Patient BOJ Weighs on the Yen, Hong Kong Re-Opens with a Bang, Middle East War Underpins Crude, while the Dollar Consolidates

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Marc Chandler
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Overview:  The US dollar is mostly little changed today. Comments from the new Japanese government and BOJ Governor Ueda reinforce the sense driven by the softness in the September Tokyo CPI and larger-than-expected decline in August industrial output that there is no urgency for another rate hike. The yen is the weakest of the G10 currencies today. The Norwegian krone leads the major currencies higher after underperforming yesterday. Outside of the yen and krone, the other G10 currencies are l +/- ~0.15% and inside yesterday's ranges. Emerging market currencies are mostly softer. The Mexican peso is firm after the new president had comforting words for investors at her inauguration yesterday. 

While US auto sales were stronger than expected (15.77 mln unit pace), the Atlanta Fed GDP tracker fell to 2.5% yesterday from 3.1%, following the weaker construction spending and manufacturing ISM. Still, the threat of a further escalation in the Israel-Iran conflict keeps risk appetites in check. Asia Pacific equities tumbled but Hong Kong re-opened and both the Hang Seng and mainland stocks that trade continued their surge with 6-7% gains today. After losing about 1.4% over the past two sessions, Europe's Stoxx 600 is slightly firmer, while US index futures are trading with a heavier bias. Bonds are under pressure in Europe, and yields are jumping by 5-7 bp, reversing yesterday's decline. The 10-year US Treasury yield is up three basis points to 3.76%. Gold is softer but consolidating around $2650. Oil remains firm and November WTI is pushing near $72 a barrel. The late September high was near $72.40.   

Asia Pacific

Japan's new prime minister Ishida has packed his cabinet with several former cabinet members and experienced LDP hands suggests a traditional course is likely. Ishida wants his own mandate and has called a snap election for October 27. The sharp 3.3% drop in August industrial output reported Monday puts at risk growth forecasts for Q3. The median estimate in Bloomberg's survey is for 1.7% annualized growth in Q3. We suspect some of Q3 growth will be pushed into Q4. Lastly, Japan and Australia see their final September services and composite PMI first thing tomorrow. Australia also reports August trade figures Thursday. Through July, Australia's trade surplus has fallen by a little more than 40% compared with the seven months of last year. Recall that exports for the first four months of the year. Imports have held up considerably better and fell in April and July. A stronger Chinese economy is directly good for the Australian economy in terms of demand, and indirectly good, if it buoys commodity prices.

The dollar chopped on the JPY143-handle in North America yesterday. The broadly firmer US dollar tone was blunted against the yen by the drop in the US 10-year yield. The 3.80% area has capped the yield for the past week or so and yesterday was pressed slightly through 3.70%, the lowest it has been in a week-and-a-half. Indications that the new government may not be persuaded that deflation has been defeated, and comments by BOJ Governor Ueda suggesting that the uncertainty of the global economy may deter it from hiking rates in the near-term helped lift the greenback to JPY144.40 today. There are nearly $2 bln in options at JPY145 that expire tomorrow, though we would not expect a rise in US yields ahead of Friday's jobs report that would facilitate such a move. The Australian dollar moved lower yesterday but the pullback was relatively shallow, and Friday's low (slightly below $06870) held. We suspect the China-stimulus story continues to lend support. It is trading inside yesterday's range, between about $0.6875 and $0.6915. The greenback approached resistance in the CNH7.0360-80 area yesterday and remains below it today. There is near-term scope into the CNH7.05 area, we suspect the market may be reluctant to push the dollar much more away from where it was when the mainland market closed on September 30 (~CNH7.0).

Europe

The eurozone labor market's resilience is one of the positive surprises of the year. It is all the more impressive given the weak growth impulses. The unemployment rate was unchanged at 6.4% in August. This is a record low. The ECB's forecasts from September have it a 6.5% at the end of this year, 2025, and 2026. It was at 7.6% before the pandemic. Still, the low unemployment rate will not stand in the way of an ECB rate cut later this month. The critical consideration is quicker decline in price pressures than central bank officials expected. Last month, it projected a 2.5% CPI at the end of the year, and the preliminary September estimate was 1.8% and the annualized pace in Q3 was almost 0.5% (4% in Q2). The swaps market is pricing in slightly less than a 20% chance that the ECB will deliver 75 bp of cuts over the two meetings left this year.

Unable to close above $1.12 and the continued rise in the US two-year premium over Germany proved too much for the euro, and the $1.1070-$1.1100 support gave way. The surge in oil prices amid warnings from US officials about an imminent Iranian missile attack on Israel spurred a wave of risk aversion. It has been unable to resurface above $1.11 today and is trading in about a 15-tick range around $1.1070. There is little on the charts to prevent a test on $1.10. If penetrated, it will leave a double top in its wake that projects toward $1.08 (which seems a bit much). There are options for about 1.8 bln euros at $1.1025 that expire today. The high-flying sterling also got its wings clipped yesterday, tumbling by about 0.7%, at the close, the most in two months. It took out the support we identified in the $1.3300-15 area and tumbled to almost $1.3235. It approached the next area of chart support in the $1.3220-30 area, which houses congestion from mid-September, the 20-day moving average, and the (50%) retracement of sterling's leg up starting with the US August CPI on September 11. Sterling is trading quietly today in a $1.3260-$1.3305 range. 

America

The ADP private sector job estimate is the highlight of the day. It is closely tracking the BLS estimate of private sector job growth this year even with the persistent downward revisions. According to ADP, the US private sector has added almost 151k a month on average this year. The BLS estimate is 152k. Last year, the BLS estimates that the private sector generated nearly 192k jobs a month, while ADP's estimate was nearly 209l. A firm ADP estimate today will do two things. First, some will begin talking about a "whisper" number, which seems to be an impressionistic bias to the median forecast (which Bloomberg's survey puts at 150k). Second, the market speculation of a 50 bp cut in November may ease. That process seems to have already begun. A week ago, pricing in the futures market was equivalent to about a 60% chance of a 50 bp cut, but that was trimmed to about 40%. That said, the market is discounting 73 bp of rate cuts here in Q4, down slightly from last week's peak near 76 bp.

The Canadian dollar held it own yesterday in the face of the broad US dollar gains. The greenback traded a couple of ticks outside of Monday's range in both directions, but settlement was neutral. Still, the momentum indicators are turning more constructive for the US dollar, and the Bank of Canada is seen as more likely to cut 50 bp later this month than the Fed in November. The US dollar is trading quietly today between about CAD1.3475 and CAD!.3500. Options for about $970 mln at CAD1.3550 expire tomorrow. It might be tempting to link the Canadian dollar's resilience to the surge in oil prices, but the correlation is weak and the other G10 perceived petro-currency, the Norwegian krone, fell by 0.6% (though it has recouped it today). While the local markets were closed for the inauguration of the new president, the market took the dollar to 2 1/2-week highs against the Mexican peso near MXN19.83. The greenback reversed lower and recorded the session low in afternoon dealings slightly below MXN19.60. It extended the pullback to MXN19.55 today. Nearby support is in the MXN19.45-50 area.