Dollar losses were widened, led by the Japanese yen

Overview

The dollar (DXY, USDOLLAR) settled last week on a weak note, and today’s subsequent sell-off has pushed it lower against almost all G10 and emerging market currencies today. Just as some observers were talking about a replay of the yen transacting, the yen appeared. The yen is up a little more than 2.2% against the dollar on Friday and today. In contrast to the yen’s earlier rally, the Antipodeans (candidates for the long leg of carry trades) traded well. Both the Australian and New Zealand dollars rose more than 1% in these two sessions. The Canadian dollar is the worst performer during this period, down a little more than one-third of one percent. It often lags the crosses in a softer US dollar environment.

The yen’s rise seemed to be weighing on the Japanese stocks, where the Nikkei (NKY: IND) fell nearly 1.8%, but most other major bourses in the region but South Korea advanced. Recall that last week, the MSCI Asia Pacific index rose 4.25% to make a four-week slide. Europe’s Stoxx 600 (STOXX) is a little firmer. It’s a four-day advance in tow coming today. It rose nearly 2.5% last week. US index futures are struggling today after last week’s advance (5.3% for the Nasdaq and ~4% for the S&P 500). Benchmark 10-year yields are weaker today, even in China, where Beijing is trying to resist lower bond yields. European yields are 2-3 bps lower, and the 10-year US Treasury yield (US10Y) is close to 3.87%, slightly more than a basis point. A weaker dollar and weaker yields helped lift gold to a new marginal record near $2,510 today ahead of consolidation. October WTI is trading about 1% lower, close to last week’s pre-weekend low (~$74.50).

Asia Pacific

The Japanese economy grew by 3.1% at an annualized rate in Q2, after contracting by 2.3% in Q1. However, it ended the quarter on a weak note. Industrial production fell 4.2% in June, and the index of tertiary activities (reported before the weekend) contracted 1.3% in June. The average forecast in the Bloomberg survey was for a 0.3% increase. May’s 0.4% decline was revised up and is now up 0.6%. Today, Japan reported a 2.1% rise in core car orders in June (0.9% expected), after falling 3.2% in May. Note that BOJ Governor Ueda will discuss the July rate hike before the Diet at the end of the week. Minutes from the Reserve Bank of Australia’s recent meeting are due first thing tomorrow, but Governor Bullock’s comments to a parliamentary committee before the weekend perhaps revealed the general direction: it is too early to contemplate a rate cut. While the futures market has reduced the odds of a rate cut this year to close to 88%, it is still quite bullish. Chinese banks set their base lending rates tomorrow and expect them to be held steady. Meanwhile, the offshore yuan and Japanese yen’s 100-day changes are the largest in more than a decade (~0.70+). The yuan is almost flat against the dollar this year. Year-to-date, it is down about 0.6% against the dollar, and that means most countries have experienced an appreciation of the yuan so far this year.

As some observers talked about strategies to return to the carry trade, the yen rose more than 1 percent ahead of the weekend to post its biggest gain in nearly two weeks. The US dollar was sold off after almost touching the minimum retracement (38.2%) of its sharp decline from the multi-year high in early June. The pullback target was around JPY 149.45 and the greenback stalled in front of JPY 149.40. The greenback touched session lows near JPY 147.65 before the weekend, and further selling today sent it to JPY 145.20, giving back about half of the rebound from the August 5 low (~JPY 141.70 ). The 30-day correlation of exchange rate changes and the US 10-year yield is just above 0.60, which is the upper end of a five-month range. The latest CFTC report shows speculators (non-trading) with the first net long position in the yen in the week to August 13, March 2021. The greenback stabilized in the European morning and is straddling the JPY 146.00 area. The Australian dollar hit a four-week high near $0.6670 ahead of the weekend, breaking through resistance near the $0.6640-45 area that had threatened to hamper the Aussie’s recovery. Subsequent buying saw the Aussie close to $0.6700 today. Some of the purchases may have been linked to options for $865 million at $0.6675 expiring today. Note that on Thursday, there is $1.7 billion in options registered between $0.6630 and $0.6650. Momentum indicators are extending, but there may be near-term potential towards $0.6700-$25. The yen’s recovery coincided with the offshore yuan’s recovery before the weekend, and today, the offshore yuan climbed to two-week highs. The dollar fell below CNH7.13 but, like its performance against the yen, stabilized. It trades near CNH7.14 in the European morning. The PBOC set the dollar reference rate at CNY 7.1415 (last week’s fixing range: CNY 7.1399-CNY 7.1479).

Europe

The only high-frequency economic point of interest this week is the flash PMI for the Eurozone and the UK. Economic impulses in the euro area remain weak, and a modest deterioration would not be surprising. The UK is doing better, but after last week’s update on the labor market, July CPI, June GDP and July retail sales, the PMI is unlikely to have a significant impact on expectations for next month’s Bank of England meeting . The swap market has about a 1 in 3 chance of a discount in September. A cut is all but cut for the November meeting, and swaps are priced in line with a roughly 70% chance of another cut in December, the lowest since August 1.

The euro ended last week just above $1.1025 to post its best settlement since Jan. 1, according to Bloomberg. The Euro rose 1% last week. It was the third consecutive weekly advance. It was more a case of a weaker dollar than positive impulses from the Eurozone. There are 765 million euros in options expiring today at $1.1090. Momentum gauges are getting stretched, but may not have been exhausted. However, the warning of the option may be too far. The single currency pushed past $1.1050 in early European trade before stalling. Initial support is seen in the $1.1020-30 area. Sterling settled last week at $1.2945, its highest close since the year high hit on July 17 (~$1.3045). It has encountered resistance around $1.2870 and the general dollar weakness is helping to push it above. That area can act as support now. It hit $1.2975 in early European trading. Momentum indicators are trending higher, but not as broadly as the Euro. It has the potential to hit a new high for the year soon. Nearby support is seen around $1.2940-$50. Futures speculators cut sterling longs for a third week for a cumulative liquidation of ~95,000 contracts (notional value ~$7.6 billion).

America

July’s leading economic indicator begins a quiet week of US data. Wednesday’s preliminary revisions to non-farm payrolls data were touted by those who believe the US is already in a recession. The NBER posts recessions, but does not stick to the rule-of-thumb definition of two consecutive quarterly contractions. So, in theory, with Sahm’s rule broken (by her reckoning) and industrial production contracting, it’s possible. However, with the economy apparently growing at or above what the Federal Reserve estimates is trend growth (a non-inflationary rate of 1.8%), it is difficult to see the general contraction that is associated with a recession. Note that after weaker-than-expected housing starts data ahead of the weekend, the Atlanta Fed’s GDP gauge was revised up to 2.0%. US consumer resilience (better-expected retail sales) and the five-week drop in weekly jobless claims point to the lengthening of that period between the end of the economic cycle and a recession, a soft landing in the vernacular. In his speech in Jackson Hole (10:00 a.m. ET, Friday, August 23), Fed Chairman Powell is likely to interpret the upcoming interest rate cut not as an easing of monetary policy but a less restrictive stance as the economy does not you overheat. He has previously brushed off questions about stagflation, arguing that no element of the description is valid. Price pressures are moderating and the economy is not stagnating. The highlight of Canada this week is the July CPI report. Both the main and underlying measures are expected to decline. The report will outline expectations for a further interest rate cut at the Bank of Canada’s September 6 meeting. After that, there are two dates in the rest of the year, and the swaps market expects a discount in both. However, with the Fed most likely starting its easing cycle next month, the peak divergence could be surpassed. Mexico reports June retail sales tomorrow. Data isn’t usually a market mover, and that could be doubly true now with Q2 GDP already out. The most important report this week is the CPI for the first half of August. The monthly primary measure has increased, but the core is still relaxing, albeit at a slower pace.

The US dollar fell to near CAD 1.3675 ahead of the weekend, the lowest level in about a month. It tested support near CAD 1.3660 today, but the key to the medium-term outlook is CAD 1.3600. Remember that after the soft June US CPI on July 11, the greenback fell there, but it turned out to be a false breakout. The US dollar subsequently rebounded to new highs for the year. Momentum indicators are moving into oversold territory, which warns that the CAD1.3600 area is likely to hold. Meanwhile, the US dollar fell to a new marginal two-week low against the Mexican peso near MXN18.60, which is also the retracement (38.2%) of the rebound from the July 12 low (~MXN17, 60). So far, it’s mostly limited to the pre-weekend range. Momentum indicators suggest there is still downside potential. Initially, the MXN18.40-50 zone may provide support. In the futures market, the peso net speculative long position is the lowest for the year (~50,000 contracts, ~$1.35 billion notional value).

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