Dollar Longs Pared as Jackson Hole Gathering is set to Start

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Marc Chandler
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Overview: It seems that many market participants had the same thing in mind, cut dollar longs before the Jackson Hole gathering. The Antipodeans lead the majors move, encouraged perhaps by China’s new economic measures, with around a 1% gain. The euro and sterling are up about 0.35% and are the laggards. Emerging market currencies are higher as well, with the notable exception of India and Turkey, which are nursing small losses. Equities are having a good day. All the major bourses, but India, rose in the Asia Pacific area, led by the 3.6% surge in HK. South Korea’s 25 bp hike did not prevent the Kospi from rallying over 1% today. The Stoxx 600 is up by about 0.3%, and US futures are 0.5%-0.6% better. European 10-year benchmark yields are 4-7 bp lower and the periphery is doing better than the core. The 10-year US Treasury yield is off a couple basis points to 3.08%. Gold is rising for the third consecutive session. Near $1765, it has retraced half of its losses since the mid-month high above $1800. October WTI is little changed after rallying 5% in the past two sessions. US oil inventories have fallen by about 10 mln barrels in the past two weeks, the biggest two-week drawdown in a year. The market also appears to be getting more skeptical that Iranian oil is going to come back soon. US natgas is giving back half of yesterday’s 1.5% gain, while Europe’s benchmark is up 8.7% on top of yesterday’s 10.8% increase. It is up by more than a quarter this week. China’s infrastructure plans did nothing for iron ore, which snapped a three-day advance by pulling back 0.5%. On the other hand, September copper has fully recovered yesterday’s 1.4% fall. September wheat is off for the first time in four sessions. 

Asia Pacific

Japan's government wants to double down on nuclear power. Prime Minister Kishida wants a committee of government ministers and outside advisers to consider calling for building new nuclear plants in its report due later this year. Before the Fukushima nuclear accident in 2011, nuclear power provided almost 30% of Japan's electricity. In 2020, nuclear power accounted for less than 5% of Japan's electricity. Russia's invasion of Ukraine, the volatility of the global energy market, and the need to boost sustainable growth favors nuclear power, according to this line of thinking. Japan's Ministry of Economy, Trade, and Industry is a strong proponent of developing nuclear power. Still, it is not an immediate solution of any problem. New, large-scale plans would take a decade or more to construct. Smaller nuclear plans, using the newest technology might not be operational until early 2040s, according to some estimates. Japan currently has seven nuclear plants operating. The prime minister wants more existing plants to re-open. A poll earlier this year found that for the first time since that 2011 accident a slim majority (53%) in Japan favor re-opening nuclear plants.

Responding to a string of data which suggests that the Chinese economy may struggle to grow by even 3% this year, the State Council announced 19 measures yesterday to support the economy. The measures included almost CNY1 trillion (~$146 bln) of new borrowing/spending for state policy banks and local governments for infrastructure projects, and some deferment of payments due to the government. These measures plus the small rate cuts that have been delivered in the past week or so are seen as modest palliatives to what is increasingly a stressed economy. The NASDAQ Golden Dragon China Index of PRC companies that trade in the US jumped 2.5% yesterday, anticipating today's surge in Hong Kong's Hang Seng (~3.6%) and CSI 300 (~0.8%)

The Chinese yuan is off about 1.7% so far this month. This is almost as much as it depreciated in the May-July period. While Chinese officials seem to have accepted the decline, they seem to be wary of unintended consequences. The PBOC's dollar fix yesterday and today was weaker than expected and some saw this as a warning shot. Consistent with this was a Reuters report that China's foreign exchange regulator warned several banks against shorting the yuan. There are at least two reasons why Chinese officials want to move gradually. First is that price pressures may be mounting and second is to avoid a vicious cycle of weaker yuan spurring capital outflows, which weakens the yuan. Foreign holdings of Chinese bonds (sovereign and policy bank bonds) appear to have fallen by a little more than 1% last month to CNY3.6 trillion (~$525.5 bln).

The dollar is inside yesterday's range against the Japanese yen (~JPY136.15-JPY137.25). It has drifted to the lower end of the range in Europe. Yesterday's range was within Tuesday's range (~JPY135.80-JPY137.70). The greenback appears nesting as the market awaits Fed Chair Powell's comments at Jackson Hole tomorrow. Note that the US two- and 10-year yields are around two-month highs ahead of it. This has helped lift the greenback to around JPY137.70. Follow-through yield gains may be needed for it to re-challenge high set last month near JPY139.40. The Australian dollar is up over 1% to a seven-day high a little below $0.7000, which corresponds roughly to the (50%) retracement objective of the slide since the month's high on August 11 around $0.7135. Like China's rate cut, so too with the new spending announcement, many trade the Aussie as if it were a proxy sometimes for China. The intraday momentum indicators are stretched. Initial support is seen around $0.6960. The PBOC set the dollar's reference rate at CNY6.8536. The market (Bloomberg survey median) expected CNY6.8656. The dollar has largely been confined to yesterday's range. While it eased a little more than 0.10% against the onshore yuan, it slipped more than twice as much against the offshore yuan. Lastly, as expected South Korea's central bank delivered the expected 25 bp hike (lifting the seven-day repo rate to 2.5%). Headline CPI is running north of 6% and additional hikes are likely. The won rose by 0.5%, its second consecutive gain, after falling for the previous six sessions.

Europe

While Japan is pushing nuclear, Germany is set to boost coal-fired power generation this year. Steag GmbH will add 2.3 gigawatts to its system within three months to replace about a quarter of the natural gas it uses to generate electricity. More broadly, the government is planing to re-open 6.9 gigawatts of coal and 1.9 gigawatts of lignite and push back planned for another 15 years. Uniper SE, is set to re-start an 875-megawatt coal plant in northern Germany next week. Yesterday, the German government announced it will give preference to transport fuels by rail to accelerate the access of power plants. Berlin also announced some conservation measures, including a ban on heating private swimming pools, and some areas in public buildings. The minimum office temperature will be reduced to 66 Fahrenheit (19 Celsius) and banning most outside lighting for monuments and buildings. Economic Minister Habeck says the measures announced will reduce natural gas use by 2% (saving 10.8 bln euros) over the next two years.

German economic news was less poor than expected today. The initial estimate of no growth in Q2 was revised to show 0.1% growth. Consumption and government spending were stronger than expected, but capital investment was considerably weaker. The IFO investor survey seemed surprisingly resilient. The current assessment slipped to 88.5 from 88.7 and expectations were practically unchanged too (80.3 vs. 80.4). The overall business climate metric stands at 88.5 (from 88.7). Still to come is the record of last month's ECB meeting and the market will be looking for more color on the new Transmission Protection Instrument.

The euro is firm. After holding below parity yesterday, it popped up in Asia to poke slightly above $1.0030. The week's high was set Monday closer to $1.0045. Yesterday's push lower, the new 20-year low set Tuesday near $0.9900 held and sparked what appeared to be a short-covering bounce into the European close. We suspect that some euro bears moved to the sideline ahead of Jackson Hole. There are options for 2.5 bln euros that expire today at $1.00. Some of the buying may be to neutralize the option. Initial support is seen around $0.9980. Sterling is trading firmer, and like the euro, it has held below the week's high (almost $1.1880). It may make another run for it, but the momentum indicators are getting stretched. Yesterday, the Office of National Statistics showed that for the first time, the UK did not import fuel from Russia in June. Prior to Russia's invasion of Ukraine this year, Russia accounted for almost a quarter of UK's refined oil imports, 6% of crude imports, and almost 5% of its gas imports.

America

Despite the US five-year yield rising to its best level in nearly two months (~3.25%), the concession did little to induce participation in yesterday's $45 bln five-year note auction. It generated a full basis point tail, stopping at 3.23% and a poor bid-cover (2.3), Earlier yesterday, the re-opening of the two-year floating rate note with a $22 bln offering, also saw a weak bid-cover (2.57 vs. 3.13 last and a 3.2 average in the last 10 such auctions. We are tempted to write-off the lackluster participation to the summer and ahead of Chair Powell's speech on Friday. In addition to $110 bln in four-and eight-week bills to be sold today, the US Treasury also will sell $37 bln of seven-year notes. The yield has risen by almost 50 bp over the past month and still the concession may not be sufficient to draw strong demand. The next long maturity is not until September 12-13 and the re-opening of the 10-year note and 30-year bond.

The US reports weekly jobs claims today, which appear to have stabilized recently around 250k. Yesterday's benchmark revisions added about 571k private sector jobs to the job growth reported in the year through March. This translates to an average of around 47.5k jobs a month. Also today, Q2 GDP revisions and the 0.9% contraction is expected to be shaved, with knock-on effects on productivity and unit labor costs later. The Kansas Fed's manufacturing survey is on tap too, but it is not a market mover. Lastly, the Atlanta Fed's GDPNow tracker sees Q3 growth at 1.4%, down from 1.6% previously. 

Brazil's IPCA CPI measure for the first half of August fell to 9.6% year-over-year from almost 11.4% last month. The market had hoped for a slightly larger decline (Bloomberg median 9.49%). It was the first month-over-month decline since May 2020. It was the third consecutive drop in the year-over-year rate, which peaked at 12.2%. The full month's report is due September 9. It peaked at 12.13% in April and stood at 10.07% last month. The government has pushed through several anti-inflation measures, including caps on utility and fuel taxes and the effect was seen with a nearly 17% drop in gasoline prices and a 5.25% fall in transportation costs. The central bank meets on September 21. It hiked the Selic rate by 50 bp earlier this month to 13.75% and said it would review the need for a "residual adjustment" in September. The central bank may stand pat without declaring an end of the tightening cycle as price pressures remain elevated. In contrast, Mexico mid-August CPI accelerated more than expected with the headline rising to 8.62% from 8.14%. The core rate rose to 7.97% from 7.75%. Banxico hiked rates five times so far this year. The first three moves were half-point increments and the last two were 75 bp steps. It meets a week after the Fed next month. At the bare minimum it can be expected to match the US move but could go 75 bp even if the Fed does not. Today, Mexico is expected to shave its preliminary Q2 GDP rise of 2.0% and minutes from last month's meeting.

After consolidating against the Canadian dollar yesterday, the US dollar has been sold today. It slipped marginally through CAD1.29 to meet the (50%) retracement objective of the rally that began off the August 11 low near CAD1.2730. The low was set in the European morning but was not confirmed by the intraday momentum indicators, a warning not to chase the greenback lower, at least immediately. Initial resistance is seen around CAD1.2950. The US dollar is easing against the Mexican peso for the fourth consecutive session, which followed a four-day gain last week. It is finding bids today around MXN1985, and a break could see a test on the MXN19.81-82 area that marked the low in late June and again near the middle of this month. The low for the year was set in late May around MXN19.4140.