Short Covering Squeezes the Yen Higher

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Marc Chandler
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Overview: The US dollar is firmer against all the G10 currencies but the Japanese yen. Local reports and the price action are consistent with short covering of the previously sold yen positions ostensibly ahead of next week's BOJ and FOMC meetings. Still, the greenback is holding above last week's low, slightly below JPY155.40. The Antipodeans and Scandis have extended their recent sharp losses. The euro eased to a seven-day low, a little below $1.0865, while sterling is holding above $1.29. Most emerging market currencies are lower. Of note, the offshore yuan as edged higher with the onshore yuan remains soft. 

Asia Pacific equities were mixed. Taiwan shares led the advance. The Taiex fell by nearly 7.5% in the past four sessions and recovered 2.75% today. On the other hand, mainland Chinese shares tumbled with the CSI 300 falling more than 2% to unwind most of this year's gain. Tokyo shares were narrowly mixed. After falling every session last week, Europe's Stoxx 600 is firmer for the second session, while US index futures are trading with a slightly heavier bias. Benchmark 10-year yields are 1-4 bp lower in Europe and core-peripheral spreads are slightly wider. The 10-year US Treasury yield reached a seven-day high yesterday slightly above 4.27% and is now a little below 4.23%. Last week's low was almost 4.14%, which it had not seen since March. Gold is trading firmer but holding below yesterday's high around $2412. September WTI is trading quietly in about a 50-cent range above $78.20, well within yesterday's wide range (~$77.55-$79.15). 

Asia Pacific

The local economic calendar is light until tomorrow's preliminary PMI report for Japan and Australia. The Bank of Japan meets next week, and a Bloomberg survey last month found about a third of economists expected a hike. This is largely consistent now with the indicative pricing in the swaps market, which has slightly less than a 40% chance of a 10 bp hike. It was near 60% as recently as July 8-11. Meanwhile, the PBOC surprised many with yesterday's 10 bp cut in the seven-day reverse repo rate. The PBOC had upgraded the importance of this rate. Ad hoc overnight repos will be conducted at 20 bp below the seven-day rate, and the overnight reverse repos will be at 50 bp above the seven-day rate. 

After dropping to JPY156.30 in yesterday in the Asia Pacific session, the dollar gradually climbed back to around JPY157.15. The recovery provided a new opportunity to sell the greenback amid market talk of yen short covering from Tokyo accounts ahead of next week's BOJ and FOMC meetings. The dollar reached a three-day low in early European turnover near JPY155.85. Last Thursday's low was closer to JPY155.40, and last month's intervention-inspired low was around JPY154.55. The Australian dollar got tagged for nearly 0.65% yesterday and extended its down draft for the sixth consecutive session. It is off further today and approached $0.6620. The five-day moving average crossed below the 20-day moving average for the first time since mid-June. The lower Bollinger Band is near $0.6615. The risk-reward is changing as the $0.6600 area, which marked the lower end of the previous trading range is approached. The intraday momentum indicators suggest a bounce in the North American session is likely. Initial resistance now may be $0.6640-50. The yen's recovery appears to be helping the Chinese yuan stabilize today. Against the offshore yuan, the dollar reached almost CNH7.2975, slightly above yesterday's high before pulling back toward CNH7.2855. Yesterday's low was about CNH7.2780. The PBOC set the dollar's reference rate at CNY7.1334 (CNY7.1335). While the offshore yuan is stronger, the onshore yuan is firmer near CNY7.2740 (yesterday's range was ~CNY7.2710-CNY7.2740).

Europe

The data highlight of the week is tomorrow's flash July PMI. The Bloomberg survey found most economists look for a small uptick in the eurozone's manufacturing and service PMI but do not expect it to translate into a gain in the composite reading (at 50.9 in June). The swaps market has about an 80% chance of a quarter-point cut when the ECB meets in September, down from almost 85% a week ago. Next week's CPI may give the market a greater pause. The year-over-year rate will likely rise from 2.5% in June as the July 2023 0.1% decline will drop out of the 12-month comparison. The Bank of England meets on August 1, and the market expectations for a rate cut have dampened a bit. At the end of June, the swaps market was discounting about a 65% chance of a cut discounted. It is now near 45%. 

The euro traded slightly outside of its pre-weekend range yesterday but spent most the session between $1,0875 and $1.0900. A move above $1.0920 weakens our bearish case, but the momentum indicators are rolling over and the US two-year premium over German may have put in a near-term low. The euro fell to a seven-day low today slightly below $1.0865. The low for the day may not be in place, though the intraday momentum indicators are stretched. We have suggested an initial target in the $1.0840-50 area. Sterling enjoyed an inside day on Monday, and it is trading inside yesterday's range today. Importantly, it is holding above $1.29. However, the upside performance was not inspiring, and sterling ran into offers in the $1.2935-40 area. The momentum indicators are running lower, but it may take a break of the $1.2880 area get the ball rolling. Lastly, note that Hungary is expected to extend its easing cycle that began last October. The base rate peaked at 13% and has been cut to 7%. It delivered a 25 bp cut in June, its smallest move in the cycle. Another quarter-point cut is likely today. Türkiye, on the other hand, sets the one-week repo rate today, and it is likely to be held steady at 50%. 

America

Ahead of next week's FOMC meeting and the July employment report, the most important data is concentrated Thursday-Friday with weekly jobless claims, Q2 GDP, and the PCE deflator. Today's high-frequency reports include the Philadelphia Fed's non-manufacturing index, the Richmond's Fed survey. June existing home sales are also due and are expected to have fallen for the fourth consecutive month. Home sales had begun the year strongly, rising more than 12% in first two months. In fact, existing home sales in February were the highest in a year. (4.38 mln, SAAR). And even with the nearly 3% decline expected, total sales on will still be above the 3.88 mln seen at the end of last year. The Bank of Canada meets tomorrow and there is little doubt in the market's mind that it will deliver its second cut. The key to the market's reaction may be the forward guidance. The market seems split nearly 50/50 over a September rate cut. 

The US dollar reached CAD1.3775 yesterday, the highest level since June 14. It is in a narrow range today, mostly between CAD1.3755 and CAD1.3775. The last time it traded above CAD1.38 was April 16-17. It frayed the upper Bollinger Band, which is found near CAD1.3765 today. Buyers may be scarce ahead of tomorrow's Bank of Canada rate decision. The downtrend line from November 2023 (~CAD1.39) through the April high comes in now near CAD1.3820. The greenback has a four-day rally in tow coming into today. After losing a little more than 2% in the previous three sessions, the Mexican peso bounced back, and recouped about 0.65%. The dollar strengthened in Asia Pacific trading on Monday morning (reaching MXN18.1120) but unwound the gains through midday in NY. The dollar found support near MXN17.88. It is trading in a narrow range (~MXN17.93-MXN17.9915). Latam currencies were the top four EM performers yesterday (COP 1.05%; MXN 0.65%; BRL 0.50%; CLP 0.45%).