BOJ Moves to Slow JGB Sell-Off, while Month-End is Making for Subdued Price Action in FX outside the Yen
<div><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjpp_VHXpUE1KMB-tKWp3oSHw77dX82t8pKuP8LaHkdYBUiFyFC43i2uykBX2DcFA-5F3smX8HkGRgvFaMWUIoqdvDGphn-jG3Z-8nqHRD4-OCocyep0bYFGz3hTaWZ1Kc1vXiWsXqRzU_NlXY5ZOdaKzyyikdA6JLH6ovsjjCdZ5y7SjAW1FFG2pxG3gpu/s1002/fish%20ruler.jpg"><img alt="" border="0" data-original-height="355" data-original-width="1002" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjpp_VHXpUE1KMB-tKWp3oSHw77dX82t8pKuP8LaHkdYBUiFyFC43i2uykBX2DcFA-5F3smX8HkGRgvFaMWUIoqdvDGphn-jG3Z-8nqHRD4-OCocyep0bYFGz3hTaWZ1Kc1vXiWsXqRzU_NlXY5ZOdaKzyyikdA6JLH6ovsjjCdZ5y7SjAW1FFG2pxG3gpu/s400/fish%20ruler.jpg" width="400" /></a></div><p><b><span>Overview: </span></b><span>The Bank of Japan took the market by
surprise with its adjustment of the cap on the 10-year yield before the
weekend, and then stepped in to buy the government bond as yields rose in
reaction today. The move helped lift the dollar to JPY142.50. from where it had
settled on Friday (~JPY141.15). The dollar is mostly softer, however, with only
the yen and Swiss franc weaker. The Australian dollar is leading the other
currencies higher ahead of tomorrow RBA meeting. Emerging market currencies,
outside of a handful of central European currencies and the Malaysian ringgit
and South Korean won are lower. <o:p></o:p></span></p><p><span>Asia Pacific equities rallied with Taiwan
being the only notable exception. Europe's Stoxx 600 has edged higher after
falling 0.2% before the weekend. US index futures are narrowly mixed. Benchmark
10-year yields are higher. In Japan, the 10-year JGB is near 0.60%. European
yields are mostly 3-4 bp higher. The 10-year US Treasury yield is near 3.98%, up
3.5 bp. Gold is a little lower but inside the pre-weekend range, which itself
was inside last Thursday's wide range (~$1942.65-$1982.15). September WTI has
rallied for the past five consecutive weeks and is higher today, pushing above
$81. The contract reached $81.75 in January and $81.45 in April. <o:p></o:p></span></p><p><b><span>Asia Pacific</span></b><span></span><o:p></o:p></p><p><b><span>China's July PMI softened in line with
expectations. </span></b><span>The
manufacturing PMI firmed to 49.3 from 49.0 and is the fourth consecutive month
it is hovering around 49.0. The non-manufacturing PMI continued to slow as it
has done since the peak in March. The 51.5 (from 53.1) is the lowest of the
year. The slippage in the composite to 51.1 from 52.3 also brings it to a new
low for the year. The data may not be relevant in the aftermath of last week's
Politburo meeting and new even if vague efforts to bolster the private sector,
property market, and foreign investment. The CSI 300 rallied 4.5% last week,
the most since in nearly eight months. It was up another 0.55%t today. <o:p></o:p></span></p><p><b><span>The Bank of Japan adjusted its Yield-Curve
Control stance ahead of the weekend. </span></b><span>The 0.50% cap is now a reference point, and the central
bank will conduct fixed-rate purchases at 1.0%. Governor Ueda explained he did
not expect the 10-year-yield to rise to that and that it was not a step toward
normalization. The 10-year yield closed near 0.54% at the end of last week and
poked above 0.60% and prompted an unexpected bond purchasing operation by the
Bank of Japan. It was the first such operation since February. It reportedly
offered to buy the equivalent of $2 bln of bonds at market rates. Note that a
few hours before the BOJ's decision, Tokyo's July CPI, which is good indicator
of the national report, saw the measure that excludes fresh food and energy
rise to a new cyclical high of 4.0%. Today, Japan reported June retail sales
and industrial production. Retail sales fell 0.4% after rising by 1.4% in May.
The median forecast in Bloomberg's survey was for a 0.7% decline. The BOJ
argues that inflation is coming from supply shocks more than excessive demand.
Industrial production, on the other hand, recovered from the outsized 2.2% drop
in May, rising 2.0% in June. Auto-related products and electronics led the
recovery. <o:p></o:p></span></p><p><b><span>The Reserve Bank of Australia meets first
thing tomorrow. </span></b><span>The
futures market has all but given up on hike. Less than a 10% chance has been
discounted. Yet, 60% of the economists in Bloomberg's survey anticipate a
quarter-point hike that would bring the target rate to 4.35%. The strong
employment data was offset by the mostly softer than expected inflation
readings. Still, Governor Lowe, who will be replaced in September, has been
criticized for communication lapses may be loath to spring another surprise in
the market.<o:p></o:p></span></p><p><b><span>Although the Bank of Japan adjusted its
Yield-Curve Control procedures to cap the 10-year yield at 1.0% rather than
0.50%, the response in the foreign exchange market was considerably more muted
than after last December's surprise. </span></b><span>The dollar initially fell to a nine-day low near JPY138
before recovering smartly and settled above the 20-day moving average (~JPY141)
for the first time since July 6. Follow-through buying today has lifted the
greenback to JPY142.50. There may be near-term potential into the JPY143.20-60
area. <b>The Australian dollar posted a bearish outside down day last
Thursday after peaking near $0.6820. </b>Follow-through selling before the
weekend saw it test $0.6625 before steadying. Today, it pushed above $0.6680,
where options expire today (~A$430 mln) and Thursday at $0.6685 for A$903 mln)
and is knocking on $0.6700 in the European morning. A move above $0.6710
targets $0.6745-60. In the bigger picture, the Aussie has been in a
$0.6600-$0.6900 range for two months. <b>Last week's greenback loss
(~0.55%) against the Chinese yuan was the third weekly decline in the past four
weeks.</b> This seemed to be more of a Chinese development than a dollar
event, as the greenback was mostly firmer against the G10 currencies and most
emerging market currencies. Vague but persistent signals of more efforts to support
the economy, including initiatives for the private sector, encouraged foreign
flows into Chinese equities. The PBOC set the dollar's reference rate at
CNY7.1305. The median forecast in Bloomberg's survey was for CNY7.1532. Last
Thursday's range (~CNY7.12-CNY7.1760) contained the price action Friday and
today. <o:p></o:p></span></p><p><b><span>Europe</span></b><span></span><o:p></o:p></p><p><b><span>The eurozone reported Q2 GDP and the
preliminary July CPI. </span></b><span>Neither
report was surprising given the national reports at the end of last week.
France reported 0.5% growth, helped by the export of a cruise ship. Spain's
economy grew by 0.5%, but the German economy stagnated, making it the best
quarter in the past three. Italy reported that it too unexpectedly contracted
by 0.3% (after growing by 0.6% in Q1). The eurozone in aggregate grew by 0.3%
in Q2. Before the weekend, Germany reported that its harmonized measures of
inflation rose by 0.5% in July. In France, it was unchanged, and in Spain, it
fell by 0.1%. Italy reported today a 1.5% decline in July, helped by a nearly
20% decline in clothing and shoes, and a 1.3% decline in housing, water, and
electricity. The year-over-year rate softened to 6.4% from 6.7%. That
translates into a 0.1% increase in aggregate, allowing the headline rate to
slip to 5.3% from 5.5%. The core rate disappointingly was unchanged at 5.5%.
The August CPI will be in hand before the ECB's September decision (September
14).<o:p></o:p></span></p><p><b><span>The UK reported consumer credit and
mortgage lending data</span></b><span>.
The June data were in line with expectations and economists expect that the UK
economy stagnated in Q2 after eking out 0.1% growth in Q1. GDP for Q2 will be
reported next week (August 11). The focus is on the Bank of England meeting on
Thursday. Recall that before the softer than expected June CPI figures were
reported on July 19, the swaps market was discounting a little more than a 2/3
chance of a 50 bp hike. Expectations have been scaled back and the swaps market
now has about a 1-in-3 chance of a half-point hike priced. That said, several
large banks continue to forecast a 50 bp move. <o:p></o:p></span></p><p><b><span>The euro posted an outside down day on
July 27, following the string of stronger US data and the ECB's press
conference, where President Lagarde was less committal about a September rate
hike than she was about the June and July hikes.</span></b><span> Follow-through euro selling ahead of
the weekend was limited to about a fifth of a cent, and the euro rebounded from
about $1.0945. The recent pullback was sufficient to drive the five-day moving
average through the 20-day moving average for the first time since mid-June. Still,
the euro settled above $1.10. The euro has traded in a narrow range between
about $1.1005 and $1.1035 today. There are about 1.33 bln euros in options that
expire at $1.10 today and about 1.5 bln euro at $1.11 tomorrow. We see initial
resistance in the $1.1045-70 area. <b>Sterling also posted a bearish
outside down day on July 27 and settled below $1.28 for the first time since
July 6. </b>Follow-through selling ahead of the weekend was limited to a
little more than $1.2765. It rebounded back to the 20-day moving average near
$1.2890. Today, it is trading quietly in a roughly $1.2835-70 range. About
GBP366 mln in options expire tomorrow at $1.29. There is another set of options
struck at $1.2855 for around GBP365 mln also expire tomorrow. Position
adjustment ahead of the BOE meeting may make for some choppy trading conditions.<o:p></o:p></span></p><p><b><span>America</span></b><span></span><o:p></o:p></p><p><b><span>After a series of mostly stronger than
expected economic data and softer inflation data, including the Q2 Employment
Cost Index, which Fed Chair Powell explicitly called attention to in his press
conference following the FOMC's decision to hike rates after the June pause,
attention turns back to the labor market this week. </span></b><span>Economists expect nonfarm payrolls to rise
by 200k. The private sector is forecast to have filled 175k jobs in July, after
averaging 215k a month in H1 23, and 317k in H2 22. Several labor market
indicators point to some easing of the tightness of the labor market, though
last week's weekly initial jobless claims (week ending July 22) to 221k, the
lowest in five months. The fact that the US unemployment rate in June was 3.6%,
unchanged from March 2022, when the Fed began the historically aggressive
tightening, is simply astounding. The initial estimate of Q2 GDP was 2.4%, the
fourth consecutive quarter that economy grew faster than what the Fed thinks is
the non-inflation speed limit. The early estimate from the Atlanta Fed's GDP
tracker is for 3.5% growth here in Q3. With such little input, this far out,
the tracker is not particularly accurate. Still, the futures market sees less
than a 20% chance of a hike in September, and this too low, especially given
that next week's CPI could see the first increase in the year-over-year rate
since last June. <o:p></o:p></span></p><p><b><span>Canada also reported July jobs data at the
end of the week. </span></b><span>Canada
created an average of 48.4k jobs a month through H1, of which, 40.3k were
full-time positions. In H2 22, Canada grew an average of 30k jobs a month and
again the bulk (27.8k) were full-time. In H1 21, job growth averaged 38.3k a
month and 46.6k full-time posts. Recall that in June, full-time employment
surged by 109.6k, which in proportional terms, would be as if US nonfarm
payrolls grew by well over 1 million. The unemployment rate has crept higher to
stand at 5.4% in June, up from 4.9% in June 2022. The Bank of Canada meets next
in early September, and the swaps market sees almost a 1-in-3 chance of a hike.<o:p></o:p></span></p><p><b><span>Mexico will report Q2 GDP shortly. </span></b><span>It is expected to have expanded by 0.6%
after 1.0% growth in Q1. The economy is expected to slow in H2, and with falling
price pressures, is seen creating space for the central bank to cut rates in
Q4. Before the weekend, Chile became the first Latam country to cut rates, and
it delivered a larger-than-expected 100 bp cut (to 10.25%). Brazil is poised to
cut the Selic rate later this week. The swaps market favors a 50 bp cut to
13.25%, but the six economists polled by Bloomberg were evenly divided between
25 bp and 50 bp.<o:p></o:p></span></p><p>
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</o:p></o:p></o:p></p><p><b><span>The US dollar rose to a nearly three-week
high before the weekend around CAD1.3255 and made a marginal new high today
near CAD1.3260, where about $343 mln</span></b><span> <b>in options expire today. before pulling back.</b> Initial
support is seen in the CAD!.3200-20 area. A move above CAD1.3275 could see the
greenback extend its recovery to the CAD1.3320-50 area. The daily momentum
indicators favor the greenback. <b>The dollar recorded an outside down day
against the Mexican peso before the weekend and saw it lows level (~MXN16.6260)
since 2015.</b> The lower Bollinger Band (two standard deviations below
the 20-day moving average) is near MXN16.6160. It is consolidating so far today
below MXN16.7880. The next downside target is in the MXN16.50 area.<o:p></o:p></span></p><p>
</p><p><o:p> </o:p></p><p><a href="http://www.marctomarket.com/p/disclaimer_28.html" target="_blank"><span>Disclaimer</span></a></p>
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