Dollar Edges to New High for the Year against the Japanese Yen, While Developer Woes Hit Chinese Stocks and Yuan
<div><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjMjqsLXJFCeBlPGRgH1Rq09yEeDqE2uFeZTr-AH7gyJBxAyuQLT14t-0z0pNoVCelfineJtDDwCP9VsK9IKxtGnU0ZPgrG9z5BUYQQ2CzfC9tDkzXaHplpYUgBq_2MBPeoTH6rkO1uvdhWt-Tz–xmFdEyf28fUyNcWm2FQvsjlXpnxfs2wFdkWBMuXIZ-/s266/higher%20for%20longer.jpg"><img alt="" border="0" data-original-height="165" data-original-width="266" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjMjqsLXJFCeBlPGRgH1Rq09yEeDqE2uFeZTr-AH7gyJBxAyuQLT14t-0z0pNoVCelfineJtDDwCP9VsK9IKxtGnU0ZPgrG9z5BUYQQ2CzfC9tDkzXaHplpYUgBq_2MBPeoTH6rkO1uvdhWt-Tz–xmFdEyf28fUyNcWm2FQvsjlXpnxfs2wFdkWBMuXIZ-/s400/higher%20for%20longer.jpg" width="400" /></a></div><p><b><span>Overview: </span></b><span>The US dollar begins the new week on a
firm note. It is trading at new highs for the year against the Japanese yen and
is bid against nearly all the G10 currencies, though the Swedish krona and
Canadian dollar are resisting the greenback's push. Most emerging market
currencies are heavier, with the Polish zloty and a few East Asian currencies
holding their own. Gold is trading with a heavier bias near $1922, but within
the ranges seen at the end of last week. <o:p></o:p></span></p><p><span>New pressure on China's
property developers, amid concerns over the possible liquidation of Evergrande
weighed on Chinese shares, but other large bourses in the region, except South
Korea, rose today. The MSCI Asia Pacific Index fell 2.35% last week, the most
in five weeks. Europe's Stoxx 600 is off almost 0.65% today, twice the
pre-weekend loss. It fell nearly 1.9% last week. US index futures are trading
slightly lower. The S&P loss 2.9% last week and the NASDAQ was off 3.6%. Bond
are also under pressure today. European benchmarks are 5-6 bp higher and most
yields are making new three-month highs. That holds for the US as well, where
the 10-year yield is approaching 4.50%. The two-year yield is near 5.13%. Lastly,
November WTI is trading little changed near $90.00, inside the pre-weekend
range (~$89.30-$91.35).</span><span> </span></p><p><b><span>Asia Pacific</span></b><span><o:p></o:p></span></p><p><b><span>Japan's Prime Minister
Kishida is expected to shortly sketch out, in broad the strokes, the thrust of
the supplemental budget that will likely be approved by the Diet next
month. </span></b><span>Kishida's
recent cabinet reshuffle has not bolstered support and several government
policies are contentious, including the national ID and the sharp increase in
defense spending. Rising pricing pressures, which has not prompted a
significant change in monetary policy. The 10-year JGB cap has been doubled
from the end of last year to 1.0%, but it has not been much above 0.73%. At
that level, the yield is up about 33 bp this year, compared with more than 55
bp in the US and nearly 60 bp in the UK, but less than 20 bp in Germany's
10-year Bund. Kishida wants to extend subsidies to blunt the impact of
inflation, boost wages and investment, and more family support measures to
counter the declining population. Tax breaks are being considered to reduce
production costs for semiconductors, EV batteries, and biotechnology. <o:p></o:p></span></p><p><b><span>The dollar finished firmly
before the weekend, slightly above JPY148.35, and edged up slightly above JPY148.60
today, a new high for the year. </span></b><span>It is the first session it has not traded below
JPY148.00. While Japanese officials have taken several steps up the intervention
ladder, the market continues to press. The secondary high from last November
was near JPY148.85, and there are $645 mln in options at JPY149 that expire
today. With US rates firm, a higher-for-longer message from the Fed, and a BOJ is
not persuaded that inflation is sustainable, this does to seem like a favorable
environment for material intervention. <b>Last Thursday-Friday's range in
the Australian dollar (~ $0.6385-$0.6510) is key for the near-term outlook. </b>Inside
that range there are two sets of options that expire today. The larger is for
A$730 mln at $0.6400 and the smaller set is for A$340 mln at $0.6485. The
Aussie is trading inside the pre-weekend range (~$0.6410-$0.6450). <b>The
greenback is trading above CNY7.31, its best level in two weeks. </b>Some
buying may be linked to the expiry of $1.3 bln in options struck at CNY7.30
today. The dollar's broader strength and new pressure on China's property
sector weighted on the yuan. The PBOC continued to set a lower dollar reference
rate than previous session, which lowers the top of the 2% band. The fix was
set at CNY7.1727 (average in Bloomberg's survey was CNY7.2977). The upper end
of the 2% range is about CNY7.3162. The onshore high has been CNY7.3125. Against
the offshore yuan, the dollar has been to CNH7.3167. Even if state bank dollar
sales, which news wires report from time-to-time, is not on behalf of the PBOC,
Chinese officials have demonstrated several levers its can pull, including
liquidity in the offshore market, foreign currency deposit rates, closer
scrutiny of even modest ($25 mln) dollar purchases, discourage yuan selling
prop trading, temporarily ban the import of gold that some on the mainland were
buying to avoid the yuan's depreciation. <o:p></o:p></span></p><p><b><span>Europe</span></b><span><o:p></o:p></span></p><p><b><span>Although the labor dispute
at Australia's natural gas export facilities has been resolved, Europe's
benchmark is trading at five-month highs today. </span></b><span>European stocks are high, and the
immediate challenge is the extended maintenance of in Norway that will carry
into October. Meanwhile, in an unusual development, the unit of Gazprom that
German nationalized last year will reportedly transport Siberian LNG to India
next month. The EU allows gas shipments from Russia, while sanctioning other
activities. Last week, Russia announced a bank on diesel and gasoline exports. It
is the largest seaborne exports of diesel (up to one million barrels a day). Turkey,
Brazil, and Saudi Arabia were among the largest buyers of Russian diesel
exports and now will compete with Europe to secure supplies. <o:p></o:p></span></p><p><b><span>Germany's IFO survey was
little changed. </span></b><span>The
current assessment slipped to 88.7 from 89.0. It is the sixth consecutive
decline and is at its lowest level since August 2020. The expectations
component ticked up to 82.9 from 82.7 (initially 82.6). It is the first increase
since April. The overall business climate reading is at 85.7, down slightly
from the revised 85.8 reading in August. It dovetails with the preliminary PMI
before the weekend. It showed some stabilization but at very weak levels. <o:p></o:p></span></p><p><b><span>The euro support in in the
last two sessions near $1.0615, a little ahead of the (38.2%) retracement of
the rally from last year's multiyear low. </span></b><span>It probably takes a move above $1.0675 to
signal anything of note, and even then, last week's high was slightly above
$1.0735. A break of $1.06 could signal $1.05, and possibly $1.04. Speculators
in the futures market continue to cut long exposure. The gross long position
has been cut to about 207.5k contracts, down from a peak in mid-July, around
the euro's peak in the spot market near $1.1275, of around 265k contracts. It
is the least since late last October. When the euro bottomed in September 2022,
the gross long position was slightly lower, but it bottomed close to 196k a few
weeks <i>after</i> the euro bottomed. In Europe today, it is finding
some bids near $1.0625. <b>A week ago, sterling was struggling to secure a
foothold above $1.24.</b> Before the weekend, the market rebuffed efforts
to resurface above $1.23. It was sold slightly below $1.2215 today in early
European turnover. The $1.2200 level beckons, and there are options for GBP1.36
bln that expire there later this week. A convincing break brings the (38.2%)
retracement of the rally since the record-low in September 2022 into view
($1.2075) and the measuring objective of the large head-and-shoulders pattern
($1.20). <o:p></o:p></span></p><p><b><span>America</span></b><span><o:p></o:p></span></p><p><b><span>This may be a more important
week than the economic calendar would suggest. </span></b><span>The headwinds are about to intensify.
Though the screen writers strike (more than four-months old) may be ending, the
UAW strike is expanding. The Republicans failed to agree among themselves their
best course, and, in any event, seem far from the Democrats. The failure to
pass the appropriations bills would lead to partial government shutdown as of
October 1. This seems to be the base case. Student loan servicing begins in a
week. The KBW regional bank and large bank index fell to new two-month lows
before the weekend. Higher rates and tighter credit conditions provide a less
than friendly backdrop. Average retail gasoline prices have risen by almost 20%
over the past three months, back to Q1 levels. <o:p></o:p></span></p><p><b><span>One way to think about
expectations for Fed policy next year is to look at the difference between the
January 2024 and January 2025 Fed funds futures contracts. </span></b><span>Due to the December meetings and year-end
distortions, the January contracts, arguably offer a clean view of year end
rates rather the intuitive choice of the December contracts. The '24 contract
implied yield is around 5.44% (currently average effective rate is 5.33%). The
'25 contract implies a yield of about 4.65%. The 79 bp differential indicates
that the market is pricing one cut more than the Fed's median's new
projections, but the spread is at a new low for the year at the end of last
week near 77 bp. The adjustment may not be over.<o:p></o:p></span></p><p>
</p><p><b><span>Expectations for the Bank of
Canada have swung back toward a rate hike in Q4 (~83% chance in the swaps
market) helped send the US dollar from almost CAD1.3700 earlier this month to
about CAD1.3380 last Monday. </span></b><span>That move is over, and a correction has ensued that saw the greenback
recovery to about CAD1.3525. Initial support today is seen near CAD1.3460. <b>The
greenback is consolidating against Mexican peso.</b> Its recovery after
last week's brief dip below MXN17.00 illustrates this loss of downside
momentum. What is also striking is that speculators in the futures market have
cut their net long position (to about 63.7k contracts) for the third
consecutive week (through September 19) and in eight of the past ten weeks. It
peaked in mid-July near a little above 96k contracts. Nearby resistance is near
MXN17.28, and above there the MXN17.35-45 area could attract prices. <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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