Greenback Returns Better Bid
<div><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEinqNBTsgtGuIlZmLhp0tx_rl2VfSBWNHz13A7mIBBzasDa2mijq5ZIRBuX06xrtXMvBe_9F431nqCaIZu7BtOvL5-5eaFDVlzI8gHb88mcjZgXopoM2aO1j8rr_klbax10EJcMt8zcMCIzMhG3QI8ToHNT53USsnV2lNmtACr43uu3XNR-dFAC2kAqXpI8/s285/pork.jpg"><img alt="" border="0" data-original-height="178" data-original-width="285" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEinqNBTsgtGuIlZmLhp0tx_rl2VfSBWNHz13A7mIBBzasDa2mijq5ZIRBuX06xrtXMvBe_9F431nqCaIZu7BtOvL5-5eaFDVlzI8gHb88mcjZgXopoM2aO1j8rr_klbax10EJcMt8zcMCIzMhG3QI8ToHNT53USsnV2lNmtACr43uu3XNR-dFAC2kAqXpI8/s400/pork.jpg" width="400" /></a></div><p><b><span>Overview: </span></b><span>After the making marginal new highs in
early North America yesterday, the dollar pulled back, arguable dragged lower
by the softness of US rates, helped by the sharp drop in oil prices and healthy
reception to the US three-year note auction. However, the greenback has
returned better bid today as the market continues to search for direction
post-FOMC and US jobs report. The euro and sterling are the weakest of the G10 currencies
through the European morning, in a day of light macro data. They are off
0.30%-0.40%. Most of the others are 0.1%-0.2% lower. The Russian ruble and
Philippine peso are only emerging market currencies that are holding their own
against the firm US dollar. <o:p></o:p></span></p><p><span>Equities are softer. Nearly all
the large markets but Taiwan, Australia, and India, moved lower in the Asia
Pacific area, and Europe's Stoxx 600 is lower for the third consecutive session
after rising every day last week. US index futures are lower. The S&P 500
has a seven-day rally in tow that is at risk. The Nasdaq has advanced for the
past eight sessions. These are the longest rallies in a couple of years.
European 10-year yields are narrowly mixed, while the 10-year US Treasury
yield, ahead of today's $40 bln sale, is a few basis points firmer near 4.59%. Gold
is consolidating inside yesterday's (~$1956.80-$1978.40) range. A convincing
break of $1950 could spur a move toward $1935 and then $1900. December WTI is
extending yesterday's 4.25% drop. It is nicked the 200-day moving average
(~$76.75) for the first time since July. Chart support is seen around $75.<o:p></o:p></span></p><p><b><span>Asia Pacific</span></b><span></span><o:p></o:p></p><p><b><span>China will report October
consumer prices and producer prices tomorrow. </span></b><span>The median forecast in Bloomberg's survey
is for a 0.1% decline after a flat September report. Food prices remain key.
Still, when food and energy are stripped out, China's core inflation stood at 0.8% in September. Producer prices have been falling on a
year-over-year basis without interruption since the beginning of Q4 22. The
deflation slowed every month in Q3, with the pace slowing to -2.5% in September
from -5.4% in June. The deflation in producer prices warns that profits remain
subdued. Next week China reports October real sector data points, including
industrial production, retail sales, fixed asset investment, property
investment, and surveyed unemployment. The year-over-year rates are likely
little changed, while retail sales may have improved. Will the PBOC allow for a
reduction in the benchmark one-year Medium-Term Lending Facility rate (now
stands at 2.50%) to complement the new fiscal efforts? It seems unlikely. Yesterday,
the IMF announced it was boosting its projection of China's growth this year to
5.4% (from 5.0%) and next year to 4.6% (from 4.2%). It attributed the slower
growth it anticipates for 2024 to the drag from the property market and weak
foreign demand. – The IMF expects China's core inflation to rise to 2.1% by the
end of next year.<o:p></o:p></span></p><p><b><span>Some more thoughts about
China's reserves:</span></b><span>
According to <a href="https://www.cfr.org/blog/china-isnt-shifting-away-dollar-or-dollar-bonds" target="_blank">Brad
Setser</a>, from the Council on Foreign Relations and formerly at the US Treasury,
the last time China revealed its dollar holdings was in a 2021 State
Administration of Foreign Exchange annual report that cited a 2017 figure of
58%, the same as 2015. Even if that number was reliable then, there is no
reason to assume that it is still valid given the numerous developments since
then, including a marked deterioration of Sino-American relations, the
expansion of the US sanction regime, and the weaponizing of the access to the
dollar. China is the largest holder of reserves and at the end of 2017, the IMF
estimated that collectively, the dollar accounted for about 62.7% of allocated
global reserves. By the middle of 2023, the dollar's share had fallen to about
58.9%. As Setser notes, the self-disclosed China allocation to dollars was previously
slightly below the IMF's <a href="https://data.imf.org/regular.aspx?key=41175" target="_blank">aggregate
estimate</a>. <o:p></o:p></span></p><p><b><span>Apparently, one can add up
Euroclear and Clearstream Treasury and Agency holdings, as if they were
all Beijing's, and make assumptions about how many of China's Treasuries (and
Agencies) are held at the Federal Reserve in its custodian facility and arrive
an estimate of what Setser calls "augmented reserves."</span></b><span> If these assumptions are granted,
Setser's conclusion is that for some unclear and uncharacteristic fashion,
China underestimates its reserves and that it has not reduced its dollar
exposure in the past six years. As we noted the other day, one can make the
argument that the US also under-reports its reserves by not including SOMA (Fed
account that holds foreign assets). Also, consider the plug factor–errors and
omissions–in China's balance of payments. Since the end of 2017, China's
balance of payments errors and omissions have totaled almost $710 bln. As we
previously <a href="http://www.marctomarket.com/2023/11/week-ahead-have-markets-turned.html" target="_blank">noted</a>,
this is thought to be capital flight. Over the same period (end of 2017 through
mid-2023), the US errors and omissions on its Balance of payments was about
$785 bln. But unlike China, US errors and omissions were positive, meaning
unaccounted for inflows (demand for dollars).<o:p></o:p></span></p><p><b><span>Yesterday the dollar held to
the tick the (61.8%) retracement objective of the losses seen since the
JPY151.70 peak on October 31 in reaction to the BOJ found slightly above
JPY150.65. </span></b><span>Today, it has
edged a little higher to almost JPY150.80. We note that the 10-year US
Treasury settled yesterday below the pre-weekend close, unwinding Monday's
bounce. Nearby resistance is now seen in the JPY151.00-10 area. <b>The
Australian dollar sold off hard yesterday, and in one fell swoop, retraced
nearly (61.8%) of last week's gains. </b>Still, after a marginal new
session low in early North American trading just ahead of $0.6400, the Aussie
clawed its way back to around $0.6440. It edged up to almost $0.6450 today
before succumbing selling pressure and returning to almost $0.6420. A break of
$0.6395-$0.6400 would disappoint and could spur a move toward $0.6365. <b>The
Chinese yuan four-day advance was snapped on Monday, and it has dribbled lower
yesterday and is slightly lower today. </b>The dollar has not taken out
yesterday's high (~CNY7.2870). In fact, it remains within range set on Monday
(~CNY7.2660-CNY7.2885). The fix was little changed at CNY7.1773 (CNY7.1776 on
Tuesday and CNY7.1780 on Monday). The average projection in Bloomberg's survey
was CNY7.2826 (CNY7.2849 yesterday and CNY7.2860 on Monday). <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 a 0.3%
decline in September retail sales. </span></b><span>The report tracks volumes not value. It was the third consecutive
decline. Although the preliminary Q3 GDP estimate has been published (-0.1%
quarter-over-quarter), the details are sparse, but the update next week will
provide more color. The retail sales decline points to a likely contraction in
consumption and recent reports suggest industrial output likely fell sharply in
Q3. The ECB also published the results of its September survey of consumer CPI
expectations. The median one-year expectation rose to 4.0% from 3.5% in August.
This is the highest since April. The median three-year expectation eased was
unchanged at 2.5%. Note that the median one-year expectation finished last year
at 5.0% and the three-year expectation was at 3.0%. The preliminary October CPI
stood at 2.9%. Given the base effect, this is likely the low print until next
February-March.<o:p></o:p></span></p><p><b><span>The euro made a low in early
North American turnover yesterday about 2/100 of a cent below the low set in
the European morning to meet the (38.2%) retracement of last week's rally. </span></b><span>That area held (~$1.0665) and the euro
recovered and traded a little above $1.07 in the NY afternoon. Unable to
sustain the push above $1.07, the euro has slipped back to $1.0660 in the
European morning. The next area of support is seen around $1.0635-40. <b>Sterling's
pullback was a little deeper, but it held to the 1/100 of a penny the (50%)
retracement of last week's rally, just above $1.2260. </b>It also
recovered and traded back above $1.2300. As was the case with the euro,
sterling could not sustain the move above the figure and was sold to almost
$1.2240. Support is seen in the $1.2200-20 area. <o:p></o:p></span></p><p><b><span>America</span></b><span></span><o:p></o:p></p><p><b><span>The US economic calendar is
light today. </span></b><span>Still,
like yesterday's trade figures, today's wholesale inventories could impact
expectations of Q3 GDP revisions. That said, the market is not focused on Q3
growth anymore, regardless of the precise pace. Instead, the key is Q4, and
consumer demand in particular, which is why next week's retail sales are
especially important. Five Fed officials speak today and what is striking is
that all five officials are governors. Most notably, a little before the stock
market main session begins, Chair Powell delivers opening remarks for the Fed's
Division of Research and Statistics conference. Tomorrow afternoon the Chair
speak participates on a panel at the IMF on monetary policy challenges in a
global economy.<o:p></o:p></span></p><p><b><span>In the face of new reports
of the dollar's demise (<a href="https://foreignpolicy.com/2023/11/02/brics-currency-dollar-china-india/" target="_blank">here</a>),
we note that the start of the US quarterly funding off swimmingly.</span></b><span> Despite a lower yield, the and the
increased size, the $48 bln three-year note drew a higher bid-cover and
indirect bidders returned in size. Tomorrow, the US Treasury auctions $40 bln
10-year notes and $24 bln 30-year bonds on Thursday. Also, perhaps also pushing
on rates was the dramatic drop in oil prices. The price of December WTI crashed
by more than 4% yesterday to almost $77.25 a barrel. It is the lowest since
late August and has taken out the 200-day moving average today near $76.75.
While demand is the main concern, but new reports suggest Russian shipments
seem to be continuing to run well above what one would expect if it were
honoring the commitment to reduce exports by 300k barrels a day through the end
of the year. OPEC+ meets on November 26 to set output targets for H1 24. Late
yesterday, API estimated a nearly 12 mln barrel build of US commercial inventories.<o:p></o:p></span></p><p>
<o:p>
<o:p>
<o:p>
</o:p></o:p></o:p></p><p><b><span>The largest monthly trade
surplus since mid-2022 could not prevent the Canadian dollar from retracing
more than half of last week's gains yesterday. </span></b><span>The US dollar pushed above that
retracement (50%) near CAD1.3765 to reach almost CAD1.3785. The gains have been
extended today to near the (61.8%) retracement near CAD1.3800. A move above
CAD1.3815 would be disappointing. <b>The greenback saw a three-day high
against the Mexican peso, a little shy of MXN17.60 before sellers emerged to
push it back to nearly MXN17.45. </b>After the Russian ruble, the peso's
roughly 0.35% gain put it at the top of the EM FX leader’s board. The dollar is
trading firmer against the peso today but is holding below yesterday's high
(~MXN17.5935).<o:p></o:p></span></p><p><br /></p><p><a href="http://www.marctomarket.com/p/disclaimer_28.html" target="_blank"><span face=""Open Sans", sans-serif">Disclaimer</span></a></p><br /><p></p>
Leave a Comment