Greenback Consolidates Ahead of September CPI

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Marc Chandler
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Overview: The dollar is mixed against the G10 currencies. It is confined to narrow ranges ahead of today's CPI report. The Russian ruble is the strongest of the emerging market currencies following the imposition of new capital controls, forcing many exporters to repatriate their foreign earnings. After posting a key upside reversal at the end of last week, gold continues to recover. It nearly $1883 so far today, the best level in more than two weeks. November WTI is steadied after yesterday's 2.9% drop. It settled near $82.80 at the end of last week and traded slightly below it today, before recovering. Reports indicate that API estimated a 12.9 mln barrel build in US stocks.

Goosed by the China's sovereign wealth fund boosting its stake in large banks, mainland stocks participated in the rally in Asia Pacific equities today. All the large bourses outside of India rose led by more than 1% gains in Tokyo, Hong Kong, and Seoul. It is the fifth consecutive session the MSCI regional index has risen. Europe's Stoxx 600 is rising for the third straight session, which is the longest advance since late August. US index futures are trading higher. The S&P 500 and NASDAQ have four-day rallies in tow. Benchmark 10-year yields are mostly a little firmer today. The 10-year US Treasury yield is near 4.57%, up a one basis point. European yields are 1-2 bp firmer, though the Italian bonds are holding their own. Their premium over German bunds has narrowed by about 10 bp since the end of last week.

Asia Pacific

The US reported a larger-than-expected rise in September producer prices yesterday (0.5% rise on the month for a 2.2% year-over-year pace). Japan's producer prices fell by 0.3% in September, allowing the year-over-year rate to slow to 2.0% from a revised 3.3% in August (initially 3.2%). The 12-month pace has slowed every month this year after peaking in December at 10.6%.

China reports September PPI and CPI tomorrow. Producer prices has been falling on a year-over-year basis beginning last October and, but the deflation has been moderating in Q3. The 12-month decline bottomed in June at -5.4%. In August, it was a -3.0%. It is seen at -2.4% in September. We suspect that the slower decline in producer prices may also take some pressure off profits. China flirted with deflation in consumer prices. They were flat year-over-year in June and fell to -0.3% in July. However, deflation forces are ebbing, and the CPI rose 0.1% in the year through August. It is expected to have risen by 0.2% in the 12-months through September. Today's focus in China was on the decision to have the sovereign wealth fund increase its holdings of the country's largest banks for the first time in eight years. The CSI 300 recorded the low for the year at the start of the week as the mainland markets re-opened from the extended holidays. Separately, Beijing reportedly reached an agreement with Sri Lanka on debt ahead of the IMF and the Paris Club negotiations, which hoped to strike a deal without China at the sidelines of the World Bank/IMF annual meetings, currently underway. The terms of the agreement have not been disclosed. Sri Lanka owes about 40% of its bilateral debt to China (and 16% to India).

Despite the soft US 10-year yield, the dollar rose to a three-day high against the Japanese yen yesterday of almost JPY149.35. It has held below JPY149.30 today and has spent little time below JPY149. There are options for $800 mln at JPY149.50 that expire today. Still, the market seems reluctant to re-challenge the JPY150 level. The greenback continues to trade in the range from October 3 (~JPY147.45-JPY150.15). The range this week has been about JPY148.15-JPY149.35. The actual (historic) three-month volatility is near 7.6%, the lowest since the April 2022. The Australian dollar traded on both sides of Tuesday's range yesterday but the close was neutral, though lower on the day. In fact, the loss snapped a five-day advance for the Aussie, the longest in four months. The low, set in North America yesterday was within a few hundredths of a cent of the (38.2%) retracement of the gains from the October 3 low for the year at $0.6385. It still managed to close above the 20-day moving average (~$0.6405). It is trading quietly today in about a quarter-cent range below $0.6430. The greenback is trading quietly against the Chinese yuan (~CNY7.2920-CNY7.3035). We note that the offshore yuan is spending more time trading firmer than the onshore yuan and this may be indicative of less downside pressure. Still, the PBOC remains vigilant and set the dollar's reference rate at CNY7.1776, slightly lower as is the pattern. The average projection in Bloomberg's survey was for CNY7.2946. 

Europe

The UK economy grew by 0.2% in August, recovering some of the 0.6% decline (revised from -0.5%) in output in July. Industrial production fell 0.7% (and July was revised to -1.1 from -0.7%). Manufacturing output was reduced by 0.8%, more than twice the contraction economists expected after the July series was revised to -1.2% from -0.8%. Services rebounded by 0.4% after a 0.6% (initially -0.5%) decline in July. Construction output fell by 0.5% after it contracted by 0.4% (initially -0.5%) in July. The trade deficit practically doubled to GBP3.4 bln from a revised GBP1.4 bln deficit in July (from -GBP3.4 bln). The UK expanded by 0.2% in Q2 and the median forecast in Bloomberg's monthly survey sees it stagnating in Q3. To avoid a contraction, the economy must expand by around 0.4% this month.

The Bank of England meets on November 2 and the swaps market has about a 25% chance of a hike discounted and a little less than 50% chance of a hike before the end of the year. Still, next week sees the employment report and CPI, which will likely impact expectations. Meanwhile, the IMF has weighed in sees one more rate hike (to 5.50%) before finishing. While it noted "subdued growth momentum" and "cooling labor market," the IMF expressed concern about the persistence of inflation. The IMF tweaked its forecast for UK growth this year by 0.1% to 0.5% but cut next year's to 0.6% from 1.0%. The Bank of England sees the economy growing by 0.5% this year and next. The forecasts diverge more inflation. The Bank of England forecasts CPI at 5.0% this year and 2.5% next year. The IMF, which forecast the average rate, puts CPI at 7.7% this year and 3.7% in 2024. Through August, the UK's CPI has averaged 8.7% this year.

The euro reached $1.0635 in early North American trading yesterday and reached $1.0640 today. That is its highest level since September 25. The five-day moving average is pushing above the 20-day moving average for the first time since late July. It also met the (38.2%) retracement of the losses since late August's high. The next retracement (50%) is near $1.07. The North American market appears to be leading the euro's recovery. Look for support in front of $1.06. Sterling's performance has been stronger, though it is lagging today. In fact, today, the euro is snapping a seven-day decline against sterling. Cable bottomed last week near $1.2035 and reached almost $1.2340 yesterday. It is consolidating in a narrow range, mostly below $1.2330 today. It is straddling the $1.23 area near midday in Europe. It surpassed the (38.2%) retracement of this leg lower and the halfway mark is near $1.2390. The five-day moving average crossed above the 20-day for the first time since July 26. 

America

The firmer than expected US September PPI may have given the market pause ahead of today's CPI. Headline CPI has risen for the past two months, and most look for a small decline (to 3.6% from 3.7%), which is to say there is scope for disappointment. The median forecast in Bloomberg's survey sees the core rate continuing to slow. The core rate peaked at 6.6% last September and has fallen every month since, but March. It was at 4.3% in August and the median forecast looks for it to slow to 4.1%. A 0.3% increase translates to a 3.2% annualized increase in the core rate in Q3, down from 4% in Q2 and 5.2% in Q1. The futures market goes into the report with about a 15% chance of a hike at the FOMC meeting that concludes on November 1. It has about a 1-in-3 chance of a hike before the year's out. Looking further afield, there is about an 80% chance of a cut discounted by the end of H1 24. Unlike Fed's dot plot that showed the median with two cuts penciled in for next year, the futures market sees three cuts. The FOMC minutes from last month's meeting that seemed to fully endorse the soft-landing scenario failed to provide fresh insight and there was little reaction to their publication.

This week's deluge of Treasury offering concludes today with $180 bln of four- and eight-week bills and $20 bln of 30-year bonds. US auctions continue to be well over-subscribed, which is at least a prima facia case for demand. Moreover, the bid-cover needs also to be understood in the context of the increase in supply. Perhaps, on ideas that the Fed may be done raising rate, demand for the three-month bill, sold on Tuesday, was the strongest in four months. It paid two basis points, annualized, more than the six-month bill (5.34% vs. 5.32%). The four-month bill sold yesterday (5.35%) drew a 3.37 bid-cover, which was higher than recent auctions. Primary dealers had to take most of the new three-year note (4.74%) in a year (~22%) and there the bid-cover of 2.56 was the lowest since February. The 10-year note sale received a bid-cover of 2.50 which was higher than the average of the past six re-opening auctions. Primary dealers were left with 18.7%, the most this year. 

The US dollar consolidated against the Canadian dollar yesterday to snap a four-day pullback. The greenback peaked near CAD1.3785 before the weekend and fell to CAD1.3570 on Tuesday. That low held yesterday, and it traded back to almost CAD1.3625. Nearby resistance is seen near CAD1.3650. Some try to link the Canadian dollar's weakness yesterday to the 2%-plus drop in the price of crude oil. However, we note that the Canadian dollar's loss yesterday of about 0.1% was less than the other dollar-bloc currencies. Also, the 30-day rolling correlation of the changes in the exchange rate and WTI is about 0.3 and the correlation was briefly inverse in late September. The greenback is in narrow range today below CAD1.3605 but mostly above CAD1.3580. A break of the CAD1.3560 area would signal the next leg down toward CAD1.3500 and CAD1.3460. After rising by 1.5% on Tuesday, the Mexican peso rose another 2/3 of 1% yesterday. After peaking last week, a little shy of MXN18.48, the dollar's low yesterday was near MXN17.7860. The dollar is traded to slightly below MXN17.77 today to briefly slip below the 200-day moving average (~MXN17.7830). Mexico's President AMLO endorsed the central bank's decision to reduce its hedging program. This speaks to the strength of the peso and the lack of need for the facility. One of the planks of the bullish narrative for the peso has been the near-shoring/friend-shoring meme. Yesterday, the government unveiled large tax breaks to capitalize on this trend. The government decree was directed at ten sectors, including semiconductors, batteries, motors, and pharma. The tax benefit ranges from 56% to 89% and will be available through the end of next year.