Yen Slumps, Germany Contracts, and the Week’s Key Events Still Lie Ahead

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Marc Chandler
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Overview: An unexpected decline in Japan's unemployment did not prevent a retreat in the yen to a four-day low ahead of tomorrow's data and conclusion of the BOJ meeting. The dollar has probed the JPY155 area where nearly $3.5 bln options expire today. An unexpected contraction Germany's Q2 GDP was offset in the aggregate by better French, and especially Spanish figures, leaving the euro consolidating in a narrow range (~$1.0815-$1.0835). The greenback is softer against most emerging market currencies, including the Chinese yuan, which has shrugged off today's yen weakness. 

Asia Pacific equities were mostly lower. The Hang Seng, and mainland shares that trade in Hong Kong, posted the largest losses (~1.4%-1.5%), while Taiwan bucked the move, and the Taiex posted a small gain. The Stoxx 600 in Europe is recouping yesterday's small (0.2%) loss. US index futures enjoy a firmer bias. Japan's 10-year yield slipped below 1% for the first time in a month. European benchmark yields have edged up slightly today. The US 10-year yield is little changed at 4.18%. The two-year Treasury is hovering near 4.40%. Gold is trading quietly in around an $8-range on both sides of yesterday's settlement (~$2484). September WTI is trading in tight range in yesterday's trough and has been unable to resurface above $76, last week's low. 

Asia Pacific

Japan June unemployment rate slipped to 2.5% from 2.6% while the job-to-applicant ratio eased to 1.23 (from 1.24). They are inconsequential morsels for this week's features. Tomorrow sees June retail sales (expected 0.2% after May's 1.6% increase) and industrial production (seen giving back May's 3.6% rise plus some). And this is ahead of the BOJ's decision. Governor Ueda indicated that its bond purchase plan will be unveiled. Some slowing is expected, which would tilt it into buying less than the maturing amounts, and hence, quantitative tightening. The failure to raise rates would likely see the yen come under new selling pressure after the dramatic short squeeze lifted it last week it its best level since early April. Australia reports June retail sales and CPI first thing tomorrow. The Reserve Bank of Australia meets next week and is widely expected to stand pat, with another hawkish hold. China's PMI is also due early tomorrow. Some slippage, albeit minor, is expected. The composite was at 50.5 in June.

The dollar has fallen for four consecutive weeks against the yen. It is easily the longest losing streak of the year. In fact, before this month, the dollar fell in back-to-back weeks only once this year and that was in the weeks ending March 1 and March 8. Although the dramatic short squeeze that lifted the yen by nearly 2.5% last week seems to have ended, many market participants seem reluctant to jump back into until after the BOJ meeting. Still, it appears that some momentum traders cut long yen positions and the greenback rose slightly above JPY155.20 in late Asia Pacific trading, a four-day high. It pulled back to find support in the European morning near JPY154.60. Note that there are nearly $3.5 bln in options struck at JPY155 that expire today. Pressure from unwinding short-yen cross positions may have eased, but the Australian dollar continues to struggle. Last Thursday's range (~$0.6515-$0.6585) remains operative. Yesterday's outside day was neutralized by the settlement inside the pre-weekend range and is being followed by an inside day today. (so far). The $0.6530 area corresponds to the (61.8%) retracement of the rally from this year's low set in April (~$0.6365) to the high set on July 11 (~$0.6800). It has frayed this area but has not closed below it. Still, a break of $0.6500 could spur a move toward $0.6450, where options for A$900 mln expire on August 1. A move back above the $0.6620 would help stabilize the tone. The greenback extended its recovery against the offshore yuan yesterday. It reached almost CNH7.2740. It rose slightly more today (~CNH7.2760) before coming off and traded below yesterday's low (~CNH7.2585). The yuan is resisting the tug of the yen today. The PBOC set the dollar's reference rate at CNY7.1364 (CNY7.1316 on Monday). The high fix last week was CNY7.1358, which was the high since last November. 

Europe

The eurozone economy grew by 0.3% in Q2 24 after 0.3% in Q1. The year-over-year pace ticked up to 0.6% from 0.4%. The German economy disappointed. Rather than stagnate, Europe's largest economy contracted by 0.1%, a 0.2% expansion in Q1. It has not grown by than 0.4% in a quarter since Q1 22. France reported 0.3% growth, which was slightly more than expected (and Q1 was revised to 0.3% from 0.2%). The year-over-year rate stands at 1.1 down from 1.5%. The Italian economy also expanded by 0.2% (0.3% in Q1). Its year-over-year pace was 0.9%. Spain's provided an upside surprise. It grew by growth of 0.8%, the same as Q1 (0.5% was expected). It was the best among the large members, and its year-over-year rate was accelerated to 2.8% from 2.6%. Germany and Spain also report July CPI figures ahead of tomorrow's aggregate estimate. The German states have already reported and a 0.4% increase on the national level (EU harmonized) looks likely, and that would keep the year-over-year rate steady at 2.5%. Spain's EU-harmonized measure fell by 0.7% (a 0.4% drop was expected) and brings the year-over-year rate to 2.9% from 3.6%. Despite the stickiness of eurozone CPI (annualized pace in Q2), the swaps market is confident (90%+) of an ECB rate cut at the September 12 meeting, and another cut in Q4.

The euro posted a bearish outside down day yesterday by trading on both sides of last Friday's range and settling well below the low. Still, the single currency found support ahead of $1.08 and is trading with a slightly firmer bias today. It reached $1.0835 in early European turnover, which stretched the intraday momentum indicators. A cap has been forged over the past four sessions in the $1.0865-70 area. Sterling also traded on both sides of the pre-weekend range but near $1.2855, it settled with the range. It fulfilled the (50%) retracement objective of this month's rally (~$1.2830). The next retracement (61.8%) is found near $1.2780. On the topside, the $1.2870 area offers a nearby cap, while $1.2900 may be more formidable. The swaps market is discounting around a 55% chance of a BOE rate cut on Thursday. The odds were 50% before the weekend and nearly 65% at the end of June. 

America

There are two US highlights this week: The FOMC meeting on tomorrow and the July employment report on Friday. Today's reports on house prices, the Conference Board's measure of consumer confidence, and the Dallas Fed's services survey offer minor distractions. A good part of the May's increase in job openings are likely to be unwound in June. The 221k increase in May's openings followed two months in which a cumulative reduction of nearly 900k openings in the previous two months. The US labor market is cooling, albeit from extremely robust levels. In Q2, nonfarm payrolls grew by an average of 177k, down from 267k in Q1 and 274k in Q2 23. Job growth in H1 was about 23% less than in H1 23. Moderating price pressures gives the Fed room to address the softening of the labor market, which is shown not just in the slower jobs growth, but the three consecutive monthly increases in the unemployment rate, and the increase in the average time of unemployment. Separately, Mexico report Q2 GDP today and the median forecast in Bloomberg's survey is for a 0.4% expansion after 0.3% in Q1. This would lift the year-over-year rate to 2.4% from 1.6% and snap a six-quarter slowdown. For its part, Brazil's central bank meets on Wednesday, and although the IPCA inflation measures has risen for the past two months, it is too early to see a rate hike. Still, the swaps market does see the next move to be a hike, likely in the next three months. On the other hand, Chile and Colombia central banks also meet in the middle of the week and are expected to extend their easing cycle by 25 bp and 50 bp, respectively. 

Pressure remains on the Canadian dollar. It is trading inside yesterday's range today Yesterday's losses extended its losing streak to nine consecutive sessions and 12 of the past 13 sessions. The US dollar rose to a new high for the year (~CAD1.3865). It reached its best level since November 1, 2023, when the 2023 high was recorded near CAD1.3900. The 2022 high was closer to CAD1.3980. It continued to fray the upper Bollinger Band (~CAD1.3880 today). The momentum indicators are getting stretched, but it continues to climb the five-day moving average (~CAD1.3835 today). The greenback has not closed below the five-day moving average since July 10. Pressure from the unwinding of short yen carry trades may have eased but the Mexican peso remains out of favor. Doubts about the near shoring, illustrated by Tesla's decision last week to delay its $10 bln investment, continued to take a toll. Trump threatened to impose more tariffs on Mexican-made goods, suggesting near-shoring even to a country, which has a free-trade agreement with the US, is not good enough. The dollar reached almost MXN18.73, its highest level since June 13. It is trading quietly ahead of the North American open at the upper end of yesterday's range. The post-election peak was a day earlier near MXN19.00. The greenback is also climbing its five-day moving average against the peso (~MXN18.5130 today). It has not settled below the moving average since July 17. It did, though, close above its upper Bollinger Band (found near MXN18.6765 today) for the first time since June 7. The Brazilian real fared better than the peso. Last week the dollar approached BRL5.70, the year's high set earlier this month. It has been consolidating above BRL5.60 for the past few sessions.