Strategic Ambiguity Leaves Intervention Question Unanswered, but US Dollar has Steadied

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Marc Chandler
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Overview: Dramatic yen price action around the JOLTS report yesterday after the dollar pierced the JPY150 level spurred speculation of BOJ intervention. Although there has been no confirmation, the strategic ambiguity is helping steady the yen and the dollar more broadly today, even though US yields remain firm. Final PMI readings were a better than the flash estimates and this may also be facilitating the consolidative tone. Most promising, from a technical point of view, is the recovery in sterling, which after taking out yesterday's low is now trading above yesterday's high. Among the G10, only the yen and New Zealand dollar (RBNZ held as widely expected) are slightly softer. Most emerging market currencies are also firmer, including the Polish zloty, where the central bank may cut rates later today. 

Asia-Pacific equities fell sharply, with Japan and South Korea off more than 2% (which may help explain the won leading the losing emerging market currencies, off more than 1%). It is the third consecutive losing session for the MSCI Asia Pacific Index. Europe's Stoxx 600 is slightly firmer after losing more than 1% on Monday and again yesterday. US index futures are straddling little changed levels. Benchmark 10-year yields are higher. The 10-year JGB is at new highs, slightly above 0.80%, while European yields are mostly 2-3 bp higher. The 10-year US Treasury yield is pushing above 4.80%. Gold is consolidating after falling to almost $1815 yesterday, the lowest level since March. November WTI could not sustain yesterday's modest upticks and has come back heavier today. It is holding above yesterday's low near $87.75. Demand destruction concerns is offsetting OPEC+ expected confirmation of current output.

Asia Pacific

Neither Japan nor Australia's final service and composite PMIs change the fundamental picture, though they were better than the initial projections. At 53.8 rather than 53.3 flash reading (down from 54.3 in August), Japan's service PMI matches the lowest since January. The composite reading is at 52.1 rather than the preliminary estimate of 51.8 (52.6 in August). It averaged 52.3 in Q3 after 53.1 in Q2. Australia's services and composite PMI rose back above 50 in September after spending July and August below the boom/bust level. September services PMI stands at 51.8 (50.5 flash estimate and 47.8 in August). The final composite estimate was 51.5 up from preliminary estimate of 50.2 and 48.0 in August. It is the best since May. It averaged 49.2 in Q3 after 51.6 in Q2. 

Japanese officials have pushed back against idea that there is an "intervention level" and instead have encouraged the market to focus on volatility. Still, despite yesterday's dramatic swing there still is not confirmation of material intervention, One-week yen vol embedded in the options market jumped to 9.4% yesterday and almost 9.8% today before pulling back to below 9%. It reached the lowest level in around 18 months last week around 6.5%. It was near 22% when the BOJ last intervened in Oct 2022. Three-month implied vol is near 9.9%. The low last week was close to 9%. The year's low was set in mid-June near 8.8%. It was closer to 13.4% in September 2022 and spiked to 14.8% October 21, 2022, when the BOJ intervened.

The dollar pushed above JPY150, where options for almost $800 mln expire today and $1.5 bln expire on Friday. After spiking to JPY150.15, the highest close from 2022, the dollar dropped to about JPY147.45 and many suspect intervention. It may not be known for sure until the end of the month report is released. Last year, the BOJ did not intervene outside of Japan's time zone. It may have checked rates, though there are no reports that it did. With US yields making new highs and the BOJ buying JGBs today, it still does not seem like an opportune time to intervene and the relatively modest vol suggests intervention would not receive much sympathy within the G7 and the EBS volume at time of the "intervention" seemed light. Still, the market has been spooked and the greenback is in a narrow range of about 30 pips on either side of JPY149.00. The Australian dollar was sold a little through $0.6290 yesterday to draw near last November's low near $0.6270. Yesterday's low is holding today, and the Aussie is hovering around $0.6325 in quiet dealings. But it is barely entering the Bollinger Band, where the lower end is found around $0.6320. A break could signal another 1% loss on the way to last October's low around $0.6170. Surprising no one, the Reserve Bank of New Zealand maintained its overnight cash rate target at 5.50% where it has been since May. The New Zealand dollar peaked at the end of last week near $0.6050, the highest since mid-August but sold off Monday and Tuesday to briefly trade below $0.5900. Follow-through selling today took it to almost $0.5870. The year's low was set in early September near $0.5860. The US dollar remains firm against the offshore yuan. It reached CNH7.33 yesterday and is holding below it today. It is trading near CNH7.3150. It was near CNH7.2950 when the mainland holiday began. 

Europe

The final September EMU services PMI confirmed the first improvement since April. The pace of contraction in services slowed to 48.7 (48.4 flash estimate) from 47.9 in August. Last September it was at 48.8. The same is true of the composite PMI. It now stands at 47.2, rather than 47.1 initial estimate and 48.1 in September 2022. The new news was not so much about the minor revisions to the German (where the services PMI rose above 50 after dipping below it in August) and French flash estimate (44.1 composite from 43.5 preliminary estimate and 46.0 in August), but modest improvement in Italy (composite at 49.2 vs. 48.2) and Spain (50.1 composite, up from 48.6). Separately, the Eurostat reported that retail sales fell by a dramatic 1.2% (volume terms) in the eurozone in August, the biggest decline this year and more than twice what the median forecast in Bloomberg's survey projected.

The UK's final services PMI is at 49.3 rather than the initial estimate of 47.2 and 49.5 in August. It has not risen since April. The composite PMI stands at 48.5 (46.8 flash and 48.6 in August). It averaged 49.3 in Q3, down from a 53.9 average in Q2 and 51.3 average in Q1. The UK economy seemed to have hit an inflection point. The composite moved above the 50 boom/bust level in February and peaked at 54.9 in April and has fallen since and pushed back below 50 in August. Recall that the economy contracted by 0.5% in July, more than twice the decline expected (median forecast in Bloomberg's survey was -0.2%). August's monthly GDP estimate will be reported next week (October 12) amid renewed recession fears. 

The euro found support after the US JOLTS report slightly below $1.0450. It found support slightly above it today. Since pushing below $1.05 in the US afternoon on Monday, the euro has not been able rise back above it. A move above the $1.0550 area may be needed to stabilize the tone. The $1.04 area is the next technical objective. There are options for nearly 2 bln euros that expire Friday at $1.0450. Sterling's drop yesterday to almost $1.2050 met the (38.2%) retracement objective of sterling's recovery from September 2022 record low near $1.0350 to the mid-July high around $1.3140. That retracement was $1.2075. The next important technical area is $1.20, which also corresponds to the measuring objective of the head and shoulders pattern. Sterling made a marginal new low today near $1.2035 before bouncing back and trading above yesterday's high (~$1.2100). A potential bullish key reversal is unfolding but the close is critical. To confirm the one-day reversal pattern, sterling must close above yesterday's high. Lastly, after cutting the reference rate by 75 bp last month (to 6.0%), Poland's central bank is expected to deliver another quarter-point cut today. Since last month's rate cut, the Polish zloty has been among the worst performing emerging market currencies, falling by about 3.7% against the dollar and around 1.3% against the euro. 

America

Although many observers have downplayed the JOLTS report, its unexpected strength reported yesterday, helped lift US interest rates and the greenback. Job openings jumped by 7.7% in August, the largest increase since July 2021, to 9.61 mln. The median forecast in Bloomberg's survey was for a small decline. Moreover, the July series was revised higher (to 8.92 mln from 8.83 mln). The focus stays on the US labor market with the ADP estimate due today, Challenger lay-offs tomorrow, and the monthly payroll report on Friday. The median forecast in Bloomberg's survey has crept up to 170k (187k in August). A slowing of job growth was supported to herald the pullback in the US consumer and slow the economy in Q4. August factory orders and another look at durable goods orders are also on tap, but they will likely be overshadowed by the ISM services, which has been running stronger than the services PMI, where the final reading is also due today (50.2 vs 50.5 in August, the lowest since January.

We argued in our monthly outlook that the weak link may not be the US economy or dis-inflation but the financial sector. Remember when banks complained that the low rates squeezed interest income. Since February and March, the increase in rates has weakened bank shares. KBW's two bank share indices (one for large banks and one for regional banks) have been trending lower since late July. Yesterday, they both gapped lower. The regional bank index fell to its lowest level since late June, while the large bank index is at its lowest level since mid-May. Last week's Fed report (H.4.1) showed a small increase in both discount window borrowings ($3.193 bln vs. $3.078 bln) and the Bank Term Funding Program to a new record ($107.715 bln vs. $107.599 bln). 

The US dollar's surge against the Canadian dollar extended to CAD1.3735 yesterday, which is about where the trendline off the 2020, 2022 and 2023 highs intersected yesterday. Last week's low was set before Canada's July GDP (flat vs. median forecast in Bloomberg's survey for 0.1% after -0.2% in June) and before US income, consumption and deflator was almost CAD1.3415. The greenback's surge has carried it to its highest level since March and through the upper Bollinger Band (~CAD1.3710). It is consolidating in a narrow range of about CAD1.3695-CAD1.3725 today. A close below CAD1.3660 would confirm the greenback's upside momentum has stalled. That said, the next important chart area is CAD1.3800-15 and then the year's high set on March 10 near CAD1.3860. The greenback's surge and risk-off has overwhelmed the Mexican peso too. The greenback pushed above MXN18.00 for the first time since early May and closed above the 200-day moving average (~MXN17.8245) for the first time since September 2022. Follow-through buying today lifted the US dollar a little above MXN18.2150 before the reversing lower to approached MXN18.00. A break of MXN17.80 would stabilize the technical tone. One take away is that this is not a peso move but a dollar move. For example, the peso and Brazilian real fell by roughly the same amount (-1.6%). Latam currencies, which have been the market's darlings this year, accounted for the five of the six weakest emerging market currencies yesterday, with the South African rand joining them.