Overview
The US dollar’s losses have been extended ahead of the June CPI. At the same time, speculation that the Bank of Japan will adjust policy later this month saw the yen extend its gains for the fifth consecutive session. Sterling made new highs since last April, while the Swiss franc has risen to its best levels in about 2 1/2 years. The Dollar Index gapped lower and through the trend line drawn off the April and May lows. The greenback has steadied a little in the European morning. Given the move, there is risk of “sell-the-rumor, buy-the-fact” type of activity. Emerging market currencies are also mostly higher, including the Chinese yuan, which is at its best level in three weeks.
The yen’s strength is weighing on the Nikkei, while indications of more economic support from Beijing are helping lift Chinese and Hong Kong equity markets. Other large bourses in the Asia-Pacific region advanced, with India being an exception. The STOXX 600 in Europe is advancing for the fourth consecutive session, and US index futures are also enjoying a firmer tone. European benchmark 10-year rates are mostly 3-4 bp lower, though the yield on 10-year Gilts is off more than five basis points. The US 10-year Treasury yield is off about three basis points to 3.94%. The two-year yield is around 4.86%, having peaked near 5.11% last week. Gold is trading around $1935 and traded above $1940 for the first time since June 20. Focus in the oil market has shifted to supply, and August WTI is trading above $75 a barrel and approaching the 200-day moving average near $75.55.
Asia-Pacific
China’s June lending figures reported late local time yesterday were stronger than expected. The CNY4.22 trillion (~$590 billion) was the strongest in three months. Bank lending rose by ~2 1/4 times over May to CNY3.05 trillion, while lending for non-bank entities (shadow banks) rose nearly six-fold (from a small base) to CNY1.17 trillion. The macro data focus now turns to the June trade figures. Through May, China has recorded an average monthly surplus of $71.9 billion, compared with $56.4 billion in the first five months of 2022 and $38.3 billion in the same period in 2021. The larger trade surplus is not a function of stronger exports. Indeed, exports have fallen on a year-over-year basis for the six of the past eight months and are expected to have contracted by 10% year-over-year in June. Imports have also fallen for six of the past eight months.
Japan reported a 0.2% decline in June producer prices. It was the second consecutive monthly decline. At an annualized rate, Japan’s PPI fell by 1.6%% in H1 ’23. It rose at a 9.4% annualized rate in H2 ’22. Still, the focus is on the consumer prices, but next week’s national figures for last month are less important than the July Tokyo CPI due a few hours before the BOJ meeting concludes on July 28. Speculation that the BOJ will adjust policy has intensified over the past week or so. Most observers are focused on the yield curve control, which caps the 10-year yield at 0.50%. Some see the steepness (the most since 2015) of the five-year to 10-year curve an indication that the market is pricing in an adjustment. There are a few other elements, including the midpoint of the band for the 10-year JGB, the negative overnight rate (-0.10%), and the easing bias that also could be adjusted.
The dollar’s sell-off against the yen is extended for the fifth consecutive session today, and near JPY136.65 is down around 3.35% this month. The greenback has seen our JPY139.50 target and steadied near JPY139.30. The JPY140 area may now become nearby resistance. A convincing break of JPY139.50 would target the JPY138.45-75 area next. As widely expected, the Reserve Bank of New Zealand stood pat with the cash target rate at 5.5%. The central bank has previously signaled its intention to keep rates steady until May next year. The New Zealand dollar made a new high (~$0.6240) since mid-June after the decision, but has reversed lower. It is likely to find support in the $0.6180-90 area. The Reserve Bank of Australia announced it would implement several reforms (two-day meetings, but eight instead of 11 a year, and the quarterly statement would be released at the conclusion of board meeting). Governor Lowe seemed to play down the need for further tightening but did not shut the door. Either an extension of his term or a successor is expected to be announced over the next couple of weeks. The Australian dollar initially advanced to $0.6740 before it too reversed lower. It is finding support near $0.6680 in the European morning. If it has not recorded the session low, it looks close. The recovery of the Japanese yen has coincided (and we have suggested, not coincidentally) with the recovery of the yuan, which reached a three-week high today. It has risen by about 0.9% this month. The dollar has spent the entire session (thus far) below the 20-day moving average (~CNY7.2060) for the first time in three months. The PBOC set the dollar’s reference rate at CNY7.1765, compared with expectations for CNY7.1912. The next target may be in the CNY7.1500-7.1680 area.
Europe
Tomorrow, the eurozone reports aggregate industrial production for June. Of the large national reports, only Germany disappointed. Output fell by 0.2%, while economists expected a flat report. France was expected to report a 0.2% decline in industrial production, but instead, it surged 1.2%. Italy’s also surged. The 1.6% gain compares with expectations of 0.6% and recovers most of the 2.0% decline posted in May. Spain’s recovery from the 1.9% contraction in industrial output in May was not quite as impressive, but the 0.6% gain surpassed the 0.4% median forecast in Bloomberg’s survey. Separately, May trade figures are due Thursday. So far, only Germany and France have reported their national figures, and deterioration in the former (14.4 billion euros vs. 16.5 billion euros in April) was largely offset by the improvement in the latter (-8.42 billion euros vs. -10.6 billion euros in April). Tomorrow, the UK reports May GDP figures and details. Weaker industrial output, services, and construction are seen as driving a 0.3% contraction.
The euro is holding above $1.10 today and, if sustained, it would be the first time in two months. On the top side, it traded slightly above $1.1035. There is little meaningful resistance in front of the late April and early May high near $1.1100. The greenback extended its losses against the Swiss franc to levels not seen since early 2021. Today’s low is about CHF0.8765, and that low from January 6, 2021 was a little below CHF0.8760, which itself was the lowest since the franc’s cap (euro floor) was lifted in early 2015. Sterling extended its rally to almost $1.2970 today, before pulling back nearly a half of a cent. It found new bids in the European morning around $1.2925. We look for sterling to have another run at $1.30, and above it, the next chart resistance may be in the $1.3150 area. Its strength appears to be a function of both the more aggressive hikes anticipated from the Bank of England and the weakness of the dollar.
America
There are two highlights in today’s North American session: the US CPI and the Bank of Canada decision. The median forecast in Bloomberg’s survey anticipates a 0.3% gain in both the headline and core measures of US CPI. That would mean that at an annualized rate, US CPI rose by about 3.6% in H1 and the core rate around 4.8%. Recall that headline inflation peaked last June at 9.1%, and with a 0.3% rise this June, the year-over-year rate can fall to about 3.1%. The core rate peaked at 6.6% last September, and a 0.3% gain last month will bring the year-over-year rate to 5.0%. The firmness of prices and the Fed’s rhetoric have persuaded the market to price in a hike later this month with high confidence. The issue is trajectory of policy from there. The market continues to resist ideas of another hike. The Fed funds futures have about a 16% chance of a September hike discounted. The year-end effective target rate (January Fed funds futures) is about 5.375%. The current effective average rate is 5.07-5.08%. The key question is, what will it take to persuade the market of another hike? Perhaps a combination of stronger inflation readings, and note, the base effect may point in this direction as early as the July CPI print (August 10). Recall that in July 2022, CPI was unchanged on the month. Lastly, note that that the SEC is expected to announce new rules for money markets. It will be the third try to put this important aspect of the capital markets on solid footing since 2008. The last reforms in 2016 failed to prevent a crisis in 2020, which resulted in the Fed’s emergency assistance facility.
The market leans toward a rate hike today by the Bank of Canada, though part of the expectation may reflect that last month’s hike surprised many participants. Most of the data since then does not necessarily make a compelling case for back-to-back hikes. Price pressures, including the underlying measures that Governor Macklem pointed to, eased. April’s monthly GDP disappointed by being flat. Canada also reported a significant deterioration its May trade balance and revisions that halved its April surplus. The main exception was last week’s June jobs report that saw an outsized 109k jump in full-time employment (though almost half seemed to be from part-time positions). Still, unemployment rose by 0.2% to 5.4%, and wage growth slowed more than expected. The Canadian economy surprised the Bank of Canada and investors by expanding by 3.1% in Q1 at an annualized pace, but economists see it slowing to less than 1% in Q2 and set to nearly stagnate in the second half. Note that the full economic impact of the wildfires and the West coast port strike, which has entered its second week and is estimated to be costing around C$500 million a day, has not been felt. There are reports suggesting that there are around 300 vessels at the Vancouver and Prince Rupert ports, and another 73 scheduled to arrive shortly. Given the strike activity, only 2-5 ships can be processed at a time. Diversions to the US could cost time and money, and US union dockworkers are resisting unloading cargo that is headed to Canada to show solidarity.
If the Bank of Canada does not hike, we expect a knee-jerk decline in the Canadian dollar that could see the greenback test the CAD1.3300 area. After peaking before the weekend near CAD1.3385, the greenback tested the CAD1.3200 area, which is the low seen last week. The CAD1.3180 area may offer mild support ahead of the nine-month low set in late June near CAD1.3115. The US dollar slipped against the Mexican peso to a four-day low (~MXN17.0145). The multi-year low was last seen in the middle of last week around MXN16.9810. The strength of the peso and the recovery of the Brazilian real yesterday suggests that the surge in the yen and Swiss franc does not necessarily mean the end of carry trade strategies, and instead lends credence to ideas that this is a dollar move.
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