Yuan Sulks in to the Weekend, While Finishing Touches are Put on the Dollar Index's Eighth Consecutive Weekly Gain
<div><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjCeF356gEOu7eHV6xBvwSxn-6sV-UuLRa4Q2w9Tkz70wG9W38bSYpUKTp2svEzIHez6z3hPDIfTgpRy6mwBlr7zM1vwqlwY9CWdHtlluVVDuqdUEZJYw1bwHnraBP-ICBtP_96DMSm5nTMmSLTAoahpWvDeLMqPgWMuv68rX3sTMCHF_SHdEyKeWTXCar_/s386/Friday%201.jpg"><img alt="" border="0" data-original-height="207" data-original-width="386" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjCeF356gEOu7eHV6xBvwSxn-6sV-UuLRa4Q2w9Tkz70wG9W38bSYpUKTp2svEzIHez6z3hPDIfTgpRy6mwBlr7zM1vwqlwY9CWdHtlluVVDuqdUEZJYw1bwHnraBP-ICBtP_96DMSm5nTMmSLTAoahpWvDeLMqPgWMuv68rX3sTMCHF_SHdEyKeWTXCar_/s400/Friday%201.jpg" width="400" /></a></div><p><b><span>Overview: </span></b><span>The greenback is lower against most
currencies today as it consolidates ahead of the weekend. The Dollar Index's
eight-week advance is the longest since a 12-week rally 2014. The Chinese yuan
is an exception. Its losses were extended today. Against the offshore yuan, the
dollar traded above the onshore band, which is most often respected. Equities
ae extending this week's slump. All the large bourses in the Asia Pacific
region but India fell. Europe's Stoxx 600 is off for the eighth consecutive
session, the longest losing streak of the year. US index futures are trading
lower and have not risen since last Friday. <o:p></o:p></span></p><p><span>European benchmark 10-year
yields are mostly marginally lower. Italy is a small exception, where its yield
is up slightly, perhaps encouraged by reports of the government's internal
debate about how to rein in the budget deficit as the Stability and Growth
rules come back into effect next year. The 10-year US yield marginally softer
near 4.24%. It and the two-year yield have risen by about six basis points this
week. Gold found support this week near the 20-day moving average (~$1916.50)
and enjoys a firmer tone today. The midweek high was set near $1929.20 and that
offers nearby resistance. October WTI is consolidating within Wednesday's range
(~$85.95-$88.10) and is little changed around $87. Partial strikes at Chevron's
liquified natural gas facilities in Australia are underpinning LNG prices. The
union's warning strikes will turn into a two-week stoppage starting September
14. Europe's benchmark rose by about 7% yesterday and another 8% today. The US
futures contract rose 2.75% yesterday and is up another 1.3% today. <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 its August
CPI and PPI figures the first thing tomorrow. </span></b><span>We continue to believe the risk is that
sentiment has swung too far–from China stands astride the world to China
cannot do anything right until it gives up what it calls communism. The news
stream is likely to begin improving, and the inflation data may point in that
direction. The deflation that so many observers wrung their hands probably is
ending. CPI, which was negative in July, is expected to have returned into
positive territory, and the deflation that was evident in producer prices is
seen moderating. China is having problems post-Covid and with the end of the
property bubble, but it is hardly an outlier, and the economy is not
contracting. The eurozone revised lower Q2 GDP yesterday to 0.1% from 0.3%. The
UK grew by 0.2% in Q2. The US has been able to go from strength-to-strength,
with a hiccup (Q1 22 and Q2 22 the economy contracted) by what appears to be a
nearly doubling of the budget deficit this year (according to the Committee for
a Responsible Federal Budget) and an increase in real wages, while rising
default rates on consumer credit points to excesses.<o:p></o:p></span></p><p><b><span>Japan offered revisions to
Q2 GDP. </span></b><span>It was shaved to
1.2% from 1.4% quarter-over-quarter. Consumption was slightly weaker (-0.6% vs.
-0.5%), but as hinted at by the recent capex report, the business spending was
a bigger drag (-1.0% vs. flat). Bloomberg's survey conducted late last
month found a median forecast for a 1.3% (annualized contraction) this quarter.
Net exports were the difference between Japan expanding and contracting in Q2.
It was unrevised, contributing 1.8 percentage points to GDP. In Q3, exports are
expected to be flat (13.6% in Q2), while imports are expected to rise by 9.8%
after dropping 16.2% in Q2. The July current account was also reported, and
while the surplus was larger than expected (JPY2.77 trillion, vs. the median
forecast in Bloomberg's survey for JPY2.25 trillion, the trade surplus itself
was less than half of the projection near JPY68.2 bln. <o:p></o:p></span></p><p><b><span>We learned last week that
Japanese household spending in July was 5% lower year-over-year. </span></b><span>Today, we got some color into a possible
driver: Labor cash earnings are 1.3% higher year-over-year, and this is
after what was regarded as a successful spring round of wage negotiation. This
is well below economists' projection for a 2.4% gain. In real terms, when
adjusted for inflation, cash earnings are down 2.5% year-over-year. The median
forecast in Bloomberg's survey was for a 1.4% decline. <o:p></o:p></span></p><p><b><span>The dollar continues to
consolidate against the Japanese yen. </span></b><span>It remains within Tuesday's range (~JPY146.40-JPY147.85) as the
market turned more hesitant since Tuesday and the stepped-up verbal
intervention by the Finance Ministry who sets exchange rate policy. In the
previous three sessions, the greenback rallied from JPY144.45 to JPY147.80. The
upper Bollinger Band is near JPY147.75. One-month implied volatility has edged
up to about 9.3% from 9.05% at the end of week but is virtually in changed
since the end of August. <b>The Australian dollar has also been consolidating
since Tuesday. </b>It reached a three-day high near $0.6415 but was greeted
with fresh selling that has pushed it back below $0.6400. Recall that the
Aussie fell for six consecutive weeks through the end of September, bounced by
about 0.8% last week, before the bears resumed the campaign and near $0.6390,
is off about 1% this week. <b>The Chinese yuan continues to dribble lower,
despite several measures officials have taken. </b>Ideas that the PBOC is
targeting a fixed rate does not give them sufficient credit. Previously, some
said CNY7.30, now the scuttlebutt is CNY7.35. The dollar stopped just shy of
that today. The PBOC set the dollar's reference rate at CNY7.2150. The median
projection in Bloomberg's survey was CNY7.3260. That puts the upper band at
CNY7.3593. The offshore market most often respects the onshore band but not
today. The dollar reached CNH7.3625. Last year's high was CNH7.3750. The yuan
is trading at the lows for the year against the dollar, but it is holding
considerably better against the euro and yen. The euro is at the lower end of a
three-month range against the yuan. It is below the 50-day moving average. The
yuan set the high for the year against the Japanese yen earlier this week
(~JPY20.2350) and has been consolidating over the last few days, trading
between JPY20.02 and almost JPY20.10 today.<o:p></o:p></span></p><p><b><span>Europe</span></b><span><o:p></o:p></span></p><p><b><span>The eurozone's industrial
sector is off to a rough start in Q3. </span></b><span>As we noted yesterday, the contraction in German industrial
production was twice as large as economists expected (-0.8%) and is the third
consecutive monthly decline. France and Spain reported today. French output was
stronger than expected rising 0.8%, and nearly offsetting in full the June's
0.9% decline. The median forecast in Bloomberg's survey was for a 0.1% gain.
Manufacturing itself fared rose by 0.7% after a revised 1.1% decline in June
(initially -1.0%). The auto sector was particularly strong, with output rising
by 2.8% in the month. Spain's industrial production's 0.2% increase was also
better than the small decline expected after a 1% decline in June. Italy
reports Monday, ahead of the aggregate estimate in the middle of next week. Industrial
output in Italy is seen falling by 0.1% after a 0.5% increase in June. The
combination of some hawkish rhetoric and the weaker euro has encouraged a small
upgrade of the likelihood of an ECB rate hike next week to about 35% in the
swaps market from a little less than 25% a week ago.<o:p></o:p></span></p><p><b><span>The euro fell to about
$1.0685 yesterday after taking out $1.07 for the first time three months. </span></b><span>Although it closed below $1.07, we had
expected more follow-through selling given the psychological significance and
optionality around $1.07. It reached almost $1.0730 in Asia Pacific turnover
before turning better offered in Europe and retuning to the $1.07 area. The
dead cat probably needs to bounce above $1.0750 to encourage anyone to take its
pulse. That said, the two-year US-German interest rate differential has stabilized,
and this may help ease the selling pressure. Still, the next technical target
is the $1.0600-35 area. <b>Sterling has steadied after slumping for its third
consecutive session yesterday. </b>It has settled the past two sessions below
the lower Bollinger Band (~$1.2465 today) and met sellers today after poking a
little above $1.2500. Chart support is in the $1.2400-$1.2425 area and a break
could send it down another cent. In the bigger picture, the potential head and
shoulders pattern, with a neckline near $1.26 could see a move toward $1.20
(perhaps spurred <b><i>if </i></b> the Bank of England does not
hike rates at the September 21 meeting). Next week, the market-sensitive jobs
and wage data, and the day before the BOE meeting, August CPI will be reported.
<o:p></o:p></span></p><p><b><span>America</span></b><span></span><o:p></o:p></p><p><b><span>The soft-land scenario,
which now seems to be the base case for most economists, got more support from
yesterday's weekly jobless claims report. </span></b><span>Unexpectedly, initial claims fell to 216k,
the lowest in seven months. The four-week moving average, used to smooth the
week-to-week volatility fell to 229.2k, a five-week low. Continuing claims fell
to 1.68 mln, a seven-week low. Today's wholesale sales and inventories will not
draw much attention, but Q2 household net worth and consumer credit will draw
interest, even if limited market impact. Recall that household net worth jumped
by a little more than $3 trillion in Q1, recouping 2/3 of what the $4.6
trillion lost last year (and the losses suffered reduced tax revenues,
exacerbating this year's budget deficit). That is more than the entire GDP of
India. The S&P 500 rose by about 8.3% in Q2 and the NASDAQ was up around
12.8%. FHFA house prices slipped by 0.2%. Over the last 10 years (40 quarters),
household net worth has risen by an average of $1.8 trillion a quarter, which
is roughly Russia's GDP in 2022. Over the last 20 years, US household net worth
has risen by an average of about $1.28 trillion, which is a little more than
the Netherland's annual GDP. The US will also report July consumer credit.
Consumer credit growth in H1 of $102 bln (~$17 bln a month on average) was the
weakest six-month period since H1 21 and the $49.6 bln extended in Q2 was least
since Q1 21. Note that consumer delinquency rates are rising. In Q2,
delinquency rates on consumer loans, credit cards, and auto were the highest in
a decade.<o:p></o:p></span></p><p><b><span>Canada reports August
employment data today. </span></b><span>Barring a significant surprise, it is unlikely to impact
expectations for interest rate policy. The swaps market has about a little more
than a 30% chance of a hike at next month's meeting and about a 38% chance of a
hike at the last meeting of the year (December 6). Canada has created about
40.6k jobs a month so far this year, of which 34.8k are full-time posts. In the
first seven months of 2022, Canada grew 36.8k jobs a month and 45.9k full-time
positions (a net loss of part-time positions). Nevertheless, jobs growth is slowing,
and it has fallen in two of the past three months. Wage growth (average hourly
earnings for permanent employees) is expected to moderate to around 4.7% from a
little above 5% year-over-year in June. The unemployment rate is seen rising
for the fourth consecutive month. It was at 5.0% as recently as April and may
have risen to 5.6% last month, which would be the highest since January 2022.<o:p></o:p></span></p><p>
<o:p>
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</o:p></o:p></p><p><b><span>The US dollar rose to nearly
CAD1.3700 yesterday, its highest level since late March.</span></b><span> It has been knocking at the upper
Bollinger Band for the last few sessions and closed above it yesterday. It is
near CAD1.3685 today. Without a big recovery today, the Canadian dollar would
have fallen for the ninth week in the past 11. It has lost about 3.65% in this
retreat. It has performed better than the Antipodeans and Swedish krona over
this period. It is holding below CAD1.3700 today but a break could spur a test
of the next important chart area (CAD1.3770-CAD!.3800). <b>The Mexican peso's
slide continued yesterday, but the extreme was set in Asia. </b>Even though the
Mexican peso is practically the only emerging market currency that trades
24-hours a day, we imagine liquidity in Asia is lighter. While the yen-peso
carry trade has been popular, we do not think that was the driver. The dollar's
high was set in Asia on Thursday near MXN17.7080 and by early North American
trading it had fallen back to MXN17.4235. The greenback recovered and reached
almost MXN17.6145 in late dealings yesterday, but it has returned to
yesterday's lows. The peso has declined by almost 5% over the past two weeks, its
worst performance in six months. The fundamentals have not changed significantly,
and net-net short-term US rates (two-year yield) is lower over the period. We
are looking for some technical sign that reduces the risk of new peso longs. A
close today below MXN17.40 would be a step in that direction. <o:p></o:p></span></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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