Dollar Sets Back into Month- and Quarter-End Ahead of likely US Government Shutdown

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Marc Chandler
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Overview: The dollar's surge stalled yesterday, and follow-through selling has pressed it lower against all the G10 currencies today. The dollar-bloc and Scandis are leading the move. Month-end, quarter-end pressures, coupled with a likely partial shutdown of the government beginning Monday, and after key chart levels were approached or violated earlier this week, serving as a bit a cathartic event. The Swiss franc snapped a 12-day losing streak yesterday, its longest since 1975, and is higher today. Still, unless the euro rises above about $1.0655, it will extend its losing streak to 11 consecutive weeks. Emerging market currencies, save the Russian ruble and Turkish lira are also firmer today. 

Although Japanese stocks traded with a lower bias, most of the other large equity markets advanced, led by Hong Kong and mainland shares that trade there. The mainland's holiday that runs all next week began today. Europe's Stoxx 600 is up over 1%, having ended a five-day slide yesterday. If sustained, it would be the largest gain in a little more than two weeks. US index futures are trading around 0.4%-0.7% higher. Bonds are also rallying. Benchmark 10-year yields are off 7-10 bp in Europe, led by Italy, despite higher-than-expected September CPI. Gilts are a laggard, with yields off about five basis points. The 10-year US Treasury yield is down around three basis points to 4.54%, nearly unchanged on the week. Lower yields and a softer dollar are lending gold some support after dropping to six-month lows yesterday. It is trading inside yesterday's range (~$1857.7-$1879.6). November WTI reversed lower after reaching $95 yesterday. It fell to around $91.40 and is consolidating today to trade near $92.30 in the European morning. 

Asia Pacific

China has begun a long holiday period that runs through next week, shutting mainland markets. Still, the September PMI will be reported over the weekend. Although it may not be evident in market prices, the numerous modest steps, instead of large stimulus appears to be yielding some results. While may be true that structural challenges are not addressed, cyclical forces can dominate in the near-term. The manufacturing PMI, for example, is expected to rise above the 50 boom/bust level for the first time in six months. The composite PMI is likely to rise for the second consecutive month. The Caixin composite is projected to rise for the first time in four months.

Japan's price pressures are moderating. Tokyo's CPI is a good tell of the national figures, which are reported with a longer lag. Tokyo's headline CPI peaked in January at 4.4% and stands at 2.8% in September. It has not risen since April. The core rate, which excludes fresh food, fell to 2.5%, its lowest level since July 2022, from 2.8%. The BOJ's latest forecasts has the core rate back below 2% by the end of next year. After stalling at 4.0% in July and August, the measure that excludes fresh food and energy slipped to 3.8%, only the second decline since the end of 2021. Separately, Japan reported August employment, retail sales, and industrial production. Japan's unemployment rate was 2.5%-2.7% in 2022 and 2.4%-2.7% this year. In August, it was steady at 2.7%, and the jobs-to-applicant ratio was steady at 1.29. The participation rate was also steady at 63.1%. After a dramatic 2.2% rise in retail sales in July, it eked out a small 0.1% increase in August, somewhat weaker than expected. Lastly, July’s 1.8% decline has been followed by a flat August, which was considerably better than the 0.8% decline projected by the median forecast in Bloomberg's survey.

Meanwhile, the "intervention watch" continues, but with US Treasury yields extending their rise, now does not seem to have the most favorable auspices. For the first time since easing early August, the BOJ bought JGBS in an unscheduled operation. The amount was thought to be small and the 10-year JGB yield is nearly unchanged on the day. Other long-dated yields are also little changed. The dollar was offered. After peaking at JPY149.70 on Wednesday, the dollar fell to JPY149.15 yesterday, and follow-through selling took it to almost JPY148.50 today in the Asian session. It recovered back to yesterday's low in early European turnover, where it appeared to be stalling. The market should be a bit more concerned about intervention if the likely partial shutdown of the US government, widening autoworkers' strike, and resumption of student loan servicing weakens the economy and pulls long-term yield back from their highs. Japanese officials have said they are in daily contact with the US Treasury and Secretary Yellen has expressed some sympathy if the intervention was aim at unstable markets. Yet, near 9.4% three-month implied yen volatility is at the lower end of where it has been for the past six months. One-week vol reached 6.5% at the start of the week, the lowest of the year and is now a little above 8%. The Australian dollar recovered smartly from the year's low set on Wednesday near $0.6330, rallying a fully cent. It closed firmly above $0.6400 and the 20-day moving average (~$0.6420). Follow-through buying has lifted the Aussie to a seven-day high near $0.6485. Options for nearly A$660 mln expire today at $0.6500. Another batch for around A$565 mln expires there on Monday. The US dollar settled against the offshore yuan near CNH7.2960 yesterday, its lowest close since Monday, September 18. Today, it has recorded a two-week low near CNH7.2810. 

Europe

The eurozone's CPI rose by 0.3% in September and that makes for a 2.8% annualized rate in Q3, down from 3.6% in Q2. The year-over-year rate fell to 4.3% from 5.2% and another large decline is expected next month. Still, the weakness of the euro and higher oil prices will blunt some of the base effect. Recall that in September and October last year, the eurozone's CPI rose by 1.2% and 1.5%, respectively. The core rate fell from 5.3% to 4.8%, which matches the slowest pace since August 2022. Yesterday, Germany reported lower than expected figures, while Spain surprised on the upside. Today France surprised on the downside, with a 0.6% decline month-over-month, which was twice as large as the median forecast in Bloomberg's survey anticipated. Italy's surprised on the upside,  

The UK's Q2 GDP was left unchanged at 0.2%, but the year-over-year rate was revised to 0.6% from 0.4%. Consumption and government spending were revised lower. Capital formation and business investment were revised higher. Exports were not as weak as initially reported but imports were considerably stronger. The UK reported a dramatic widening of the Q2 current account deficit from a revised GBP15.2 bln (from GBP10.8 bln initially) to GBP25.3 bln in Q2. The median forecast in Bloomberg's survey sees the UK economy growing by 0.1% expansion in Q3 and in Q4 before stagnating in Q1 24. That said, the swaps market in about an 80% chance of a hike Q1 24. At the start of the week, only slightly more than 50% discounted. 

Slovakia goes to the polls tomorrow to elect its fifth prime minister in four years. For Slovaks, the election is important as former Prime Minister Fico, who was forced to resign in 2018 amid mass protests following the killing of an investigative journalist and his fiancée, is running ahead in the polls. It is important because since Russia's invasion of Ukraine, Slovakia has been an important ally. Unlike Poland and Hungary which continued a ban on Ukrainian grain after the EU abandoned its, Slovakia appears to have worked out a licensing arrangement. Fico's election would strain the ties with Ukraine. Cracks in the support for Ukraine, also emanating from the US budget debate, may encourage Russia (and China) to stay the course. The war in Ukraine is set to continue and broaden.

Short covering helped lift the euro to almost $1.0580 yesterday, slightly more than we had projected. There are options for a little more than 3 bln euros struck at $1.06 that expire today and the follow-through buying today lifted the euro to around $1.0615, a four-day high. The next chart resistance is near $1.0640. Sterling recovered from six-month lows on Wednesday a little ahead of $1.21 and traded to $1.2225 yesterday, a three-day high. It stalled shy of the $1.2230, the (38.2%) retracement of the leg down that began from around $1.2425 on September 19. But has surmounted it today, rising to about $1.2255 in Europe. The next resistance area is $1.2270-$1.2300.

America

The US Q2 growth was left unchanged yesterday at 2.1%, but the consumption component was slashed in half to 0.8% from 1.7%. That warns that the anticipated pullback in the consumer has already begun. Today's August personal consumption expenditures will likely be lifted by higher energy prices, but in real terms, it may be flat. The resumption of student loan servicing is likely to knock consumption further next month. Still, personal consumption is expected to outstrip the gain in income and that means savings continues to be drawn down. The Federal Reserve targets the headline PCD deflator but draws attention to the core rate, which is understood as better gauge of price pressures.

Rising energy prices, even if the US is a net energy exporter, still acts as headwind to consumption. The core PCE deflator has stabilized around 0.2% a month. A 0.2% rise in August puts the three-month annualized rate at about 2.5%, by third from the previous three months. It has been a while since the US trade balance attracted much market attention. Given the dollar's strength and growth differentials, it has been impressively stable and smaller than a year ago. In the first seven months of 2023, the US trade deficit has averaged $90.4 bln a month. In the Jan-July 2022 period, the deficit averaged about $103.9 bln a month. That said, there has been a significant deterioration since before Covid. In the first seven months of 2019, the US monthly trade deficit averaged $72.4 bln. Moreover, the deterioration has taken place even though imports from China have been reduced. China's mercantilism is disruptive, but the US chronically large trade deficit emerged before Beijing. The source of US imports is changing and the new surplus countries, like Vietnam will fall under great scrutiny.

Canada reports July GDP today. After a 0.2% contraction in June, a 0.1% expansion is expected. The market already appears to have taken this onboard and the firmer inflation readings. The swaps market has a nearly 80% of a hike discounted for Q4. While the partial closure of the US government will interfere with the economic reports, Canada sees merchandise trade, IVEY and S&P PMIs, and September employment data next week. For its part, the central bank of Mexico kept its overnight target rate at 11.25% and reiterated no cuts are expected anytime soon. Next week, Mexico reports survey data and worker remittances. Domestic vehicle sales for September will be reported too. August sales were 25% above August 2022 and year-to-date vehicle sales have increased by slightly more than 23%. Through August, in comparison, US vehicle sales are almost 13% above year ago levels.

The US dollar reversed lower on Wednesday after testing the 20-day moving average near CAD1.3540. Follow-through selling took it to almost CAD1.3470 before finding new bids, which carried it back to around CAD1.3515. Today, the greenback has fallen to about CAD1.3430, a new low for the week. Last week's low was closer to CAD1.3380. A break of that area would target CAD1.3300. The US dollar traded inside Wednesday's range against the Mexican peso. It finished near session lows (~MXN17.55) ahead of the conclusion of the central bank meeting. The central bank raised it inflation forecast for Q1 24 to 4.4% from 4.1%, driving home the point that policy is on hold. Many now do not think the first cut will be delivered before the election around the middle of next year. The greenback has been sold a little below MXN17.42. A break of MXN17.40 could signal a move toward MXN17.25-35. The greenback consolidated against the Brazilian real as well, but it mostly held above the 200-day moving average near BRL5.0230. Still, given the dollar's heavier tone, it could return toward BRL4.97-8 today.