After Dramatic Week, Capital Markets are Stabilizing

Overview: After tumbling headlong this week, the dollar appears to be broadly consolidating ahead of the weekend Among the G10 currencies, the Canadian dollar's 1.2% gain is the least and it made new 10-month highs earlier today The beleaguered Scandis soared The Norwegian krone's 6.6% advance followed by the Swedish krona's 5.8% surge led the major currencies The Dollar Index is off about 2.4% this week ahead of the North American session It is the largest loss since last November. Among emerging market currencies, the Hungarian forint (~5%) and South African rand (~4.5%) led the way. Only the Chilean peso, Turkish lira, and Argentine peso fell. The lower dollar and softer rates helped lift gold to $1963 today. It settled near $1925 last week. As the greenback stabilized today, the yellow metal slipped back to around $1955. 

Most Asia Pacific bourses but Tokyo advanced today Taiwan and South Korea led today's advance, but Hong Kong's 5.7% advance leads the week's surge Europe's Stoxx 600 is stalling after rallying for the past five sessions The slippage today leaves it up a little more than 3% to nearly offset last week's decline. Several large US banks report earnings today. The index futures are sporting minor losses today. After a sharp drop in yields in recent days, European and US benchmark 10-year yield are mostly a little firmer (1-3 bp) The 10-year Treasury yield is up 2.5 bp to 3.79% and the two-year yield is 3.5 bp higher to 4.66% Broadly speaking, the moves this week have been statistically quite large and we suspect a bit exaggerated. The consolidative tone with some back-and-filling may be needed.   

Asia Pacific

Even after the surge in lending last month, Beijing seems to recognize the need for additional measures to support the economy. Officials are suggesting more, targeted measures for the property market will be forthcoming. Still, after shaving the one-year medium-term lending facility rate last month by 10 bp to 2.65%, it is unlikely to announce another cut when it set first thing Monday. Shortly after the MLF rate is set, China will announce Q2 GDP and details from June. While the economy appears to have slow some momentum as the quarter progressed, economists expected China to report quarter-over-quarter growth of 0.8%. That follows a 2.2% expansion in Q1 and leaves the world's second-largest economy on track to achieve the 5% growth target this year.

Japan revised May's industrial output figures to show a 2.2% decline from -1.6% initially. It was the first decline since January. On a year-over-year basis, the 4.2% (rather than 4.7%) increase was the first since last October. Japan's economy grew but 2.7% at an annualized rate in the first quarter and is seen slowing to around a 1% in Q2. Economists in Bloomberg's survey see it slowing a bit more in Q3. Meanwhile, as the yen rallied recently implied one-month volatility reached 11.6% on Wednesday, the highest since mid-April. It eased nearly one percentage point yesterday as the yen's recovery slowed. It is straddling the 11% area today. It has remained below its 200-day moving average (~12%) since mid-April. It bottomed on June 22 near 8.4%, a few days before the dollar topped (June 30). 

The dollar held below JPY139 yesterday and eased to new session lows in late turnover yesterday, slipping below JPY138. The JPY138.25 area corresponds to the (38.2%) retracement of the dollar's rally from the JPY127.25 low seen in mid-January to the year's high set on June 30 near JPY145.05. The dollar's losses were extended to JPY137.25 in Asia today before rebounding to JPY138.50. The 200-day moving average is near JPY137.10 The dollar settled the past two sessions below the lower Bollinger Band (~JPY138.15 now) A move back above JPY139.00 would lift the tone, but expectations for an adjustment in the Yield Curve Control are running high and may limit the dollar's upside. The Australian dollar approached $0.6900; the four-month high set in mid-June. There are options for A$805 mln at $0.6900 that expire today. It is holding above $0.6860 amid today's consolidation. Recall that last week, it has retested $0.6600. The next technical target is near $0.7000. The move has been so quick, that Australian dollar is fraying its upper Bollinger Band (0.6885). Deputy Governor Bullock was named Governor Lowe's successor The substance of policy is not seen changing when she takes the reins in September, but a change at the helm was thought necessary to implement the reforms that have been announced that include fewer meetings, regular press conferences, and a committee that set monetary policy The greenback gapped lower against the Chinese yuan and briefly slipped below CNY7.12 to its lowest level in nearly a month (June 16) The yuan's 1.2% gain this week is the most in six months We do not think it is coincidence that the yuan's recovery this week took place as the as the dollar fell broadly Still, the PBOC continued to set the dollar's reference rate higher than expected (CNY7.1318 vs. CNY7.1425). 

Europe 

The news stream from Europe is light ahead of the weekend. The eurozone reported May's trade figures, a 900 mln euro deficit was recorded. The eurozone's trade balance averaged a 2.3 bln euro deficit this year through May, roughly 1/10 of the size seen in the year ago period. Late yesterday, Germany reported a current account surplus of almost 9 bln euros in May after a 22.4 bln euro surplus in April (revised up from 21.8 bln euros). Germany's current account surplus is driven by its trade account. In the first five months of the year, Germany has recorded a 77 bln euro trade surplus (up from a 32 bln euros surplus in Jan-May 22). The current account surplus so far this year is a little more than 101 bln euros (~88.5 bln euros in the comparable year-ago period). The key development this week has been financial asset rally and the 2%+ appreciation of the euro. The 3.1% rally in the Stoxx 600 this week was the most since the end of Q1. Benchmark 10-year yields fell 15-24 bp and the peripheral premiums mostly fell. Two-year yields fell 9-15 bp, and the peripheral premiums also fell. 

For its part, the euro rallied about 2.4% this week, making it the best weekly performance since last November. It is fifth weekly gain in the past six. The euro punched through $1.12 in the US yesterday and reached $1.1245 today. The next notable technical area around $1.1275, the (61.8%) retracement of the euro's decline from the early 2021 high near $1.2350. The move has been very sharp and at its best yesterday, the euro was more than three standard deviations above its 20-day moving average (the Bollinger Band is set at two standard deviations). Today, the upper Bollinger Band is near $1.1180. Sterling continued to plough ahead. It was probing $1.26 at the end of June and has broken above $1.31 for the first time since last April. The move has been quick, and sterling settled above its upper Bollinger Band for the third consecutive sessions yesterday. It is found near $1.3080 today, while sterling found support around $1.3095. While the $1.3200-50 may hold psychological significance, the next important chart area may be closer to $1.3325-50. 

America

Softer than expected producer prices, on the heels of the softer CPI and the disappointing jobs report has fueled a sharp decline in US rates and dropped the boom on the dollar. The Dollar Index is having its worst week since the end of Q1 2020, falling nearly 2.5%. A trade-weight dollar index fell by closer to 1.7%, which was the largest weekly decline since November 2020. Bannockburn's World Currency Index, a GDP-weighted basket of the 12 largest economies has risen by about 1.2% this week, its best week since mid-January, reflecting the strength of the large economies' currencies against the dollar. 

The weighted average of transactions in the Fed funds market, its effective average, rather than middle of the target range, is what Fed funds futures contract settles against. It stands at 5.08%. Assuming a 25 bp hike, for which the CME FedWatch Tool estimates is about 95% discounted for the end of the month,  the effective average will for the Fed funds rate will be about 5.33%. The January 2024 contract (FOMC meeting concludes on January 31, making it a good proxy for the year-end rate) implied yield is 5.31%, down about 11 bp since before the last Friday's employment report. In the last two sessions alone the US two-year yield has fallen by almost 25 bp Now, near 4.66%, it is about 45 bp below its July 6 high As an aside, we note that St. Louis Fed Bullard unexpectedly announced he will step down next month and take an academic post Earlier this year, the Fed lost an important voice in Brainard, and now from the opposite side of many debates, Bullard Still, the substance of policy is unlikely to be impacted

The US dollar briefly traded below CAD1.31 today, a new low since last September However, the greenback recovered to near CAD1.3140 It is consolidating in the European morning. Position adjustment ahead of the weekend could see CAD1.3160-75. Note that the lower Bollinger Band is slightly below CAD1.31 today The US dollar set new multiyear lows against the peso near MXN16.81 in the middle of the week It recorded a slightly higher low yesterday (~MXN16.8265), and so far, today, has not traded below MXN16.8340. The dollar settled the last two sessions below the lower Bollinger Band, found near MXN16.8760 today. Given the quieter economic calendars ahead of the FOMC, ECB, and BOJ meetings in the last week of the month, the peso looks like an attractive place to park funds ideally on a dollar move above MXN17.00