Week Ahead: Yen's Recovery Ahead of the Weekend may Give the Yuan a Reprieve or Be Ready for BRICS to Disappoint High Hopes for a Dollar Alternative
<div><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgv26GhNfELfFdOn-5sa08OdjME0HA3fGoBWrdXlJt8pgGAwc1qqweVlUVorHhzQCq3C67pYbxsS43UbxC0n1x3JEehWi9MclJC9M76xfxeJK6B-r3jDdToMm5bC8fdlU9lR8ca44OqPWh3Zfvpkjyw5BOA8ZV7WA6t8U-5GG8D1JAjDcWv-ZsHNE2Rgc7F/s820/weekly%20summer.jpg"><img alt="" border="0" data-original-height="451" data-original-width="820" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgv26GhNfELfFdOn-5sa08OdjME0HA3fGoBWrdXlJt8pgGAwc1qqweVlUVorHhzQCq3C67pYbxsS43UbxC0n1x3JEehWi9MclJC9M76xfxeJK6B-r3jDdToMm5bC8fdlU9lR8ca44OqPWh3Zfvpkjyw5BOA8ZV7WA6t8U-5GG8D1JAjDcWv-ZsHNE2Rgc7F/s400/weekly%20summer.jpg" width="400" /></a></div><p><span>There seem to be three large
forces shaping the investment climate. First is the resilience of the US
economy, with four consecutive quarters of above trend growth. It appears that the US economy may be expanding faster than the 2.4% annualized pace seen in Q2. Many of the
largest naysayers have capitulated. Second, the monetary tightening cycle is
widely seen as almost over, and many are beginning to fine tune forecasts for
the first cut by the major central bank. Rate cuts by the Federal Reserve and
European Central Bank are priced in for the first half of next year. Third, the
poor economic performance in Europe and China is in stark contrast to the US. Europe
does not appear to be considering fresh measures to support the economy. China
has published several long lists of actions and reforms it will consider but
investors and economists are not convinced. And every new list is a reminder
that the previous list was not sufficient. It appears more like flailing than
playing Go. <o:p></o:p></span></p><p><span>In a generally quiet week ahead for
high-frequency data, the preliminary estimate for the August PMI stands out. The
broad pattern seems clear. The manufacturing sectors have been below the 50
boom/bust for some time. The service PMI has fared better, but it too has begun
to soften. As inflation falls, real rates area are seen rising. Consider
that last October, the US 10-year yield peaked around 4.33%. US CPI rose by
7.7% in the year through October 2022. Subtracting inflation from the 10-year yield
showed a negative "real" rate of 3.37%. Now the US 10-year yield is slightly below 4.25% and inflation is 3.2% over the past 12 months. The translates to a
"real yield" of about 1%. European "real" yields are still
negative. Japan's real yields are also well below zero. The dollar is on a tear, supported by a sharp rise in US rates and is forcing an equity market adjustment. <o:p></o:p></span></p><p><span>Two meetings next week will be
the focus. First, the long-anticipated BRICS summit will be held August 22-24. There
had been some speculation, seemingly spurred by Russian sources and caught in
the echo-chamber of social media, of a gold-backed new currency or
trade-settlement token. This continues to seem far-fetched and would seem to
weaken Chinese and Indian attempts to boost the internationalization of their
currencies. There is no major external impediment of settling more bilateral
trade in local currencies, and there have been countries, like China and
Brazil, talking about it for a decade. The more concrete outcome will be to
broaden the membership. We suspect that wider membership will restrain whatever
'radical' impulses there may be, like it did with the Asian Investment
Infrastructure Bank (AIIB). The US initially opposed it, but the UK joined over
the Washington's objections and subsequently several other NATO members have
joined. The AIIB seems to supplement the existing multilateral lenders and is
reportedly honoring the financial sanctions on Russia. The second meeting, the
Fed's Jackson Hole symposium will be August 24-26. This year's topic is
"Structural Shifts in the Global Economy." Fed Chair Powell speaks a
little before European markets close at the end of next week. The recent pattern
has been for the markets to hear the Chair as more dovish than the FOMC statement. Yet,
given that the futures market sees only about a 10% chance of a hike next month
and the first cut is fully discounted in Q2 24, while the US economic data for
the most part has surprised to the upside, it is difficult to envision a more
dovish-inclined market. <o:p></o:p></span></p><p><b><span>United States:</span></b><span> Compared with its peers and rivals,
the US economy is proving surprisingly resilient. June retail sales excluding
autos and gasoline rose 1% in July, the most since January and nearly matches
the 1.2% increase in Q2. July industrial output and housing starts recovered
from declines in June. Economists are bound to boost their forecasts for Q3 GDP
from 1.5% (median projection in Bloomberg's survey). The Atlanta Fed's GDP
tracker sees Q3 growth stands at 5.8% and its accuracy tends to improve
as the quarter progresses. Still, in the coming days, the US is expected to
report the fifth monthly decline this year in existing home sales, while new
home sales may stabilize after falling by 2.5% in June. A sharp drop in Boeing
orders (52 in July from 304 in June) and deliveries (43 vs. 60) will likely see
July durable goods orders reverse the lion's share of June's 4.6% surge. Excluding
airplanes and defense, durable goods orders may be flat. <o:p></o:p></span></p><p><span>The Dollar Index moved above
the 200-day moving average (~103.25) last week for the first time this year. It
is flirting with the (61.8%) retracement of the decline from the year's high
set in early March (~105.90) that is found near 103.50. The late May highs
~104.40-104.70) is the next target. As one would expect after a five-week
rally, the longest since May 2022, the momentum indicators are stretched. Momentum
traders and trend followers will likely tighten stops on longs. It may take a
break of the 102.80 area to begin forcing them out. <o:p></o:p></span></p><p><b><span>Japan:</span></b><span> Alongside the stronger than
expected Q2 GDP, Japan reported the deflator accelerated to 3.4% from 2.0%.
However, the Japan's growth was not so much a domestic demand story, but one of
stronger exports, including hospitality services (tourism). This lends support
to the BOJ's argument that price pressures are not demand-driven. Still,
Tokyo's CPI at the end of the week will be scrutinized. The Tokyo CPI offers a
good guide to the national figures. We expect Japanese inflation to begin
easing. The other focus is on the BOJ. The rise in global yields and the Q2 GDP
are dragging Japanese yields higher and is near levels that the BOJ stepped to
buy bonds in the market earlier this month. At the same time, the dollar is
trading at levels at which the BOJ intervened last year. We do not think that
the BOJ is defending a particular level. The dollar rose to its best level in
nine months near JPY146.55 on August 17 and found support ahead of the weekend
in front of JPY145.00. An eight-day rally has been halted by a combination
stepped up efforts by China to check the yuan's decline and the pullback in the
US 10-year yield from around 4.33% to almost 4.20%. Momentum indicators remain
stretched, but we suspect a break of the JPY144.60 area is needed to signal an
end of this bull run. <o:p></o:p></span></p><p><b><span>Eurozone: </span></b><span>The preliminary August PMI is the main
data point in the weekend ahead. Germany also sees the IFO August survey
results. The economic malaise persists but officials seem reluctant to provide
more assistance in terms of fiscal or monetary policy. The swaps market is
discounting a little more than a 50% chance of a rate hike next month. The euro
cannot sustain even the most minor of upticks. It has not traded above the
previous session's high since August 10, and it made new lows (since July 6)
before the weekend (~$1.0840). Although momentum indicators are stretched from
the five-week drop, the speculative positioning in the futures market warns of
the risk of more liquidation. Chart support is seen in the $1.0790-$1.0800 area
and then $1.0755. The diverging economic performance could spur a test on the
late May low near $1.0635. <o:p></o:p></span></p><p><b><span>China:</span></b><span> Officials managing the world's
second largest economy appear becoming more desperate. Several multi-prong
initiatives have been announced and informal power to reduce dollar purchases
and encourage dollar sales, cut mortgage rates, and deter equity sales has been
exercised. The policy divergence has seen Chinese 10-year bonds trade at 170 bp
discount to US Treasuries, the most since 2007. Chinese stocks are performing miserably
and have given back all the gains since recent Politburo meeting. Foreign
direct investment flows are slowed markedly. The 15 bp cut in the one-year
Medium-Term Lending Facility signals a cut in the loan prime rates as the start
of next week. Surely, Chinese officials understood that in the current context,
a rate cut would spur yuan sales and encourage Chinese business to hold onto
their foreign currency export earnings. We do not think Beijing is defending a
specific exchange rate with the dollar, but they do seem to push against a
one-way market. Of the 14 sessions so far this month, the yuan has risen in
three. Reports circulated that China wanted state-owned banks to sell
dollars <i>after</i> the yuan had fallen for five consecutive
sessions and was accelerating to new lows for the year. Sometimes, Beijing is
believed to do this quietly but that it allowed the word to go out suggest a
higher degree of concern. Still, the yuan was sold the following day, ahead of
the weekend, but the yen's extended its recovery against the dollar and seemed to help pull the yuan higher too. <o:p></o:p></span></p><p><b><span>UK:</span></b><span> Last week's data, which included new
cyclical high in average weekly labor earnings, a slowing of headline CPI (6.8%
vs. 7.9%) but an unchanged core rate (6.9%) and a decline in July retail sales
twice as large as expected (-1.2%), expectations shifted in favor of a more
hawkish BOE trajectory. The swaps market had grown a bit skeptical of even a 25
bp hike, but after the flurry of data, the market now prices in about a 25%
chance of a 50 bp hike. This may help explain why sterling was the only G10
currency rise against the dollar. It gained about 0.25% and the yen was the
second strongest, falling by about 0.33%. Still, sterling remains mired to a
roughly $1.26-$1.28 trading range and finished the week near the middle of it.
The MACD has stopped falling and the Slow Stochastic has turned higher. Sterling
may lead the currencies higher when the dollar's rally stalls. Outside of the
PMI and CBI surveys, the UK reports on its fiscal position. The market (median
in Bloomberg's survey) sees the budget deficit widening in the current fiscal
year to 5.2% of GDP from 4.4% last year. <o:p></o:p></span></p><p><b><span>Canada: </span></b><span>Canada added nearly 110k full-time jobs in
June. Relative to the size of its economy, it would be as if US nonfarm
payrolls jumped by more than a million. The question in coming week is whether
the jump in jobs translates to stronger retail sales. In the first five months
of the year, Canada's retail sales rose by an average of 0.2%, However, the
average disguises a volatile time series. Three of the five months of data
swung by 1% or more. The Canadian dollar extended is downtrend for the fifth
consecutive week, the longest losing streak since April-May 2022. The greenback
set a new two-month high ahead of the weekend near CAD1.3575, which met the
(61.8%) retracement of its losses since the year's high was set on March 10
(~$1.3860). The momentum indicators are overextended but show little sign of
turning. The next important chart areas are the Q2 highs (~CAD1.3650-70). The
US dollar has not closed below the five-day moving average (~CAD1.3520) this
month. Doing so could be a preliminary sign that that the run-up has stalled. <o:p></o:p></span></p><p><b><span>Australia: </span></b><span>The Australian economic calendar is light
outside of the flash PMI. The composite PMI fell below the 50 boom/bust level
in July for the first time since March and likely remained in contraction
territory this month. The Australian dollar peak at $0.6900 in June and fell to
about $0.6600 before rallying back to $0.6900 in mid-July. Since then, it has
fallen by around 7.75% to new lows for the year. The Aussie fell to $0.6365
last week and the measuring objective of the potential double top is closer to
$0.6300. Initial resistance may be seen in the $0.6450-65 area. The five-week
slide has stretched the momentum indicators, but they are still falling. <o:p></o:p></span></p><p>
</p><p><b><span>Mexico:</span></b><span> The peso is not immune to the
dollar's broad rally, but its losses have been relatively modest compared with
the most other Latam currencies. This is true even if Argentina, is excluded as
a special case given the devaluation. The Mexican peso is off about 1.8% this
month. The Brazilian real and Colombian peso had fallen more than twice as much.
The Chilean peso has fallen about 3.3% and the Peruvian sol is down about 2.9%.
The peso's resilience also may be impressive given the tension between the US
and Mexico over genetically modified corn. A 75-day negotiating period proved
for naught. The issue is that Mexico has banned importation of GMO corn for
consumption, but the lion's share of the corn imported is for animal feed,
which is not prohibited. The broad sideways movement of the peso does not deter
carry-trade strategies, but there is no momentum to speak of. After briefly
trading below MXN17.00 at the start of the last week, the greenback was mostly
a MXN17.04-MXN17.20 range last week. Mexico sees CPI figures for the first half
of August on the 24th. Inflation is expected to continue to trend lower. It was
slightly below 4.80% in July (and ~6.65% at the core). However, the minutes
from the recent Banxico meeting a several hours later may temper any reaction. The
central bank has signaled a desire to keep the overnight cash target rate at
11.25% for a protracted period, which means late in the year, at the earliest,
and maybe Q2 24 at the latest (before the first cut). <o:p></o:p></span></p><p><br /></p><p><br /></p><p><a href="http://www.marctomarket.com/p/disclaimer_28.html" target="_blank"><span>Disclaimer</span></a></p>
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