The Greenback Firms to Start the New Week, Stocks Slide

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Marc Chandler
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Overview:  The busy week is off to a slow start as Japan is on holiday and the UK and Canadian markets are closed to honor Queen (Australia will commemorate with a holiday on Thursday). Nevertheless, the sell-off in equities continues and the US dollar is firm. Most of the large markets in Asia fell. India is a notable exception. Its benchmark rose for the first time in four sessions, helped by bank shares and Infosys. Europe’s Stoxx 600 is off for the fifth consecutive session, and US futures are trading broadly lower. European benchmark yields are mostly 3-6 bp higher. US Treasuries have not trade in cash market, while the December futures point to a couple basis points higher yield. The dollar is rising against most currencies today. The Antipodeans and Scandis are bearing the brunt. Note that Sweden could hike by as much as 100 bp tomorrow and Norway is expected to raise rate by 50 bp on Thursday. The Swiss franc is the most resilient of the major currencies, off about 0.20%. The SNB is seen lifting its deposit rate 75 bp on Thursday. Emerging market currencies are weaker, and the JP Morgan Emerging Market Currency Index is off around 0.2%. It has fallen for the last three consecutive weeks. Gold is giving back its pre-weekend gain of almost $10 and looks set to retest the $1650 area. December WTI is trading below last week’s lows and near $82.40 is poised to test the month’s low near $80. Natgas is trading lower. In the US, it is off 1.7% after falling more than 15% in the last two sessions. It is trading near last month’s low. Europe’s benchmark is off 4.5%. It also fell about 15% in the last two sessions. It is back at late July levels. Iron ore fell for the fourth session in a row. Last week, it fell by 4.8%. December copper is off nearly 1%. It fell 1.45% last week. Finally, December wheat is off 2% after gaining 1.75% before the weekend.  

Asia Pacific

On the sidelines of the Shanghai Cooperation Organization meeting, Putin felt obligated to respond to the Xi and Modi's separate questions and concerns about the invasion of Ukraine. It seems naive to expect this to be a prelude to a change in the relationship. Similarly, America's European and Asian allies were not supportive of US military action in Vietnam, which was also not called a war, but they did not desert the US. Moscow and Beijing share a common dislike: a US-dominated world. New Delhi has a tradition of non-alignment. It has extensive trade and military ties to Russia and border disputes with China. We have noted that while NATO pushed from the West, Xi's Belt Road Initiative penetrated central Asia, another part of Russia's "near-abroad," which Moscow claims as a sphere of influence  On the sidelines of the summit, China struck a deal that has been in the making for some time for a railroad in Uzbekistan and Kyrgyzstan that bypasses Russia for a shorter trip to Europe.

Russia did not quit the dollar/euro financial system as much as it was evicted. It makes a virtue out of necessity. Russia is pushed further into China's embrace. Moscow has become the third largest center after Hong Kong and London for trading the offshore yuan. Russian companies are issuing offshore yuan bonds. Russia is believed to be one of the largest holders of yuan in reserves and has indicated it may boost its holdings. That said, the yuan's share of global reserves was about 2.9% in March (the IMF's COFER data will be updated at the end of the month). This is a little more than twice the yuan's 2017 share. The IMF boosted the yuan's weighting in the SDR to 12.78% from 10.92% this past May.

On national television yesterday, President Biden announced that the US would defend Taiwan from an "unprecedented attack", while at the same time saying that the one-China policy remains intact. Recall that Biden made similar remarks in May, but the White House later walked them back (whatever that really means). At the same time, the G7 trade ministers reportedly agreed to toughen the stance toward Beijing because of its aggressive behavior.

The dollar is firm against the Japanese yen, but it is still in the range set in the middle of last week (~JPY142.55-JPY144.95). A quiet Asia Pacific session saw the dollar record its low near JPY142.65. The high was set in early European turnover around JPY143.55. The intraday momentum indicators are stretch and initial support now is seen in the JPY143.00-20 band. The Australian dollar initially rose edged above the pre-weekend high to almost $0.6735 before sellers emerged that pushed it below $0.6680. The two-year low set before the weekend was closer to $0.6670. The intraday momentum indicators are also stretched. Nearby resistance is seen in the $0.6700-20 area. Meanwhile, the re-opening of Chengdu and Dalian had little impact on China's markets. The CSI 300 fell to its lowest level in four months. The 10-year yield crept up and around 2.67% is at its highest level in a month. The dollar is firm, even if it held below the pre-weekend high of CNY7.0255. The PBOC set the dollar's reference rate at CNY6.9396, while the median projection (Bloomberg survey) was CNY7.0043. This is the largest gap that Bloomberg has recorded. The 2019-2020 high was set around CNY7.18.

Europe

The European winter season, in terms of energy consumption, begins next month. The EC's recommendations were announced last week, and the subsequent pushback shows an energy union is likely to prove as elusive as the monetary union. Instead, national responses have dominated to ease the burden on households and businesses. Separately, but along similar lines, reports in the Italian press (La Repubblican) and confirmed by Italy's ministry of Ecological Transition, France's EDF formally informed Italy that it may suspend energy exports for two years. France's nuclear output is the lowest in 30 years due to maintenance issues and the simple aging of the facilities. EDF supplied about 5% of Italy's energy consumption or a little more than a third of Italy's energy imports.

Meanwhile, before the weekend, Germany put the three Rosneft refiners, which account for around an eighth of the country's refining capacity in trusteeship with its federal energy regulator. The key seems to be the PCK refiner in Schwedt, which supplies roughly 90% of Berlin's power. Rosneft owned 54% of it (Shell is a minority shareholder). Schwedt received all its oil from Russia via the Druzhba pipeline. Although there are some allowances for this pipeline after January's full embargo, Poland and Germany are going to honor it, and Poland was balking at providing the refiner with oil if it were owned/controlled by Rosneft.

Tensions of bubbling around Europe. The UK informed the EU that it will continue to postpone customs checks on goods leaving Great Britain for Northern Ireland. Prime Minister Truss may meet with EC President von der Leyen on the sidelines of the UN. The EC also took its strongest actions to date, proposing to cut funding to Hungary by about 7.5 bln euros for various infringements on the rule of law. EU members will have three months to object/veto. Hungary has pledged to address the issues. In addition, the US lifted its arms embargo to Cyprus. This is going to further enflame the tensions between Ankara and Athens. Separately, note that Turkey has become the first NATO member to seek membership in the Shanghai Cooperation Organization.

We had focused on the G7 central banks that meet this week. However, to be sure, other European central banks meet too. Sweden's Riksbank meets tomorrow. The market expects the repo rate to double to 1.5%. However, the swaps market shows a bias toward a 100 bp move. Its tightening cycle began with a 25 bp hike followed by a 50 bp hike in June. Headline inflation stood at 9.8% in June and the underling measure is at 9%. On Thursday, along with the Bank of England, Switzerland and Norway's central banks are set to hike rates too. The SNB is expected to lift its deposit rate 75 bp, which would put it at 0.50%. It would be the second hike in the sequence. Also on Thursday, Norges Bank is seen lifting its deposit rate another half point (to 2.25%), matching the move of June and August.

Before the weekend, the euro traded on both sides of the previous day's range and closed firmly around $1.0015. It is trading with a heavier bias today, unable to rise above $1.0030. It recorded a low near $0.9965 in early European turnover. Trading may remain choppy and with bulk of the activity between $0.9960 and $1.000. Sterling is struggling to sustain even minor upticks. Recall, that the pre-weekend low, $1.1350, was not seen since 1985. Sterling recovered to almost $1.1450 before the weekend and tried again today in vain. There are options for nearly GBP600 mln that expire tomorrow at $1.1425.

America

A dozen years ago, Brazil's finance minister accused the US of initiating a currency war by pursuing unprecedented monetary easing, expanding the Federal Reserve's balance sheet to address the fallout from the collapse of the housing market bubble. We were told there was a "race to the bottom". There was no such thing. Countries were responding to weak economies and low inflation. There are many fundamental factors that influence the exchange rate. A weaker exchange rate is often consistent with an easier monetary policy. In turn, weaker exchange rates are often linked to stronger exports, so easier monetary policy and currency appreciation fit into the beggar-thy-neighbor narratives. Ironically, the weaker yen is now understood to be exacerbating Japan's trade deficit. Few pundits and media voices recognize that despite the historic dollar appreciation, US goods exports reached a record in July, the most recent data available.

Now, the complaint is that US monetary policy aimed at bringing inflation back to target is driving the dollar higher. Asian currencies have had a rougher ride of things. The yuan and yen are not the only ones. Recently, we briefly discussed South Korea and the possibility it seeks to renew the swap line with Federal Reserve. In Vietnam, which seems to be a favorite location of some industries developing Asian supply chains outside of China, foreigners have been selling local shares and pressuring the currency to new 30-year lows. The central bank has threatened to intervene to curb the dong's decline. The Philippine peso has fallen to record lows, and the central bank has also threatened to intervene. Yet, for the most part, LATAM has been fairly resilient. Many central banks hiked aggressively, offering higher interest rates and exposure to commodities. Leaving aside the Russian rouble, the three emerging market currencies have appreciated against the dollar this year:  Brazil, Peru, and Mexico.

The economic calendar is light today. The NAHB September housing market index is due today ahead of tomorrow's August housing starts and permits. Existing home sales will also be reported before the outcome of the FOMC meeting on Wednesday. Higher interests are slowing housing market activity. Canada's markets are closed today, but industrial and raw material price indices are due ahead of tomorrow's August CPI. Like we saw in the US, Canada, headline inflation may ease while the core measures tick up. This week's highlight for Mexico are the July retail sales on Wednesday and CPI for the first half of September on Thursday. Brazil's central bank meets on Wednesday and its decision will be announced a few hours after the Fed's. The market looks for a steady hand with the Selic rate at 13.75%.

Weakness in US equities is helping lift the greenback to new two-year highs against the Canadian dollar today. It is making the highs late morning turnover in Europe. As we have noted, the CAD1.3340 area is the (50%) retracement of the US dollar's slide from the March 2020 high. Above there, the next chart points to watch are found between CAD1.3390 and CAD1.3420. That said, the market is stretched on an intraday basis, but also note that the greenback is above the upper Bollinger Band (~CAD1.3310). While it has pushed above MXN20.20 on an intraday basis a few times, it has not settled above it since August 9. The intrasession high this month was near MXN20.2945, around where the 200-day moving average is found.