Run on the Dollar Stalls after the Market Boosted Odds of another 50 bp Fed Cut

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Marc Chandler
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Overview: Weak US consumer confidence, especially regarding the labor market boosted speculation of another half-point Fed cut in November when the central bank meets again. This weighed on the dollar. Sterling and the Australian dollar rose to new 2 1/2-year highs. The PBOC followed up yesterday's package with a 30 bp cut in the one-year Medium-Term Lending rate. After extending its losses earlier today, the dollar has steadied and turned higher against most of the G10 currencies. Sweden delivered the expected quarter-point rate cut, and the Riksbank signaled it may deliver 75 bp in cuts in the last two meetings of the year. Recently, the Bank of Canada Governor Macklem suggested that it too could accelerate the pace of cuts. Emerging market currencies are mixed. Asian currencies did well but central European currencies are trading with a heavier bias. 

Chinese equities extended yesterday's rally, and Taiwan and Hong Kong joined, but most of the other large bourses in the Asia Pacific area fell. Europe's Stoxx 600 is off marginally, and US index futures are trading with a heavier bias. Bonds are also trading lower. Benchmark 10-year yields are up mostly 1-2 bp in Europe, but Sweden's 10-year yield is up four basis points. The 10-year US Treasury yield is up a couple of basis points to 3.75%. The yield has risen in five of the past six sessions. Gold is little changed after setting a record a little above $2670. November WTI is consolidating quietly on a $71-handle after reaching $72.40 yesterday, its best level since September 3. 

Asia Pacific

The government's energy subsides helped push Australia's monthly CPI back into the 2-3% target, but the market and officials looked through it. The Reserve Bank of Australia kept rate steady yesterday at 4.35%. The headline CPI moderated to 2.7% from 3.5%, and the trimmed mean slipped to 3.4% from 3.8%. The RBA puts more emphasis on the quarterly estimate and core figures. The Q3 CPI is due on October 30, a few days ahead of the next central bank meeting (November 5). Still to come this week Tokyo's September CPI on Friday. It is expected to have softened on the back of the government's energy subsidies. It is a good guide to the national reading and would seem to underscore the low probability of a hike in October. Also ahead of the weekend, the LDP will have a new leader and Japan a new prime minister. Meanwhile, the market is digesting Beijing's measures, which were followed up with a record 30 bp cut in the one-year Medium-Term Lending rate. The amount of loans was cut back sharply having been replaced by other facilities. 

The dollar peaked yesterday in the Asia Pacific session near JPY144.70 and trended lower to slip through JPY143.40 before Europe closed and almost JPY143.20 before the North American close. It found support a little below JPY143 early today before recovering to JPY144. Nearby resistance around JPY144.25 may be a sufficient cap given the stretched intraday momentum indicators. Between China's move yesterday and Fed's half-point cut last week, risk appetites have been boosted, and in such an environment, it is not surprising the Japanese yen (and Swiss franc) underperformed Tuesday. After wobbling a bit after yesterday's central bank meeting, the Australian dollar recovered fully and trended higher through most of the North American session. Today, it briefly traded above $0.6900 for the first time since February 2022. With the breach of the level, profit-taking set in, and the Aussie slipped through $0.6875. Initial support is seen in the $0.6840-60 area. With the help of the Chinese bazooka, the dollar posted an outside down day against the offshore yuan. Today's the greenback traded below CNH7.0 for the first time since May 2023. While it is a notable psychological level, technical support is probably closer to CNH6.95. With the dollar's recovery against the yen, it recaptured CNH7.0. This culminated a 4.2% slide since the end of June and could mark a near-term bottom. Initial resistance is seen in the CNH7.03-04 area. The PBOC set the dollar's reference rate at CNY7.04202(CNY7.0510 yesterday), representing another large (~0.45) reduction. 

Europe

Sweden's Riksbank delivered the expected 25 bp rate cut, which brought the policy rate to 3.25%. It is the third cut in the cycle that began in May. The central bank implied that rates will fall further and signaled a 50 bp cut will be considered. The market anticipated this, and the swaps market has about 68 bp of easing discounted in Q4, which is equivalent to around a 72% chance that in one of the two remaining meetings of the year, a half-point cut could be delivered. The Swiss National Bank meets tomorrow. It is SNB President Jordan's last meeting. The market is discounting almost a 40% chance of a 50 bp cut. This seems a bit much. After two quarter-point cuts, the Swiss deposit rate is at 1.25%. Tomorrow's cut will bring it to 1%. At such a low level, quarter-point cuts are substantial. Also, there does not seem to be a rush to push the rate back below 1%. It likely will, but there is no need to get there now. Most policymakers throughout the high-income countries, and many observers, think that on the other side of the pandemic, r*, the neutral short-term interest rate is higher than it was before. Switzerland may be the first to challenge this. By the middle of next year, the swaps market has the Swiss policy rate at 50 bp.

The euro traded firmly yesterday but remained within its recent range. It traded between $1.1070 and $1.1190 for the past eight sessions. It reached a bit closer to $1.12 today, without going through it. It is in a tight range and backed off only a little below $1.1180. We are continuing to monitor the US-German two-year interest rate differential. It rose for the fourth consecutive session yesterday, and at slightly more 145 bp, the US premium is the most in nearly two weeks. It has yet to cap the euro, and a break of $1.12 signals a test on last year's high near $1.1275, which is also the (61.8%) retracement of the euro's losses since the January 2021 high (~$1.2350). Sterling pushed above $1.34, culminating a two-week, four-cent advance. It settled above its upper Bollinger Band for the fourth straight session. It recorded a marginal new high today near $1.3430 before triggering profit-taking, which pushed it below $1.3370 in the European morning. If a modest correction has begun, the first corrective target is $1.3260-$1.3300.

America

The US reports August new home sales today. After a 10.6% surge in July, they are likely to given back around half, according to the median forecast in Bloomberg's survey. The average annual pace through July (686k) is a little ahead of the average in the first seven months of 2023 (671k). New home sales typically do not move the capital markets. Potentially more impactful today, eight Fed officials speak. This includes Chair Powell, but his opening remarks at the 10th annual Treasury Market Conference are pre-recorded. Last week's Summary of Economic Projections showed the median projection was for another 50 bp of cuts this year. The derivative markets continue to discount almost 75 bp, which would entail another half-point move. Mexico reported a modest decline in the first half of the September's CPI yesterday ahead tomorrow's central bank meeting. The Federal Reserve's 50 bp cut, the continued moderation in prices, albeit slowly, and soft data may spur Banxico into delivering its third quarter-point cut in the cycle that in March. The overnight rate currently is at 10.75%. The swaps market has it near 9.5% in six months. Brazil's central bank is moving in the other direction. And even if the first half of September IPCA inflation is softer, it will not stand in the way of another hike after last week's move. The Selic rate is at 10.75% and the swaps market has about 100 bp higher over the next three months, which seems a little exaggerated.

A four-day slide has taken the US dollar from CAD1.3650, its best level in a month, to CAD1.3435 yesterday, a new six-month low, and CAD1.3420 today. The CAD1.3400 area offers the next chart support. The greenback has recovered to around CAD1.3440, but there may not be much more upside in the North American session. Still, the Canadian dollar is a laggard. All the G10 currencies have appreciated against the greenback this quarter, but the Canadian dollar's 1.80% gain is also the least among the major currencies. The JP Morgan Emerging Market Currency Index rose by nearly 0.5% yesterday, the second biggest gain this month. The Indian rupee and Philippine peso were the notable exceptions. The Mexican peso settled about 0.45% higher, a middling performer. The Brazilian real's 1.5% rise and the Chilean peso's 1.4% gain led the emerging market currencies higher. The greenback set a three-day low near MXN19.2350. It recovered back to the middle of the range around MXN19.35 The momentum indicators are moving higher and last week's high of about MXN19.50 looks more likely to be taken out before last week's lows near MXN19.00.