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Marc Chandler
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Overview: US interest rates and the dollar turned higher following comments by the Fed's Vice Chairman Clarida, who appeared to throw his lot with the more hawkish members. The dollar recovered from weakness that had seen it fall to almost JPY108.70, its lowest level since late May, and lifted the euro to $1.19.  Still, there has been little follow-through dollar or Treasury buying today.  The euro and yen are marginally softer, but most other major currencies post small gains.  Emerging market currencies are mixed, and the JP Morgan Emerging Market Currency Index is slightly softer, declining for the third consecutive session and four of the past five.  The US 10-year yield is hovering around 1.18%, while European yields are 1-3 bp lower at new multi-month lows.  With travel restrictions imposed throughout China as the virus is detected in all the provinces, China's 10-year bond yield is at new 12-month lows at 2.80%.  Equities in the Asia Pacific regions were mixed, with China, Hong Kong, Taiwan, and South Korea falling and Japan, Australia, and India posting small gains.  Europe's Dow Jones Stoxx 600 is up for the fourth consecutive session and is extending its push into record highs.  US futures are slightly higher.  Demand concerns and an unexpected build in the US (3.6 mln barrels instead of a 2.9 mln draw) keep oil on the defensive.  September WTI recovered after initially extending its losses for the fourth consecutive session. It saw a marginal extension of yesterday's losses to almost $67.60 before bouncing to almost $69.  Recall that it settled a little below $74 last week.  Gold peaked yesterday a little shy of $1832 but is probing the lower end of this week's range that extends to $1805.  Copper is extending its losing streak to a fifth consecutive session (for a cumulative loss of nearly 5%).  Iron ore prices tumbled 2.4% (12th decline in 14 sessions) to approach four-month lows. The CRB Index fell yesterday to bring its four-day drop to about 3.5%.   

Asia Pacific

Melbourne and the rest of Victoria are in a new lockdown, which now covers about 2/3 of Australia's population.  Sydney is reporting record cases still.  Australia reported a record trade surplus in June of A$10.5 bln.   Exports and import growth rose less than expected.   Despite China's trade sanctions (for Canberra's foreign policy), exports to China rose 8.2%, led by iron ore. Australia exports a record amount of iron ore.  The recent decline in iron ore prices will show up in the trade figures later this year. Coal exports rose by 15.5% month-over-month.

Japan is extending the quasi-emergency to eight more prefectures as it still wrestles to bring the virus under control.  Separately, the MOF weekly portfolio flows showed that Japanese investors returned to the buy-side after selling nearly JPY1.1 trillion of foreign bonds in the week through July 23 (JPY225 bln). Foreign investors bought a record amount of Japanese bonds in early July (~JPY2.6 trillion) and in the subsequent three weeks added another JPY750 bln.  Equity flows were minor.  

The Biden Administration announced its first weapon sales to Taiwan.  The $750 mln deal is relatively modest, but it will draw Beijing's ire.  The highlights include new self-propelled howitzers and almost 1700 kits to enhance some missiles with more accurate GPS guidance.  Reports suggest that since 2010, the US has sold more than $23 bln of weapons to Taiwan.  Meanwhile, the US has begun its largest war game exercise in 40 years, involving three dozen ships and 50 virtual units, covering 17 time zones.  

The dollar initially fell to 3.5-month lows yesterday near JPY108.70 and reversed higher to close above the previous session high.  The key reversal has seen a little follow-through buying to JPY109.75, just shy of the week's high.  The JPY109.85-JPY110.00 may offer a formidable cap ahead of tomorrow's US jobs data and is reinforced with a $625 mln option at JPY110.00 that expires today.  The Australian dollar poked slightly through $0.7425 yesterday and recorded its best level since July 18 before dropping to $0.7370.  There has been no follow-through selling today, and the Aussie is straddling the $0.7400 area near midday in Europe. A close above that threshold today would help lift the tone.  The US dollar slipped fractionally against the Chinese yuan for the second session, but the real takeaway is that it is consolidating in a narrow range. Indeed, today's range (less than 65 pips) appears to be among the narrowest this year.  Again, the PBOC set the dollar's reference rate tightly against expectations at CNY6.4691 and CNY6.4692, respectively.  

Europe

The Bank of England is not in a hurry to adjust monetary policy, even though inflation is running a little above the medium-term target, and a couple of officials have expressed concerns about it.  Like the ECB and Fed, Governor Bailey takes the view that, most likely, the elevated inflation readings are a temporary phenomenon related to the base effect, bottlenecks, and supply chain challenges related to the uneven re-opening.  Other price increases, like energy, may have economic drivers.  We also argue that the disruption in the semiconductor chip market was exacerbated, if not triggered by the US sanctions against China's largest chip producer and consumer.  There is no compelling sign that the BOE is behind the curve of expectations.  

Sterling is the strongest of major currencies this year, with a nearly 1.7% gain against the dollar and about a 4.75% appreciation against the euro.  At the end of June, the interpolating from the swaps market, a 40-45% chance of a hike in Q2 22 appeared discounted.  Now the probability is seen closer to 55-60%.  Caveat: The BOE may formally accept that a negative policy rate can be adopted if necessary, but the point is that it is not necessary now.  In this respect, it is like the standing repo facility that Fed announced last month.  It is not needed now, but it could be in the future.  It is precautionary in nature and is simply good housekeeping, not a policy signal.  

The 4.1% jump in German June factory orders was twice what economists projected in Bloomberg's survey.  May's 3.7% decline was revised to -3.2%.  With Q2 GDP reported last week, most June data seems dated, but factory orders are a leading indicator, though some economists may revise up their estimate for tomorrow's June industrial production report.  The median called for a 0.5% increase (-0.3% in May).  Foreign orders were weak, rising 0.4% after a 6% decline in May.  Foreign orders for intermediate goods and consumer goods fell.  Domestic orders for capital goods (+14.8%) were particularly strong.  

The euro is in a 20-tick range below $1.1850.  As we noted yesterday, there are options for almost 3.8 bln euros struck at $1.1850-$1.1860 that expire today.  Today's low of $1.1830 corresponds to the (50%) retracement of the bounce from almost $1.1750 on July 21.  Sterling made a marginal new low for the week today, slightly below $1.3875.  Yesterday's high, near $1.3960, is the first hurdle, but the key cap remains $1.40.  After the BOE's decision, the Czech central bank is expected to announce a 25 bp rate hike, its second move in the cycle.  The Czech koruna is flat on the day and week.  

America

The dollar and US rates moved higher after the Fed's Clarida comments.  Yet, he did not say anything really new.  He said that the Fed was on course to announce tapering later this year.  The market has long thought so, and Clarida was not clear on whether an actual reduction of purchases could begin this year.  He said that the "necessary conditions for raising the target range for the federal funds rate will have been met by the year-end 2022," and allowing a hike in 2023. This is not the hawkish view that the long-term interest rates and the dollar seemed to think.  Recall that in June, seven of 18 Fed officials envision a hike in 2022.  The implied yield of the December 2022 Eurodollar futures rose 2.5 bp yesterday to 39.5 bp.  It had fallen to 35 bp earlier in the session, the lowest yield in about seven weeks.  At the end of July, the contract implied a yield of 40 bp, and at the end of June, 52 bp. The implied yield of the December 2022 fed funds futures contract settled at 22 bp, up to two bp on the day, but half a basis point lower on the week.    

The ADP private-sector jobs estimate yesterday disappointed, showing only around half of the job gain that was expected. The 330k estimate is the lowest since February.  The median forecast for tomorrow's non-farm payroll report in the Dow Jones survey is near 845k, and the median in the Bloomberg survey appears to have drifted lower to 870k.  The increase in the virus is delaying the return to offices for many companies, which could have some impact.  Infections in the US reached a new six-month high of over 100k yesterday. The seven-day average has increased five-fold in less than a month (some states report infections once or twice a week). For the past five weeks, the weekly initial jobless claims have been alternating between gains and declines.  In the week of July 23, claims fell by 24k.  The median forecast in Bloomberg's survey calls for a 17k decline last week.  An unexpected increase, perhaps as some have suggested due to auto sector retooling, could weigh on sentiment ahead of tomorrow's national report.  Separately, the US reports the June trade imbalance.  The deficit is expected to have widened and may approach the record set in March near $75 bln.  

Canada reports its June merchandise trade balance today.  A small deficit is expected.  Last year Canada's goods deficit widened to a monthly average of C$3.12 bln, up from a C$1.28 bln average in 2019 and C$1.65 bln in 2018.  Canada reported trade surpluses in three of the first five months of 2021 and an average monthly shortfall of about C$30 mln.  The market and expectations for policy put more weight on tomorrow's employment data.  Separately, but not totally unrelated, speculation is increasing that Prime Minister Trudeau will call for a snap election as early as next month. 

The US dollar reached CAD1.2575, the week's high on Tuesday, and has drifted lower.  It is near session lows, a little above CAD1.25, as North American markets re-open.  Initial support is seen in CAD1.2480, but the week's low is closer to CAD1.2450, and support extends toward last week's low near CAD1.2420.  The greenback posted an outside up day yesterday against the peso and briefly poked above MXN20.00 for the first time in a week.  There has been no follow-through dollar buying so far today, and the MXN20.00-level held.  Support is seen in the MXN19.80-MXN19.82 area.  Brazil's central bank delivered the anticipated 100 bp rate hike yesterday.  It was the largest hike since 2003 and brings the cumulative hikes to 325 bp this year.  And the central bank is far from done.  It explicitly committed to hiking another 100 bp in September.  That hike would lift the Selic rate to 6.25%, and the market seems to have another 200 bp discounted in Q4.  The US dollar appears to be in a range roughly between BRL5.05 and BRL5.30.  The upper end was tested earlier this week, and the rule of alternation warns of a push lower now.  

Disclaimer 

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