Dollar Trades Above JPY150 and Truss Gets No Reprieve

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Marc Chandler
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Overview: China and Japan continue to struggle to stabilize their currencies, while global interest rates rise. The offshore yuan has fallen to new lows but in late dealings the onshore and offshore yuan have recovered. The dollar also traded above JPY150 for the first time since 1990 and the market knows it is on thin ice as with the threat of official intervention. A risk-off mood permeates. Equity markets have retreated in the Asia Pacific region and Europe. US futures are also trading lower. Benchmark 10-yields are 1-3 bp higher in Europe, and 10-year US Treasury yields reached a new high around 4.17% before steadying. The greenback is mixed. Among the G10 currencies, the Australian and Canadian dollars are firmer, while sterling, the Swiss franc, and Swedish krona are nursing small losses. Emerging market currencies are also mixed. Central Europe is outperforming East Asia. Gold recorded a new low for the month near $1622.50 before catching a bid. Initial resistance is seen near $1640. December WTI extended yesterday’s recovery and reached a new four-day high near $86.30. The nearby cap is seen in front of $88.00. Natural gas is snapping a four-day drop in both the US and Europe’s benchmark. Iron ore tumbled 2.4% to new lows below $90. However, copper is jumping back 1.4% in what could be its first gain in five sessions. December wheat, which has lost 2.3% over the past two sessions is recouping a little more than 1% today. 

Asia Pacific

The dollar rose above JPY150 for the first time since 1990 and there has been no sign of intervention. Ironically, the weaker yen is one of the factors pushing up Japanese yields, which in turn spurs BOJ purchases, which in turn underscore the monetary divergence that weighs on the yen. In regularly scheduled and unannounced purchases, the BOJ bought about JPY1.3 trillion today (~$8.5 bln). The yen's weakness aggravates the terms-of-trade shock in the first instance. Japan reported a slight narrowing of the September trade deficit to JPY2.09 trillion from JPY2.8 trillion. Export growth accelerated to 29% year-over-year from 22%, while import growth slowed to 45.9% from 49.9%. Tomorrow, Japan reports September CPI. The core rate, which excludes fresh food, is seen rising to 3%, while the measure that excludes both fresh food and energy may tick up to 1.8% from 1.6%. The BOJ meets next week. Its forecasts may change, but policy is a different story.

Employment in Australia ground to a near halt in September, gaining less than 1000 jobs. This may overstate the case, a little. The loss of part-time positions more than offset the 13.3k increase in full-time posts. Still, the loss of momentum is clear. The three-month moving average of full-time posts is slightly negative the lowest this year. The other metric held in better. The participation rate was unchanged at 66.6%, and the unemployment was steady at 3.5%. The Reserve Bank of Australia meets on November 1 and is expected to hike the target rate 25 bp to 2.85%.

The dollar poked above JPY150 in early European turnover and quickly fell back to about JPY149.70. It just as abruptly snapped back to the JPY149.90 area. The market knows it is tempting official action and is skittish. Indeed, the entire session range was set in a little more than 30 minutes. Without international cooperation, we see BOJ intervention most likely confined to Tokyo hours and that the second operation will not yield the same results as the first. Late September's record intervention immediately knocked the dollar back about 5.5 yen. Follow-through selling initially saw the Australian dollar fall to a three-day low near $0.6230 before bouncing back to new session highs in the European morning near $0.6280. The intraday momentum indicators are getting stretched, suggesting a run to yesterday's highs around $0.6325 may be too much. The dollar traded to CNY7.2480 today, its highest level since late September. It pulled back a little away from the CNY7.25 level and is trading near CNY7.2360 in late turnover. The prime lending rates were left unchanged today. Even without the latest weakness of the yuan, a cut was not expected. The PBOC lifted the dollar's reference rate to CNY7.1188. That puts the upper end of the 2% band a little above CNY7.26. The greenback reached CNH7.2790 against the offshore yuan, a new high. It has pulled back to below the CNH7.2550 area.

Europe

Out of the frying pan, into the fire. So goes the UK Prime Minister whose honeymoon may be measured in hours. Her tenure is still be debated. It is not about economic policy so much anymore, as Truss has accepted the reversal of her fiscal experiment. She did not win the leadership challenge among the Tory parliamentary members, but their job was to narrow the field to two candidate and let the rank-and-file decide. And chose they did. Now, a new effort by the MPs to force her out short of an election, which polls say the Conservatives are sure to lose. Meanwhile, Home Secretary Braverman was forced to resign after violating cabinet confidentiality. Braverman was a candidate herself party leader but was knocked out early. Her resignation letter was also a biting criticism of Truss. Ironically less than 24 hours earlier, in a rhetorical flourish, Braverman called the Labour Party and the Lib Dems, a "coalition of chaos, it's the Guardian-reading, tofu-eating wokerati."  Truss tried tightening the screws on a vote on fracking, Tory MPS were threatened with expulsion from the party if they voted against the beleaguered government and controversial issue even in some strong Tory districts. The Chief whip, the parliamentary enforcer resigned as did her deputy. And then in a dramatic reversal, it appears Truss persuaded them to retract their resignations to end a dramatic day.

The eurozone reported a 26.3 bln euro August current account deficit. Like, Japan, the eurozone has experienced a significant terms-of-trade shock and a marked deterioration of its external balance. Consider that last August, the EMU recorded a 17.1 bln surplus, or that this year it has recorded an average monthly deficit of 9.2 bln euros compared with an average surplus of 28.3 bln euros in the first eight months of last year.

The euro initially extended yesterday's losses to about $0.9755 before recovering to almost $0.9800, where options for nearly 2 bln euros expire today. We suspect that they have largely been neutralized, but today's high is about $0.9795. The intraday momentum indicators suggest there may be a little more upside potential, but the $0.9820 area looks like the best that can be hoped for today, barring new developments. Sterling has sulked to almost $1.1170 in the European morning. On the downside, there are options for GBP480 mln at $1.1145 that roll off today. If Truss does step down, we suspect sterling can bounce initially. While we suspect a major low is in place, a move above $1.15 would add credence to this view. More immediately, the $1.1250 area looks to offer the initial cap. Lastly, Turkey's experiment is set to continue. Despite CPI above 84%, the central bank is expected to cut its one-week repo rate by 100 bp (to 11%) for the third consecutive move. The lira is off about 28.5% this year, of which about 5% has been recorded in the past three months.

America

The Beige Book was unexpectedly dour. However, it did not deter the surge in US interest rates. The anecdotal report prepared for the November 1-2 FOMC meeting gave an overall sense of slowing activity and easing of some price pressures. Businesses were worried about demand. Several districts reported easing of labor market conditions. In broad strokes, here is a scenario, which seems to be gaining credence:  Q3 growth is a bit of catch-up the first half and most of the payback will be from trade. The US economy may nearly stagnate or worse over the next few quarters. Monetary and fiscal brakes are being slammed. Inflation is high but the year-over-year comparison has too long of a memory, as it were. US headline CPI rose at an annualized rate of around 10% in Q1 and Q2. It slowed to 2.0% in Q3. The Fed, as Bullard suggests, may front load more hikes this year and ratify market expectations (that he helped shape), meaning 75 bp moves in November and December. Frontloading takes on new meaning if one is in a hurry to get inflation down, so it is in a better position to act if when the economy warrants. The implied yield of the December 2023 Fed funds futures is about 17 bp below the implied yield of the September 2023 contract. 

September housing starts reported yesterday were weaker than expected, slowing after jumping almost 14% in August. Existing home sales are on tap for today and they are expected to have continued to fall. January was the last month-over-month increase. Mortgage demand has cratered as one would expect. Also, the drying up of the refinance market also cuts into a source of income (consumption?) as previously, owners were often tempted to take out equity. Also, weekly initial jobless claims are rising again but the levels are modest. Still, looking ahead, it seems reasonable to assume the labor market conditions are likely to weaken. The October Philadelphia Fed survey may confirm the weak sentiment seen in the Empire State survey last week. The price sub-indices draw attention given the market's sensitivity to inflation. Four Fed officials have scheduled appearances, but only Hacker (around midday ET) may address the economic issues.

Canada's CPI was stronger than expected and this sparked a new appreciation for the risks that the Bank of Canada delivers another three-quarter point hike next week. The headline rose slightly, and the market had expected a small decline. The year-over-year rate eased to 6.9% from 7.0%., not quite as much as expected. That said, the pace of inflation stopped cold in Q3. Consider, and CPI rose at an annualized pace of more than 13% in Q1 and almost 12% in Q2. Q3? Minus 0.4%. The average of the core rates was little changed because of the upward revision to the August series. In the swaps market the odds of a 75 bp move surged from almost 25% to 85%. That failed to give the Canadian dollar traction as the risk-off (proxy S&P 500) was the flavor of the day.

For the third session, the US dollar has found offers above CAD1.38 that caps the greenback. A close below CAD1.3720, where the 20-day moving average is found, would be a cautionary note for the greenback. This moving average has not been violated on a closing basis for over a month. Without new US dollar strength, the 5-day moving average can fall below the 20-day moving average early next week. It would be the first time in two months. The greenback firmed to a marginal new high for the month yesterday against the Mexican peso near MXN20.1760. With a few exceptions, the MXN20.20 area has capped the dollar since mid-August. For those needing to buy peso, this area may be attractive. Initial support today is seen near MXN20.05-MXN20.10.