Food Prices Drive China’s CPI Lower while the Greenback is Mostly Firmer in Narrow Ranges

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Marc Chandler
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Overview: The dollar is mostly firmer against the G10 currencies and has been confined to tight ranges through the European morning. Outside of the China's deflation and Japan's monthly portfolio flow data that showed Japanese investors bought the most amount of US Treasuries (~$22 bln) in six months in September, the news stream is light. Most emerging market currencies are trading with a softer bias today. The Philippine peso is the strongest among the emerging market currencies after Q3 GDP rose nearly twice as much as expected (3.3% quarter-over-quarter vs. 1.8% median forecast in Bloomberg's survey. 

Benchmark 10-year yields up mostly a couple of basis points in Europe, while the 10-year US Treasury yield has popped up by five basis points to 4.53%. The two-year Treasury yield is flattish near 4.94%. Meanwhile, equities are mostly higher. In Asia Pacific, Hong Kong and India were the exceptions, with modest losses. Europe's Stoxx 600 is extending yesterday's gains after falling Monday and Tuesday to snap last week's five-day advance. US index futures are narrowly mixed after the late recovery yesterday allowed the S&P 500 to extend its gain to eight consecutive sessions and the NASDAQ to streak to nine sessions. Gold briefly dipped below $1950 yesterday and its losses have been extended slightly through $1945 today. Support is seen now in the $1925-$1935. December WTI frayed the $75-level yesterday but remains above there today. A move back above $76.70-$78.00 may help steady the technical tone. 

Asia Pacific

China's October CPI fell to -0.2% year-over-year after a flat September. While consumer price pressures are soft, the headline overstates the case. Pork prices plunged 30.1% and fresh vegetable prices fell by 3.8%. Excluding food and energy, China's core CPI stands at 0.6%, down from 0.8% where it spent Q3. Commodity prices fell in October, and this arrested the recovery in producer prices seen every month in Q3. Producer prices fell 2.6% from a year ago after a 2.5% decline in September. On a month-over-month basis, producer prices were unchanged after rising 0.4% in September. Even though the decline in consumer prices was driven by food prices, today's report boosts speculation that the PBOC may cut the one-year Medium-Term Lending Facility rate (2.50%) next week.

Japan reported a larger current account surplus in September of JPY2.72 trillion (JPY2.14 trillion in August). It was the largest since March 2022. As is widely recognized, Japanese current account surplus is not driven by the trade balance. Afterall, Japan is experiencing a trade deficit, though it is falling. The average monthly trade deficit was JPY1.3 trillion last year. The average monthly trade deficit this year has been about JPY625 bln. Still, on a quarterly basis the deficit was reduced to about JPY113 bln monthly average in Q3, the fourth consecutive quarterly improvement. While Japan's undervalued currency has not brought much criticism from Europe or the US, we suspect it could change if Japan begins experiencing a growing trade surplus. The current account figures also showed that Japanese investors bought JPY3.3 trillion (~$22 bln) of US Treasuries in September, the most in six months. Japanese investors were net sellers of other sovereign bonds in September, with the notable exception of French and Swedish bonds.

The yen fell to five-day lows yesterday, even though the US 10-year yield softened, dipping below 4.50%. Part of the yen's weakness may have stemmed from comments by Bank of Japan Governor Ueda who seemed to suggest that there is only a small chance of an end to the negative overnight interest rate this year, as some had anticipated. He was quoted saying "At this point, I am not sure when we can be confident" that the inflation target will reach on a sustainable basis. By poking above JPY151, the dollar retraced a little more than (61.8%) of the three-day decline that began the month. It extended yesterday's gains marginally to almost JPY151.20 in the European morning. There are around $1.1 bln in options at JPY151 that expire today. The Australian dollar slipped through $0.6400 in late dealings in North America yesterday to meet the (50%) retracement objective of the rally off the year's low set on October 26 near $0.6270. It is in narrow range today of roughly $0.6395-$0.6410. The next retracement (61.8%) is near $0.6365. Additional support maybe around $0.6330. A move above $0.6450-5 would lift the tone. The greenback edged higher against the Chinese yuan to a three-day high near CNY7.2875. Still, it continues to trade in a narrow range that was largely at the end of last week. The PBOC's dollar fix and the average in the Bloomberg survey continues to narrow gradually due to the survey response. The reference rate has slipped slightly to CN7.1772. A week ago, it was CNY7.1796. The average projection in Bloomberg's survey was CNY7.2721, down from CNY7.3134 a week ago.

Europe

The five economic think tanks that advise the German government delivered more sobering news. Yesterday, they slashed this year's GDP forecast to 0.4% from 0.2% and nearly halved next year's forecast to 0.7% (from 1.3% in March). Germany's national measure of CPI (as opposed to the EU harmonized metric) has averaged 6.5% through October. The Council of Economic Advisers see it falling to 6.1% this year before tumbling to 2.6% next year. 

Negotiations between the EU and Switzerland for a more comprehensive trade agreement were aborted in 2021 but may resume next year. Yesterday, Swiss government indicated it was cobbling a new negotiating mandate together. There are various sectoral agreements in place but both sides seem interested in a broader agreement. Switzerland wants to reach new agreements on electricity, food safety, and health, single market participation (to include the Agreement on the Free Movement of Persons), its financial contributions to the EU, rules regarding state aid to industry and financial regulation.

Switzerland was dropped from the US Treasury's monitoring list of countries having met only one of its three criteria (fx intervention, size of current account, and bilateral trade imbalance with the US) in the four quarters through June 2023. Separately, the Swiss National Bank's 13F filing with the SEC published yesterday revealed that its US equity portfolio (of more than 2600 listed companies) declined by 13% in Q3 to $127.5 bln as of the end of September. Yet, the Russell 3000 and the S&P 500 fell by about 3.6% in Q3. The Swiss franc depreciated by a little more than 2% against the US dollar. The SNB holds about 25% of its foreign exchange reserves in equities ("as market-neutral and passive as possible", while exempting systemically important banks and coal miners). As of the end of last month, the value of SNB reserves was CHF657.8 bln (or ~$725 bln).

The euro met the (38.2%) retracement of last week's rally found near $1.0665. It recovered to new session highs around $1.0715 before consolidating above $1.07. A move above $1.0720 lifts the technical tone. It is in an exceptionally narrow range so far today, mostly between $1.0685 and $1.0715. Provided, the $1.0680 area hold now, we anticipate another try at the $1.0720 area in the North American session. For its part, sterling met the (50%) retracement objective of last week's rally on Tuesday near $1.2260. Yesterday, it fell to almost $1.2240 before it too recovered. The next retracement (61.8%) is slightly below $1.2225. The recovery stalled around $1.2300, and sterling held above $1.2280 in the North American afternoon. It is little changed in Europe, rising to almost $1.2310 before slipping back. Overcoming resistance in the $1.2335-60 area would boost confidence that the pullback is over. 

America

The US 10-year yield fell to a marginal new session low near 4.50% after the $40 bln sale. The auction was not as smooth as yesterday's three-year note sale. The 10-year was awarded at 4.519% ever so slightly higher than the 4.511% in the When-Issued market. The bid-cover for the three-year was higher than the last auction (2.67 vs. 2.56) but not for the 10-year (2.45 vs. 2.50). Still, indirect bidders stepped up for 69.7% of the sale (vs. 60.3% previously). In dollar terms, this means that indirect bidders took $27.88 bln of the 10-year note, up from $22.9 bln at the auction. Given the yield was near the lower end of where it has traded since late September, meaning that there was no "concession" to induce buying the larger amount ($2 bln increase from August's refunding) that was being tendered, the auction was successful even with the tail. Today, Treasury is in for more. It will sell $180 bln of four- and eight-week bills and finishes the refunding with $24 bln 30-year bonds. The 30-year yield fell to about 4.63%, its lowest since last September. Some argue that the 30-year is not so attractive when one can be 5.4% on the three-month bill. The issue is really about market segments. If one thought that the US interest rate cycle was near a peak and wanted to lock in rates, one faces reinvestment risk with the bill. That is ask when the bill mature then what? One may have to accept lower yields.

There seems to be a new buzz that US-Chinese relations are thawing. US Treasury Secretary Yellen will meet with China's Vice Premier He. Earlier this week US and Chinese officials had "constructive" nuclear talks with the US. There is speculation that Kerry (special presidential envoy on climate) may meet his Chinese counterpart on the sidelines of COP28 in Dubai that starts at the end of month. More immediately, Biden and Xi may meet in San Francisco next week at the APEC summit (though Beijing does not appear to have confirmed it). This all might be Kabuki theater. While there have been a number of high-ranking visits, behaviors have not changed. That is the only thing, arguably, that really matters. The US announced its latest technology sanctions on China a month ago and reports suggest that the US continues to military personnel in Taiwan on training assignments. This week, Beijing required exporters of rare earths and oxide products to report transactions. China accounts for almost 70% of the mining of rare earths and almost 85% of the global processing capacity in 2022. Earlier this year, China boosted the export reporting requirements for graphite, gallium, and germanium products, used in semiconductor chip fabrication and computers.

Mexico reports October CPI today, several hours before the central bank concludes is policy meeting. Headline and core inflation likely continued to moderate. The improvement in Q2 may have overstated the case. Mexico's CPI actually fell in Q2 (~-0.20% at an annualized rate) and rose at almost a 2.0% annualized rate in Q3, which is the same pace as H1 23. The pace of core inflation rose at annualized rates of almost 1.40% in Q2 and Q3 down from 2.40% annualized rates in the previous two quarters. The median forecast in Bloomberg's survey calls for a 4.26% year-over-year headline rate (down from 4.45% in September). The core rate is expected to fall to 5.49% (from 5.76%). There is little doubt that the central bank will keep the overnight cash rate target at 11.25%. Forward guidance from the central bank, and its economic outlook will be the key to the market's reaction. The swaps market appears to be looking for the first cut by Banxico in Q2 24 (June 1 national elections).

The Canadian dollar has underperformed. Unlike the other currency pairs, we look at here, it is the only one to overshoot the (61.8%) retracement of last week's gains. For the greenback that level was almost CAD1.3800 and yesterday's high was closer to CAD1.3815. The weakness in Canada's September building permits (-6.5% vs. median forecast in Bloomberg's survey of a 1.2% gain) may not have helped matters, but the Canadian dollar was soft ahead of it, and was near session lows before the data release. The US dollar is consolidating in a narrow range between about CAD1.3780 and CAD1.3805. It takes a break of the CAD1.3740-50 area that holds a retracement objective of this week's recovery and the five- and 20-day moving averages to give technical reason to suspect the high is in place. The greenback traded inside Tuesday's range (~MXN17.45-MXN17.5940) against the peso yesterday, which was largely seen on Monday as well. This consolidation looks slightly favorable for the US dollar. The MXN17.59 area is the (38.2%) retracement of the leg down since November 1. It is in a range today of approximately MXN17.5250 and MXN17.5835. The (50%) retracement and 200-day moving average is near MXN17.68-69. The greenback snapped a five-day slide against the Brazilian real yesterday and settled above BRL4.90. The gap from last week, roughly BRL4.9340-BRL4.9515, is important from a technical perspective. Overcoming it could signal a move back to the BRL5.00-BRL5.05 area.