Dollar Consolidates to Start the New Week

by
Marc Chandler
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Overview: The assassination attempt on former President Trump has injected a new dynamic as his chances of being re-elected appear to have risen. There are a few trades that seem to benefit from a second term:  steepening yield curve, weaker Mexican peso, and stronger crypto. The dollar initially strengthened as the market's initially responded, while Tokyo markets were closed for Marine Day. As North American activity is about to begin, the dollar is mostly little changed. The Scandis and the New Zealand dollar are exceptions, and off around 0.4%. Among emerging market currencies, central European currencies are slightly firmer, while the Mexican peso, which had enjoyed its best week of the year last week is off more than 1.1% to be the worst performer today, though the South African rand is giving it a run for its money. 

Disappointing Chinese data sent the shares that trade in Hong Kong lower (-1.7%) while the mainland equities were little changed. Outside of Hong Kong and Taiwan, most Asia Pacific equities advanced. Europe's Stoxx 600 is trading a little heavier after a three-day rally to finish last week. US index futures are firm. The S&P 500 and NASDAQ have fallen only once so far this month. European benchmark 10-year yields are most 1-3 bp softer, while the 10-year Treasury yield is up nearly three basis points to 4.21%. The US two-year yield is almost a basis point softer at 4.44%. Fed Chair Powell will be interviewed at the Economic Club in Washington a little after midday. Gold is consolidating inside the pre-weekend range. It is holding above $2400 and below $2414. September WTI extended last Friday's pullback to almost $80.50 before catching a bit to resurface above $81. 

Asia Pacific

China's economic data disappointed. At 0.7%, the pace of growth more than halved from Q1 1.6% quarterly pace. Economic output in H1 24 was 5.0% greater than in H1 23. Details for June warn of weak momentum. Industrial production and retail sales slowed sequentially a year-to-date, year-over-year basis (6.0% vs 6.2%, and 3.7% vs. 4.1%, respectively). The slowing of auto sales accelerated to a 6.2% contraction from 4.4% in May. Auto production decelerated to 6.8% from 7.6%, even as EV output increased (37% from 34%). New and used home prices softened further. The contraction in property investment was steady at a 10.1% year-to-date, year-over-year pace. The PBOC kept its one-year Medium-Term Lending Facility rate at 2.50% while reducing the volume to CNY100 bln from last month's CNY182 bln, which implies a drain of CNY3 bln. The data reinforces the sense of the importance of the Third Plenum session that began today. 

The 10-year US yield reached its lowest level in four months after the US CPI was reported July 11. It is little wonder that the dollar fell against the yen. The speculative market was caught the wrong way. Non-commercials in the CME futures market have shaved their largest net short yen position since 2007 by a couple thousand contracts in week through July 9 but at 182k contracts (notional value ~$14.2 bln), it was still extreme. Japanese officials may have intervened to ensure the lesson was painful and bolster the chances that it might not have to repeat the exercise again. With Tokyo on holiday today the dollar has been confined to a narrow range (~JPY157.75-JPY158.40), the lower half of the pre-weekend range. After the BOJ, the Reserve Bank of Australia seems to be the most hawkish of the G10 central banks. Still, the futures market has downgraded the chances of a hike to less than 20% from slightly more than 40% a week ago. The Australian dollar closed at its best level since January 1 before the weekend (~$0.6785). Still, that leaves it nearly a cent below the high at the end of last year. It is trading firmly today (~$0.6760-$0.6790) within the pre-weened range. Yet, with momentum indicators stretched and the proximity of the upper Bollinger Band, ($0.6795), and Thursday's employment report, some near-term consolidation looks likely. The yuan finished last week at its best level in a month, aided by the same forces that weighed on the US dollar more broadly. The five-day moving average is slipping below the 20-day moving average today for the first time in two months. The moving averages against the offshore yuan crossed last Thursday. Yet, ahead of the weekend, the dollar held above Thursday's low (~CNH7.2580) in the offshore market and today, it held mostly above CNY7.26. The PBOC set the dollar's reference rate at CNY7.1313 (CNY7.1315 before the weekend), the third consecutive decline, albeit minor. The highest fixing last week was at CNY7.1342.

Europe

Eurozone industrial production fell for the second consecutive month in May. It fell by 0.6% and April's 0.1% decline was revised away. Recall the 2.5% and 2.1% collapse month-over-month in Germany and France, respectively. On a workday adjusted basis, industrial production in the eurozone is off 2.9% year-over-year after falling 2.1% year-over-year in May 2023. Nevertheless, it is unlikely to persuade the ECB to cut rates again when it meets later this week after last month's move. Still, there is little doubt that the ECB will cuts rates further this year, and if anything, the recovery of the euro may make it more likely. It is a big week for the UK data, and it will impact expectations for the Bank of England meeting on August 1. However, the data are concentrated in the second half of the week, with the June CPI on Wednesday, employment and wage data on Thursday, and retail sales on Friday. 

The euro settled last week at its best level since March 20 and above its upper Bollinger Band (~$1.0890) for the first time in a couple of months. It initially slipped to almost $1.0880 in Asia Pacific turnover as the market reacted to the assassination attempt on Trump. It recovered and has made a marginal new high in the European morning. French politics will return to fore, ahead of the ECB meeting on Thursday. This may encourage some consolidation the single currency's three-week 2% run. Looking at the positioning in the futures market, short covering may have been the main driver of the euro's gains. In the two weeks through July 9, the gross short non-commercial euro position was trimmed by 14k contracts, while the gross long position fell by about 1.5k contracts. Sterling has surged almost 3% over the past two weeks and settled before the weekend at its highest level since July 18, 2023. It stalled slightly in front of $1.30 but closed above its upper Bollinger Band (~$1.2930) for the second consecutive session. The upper Bollinger Band is near $1.2970 today. It found support today, slightly below $1.2960 before recovering to the pre-weekend high. Sterling has not traded much below $1.29 since the US CPI. The net long non-commercial position in sterling futures nearly doubled in the two weeks through last Tuesday to about 84.7k contracts, which is the largest net long position since 2007. The gross long position rose about 32k contracts over the two weeks to edge above last July's multi-year high of 135.2k contracts. The gross short position has fallen by 7.8k contracts, and that includes an increase of almost 6k contracts in the CFTC reporting week than ended July 9. 

America

The market took a big bite from the apple last week. It moved to discount almost a 50% chance of three cuts this year, which the Federal Reserve had backed away at the June 11-12 FOMC meeting. The median projection saw room for one cut this year. Of course, it is simply a snapshot based on the data at the time. It is reasonable that the pendulum of sentiment at the Fed shifts based on the recent data, which will likely boost its confidence that inflation is resuming its glide path toward the target. Fed Chair Powell spoke to Congress about the risks being more in balance on its full employment and stable price mandates. The focus this week shifts to back from prices to the real economy, though import/export price figures will be reported tomorrow and import prices are expected to have fallen for the second consecutive month. However, due to the base effect, the year-over-year rate may have risen for the sixth consecutive month and around 1.4%, it would be the highest since the end of 2022. Today's Empire State manufacturing survey is of little consequence. It is too early in the month to be indicative. Tomorrow's June retail sales report is likely to be held back by weaker auto sales, but signal of slower US consumption is real. In the first five months of the year, retail sales have risen by an average of 0.1%. In the Jan-May 2023 period, retail sales averaged a monthly increase of 0.5%. Canada reports June CPI tomorrow, and after an outsized jump of 0.6% in May, a 0.1% gain is the median projection in Bloomberg's survey. With a little more than a 72% chance of a cut at the July 24 central bank meeting discounted in the swaps market, the market seems more vulnerable to a upside surprise, especially in the underlying core rates, than a softer print. The swaps market is pricing in an aggressive course for the remainder of the year with two cuts fully discounted and around a 57% chance of a third cut, with four meetings to left.

Given the aggressiveness of the swaps market, it is a wonder that the Canadian dollar is holding in as well as it has. The attempt to break CAD1.3600 support was rejected after intraday violation at the US CPI. Initially today, the greenback pushed to an eight-day high near CAD1.3665, the 20-day moving average before returning to CAD1.3630 in early European turnover. The speculative positioning in the future market suggests short covering rather than establishing new longs may be an important part of the explanation of the Canadian dollar's resilience. About a quarter of the gross short position has been covered in the past three weeks, after reaching a record of 170.7k contracts. The gross longs have been cut by about 5.5k contracts over the last three weekly reporting periods, and at about 20.2k contracts, it is the smallest position this year. Last week's nearly 2.8% rise of the Mexican peso was its best weekly performance of the year. Higher than expected headline inflation, the fall in US rates, and risk-on mood helped fuel the gains, while Mexican political developments were sparse. Last week, Latam currencies accounted for five of the top six emerging market currency performers (joined by the Polish zloty). The dollar approached MXN17.6050 before the weekend. It the fifth consecutive session that the dollar fell. Today, the peso is the weakest of the emerging market currencies, off more tha1%. As the market games out the implications of a second turn for Trump, many see Mexico as vulnerable. A move above MXN17.84 may spur a greenback recovery toward MN18.00-MXN18.10.