Greenback and Yen Extend Gains

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Marc Chandler
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Overview: The dollar's gains have been extended today, but in the risk-off mode, and unwinding of carry positions, the Japanese yen and Swiss franc are firmer.  the dollar has stabilized in late European morning turnover. The Bank of Canada is widely expected to cut rates today and the greenback is pushing against CAD1.38, which it has not traded above for three-months. The US dollar gains, which we anticipated, are coming despite interest rates remaining soft. The US 10-year yield is a little lower around 4.23%, it remains within the range set on Monday. A disappointing Eurozone PMI and the risk-off has seen peripheral premiums widen over core rates in Europe. Leaving aside the Russian ruble and the South African rand, most other emerging market currencies, mostly from central Europe and the Mexican peso are leading the decliners. 

It is a poor session for equities. Poor earnings are the main trigger. A typhoon led to the closure of Taiwan and Philippine markets, which spared them, at least for the moment, the downdraft, which created a sea of red for the large bourses. Europe's Stoxx 600 is off 0.65%, giving back more than half of the Monday-Tuesday gains, which had snapped a five-day losing streak. US future indices are off sharply, warned of a gap lower opening. Gold is extending yesterday's recovery sightly and reached a three-day high a little below $2420. September WTI stabilized after plunging to $76.40 yesterday, its lowest level in more than a month. Another drop in private US oil inventories (API). If confirmed today, it would be the fourth consecutive draw, the longest streak since last September. Separately, reports suggest that the wildfires in Alberta, Canada are threatening around 10% of the region's oil output. 

Asia Pacific

Japan's PMI has lifted the odds of a rate hike next week. According to the swaps market, the odds of a 10 bp hike rose from about 40% to slightly more than 60%. Still to come, the Tokyo CPI on Friday, which may also impact sentiment. The composite PMI rose to 52.6 from 49.7. It was due to services, where the PMI surged to 53.9 from 49.4, while the manufacturing PMI eased to 49.2 from 50.0. The Japanese economy is expected to have returned to growth after contracting by 2.9% at an annualized pace in Q1 24. Consumption and capex look to have improved and net exports likely contributed. Australia's composite PMI has been above 50 since February but it eased for the fourth consecutive month in July to 50.2 (from 50.7). The 53.3 reading in March was the best since April 2022. The manufacturing PMI edged slightly higher to 47.4 from 47.2, while the services PMI eased to 50.8 from 51.2. More important for the central bank, which meets on August 6, is next week's quarterly CPI. The risk is on the upside after the monthly series rose each month in Q2; from 3.5% in March to 4.0% in June. The monthly CPI rose at an annualized pace of 2.8% in Q2 after a 1.2% pace in Q1 24.

The strong yen was supposed to be a trade to benefit from Trump's criticism of Japan, but it has morphed into some greater. Indeed, the dollar settled at its weakest level against the yen since early June, and despite the softer 10-year Treasury yield. Follow-through selling today sent the greenback to almost JPY154.35, its lowest level since May 16. The break of JPY155, where $1.2 bln in options expire today, may have contributed to the selling pressures. The yen's recovery is dramatic on the crosses against the Antipodean currencies, but the euro has fallen by almost 4.6% since the peak on July 11, and sterling is off nearly 4.4% against the yen at the same time. The persistent selling of the Australian dollar has seen it fall for the last seven sessions. It is the longest losing streak since last August when it strung together eight consecutive declining sessions. Follow-through selling has sent it below $0.6600, where options for A$1.7 bln expire today. It is also where the lower Bollinger Band is found. The low from June was near $0.6580, which is also the halfway mark of the rally from the year's low in April (~$0.6365), and the 200-day moving average is about $0.6585. The yen's recovery has barely helped the offshore yuan stabilize but little more. Many understood the reluctant of the PBOC to cut interest rates due to concerns about the exchange rate. Within that narrative, the surprise rate cut on Monday, suggests officials are more concerned about the economy than the exchange rate. Still, the gap between the on- and offshore yuan has narrowed by nearly two-thirds since early this month, suggesting maybe less speculative pressure. The PBOC set the dollar's reference rate at CNY7.1358, which is a new high for the year (CNY7.1334 yesterday and CNY7.1335 last Friday). 

Europe

The eurozone composite PMI fell for the first time in June since last October. It slipped to 50.1 in July from 50.9 in June. Manufacturing remains a drag. It has not been above 50 since June 2022. Energy costs in the eurozone remain well about US energy costs. It eased to 45.6 from 45.8. The services PMI was below 50 from last August through January. However, it peaked in April at 53.3 and slowed for the third consecutive month in July (51.9 vs. 52.8). France is not as fortunate. The services PMI has been below 50 since last June, with April 2024 being an aberration (it rose to 51.3 from 48.3). But it rose to 50.7 from 49.6 in July. However, the manufacturing PMI fell by more than the services PMI rose (44.1 vs. 45.4). France's composite rose to 49.5 from 48.8. The UK stands in sharp contrast. The composite spent last August-October below the 50 boom/bust level but has recovered and reached 54.1 in April. After slipped in May and June (to 52.3), it edged up to 52.7 in July. It was at 50.8 in July 2023. UK manufacturing has struggled. It rose above 50 in March for the first time since July 2022 but slipped back below it in April. It has been in a sawtooth pattern, alternating between gains and losses since March. True to form after slipping in June (to 50.9 from 51.2) it rose to 51.8 in July. The services PMI peak in April at 55.0 was the highest since May 2023, but it slowed in May and June. It edged up to 52.4 in July (from 52.1 in June). The Bank of England meets on August 1 and the odds of a rate cut have diminished. Pricing in the swaps market is consistent with about a 45% chance of a cut next week, down from nearly a 70% chance on July 5. 

The euro entered our initial target area (~$1.0840-50) yesterday. It has fallen to almost $1.0825 so far today. Although US rates have not risen as we had expected, the US two-year premium over Germany rose by the most since early June yesterday (~8 bp) and to its best level in nearly three weeks (~180 bp). We have suggested a secondary target near $1.08, around where the next retracement and the 200-day moving average can be found. That said, given the positioning of the momentum indicators, the risk in on the downside, maybe closer to $1.0750. Sterling pushed through $1.29 yesterday for the first time in eight sessions. After the low was set slightly below $1.2890, it was unable to recover above $1.2920, and has not spent much time above $1.2910 today. The daily momentum indicators have turned down, suggesting further corrective pressure. Today's low was a little below $1.2880. We have suggested scope toward $1.2830 and possibly $1.2780.

America

US inventory and goods trade data are more important for economists trying to fine-tune forecasts for tomorrow initial estimate of Q2 GDP. The Atlanta Fed's GDP tracker will be updated today after last week's 2.7% estimate. The median in Bloomberg's survey is for 2.0%. The PMI may be more interesting but has been in stark contrast to the ISM, to which the market has seemed more sensitive. The manufacturing PMI finished 2023 at 47.9 but has not been below 50 this year. The manufacturing ISM, on the other hand, has been below the 50 boom/bust level since October 2022 with the exception of March and slowed even month in Q2 24. The services PMI also has outperformed the services ISM. The services PMI finished last year at 51.4 and stood at 55.3 in June. The services ISM ended 2023 at 50.5 and was at 48.8 in June, the lowest since May 2020. The highlight of the day is the Bank of Canada meeting. The market has been fairly confident (80%+) of a cut for more than a week. It will be the second consecutive cut. The swaps market shows about a 50% chance of a September cut. The forward guidance will likely drive the market’s reaction. The swaps market is pricing in another cut after today and about 60% chance for what would be the fourth cut of the year. Mexico reports CPI for the first half of July. The recent pattern of sticky headline and soft-core measure is likely to remain intact.

The greenback consolidated in a range yesterday mostly between CAD1.3750 and about CAD1.3785. It posted its highest close since the end of April.  The risk is on the upside if the Bank of Canada does not push against the dovish expectations reflected in the spot market. The US dollar has not traded above CAD1.38 for more than three months. Since July 11, the US dollar has only fallen once and that was on July 16 by less than 0.1%. The Mexican peso fell by a little more than 1.1% yesterday. It was the weakest among emerging market currencies. The US dollar closed above the downtrend line connecting the June 12 high (~~MXN19.0), the June 28 high (~MXN18.60), and Monday's high (~MXN18.11). The five-day moving average is poised to cross above the 20-day moving average, and the momentum indicators have turned up. It traded slightly above MXN18.28 today. A move above MXN18.30 targets the MXN18.50 area.