Dollar Comes Back Bid

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Marc Chandler
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Overview: The US dollar is recovering today after it was sold following the jobs report before the weekend. It is enjoying a firmer bias against nearly all the G10 currencies. The dollar-bloc is faring best, while the Scandis are off close to 0.5%. Most emerging market currencies are also softer, with only a few Asian currencies edging higher today, including the South Korean won, Indian rupee, and Taiwanese dollar. With a stronger dollar and firmer interest rates, gold is trading heavier and looks poised to test last week's low near $1926.

Asia Pacific equities are mixed. The softer yen may have encouraged the bid to Japanese stocks, while Hong Kong and mainland, South Korean and Australian stocks eased. Europe's Stoxx 600 is giving back the pre-weekend gain of nearly 0.3% in fully amid another disappointing German industrial production report. US futures indices are trading with a firmer bias. While the yield of the 10-year JGB slipped for the second consecutive session, European and US rates are higher. European benchmark yields are mostly 3-4 bp stronger, the British and Italian benchmark yields are six basis points higher. The 10-year US Treasury yield that fell 14 bp before the weekend is nearly seven basis points higher today around 4.10%. September WTI that advanced nearly 2.8% last week, its sixth consecutive weekly gain, has come back offered today. It is off about 1% and dipping below $82 a barrel in the European morning.

Asia Pacific

Two stories by the Financial Times drew attention over the weekend. The first was that in China “Multiple local brokerage analysts and researchers at leading universities as well as state-run think-tanks said they had been instructed by regulators, their employers and even domestic media outlets to avoid speaking negatively about topics ranging from fears of capital flight to softening prices."  The broader context includes that Beijing has quietly been reducing the information flow and access to data. Many outside observers have been suspicious of the veracity of Chinese data, and this can only contribute to the basic mistrust. 

The second story was the pushback against the US weaponization of semiconductors in its competition with China. Yang Hyamg-ja, a member of South Korea's parliament and former chip engineer and Samsung executive caution that Washington's approach risked damaging relations with America's Asian allies. The threat is two-fold. First, it could provoke a backlash from China that would disrupt the finely balanced supply chains. Second, and more threatening, it creates more incentives for China to pursue rapid technological advancement and strengthen China-based rivals like YMTC. Ironically, if this is among the first signs of "sanction fatigue," Ukraine fatigue seems to on the rise. At the end of last week, a poll for CNN, conducted by SSRS, found that a slim majority of Americans (55%) do not favor more aid to Ukraine. The partisan split could position Ukraine as an issue (71% of Republicans favor no more aid, while 62% of Democrats favor more assistance).

The dollar recovered from a test on the JPY141.50 area to reach JPY142.40 in Europe. The pre-weekend high near JPY143.00 stands in the way of another run at JPY144.00 and the June high slightly above JPY145.00. Initial support is now seen near JPY142.00. The Australian dollar was turned back from $0.6600 before the weekend. It could not resurface above it today. It is hovering around where it settled at the end of last week (~$0.6570). It has spent most of the session thus far between $0.6560 and $0.6580. It has lost nearly four cents since mid-July and may have entered a consolidative phase. A close above $0.6600 would help lift the tone. The greenback gapped higher against the Chinese yuan but held below last week's high (~CNY7.1955). It slipped to CNY7.1875 in late dealings, Last Friday's high was closer to CNY7.1860. The PBOC set the dollar's reference rate at CNY7.1380. The median projection in Bloomberg's survey was CNY7.1678. Separately, as we suspected, Chine's reserves edged up last month to $3.204 trillion from $3.193 trillion on what appears to have been valuation adjustments.

Europe

The 7.0% surge in Germany June factory orders did not spell relief for Germany industry. Industrial production fell for the second consecutive month. The 1.5% decline was three-times largest than expected as output slumps to a six-month low. It brings the Q2 23 contraction to an annualized pace of about 5.2%. In Q2 22, German industrial output expanded by about 7.2% at an annualized rate. Even though the German economy contracted by 0.1% quarter-over-quarter in Q1 23, industrial production (averaged 1.0% increase a month) expanded by the fastest since Q4 21. Separately, reports suggest that the German government will shortly announce its intention to boost the Climate and Transformation Fund by about 20 bln euros to more than 200 bln euros (to cover a period through 2027). The cabinet's approval may be secured in the middle of the week before seeking parliamentary approval. Note that the fund is not part of the regular federal budget. It is being financed from a diversion of about 60 bln euros that had originally been to cope with the pandemic. The move is being challenged in German courts. The fund's revenues are also garnered from proceeds for European emissions trading and Germany's carbon prices. At the beginning of next year, the tax will be lifted from 30 euros a ton to 40 euros. Lastly, the Bundesbank, perhaps in anticipation of the ECB doing the same thing, will no longer pay an interest rate on government deposits as of October 1. The ECB's caps the yield om government deposits around 3.45%. The Bundesbank held about 54 bln euros of government deposits at the end of last month. Ostensibly, those government deposits would flow German bills.

Brent and WTI rose to new highs for year, with six-week rallies in tow to start this week. Last week, Saudi Arabia announced it would extend the unilateral 1 mln barrels-per-day- cut in exports and kept the door open to more cuts. Its output is seen near a two-year low of around 9 mln bpd. Russia appears to have begun delivering on its March promise to cut exports by 500k bpd. Estimates suggest, it may have cut by about 300k bpd to 9.5 mln bpd. Due to inadequate investment, political instability, and arguably, questionable decisions, many other OPEC+ countries are producing less than their quotas. Although reports suggested US output was stagnating, several of the largest shale producers in the US have upgraded their output forecasts, even as the number of rigs fall. Over the weekend, Saudi Arabia announced it was lifting September prices to Europe and Asia by about 30 cents a barrel to $3.50 above the benchmark. Some had expected a 50 cents bump. Also, notice that although there has been much ink spilled on claims about a new petro-yuan, its oil is still being benchmark in dollars, its currency is pegged to the dollar, and leaving aside one-off transactions, the bulk of its oil appears to be sold for dollars. Lastly, while there is often a reasonable correlation between changes in oil prices and the US and Germany's 10-year breakeven rates (the interest rate difference between inflation-linked and the conventional instruments) it has broken down. Over the past 30 sessions, the correlation has become slightly inverse for the first time since late 2021. The correlation between the change in Germany's 10-year breakeven and Brent has also become slightly inverse, but it also had been inverse briefly this past February. This suggests that the markets are not seeing the rise in crude oil to be inflationary.

The euro is paring the pre-weekend gains that stopped short of resistance in the $1.1050 area. The euro recovered from the $1.0910 area on August 3 and with today's losses, it has approached the (61.8%) retracement objective seen near $1.0960. There are options at $1.0940 today for almost 875 mln euros that expire today. There are around 1.3 bln in options that expire tomorrow at $1.0870 and another batch for 980 mln euro at $1.0890 that expire Wednesday. Sterling is faring a bit better and is consolidating in a narrow range of around a quarter-of-a-cent on either side of $1.2740. It rallied near two cents from last Thursday's low to Friday's high and at $1.2700 would have given back half. The daily momentum indicators are stretched but look poised to turn higher in the coming days.

America

Although hourly earnings were firmer than expected and the unemployment rate ticked down (to 3.5% from 3.6%), the overall report is seen as consistent with the soft-landing scenario. The pendulum of market sentiment appears to have swung toward a soft-landing after all. Yet this might be an ill-timed capitulation. The decline hours worked in the July jobs report is consistent with how productivity rose more than expected in Q2 (3.7% vs. median forecast for a 2.2% gain). It was a decline in aggregate hours worked. Moreover, oil and gasoline prices, and foodstuffs prices are rising. September crude oil has rallied for the past six weeks to reach levels not seen since last November. In the past three weeks, retail gasoline prices ae up more than 7.5%. This will reduce disposable income. On top of that the servicing of student loans will resume shortly.

Although the Atlanta Fed GDP tracker (updated tomorrow) currently sees the economy gaining momentum, we suspect the economy will slow. For this to happen, the consumer plays an important role. Consumption slowed from 4.2% in Q1 (according to the GDP report) to 1.6% in Q2 and may be halved this quarter. Government spending is likely to slow. Moreover, the decline in prices pressures will become more difficult. Consider that headline CPI fell from 6.5% at the end of last year to 3.0% at the end of June. The PCE deflator fell from 5.3% to 3.0%. The median dot in the Fed's June Summary of Economic Projections is it at 2.5% for the end of next year.

The Canadian employment data was disappointing. The unemployment rate rose for third consecutive month to stand at 5.5%. It was at 5.0% as recently as April. Canada lost 8.1k part-time jobs, which were not converted to full-time position, which rose by a mere 1.7k. It followed a surge of 109.6k full-time positions in June. Hourly wage (permanent workers) growth accelerated to 5.0% from 3.9%. Economists had expected a smaller increase. The Canadian dollar has fallen out of favor despite the six-week uptrend in crude oil prices. It has been struggling regardless of the risk environment or the direction of rates.

The US dollar is firm and knocking on the CAD1.34 area. A move above there targets the CAD1.3440-55 area, which holds the (61.8%) retracement objective of the decline from the end of May high near CAD1.3650 and the 200-day moving average. Initial support is seen in the CAD1.3360-70 area. Before the weekend, the dollar fell from MXN17.4280, its best level in two-months, to almost MXN17.00. It is consolidating today between around MXN17.0540 and MXN17.1140. This week's highlights are the July CPI report on Wednesday and the central bank meeting on Thursday. Inflation continues to moderate but it is still above target, and the economy appears to be resilient, leaving the central bank on hold for next several months, at least. Chile and Brazil begun their easing cycles.