. The PBOC set the dollar'sreference rate at CNY7.1733. The average estimate in Bloomberg's survey was forCNY7.2958. The gap between the two appears the largest to date. The dollar hasheld slightly below CNY7.30, but it reached a seven-day high against theoffshore yuan near CNH7.3160.
Construction in the eurozoneis not typically a market mover. Yet, amid the string of poor economic news, construction outputwas firm. Construction rose by 0.8% in July after a 1.0% decline in June. Theeuro is not only vulnerable to the outcome of today's FOMC meeting but alsoFriday's preliminary September PMI. The composite has been below the 50boom/bust level for the past three months and likely remains there inSeptember.
The UK's August CPI rose by0.3%, less than half of the median projection in Bloomberg's survey and theyear-over-year rate slipped to 6.7% from 6.8%. The core rate fell to 6.2% from6.9%. The 0.3% increase means that over the past three months, UK CPI has beenflat. Meanwhile, producer prices continue to fall on a year-over-year basis.The Bank of England meets tomorrow, and today's data has seen a marked shift inexpectations. As of yesterday, the swaps market had discounted an almost 80%chance of a hike. Now, post-CPI, there is less than a 50% of a hike discountedfor tomorrow. The market has an almost 90% of a hike between now and the end ofthe year. Before today's CPI, the market was leaning toward two hikes thisyear. Some officials have suggested that the pace of QT could be acceleratedfrom the current GBP80 bln a month. With GBP100 bln being the maximum (signaledby the top two BOE officials), GBP90 bln then seems most likely forcentral-bank think. Ahead of the weekend, the UK reports August retail sales. Abounce back after a 1.2% fall in the headline was reported in July (-1.4%excluding gasoline) is expected. The UK will also see the preliminary SeptemberPMI before the weekend. The composite fell below 50 in August (48.6) for thefirst time since January and likely remained in contracting territory thismonth.
The euro was turned backfrom approaching $1.0720 in early North American activity yesterday and wassold back to the session lows (~$1.0675) and closed poorly. The nine-week slide is longer than mosttraders have seen in their careers, and many are tempted to pick a bottom,maybe like seeing nine reds in a row at a roulette table. The price action,though, is not encouraging. The nine-week losing streak could become ten. Positioningin the futures market does not seem consistent yet with kind of capitulationoften seen at the end of a such a persistent trend. The euro has been mostly confinedto the quarter-cent range mostly below $1.07, so far today. Sterling bears havebeen stymied for the past three sessions near $1.2370. The soft CPI figuressaw it give way, and sterling fell slightly below $1.2335 before recoveringback to $1.2375. There is scope for additional albeit modest gains. Despiteintraday penetration, it has not managed to close above $1.2400 either. It hasalso settled the past four sessions below the 200-day moving average(~$1.2435), the most this year.
What officials do is oftenmore important than what they say, but this is not true for today's FOMCmeeting. Even someof the more hawkish members have signaled the willingness to pause again afterhiking rates at the last meeting. Ironically, despite past efforts to play downthe significance of the summary of economic projections, the dot plot, it isthe key today. The UAW strike, which may widen at the end of the week, unlessthere is more progress, and the threat of a partial government shutdown at thestart of next month, are difficult to incorporate forecasts. These "knownunknowns" may reduce the confidence that members have in their forecasts.If there is a consensus, it is for a hawkish hold by the Fed today. Thathawkish element will be expressed through the updated macroeconomic forecasts.In broad strokes, new forecasts will likely anticipate stronger growth thisyear (perhaps has high as 2% from 1.0% in June). The median unemploymentforecast may be shaved to 4.0% from 4.1%. It was at 3.8% in August. In June,the median forecast by Fed officials was for the headline PCE deflator to be at3.2% at the end of the year with the core at 3.9%. It is possible that the newforecasts raise the headline rate but shave the core forecast. The hawkish holdwill also be expressed by maintaining the possibility of a hike in Q4 whilereducing the number of cuts anticipated next year from four to three. Lastly,we note that the market has often reacted to the FOMC statement one way andreversed it as Chair Powell's press conference got under way.
Canada's August CPI wasstronger than expected, and this encouraged the market to move in the directionit was moving boosting the odds of a Bank of Canada rate hike in Q4 and takingthe Loonie higher. Headlineinflation rose twice the 0.2% increase expected by the median forecast inBloomberg's survey, and this lifted the year-over-year rate to 4.0% from 3.3%.It is the second consecutive increase in the 12-month rate and is the highestin four months. The underlying core measures (trimmed and median) also rosemore than expected. Bank of Canada Governor Macklem has referred to thethree-month moving average of the underlying core measures. This metric rose to4% from 3.75% in July. There will be another CPI report before the central bankmeets again on October 25. Gasoline prices rose 4.6% in August and theyear-over-year rate turned positive for the first time since January. Shelterprices accelerated to 6% year-over-year from 5.1% in July. Grocery prices fellby 0.4% in August, which translates into a year-over-year rate of 6.9% (8.5% inJuly). The swaps market is now seeing slightly better than a 50% chance of ahike next month, around twice as much as before the inflation report. The swapsmarket has around an 85% chance of a hike at the December meeting. A week ago,it was seen as slightly less than a 50% probability. Note that the Canadianauto workers reached a tentative three-year deal with Ford that averts a strike.Details have yet to be disclosed.
Oil prices are rising, but theCanadian dollar is not really a petro-currency, even though it has appreciatedover the past couple of weeks. In fact, the correlation of changes in the exchange rate andWTI over the past 30-sessions is near the lowest since February (~0.18) and the60-day rolling correlation is around 0.35, around the lowest since April. The30-day correlation of changes in the exchange rate and the S&P 500 is near0.45 and the 60-day correlation is a little lower (~0.41). The 30-daycorrelation between the Dollar Index and the USD-CAD exchange rate is around0.57 and the 60-day is lower (~0.47). The correlation the changes in theexchange rate and the two-year interest rate differential with the US is near0.34 for the past 30-sessions and slightly lower for the past 60 sessions(~0.32).
The combination of a softerUS dollar in early North America yesterday and surprisingly firm Canadian CPIsaw the greenback tumble to almost CAD1.3380, its lowest level since mid-Augustbefore rebounding. Itheld below CAD1.3450 but rose to CAD1.3465 today before turning back. The USdollar has been pulling back against the Canadian dollar since the September 7high (~CAD1.3700). In the eight sessions since that peak, the US dollar hasrisen once. The US dollar approached the (61.8%) retracement of the rally fromthe mid-July low (~CAD1.3090) that is found near CAD1.3365. A break of that isneeded to sustain the momentum. There was no follow-through yesterday afterthe US dollar posted an outside up day against the peso on Monday. Thedollar traded quietly inside Monday's range (~MXN17.03-MXN17.18) and remains atthe lower end of the range today. Mexico still has retail sales and the CPI forthe first half of September due this week and the central bank meeting nextweek. The peso may be sidelined a bit too by today's Brazil central bankmeeting. It is widely expected to deliver its second 50 bp cut in the Selicrate (to 12.75%). For the past month and a half, the dollar has traded in arange between roughly BRL4.84 and BRL5.00. It tested the lower end of the rangethis week.
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