Intraday Momentum Indicators Point to a Dollar Recovery After the Employment Report

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Marc Chandler
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Overview: Asia Pacific bourses followed yesterday’s US loss, but after opening lower Europe’s Stoxx 600 has steadied. US futures are narrowly mixed ahead of the US jobs report. Benchmark 10-year yields are higher across the board. The US 10-year Treasury yield is near 3.84%, slightly higher on the day. It is up a single basis point on the week. European yields are 3-5 bp higher. The dollar is softer against the G10 currencies, but as we note below, the intraday momentum indicators are stretched, suggesting limited downside in North America, which may point to firm employment data. Emerging market currencies are more mixed, with Asia lower and central Europe (and the Mexican peso and South African rand) firmer. Gold is consolidating in a narrow range of a few dollars on either side of $1711. It settled near $1660 last week. December WTI is edging higher in what could be the fifth consecutive advance. It has risen by $10 a barrel this week and it approached the 200-day moving average (~$88.65). US natgas is trying to snap a 3-day advance. It is slightly lower on the week. Europe’s benchmark is off 1.2% after falling 4.8% yesterday. Net-net, it is flat this week. Iron ore was unchanged today and after some volatility earlier this week, it has returned to where it was when China’s Golden Week holiday began. December copper is a little softer today after falling 1.55% yesterday. It is slightly higher on the week. December wheat has come back bid after falling for the past four sessions. It is off about 3.5% in the first week of October after surging 10.8% last month. 

Asia Pacific

Household spending in Japan rose 5.1% year-over-year in August. It missed Bloomberg's survey median forecast of 6.7% but was still the strongest increase since January. Yet, it masks the 1.7% month-over-month decline. At the same time, cash wages rose 1.7% year-over-year, while adjusted for inflation, wages fell by as much (-1.7%). The government has extended some relief measures and is putting together another stimulus package by the end of the month. Separately, next week (October 11), Japan is set to re-open its borders and tourism is expected to help support the economy.

Observers have played up the decline in reserves. Bloomberg estimates that reserves have fallen by around $1 trillion this year. China's September reserves, reported earlier today, fell to $3.029 trillion from $3.055 trillion, which was about half of the decline that was projected. Through September China's reserves have fallen by about $222 bln. Much of this can be explained by valuation swings rather than intervention. Most of the focus of valuation is on the more volatile foreign exchange market. And the dollar did rise against other currencies that the PBOC likely holds in reserve. However, the volatility of the bond market, where the reserves are kept, is elevated. The decline in bonds has been simply breathtaking. For example, after rising by nearly 55 bp in August, the US 10-year yield rose almost 65 bp in September. The 10-year German Bund has performed similarly. The yield rose by about 57 bp in September following the 72 bp increase in August. Note that Japan's September reserves were also reported today. They fell by $54 bln to slightly less than $1.24 trillion. It was the largest month-over-month decline. Actual material intervention accounted for about $20 bln of the decline.

The dollar closed above JPY145 yesterday for the first time since 1998. However, it was unable to sustain a perch and slipped to almost JPY144.70 in early European trading. Monday is a partial holiday in the US and that could theoretically be a conducive opportunity for another bout of intervention. The intraday momentum indicators are stretched, pointing to the likelihood of a dollar rebound. The Australian dollar frayed the $0.6400 support area but has not closed below it. The Aussie recorded the low for the week in late Asia Pacific turnover near $0.6385. It needs to re-surface above $0.6450-60 to help stabilize the tone. The dollar closed last week near CNH7.1420. It is trading around CNH7.0950 now. This suggests that when the mainland markets re-open, the greenback will be a bit softer against CNY. It settled before the holiday at CNY7.1160, having been above CNY7.20 in the last week in September.

Europe

When Japan intervened in the foreign exchange market, they did it in size. They sold about $20 bln, a record-amount, to support the yen (what happened to the race to the bottom that was systemically induced?). When the Bank of England announced its GBP65 bln facility it seems designed to shock and awe at a maximum of GBP5 bln a day. The average daily volume in the Gilt market is around GBP37 bln. The BOE operation was focused on the long-end, and this might be a third of the market. However, what has transpired through a little more than the first half of the effort is rather than try to muscle with size, the BOE was more a finesse game. After not buying any bonds, which is to say rejected all offers, it bought less than GBP152 mln on Thursday. Overall, it has bought less than GBP5 bln. Understandably, an emergency program should be of a limited duration, and that is next week's challenge, the exit strategy. The BOE may be also hamstringing itself by insisting on beginning to sell Gilts from its portfolio at the end of the month.

The German government and the Bundesbank have warned of the coming economic contraction and the data is pushing in that direction. August retail sales fell 1.3% from July, which was a touch worse than expected, but adding to pessimism was the revision to the July series to 0.7% from 1.9%. Industrial output also was weaker than expected, falling by 0.8%. July's 0.3% fall was revised to flat. After eking out a small expansion in Q2 (0.1% quarter-over-quarter), Europe's biggest economy is expected have contracted by 0.2% in Q3. The median forecast in Bloomberg's survey does not see Germany returning to growth until Q2 23. 

France's trade balance is deteriorating and faster than expected. The August trade deficit fell to a record of 15.3 bln euros. The average deficit this year has been about 12.76 bln euros. It is practically double the pace seen last year. In the first eight months of 2021, the average monthly shortfall was 6.04 bln euros. Before Covid, in 2019, the deficit averaged 4.76 bln euros a month through August. This is broadly representative of the regional deterioration. On top of the monetary policy considerations, this seen as an additional weight on the exchange rate.

The euro slipped to a four-day low near $0.9765. This met the (50%) retracement of the euro's recovery off the September 28's 20-year low of almost $0.9535. The single currency was turned back earlier this week after approaching parity. Now it needs to regain a foothold above the $0.9855 area to deter a test on the next retracement target (61.8%) found by $0.9715. Sterling has held yesterday's low near $1.1115 and bounced a cent. Above the $1.1220 area, the next hurdle may be near $1.1260. With the intraday momentum indicators getting stretched, it may be a sufficient check. On the other hand, it is holding on to more of its gains from last week's (record) low than the euro. However, if we take the secondary low from September 29, when it held $1.0765, sterling met the initial (38.2%) retracement found near $1.1130. The next retracement (50%) is closer to $1.1020. 

America 

The resilience of the labor market allows the Federal Reserve to continue to focus on its other mandate, price stability. The non-farm payroll report is among the most difficult to forecast. The last batch of data has been mixed. Let's leave aside the ADP and its new methodology, which it says complements but does not forecast the BLS report. The JOLTS disappointed, and weekly initial jobless claims rose a bit more than expected, though the four-week moving average is still near 4-month lows. The ISM services employment expanded and showed businesses were resisting layoffs in favor of hiring freezes.

The market is going into the employment report with a strong (~87%) conviction of a 75 bp rate hike by the Fed. The median forecast in Bloomberg's survey sees a 250k increase, with the government sector losing 25k. A large rise is unlikely to sway the market in favor of a 100 bp hike, but a sufficiently weak report could change views. That weakness could take one of two forms. First, it could be picked up in the establishment survey, with a small, say sub-100k increase in payrolls. An outright decline is difficult predict and will be a shock. And it is bound to come in this cycle. Second, it could come from the household survey. The unemployment rate rose to 3.7% in August from 3.5% in July. Another sharp jump, especially if not accompanied by a greater participation rate, could also elicit a strong market response. It seems that the markets are trading as if bad news on the economy is good news for risk taking on ideas that the extent of tightening will be limited after this year. 

Canada also reports September employment figures. They often are overshadowed by the US. Still, without putting too fine a point on it, Canada's economy has lost it mojo. It created 131k full-time jobs in the first three months of the year. In the three-months through August, it lost 94k full-time posts. The unemployment rate jumped to 5.4% in August from 4.9% in July. Over the past three months, the participation rate is about 0.5% lower than over the previous three month. Just as importantly, hawkish comments by Bank of Canada Governor Macklem yanked the market's chain. The swaps market had been gradually having doubts about a 50 bp hike on October 26. Before he spoke, the market saw it around a 60% probability. After he spoke, there market priced in about a 25% chance of a 75 bp move. 

Despite Macklem's comments, the US dollar extended yesterday's gains briefly and marginally to CAD1.3760 before pulling back. It is trading near CAD1.3710 in the European morning. It is looking stretched now and is unlikely to break below the CAD1.3680-CAD1.3700 area. Recall that at the end of last week, the end of September, the greenback settled around CAD1.3830. Meanwhile, the greenback has meet offers in the past two sessions in the MXN21.15-16 area and that is holding so far today. It has also remained above yesterday's low (~MXN20.0175). It is recording session lows in Europe and here too the intraday momentum indicators are getting stretched.