Greenback Holds Above JPY150, while BOJ goes MIA

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Marc Chandler
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Overview: The continued surge in US rates and inability of the equity market to sustain gains saw the post-Truss sterling rally unwind amid a broader recovery of the dollar. Sterling has been sold to new lows for the week. Meanwhile, the dollar has held above JPY150, and the BOJ hand has not been seen. It rose to almost JPY151 in Europe. Equity markets are on the defensive. Nearly all the bourses in Asia fell, and the 1.65% drop of the Stoxx 600 is the biggest loss this month. US futures are also trading heavily. Yields are soaring, with European benchmark yields up 9-12 bp, while the 10-year US Treasury yield is about five basis points higher near 4.27%. This is the 13^th consecutive week that the US 10-year yield has risen. Gold is approaching the two-year-low set last month near $1615. December WTI was turned back yesterday from the week’s high a little north of $87. It is now changing hands around $84. US natgas is lower for the sixth session. During this run, it is off around 20%. European natgas is off 9% after rallying more than 13% in the past two sessions. European officials conclude their meeting today with efforts to limit the disruption from natural gas prices. Iron ore recouped about half of yesterday’s 2.4% decline. December copper is off for the fifth session in the past six after it recovered from the month’s low yesterday. December wheat is off more than 1% to bring this week’s loss to about 2.4%. It is trading at new one-month lows. 

Asia Pacific

Japan's September CPI was unchanged at 3.0%. The core rate, which excludes fresh food also rose to 3.0% (from 2.8%). The measure that excludes both fresh food and energy accelerated to 1.8% from 1.6%. Yet, despite these elevated readings, the Bank of Japan widely expected to not change policy when it meets next week. Many observers see the exit from the Japan's ultraloose monetary policy and yield curve control as a potential disruptive event whenever it occurs.

It seems the most common expectation is for it to happen after Governor Kuroda's term expires next April. Still, the median forecasts in Bloomberg's survey are not far from the BOJ CPI forecasts, which will updated next week. The median projection is for Japan's core CPI to ease to 1.7% next year and 0.6% in 2024. The BOJ's July forecasts put core CPI at 1.4% in 2023 and 1.3% in 2024.

We argued that worse than no intervention is failed intervention and that seems to be the conclusion the market is drawing. The dollar has remained above the JPY150 level today and as the Asian session closed, and the market sees the risk of intervention has having been reduced, took the greenback to almost JPY151, where the upper Bollinger Band is found. Implied three-month vol is above where it was before the BOJ intervened last week. Prudence seems to be the main reason the dollar is not even higher. Japanese officials, it must be assumed, know what the market does:  that there is little on the charts before JPY160. Talk about a one-way market, today is the 13th consecutive advancing session for the greenback. And since the intervention on September 22, the dollar has fallen in only three sessions. The Australian dollar remains pinned in its trough. It did rise to almost a two-week high yesterday, near $0.6355, but is back near $0.6250 today. The two-and-a-half-year low set last week was around $0.6170. The 20-day moving average, which the Aussie has not been above in over a month, is found slightly below $0.6370. China, like Japan, is finding it difficult to resist US dollar strength. The PBOC set the dollar's reference rate at CNY7.1186, while the median projection in Bloomberg's survey was for CNY7.2077. Many expect officials will accept a weaker yuan after the Party Congress ends over the weekend, when new Politburo and standing committee members are announced. The dollar traded above CNY7.25 for the first time since 2008.

Europe

Sterling initially rallied about when UK Prime Minister Truss capitulated to pressure from parliament and resigned. She would not have won a vote of confidence. Recall that she came in second to Sunak in the parliamentary part of the leadership contest to replace Johnson. She won the decisive contest with the rank-and-file of the party (almost 190k Tory members voted). She campaigned in opposition to Johnson/Sunak tax increases. Capital went on strike and the dramatic jump in rates resulted collateral damage to the levered strategies pursued by pension funds and some insurance companies. This collateral damage posed systemic risks, and the Bank of England stepped in, purchasing several billion pounds of Gilts. It is difficult to know precisely how much sterling rallied on Truss's resignation. Some seemed to have been anticipating it given Wednesday's developments and the sterling was bid from the late in the European morning when it briefly dipped below $1.1180. Sterling peaked in front of $1.1340 and turned lower ahead of the London close. It fell to almost $1.1210 in the North American afternoon before steadying. The dollar pared its loss against most of the major currencies, not only against sterling. Today, sterling has fallen to new lows for the week slightly above $1.1100. 

A new Tory leadership contest will be held, and the rules changed to help expedite the process of picking the fifth Tory Prime Minister in seven years. A new candidate will need 100 Conservative MPs for support. There are 357 such MPs, which means there can be no more than three candidates. Nominations will close Monday after there are two candidates. The rank-and-file will again get to choose, though as noted the MPs rejected their last choice, not because Truss lied or deceived them but because she had the audacity to carry out the agenda she promised. It will be an electronic ballot. The results are expected at the end of next week. Ironically, the next party leader and PM has yet to be chosen, Chancellor of the Exchequer Hunt is expected to keep his post and deliver the fiscal statement on October 31, as it stands now.

Poor UK retail sales did nothing to help sterling. The median forecast in Bloomberg's survey anticipated a 0.5% decline. Instead, UK's September retail sales dropped 1.4%, following the 1.7% decline in August. So far this year, UK retail sales rose only once and that was in July (0.1%). Sterling has pushed below the 20-day moving average (~$1.1145) and may be headed toward last week's low around $1.0925. A break of that next week could be ominous, signaling potential toward $1.06. Meanwhile, the market has downgraded the likelihood of a 100 bp hike when the BOE meets on November 3. The swaps market now sees it as about a 45% chance. A week ago, it was fully discounted. For its part, the euro is trading at a four-day low in Europe near $0.9750. Monday's low was near $0.9710. The euro settled last week a touch above $0.9720. The ECB is widely expected to hike 75 bp next week and provide more color about the unwinding of its balance sheet, which sequentially, has thus far been tipped to begin after the rate hikes have been completed. A close above $0.9800 may be needed to steady the tone.

America

Freddie Mac says that the average 30-year fixed-rate mortgages now stand at 6.94%, the highest level in 20.5 years and more than twice the rate earlier this year. Some industry estimates are higher and closer to 7.25%. A survey from Zillow found that for over 2/3 of people looking to buy houses have a 7% threshold. Existing home sales slipped last month, the eighth consecutive monthly decline., bringing this year's decline to around 23%. Separately, the US reported that weekly jobless claims unexpectedly fell by 12k last week, which covered the survey week for the October jobs report. The four-week moving average stands at 212.3k. In the middle of last October, it was near 335k.

Canada reports August retail sales today. After the 2.5% drop in July (-3.1% excluding autos), retail sales are expected to have stabilized in August. Still, this week's takeaway is that the strong CPI reading increased the risk of a 75 bp hike on October 26. Around an 85% probability, the market is the most confident has been about a three-quarters point move. The Canadian dollar has not drawn much support from the shift in expectations. The exchange rate continues to appear sensitive to the broader risk environment. Also, the rolling 60-day correlation of the percent change in the Canadian dollar and the S&P 500 reached a new 10-year high this week near 0.76. 

With US stocks on the defense, it is not surprising then that the Canadian dollar is offered. The US dollar is above CAD1.3820 to trade at four-day highs. The high for the week was set on Monday around CAD1.3880. Last week's high near CAD1.3975 was also a two-and-a-half year high. Yesterday's US dollar low (almost CAD1.3760) was a two-week low and the price action shows the market rejected it. The intraday momentum indicators are stretched but given sentiment, the most that can be reasonable hoped for is some consolidation, rather than a reversal. Watch US stocks. The US dollar continues to trade broadly sideways against the Mexican peso. This week's range has been roughly MXN19.96 to MXN20.1760. Since mid-August, with a few notable exceptions, the greenback has been mostly confined to a MXN19.80-MXN20.20 range. We suggest that opportunity exists as the extremes of the range are approached. The dollar has held below MXN20.0650 so far today. The immediate risk seems to be on the upside and the first hurdle in North America may be the MXN20.08-MXN20.10 band.