The Dollar Posts Corrective Upticks, while the Market Digests China’s Initiatives

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Marc Chandler
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Overview: China’s new initiatives to support the property sector helped lift the Hang Seng. And while the China’s CSI 300 edged higher both the Shanghai and Shenzhen composites fell. Most Asia Pacific markets fell, while Europe’s Stoxx 600 is posting a small gain. US futures are sporting modest losses. European benchmark 10-year yields are 3-5 bp lower, including UK Gilts ahead of Thursday’s budget that is expected to confirm new borrowing (Office for Budget Responsibility projects to be GBP70 bln more than previously anticipated). The 10-year US Treasury yield is about seven basis points higher near 3.88%. The dollar is mostly firmer after last week’s sharp losses. The yen is leading to the downside with about a 1.3% loss, while the Canadian dollar is holding up the best, off around 0.2%. A small handful of Asian currencies, including the Chinese yuan, are posting small gains against the greenback. Higher yields and a stronger dollar are paring last week’s sharp gold gains. It is off a little less than 1%. December WTI rallied nearly 2.9% before the weekend and is also off nearly 1% today. The cold spell in the US is helping natgas recoup its pre-weekend loss of more than 5%. Similarly, though more volatile, Europe’s natgas benchmark is recovering fully the 10.5% drop seen at the end of last week. Iron ore continues to rebound. Today’s 3.1% advance comes on top of the more than 14% rally over the past two weeks. December copper’s four-day rally is stalling, and it is off 2.3%. It rallied about 13.5% over the past two weeks. December wheat snapped a four-day before the weekend with a nearly 1.3% bounce. It is come back offered and is trading about 1% lower.

Asia Pacific

China has launched two multi-point programs to revive the property market and allow a more focused implementation of its zero-Covid policy. So much depends on the implementation that it is hard to discern the real impact. Moreover, given the excess capacity in the housing market, even with the 16-points to be implemented and lending renewed, many Western observers are skeptical that the underlying challenges will be addressed. Reducing mass testing, resisting overzealous lockdowns, reducing the number of days in quarantine for inbound travelers, dropping the punishments against airlines for bringing into too many sick passengers sound well and good, but they may not herald the kind of pivot some in the financial press are claiming. Chinese officials themselves claim that policy is not being relaxed, and the number of cases is surging to 7–8-month highs.

Japan reports its first estimate of Q3 GDP first thing tomorrow. It is expected to slow from 0.6% quarter-over-quarter to 0.2% largely on the back of slower consumption. Consumption rose 1.2% in Q2 and is seen having grown about a quarter as much. Business spending may have increased a little and inventories may not have been a drag (-0.3% in Q2). Despite the yen’s weakness, net exports were likely a drag after contributing slightly in Q2. The GDP deflator, which is often seen as among the best metrics of overall price pressures, may show the most deflationary pressure this year. After falling 0.3% in Q1 and 0.5% in Q2, the median forecast in Bloomberg’s survey projects a -0.6% reading.

The dollar slid to its lowest level against the yen since late August ahead of the weekend, slightly below JPY138.50, but has rebounded back above JPY140 in the European morning. It had stalled in front of there in Asia, but stops, perhaps related to the roughly $510 mln option (at JPY140) that expires today, saw it quickly trade up to JPY140.40. The rebound in US yields was also supportive. Nearby resistance is around JPY141.00. The Australian dollar initially rose through the pre-weekend high marginally on some optimism arising from China’s measures but has succumbed to mild profit-taking pressures. It was knocked back from nearly $0.6725 to slightly below $0.6665. A break of $0.6650 could spur a retreat toward $0.6600. The greenback may have completed a three-day 3.4% decline against the Chinese yuan that took it to its lowest level since September 20 (~CNY7.0255). Optimism about the Covid and property measures helped the yuan recover. China may boost the lending at the one-year Medium-Term lending facility tomorrow and it reports October economic activity. The PBOC set the dollar’s reference rate at CNY7.0899, nearly matching the median projection in Bloomberg’s survey for CNY7.0903.

Europe

While tighter US monetary policy, via rate and the balance sheets, are well known, we have argued that many observers do not seem to be aware of the magnitude of the fiscal tightening that is taking place. The budget deficit is set to be more than halved from last year. After the Great Financial Crisis, it took several years to deliver the magnitude that is being experienced this year. The UK is engaging in its own double-barrel effort. The Bank of England is one of the few central banks that have begun to actively sell bonds it bought during QE rather than the more passive approach of limiting the re-investment of maturing proceeds. The BOE also signaled that it will begin selling the GBP19 bln (~$22 bln) Gilts purchased to help stabilize the markets (Sept 28-Oct 14). These sales of long-term bonds and inflation-linked instruments will begin at the end of the month. The operations will be demand-led, in a reverse enquire window, rather than at a preannounced pace so as to be responsive to market conditions and interest. It will publish additional operational details next month. Meanwhile, the highlight this week is Chancellor Hunt’s budget statement on Thursday. Spending will be cut, and taxes will rise, even if the precise details are not fully known. The windfall tax on oil and gas firms appears earmarked to increase. Also, more revenue is to be had on bracket-creep, while lowering the threshold for paying the top rate. Still, the Office for Budget Responsibility warns borrowing will be around GBP70 bln more than previously anticipated.

The UK’s Telegraph reported over the weekend that the US has given the UK and EU until April to reach an agreement on the Northern Ireland Protocol. It is when President Biden is expected to visit Northern Ireland and commemorate the 1998 Good Friday Agreement, for which the US is a guarantor. However, the article’s only detail was a far cry from the US setting the deadline as the headline claimed: “…and White House officials have privately indicated that he [Biden] would be happier if the situation was resolved before then.” The Democratic Unionist Party has boycotted the Northern Ireland Assembly since the May election over the Protocol. New elections were delayed last week potentially until April 13, three days after the anniversary in hope of the deal by then. The UK is demanding that the role for the European Court of Justice in adjudicating disputes over the Protocol is eliminated. This has become the latest sticking point.

More promising was the Telegraph’s story that UK and France have reached an agreement to limit migration. The UK apparently has agreed to pay GBP60 mln to France to share intelligence on the people being smuggling through the English Channel and boost the number of officers on the beaches to limit the proportion of migrants leaving France for the UK. The UK had demanded that British “officials” would be allowed to join the patrol of the French beaches, but Paris could not abide. Instead, some British immigration officials would be part of a joint control center.

The stronger than expected eurozone September industrial output figures (0.9% vs. 0.5% median forecast and August revised to 2.0% from 1.5%) failed to deter the market from paring the euro’s advance. It did rise a few hundredths of a cent above the pre-weekend high but continued to work its way lower through the European morning and slipped below $1.03. The low in the North American session before the weekend was near $1.0265 and that may offer the nearby target. Sterling’s pre-weekend high was near $1.1855, and initially it was bid slightly through $1.1870 in early Asia Pacific trading, but when it stalled, momentum traders appear to take profits. Sterling fell to about $1.1745 and another attempt on the upside stalled near $1.1830. It came under new selling pressure in the European morning and the market may have its sights set on the roughly GBP560 mln options that expire at $1.1715 today.

America

The busy week of US economic reports begins slowly. Many economic calendars do not include it, but the results of the Federal Reserve’s October survey of consumer inflation expectations will be reported today. In September, the one-year expectation had fallen to 5.4% from 5.7%, the lowest since September 2021. By comparison, the University of Michigan’s survey found expectation in September slipped from 4.8% to 4.7%, and then rose to 5.0% in October. Last week’s preliminary results showed a tick up to 5.1%. The Fed’s survey saw three-year expectations edge up to 2.9% from 2.8% and the five-year outlook rise to 2.2% from 2.0%. The University of Michigan’s survey showed the 5–10-year inflation forecast outlook rose to 2.9% in October from 2.7% in September, and then, the preliminary estimate for October rose to 3.0%. It has been between 2.7%-3.1% since the start of last year.

The Fed’s Waller pushed hard against the market exuberant response to the softer than expected inflation print. He argued that it was only one print, and that the Fed has more work to do. But he was preaching to the converted. The market is well aware of those facts and continues to price in not only a 50 bp hike next month but more hikes next year. Governor Cook also reiterated what is widely recognized the more and longer the Fed hikes the more it risks overdoing it. Governor Brainard and NY Fed President Williams speak today, and they too are unlikely to break fresh ground. No official that has spoken before or after the CPI report to give any reason to expect a dissent at the December meeting, which slows the pace of tightening from 75 bp to 50 bp, which had been tipped in the September dot plot.

Brazil has been a market darling this year, but concerns about the new government’s fiscal plans has pushed it from second place behind the Russian rouble to third place, below the Mexican’s peso as well. With a new team in place, including naming a finance minister, Lula appears to be pushing for a constitutional amendment that would allow welfare expenditures to be permanently outside of the budget cap. The cap limits spending increases to inflation. Constitutional amendments require 3/5 of both houses to support it in two votes. The Brazilian real was the weakest currency in the world last week, falling 3% against the weakening greenback. The Bovespa fell 5%, bucking the global equity rally.

The US dollar fell to almost CAD1.3235 ahead of the weekend, culminating a 1.5% weekly drop. It was the fourth consecutive weekly decline for the greenback, the longest losing streak since October 2021. The modest unwinding of risk-sentiment and the firmer tone for the US dollar, has seen the greenback recover to CAD1.33. The next upside target may be near CAD1.3350. Many find the Mexican peso’s weakness ahead of the weekend difficult to comprehend, but we suspect it was the result of unwinding short yen carry trades that were used to finance long peso positions. As the yen strengthened dramatically, positions were unwound. The dollar shot up from new two-and-a-half year lows (~MXN19.2655) to a little above MXN19.59. A move now through MXN19.63 may signal a move toward MXN19.70-75.