Neither the Threat of Intervention Nor a Possible US Government Shutdown is Derailing the Greenback

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Marc Chandler
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Overview: The US dollar is stabilizing a bit but only after extending its gains initially It reached almost JPY149.20, while the euro slipped to $1.0570 before recovering to straddle $1.06 in the European morning. Sterling sank a little through $1.2170 but stabilized to return to almost $1.2200. The Australian dollar tested last week's low slightly below $0.6390 before resurfacing above $0.6400. The US dollar toyed with CAD1.3500, where there is a large option expiry today. Emerging market currencies are mostly lower, but the Hungarian forint (overnight deposit to converge with base rate today at 13%) and the Chinese yuan are notable exceptions.

The equity rout continues. Several large bourses in the Asia Pacific region, including the Nikkei, Hang Seng, Taiex, and Kospi are off more than 1%. Europe's Stoxx 600 is off for the fourth consecutive session. US index futures are extending yesterday's sell-off. Benchmark 10-year yields are mixed. Yields in the US, UK, Germany, and France are slightly lower, while the peripheral European yields are higher, led by a three-basis point increase in Italy and Greece. The 10-year US Treasury yield is near 4.50%. In addition to $60 bln cash management bill, the US Treasury is also selling $48 bln two-year notes. At the previous auction, the high yield for the two-year was 5.02%. It is now near 5.12%. Gold tested $1909 today, having been turned back from $1950 last week. This month's low is near $1901. November WTI slipped to an eight-day low near $88.20. It peaked a week ago near $92.45. It is recovering in the European morning and looks poised to returned to the $89.50-$90.00 area. 

Asia Pacific 

Bank of Japan Governor Ueda and Deputy Governor Uchida indicated yesterday that uncertainties around wage growth and inflation mean that it is not clear that inflation has reached 2% on a sustainable basis. They continue to preach patience. Ueda apparently sees no contradiction between toward his two claims: 1) "The BOJ won't conduct policy to directly influence foreign exchange rates," and 2) "It's desirable it moves in a stable manner and reflects economic fundamentals."  It is difficult to argue that the exchange rate is not reflecting fundamental factors. The US 10-year premium over Japan is at a new high for the year near 382 bp. Last year's peak in late October was a little below 400 bp. That said, the gross short speculative position in the IMM futures is around 147.3k contracts (JPY12.5 mln yen per contract, or almost $84k), which is larger than last September-October, when Japan intervened materially to sell dollars and buy yen. Still, one-week implied volatility fell below 6.6% yesterday, its lowest level since Q1 22 but has come back a little firmer today, slightly above 8%. 

The Thai Baht has eclipsed the yen as the weakest currency in the Asia Pacific region here in September. It is off 3.7% compared with the yen's 2.3% decline. The new government's efforts to support the economy and in particular measures to ease the cost-of-living squeeze contributed to the sell-off of Thai bonds, which dragged the baht down. Domestic consumption and the improved outlook for tourism (visa requirements for visitors from China and Kazakhstan for five months have been waived starting yesterday). The central bank meets first thing Wednesday and the officials previously warned that higher food and energy prices may require higher rates. A quarter-point hike to 2.50% is expected. Earlier this month, Thailand report August CPI rose faster than expected (0.55% month-over-month for a 0.88% year-over-year rate, up from 0.38% in July.

The market pushed the dollar to almost JPY149.20 today as the broader gains and jump in US rates is seen dampening the likelihood of imminent intervention. It remains in a narrow range and has not traded below JPY148.70. The JPY150 level may hold some psychological significance but last year's multiyear high was set closer to JPY152.00. Moreover, the fact that Japan's policy rate remains at minus 0.1% means that Japan gets little sympathy from other G7 members. The Australian dollar has been capped near $0.6450 for the past three sessions. The Aussies traded slightly below $0.6390. It looks poised to retest the year's low set earlier this month near $0.6355. The measuring objective of the double top from June and July (~$0.6900) is $0.6300. This still seems to be a reasonable target. The secondary low after the multiyear low last October (~$0.6170) was about $0.6270. Meanwhile, speculators in the futures market have accumulated what appears to be a record-large, short Australian dollar position (~97k contracts). Yesterday, the Chinese yuan fell to its lowest level in two weeks and today is its consolidating in a narrow range. The dollar has traded between roughly CNY7.3020 and CNY7.3120. At best, Chinese officials can moderate the pace of the yuan's decline but given the dollar's strength, the policy divergence, and the ongoing property developer woes, which seem to be eclipsing official economic and financial measures. The PBOC set the dollar's reference rate at CNY7.1727, the same as yesterday (average forecast in Bloomberg's survey was CNY7.3133). The top of the 2% band is about CNY7.3160. The dollar briefly traded above the onshore band against the offshore yuan (reached almost CNH7.3170). 

Europe

The eurozone's August M3 month supply is due tomorrow and is expected to have contracted by 1% year-over-year, the second consecutive decline. The last time M3 was contracting on a year-over-year basis was in 2010, but this decline is steeper. Note that US M2 money supply is also contracting year-over-year. In July, it was down 3.7% year-over-year. The highlight of the week is the preliminary September CPI on Thursday. A 0.5% increase translates into a 3.6% annualized increase in Q3, the same as in Q2 and down from 6% in Q1. Due to the base effect, the year-over-year rate is seen falling to 4.5% from 5.2% and another sharp decline is expected next month as well. Last September, eurozone consumer prices surged by 1.2% and in October, by 1.5%. With conservative assumptions, the eurozone headline CPI can fall toward 3.5% by the end of next month. Core inflation is expected to fall from 5.3% in August to 4.8% in September. Slower inflation will reinforce the belief, reflected in the swaps market, that the ECB's tightening cycle is over.

With a 10-week losing streak in tow, the euro slide continues. Indeed, the euro has not settled higher for a single session since last Monday. It settled every day last week below $1.07 and broke below $1.06 yesterday, which should now act as resistance (may be up to $1.0615). The euro met the (38.2%) retracement of the rally from the multiyear low last September (~$0.9535). The next retracement (50%) is near $1.04. Note that for the third consecutive session, the euro closed above its upper Bollinger Band against the Swiss franc (~CHF0.9655). It is trading near a two-month high after the Swiss National Bank surprised many by standing pat last week. We do not expect the move to be sustained and are awaiting a reversal in the price action. Sterling does not have the euro's 10-week slide, but it trades poorly, just the same. It extended its push lower yesterday by trading below $1.22 for the first time in six months but settled slightly above. Today, its losses have been extended slightly below $1.2170. There is little standing in the way of a move toward $1.2075, the (38.2%) retracement of its rally from the record low last September and the $1.20 area, which is measuring objective of the head and shoulder pattern carved in June through August. Initial resistance now maybe near $1.2225. Lastly note that Hungary is expected to cut is overnight deposit rate today to bring into to the base rate of 13%, which signals the end of its emergency measures implemented in 2022 to stabilize the forint. Ahead of the rate decision, the forint has steadied after falling for the past six sessions against the euro. 

America

US high-frequency data reports today include house prices (narrowly mixed), new home sales (softer after a 4.4% increase in July), and the Conference Board's September consumer confidence (slightly softer). The Philadelphia Fed's non-manufacturing survey, the Dallas Fed's services survey, and the Richmond Fed's survey round out today's report. While there may be some headline risk, these reports are unlikely to change views on the US economy. US yields and the dollar remain firm. Some observers have expressed concerns about the demand for US debt, and the US Treasury is raising $158 bln in coupons this week and even more in bills. Yet, the concern seems misplaced or exaggerated. Recent bill and coupon demand has been strong, and the bid-cover has been robust. Even last week's 20-year bond sale, which is not the more popular tenor, was over-subscribe 2.7x.

Meanwhile, the US still appears headed for partial government shutdown. There are some efforts, of course, to avert it, but they lack sufficient support. A House proposal of a stop-gap measure cuts spending by more than 25%, which is unacceptable to the Senate. A bipartisan bill in the Senate will not get the support of much of the Freedom Caucus in the House. Four appropriations bills are making progress:  State, Agriculture, Homeland, and Defense.

The Canadian dollar continues to consolidate. The greenback held below CAD1.3500, where options for $1.2 bln expire today. It is the only G10 currency that has appreciated (~0.15%) against the greenback this month. It has been aided by the swing in expectations with the swap market discounting about a little more than an 85% chance of a hike in Q4. Initial support is now seen in the CAD1.3435-50. The risk-off mood taking a toll on the Mexican peso. Its 1% decline yesterday was second only the Colombian peso among emerging market currencies. It is off another 0.3% today. The greenback's gains met the (61.8%) retracement of the dollar from the month's high (~MXN17.7080) to last week's brief slippage below MXN17.00. The dollar poked above MXN17.45 yesterday, and approached MXN17.5670 today, where sellers emerged to push it back to almost MXN17.37. Still, the shake out does not appear over. Nearby resistance is seen in the MXN17.60 area. The dollar quickly filled the opening downside gap against the Brazilian real yesterday (the pre-weekend high was slightly below BRL4.9380) and then advanced to nearly BRL4.97. It has not closed above BRL5.0 since for almost four months. Above there, the 200-day moving average is near BRL5.0265, and the dollar has not traded above it since late March.