U.S. Dollar is Soft Despite Consolidating Yesterday’s Loss

US Dollar
Overview

Although the U.S. Dollar has recovered its losses from yesterday, it still trades with a greater bias against emerging market currencies and major currencies. Although the yield on the US 10-year bond is now below 2.77%, European yields are typically 2-4 bp higher, it is still very soft. The peripheral premium today is slightly lower that the core. The equity markets have risen in line with the US and are now much higher. The Hang Seng and China’s CSI 300 rose by more than 2%. Japan was the only country that saw a rebound in the Japanese currency. Stoxx 600 in Europe saw an increase of 0.9% yesterday. It is currently trending higher and US futures are firmer. Yesterday’s gold price rose above $1800 but was not sustained. It currently lies in a $5 range of $1788 to $1788. After rebounding from an initial low of $87.65, yesterday’s September WTI close reached $92.00. It is now close to $93.00. It is now at a near two-week high of 1.4%. For the third session, the benchmark in Europe has also increased. This week, it has increased by nearly 8%. Today’s gain in iron ore of 2% is the fourth consecutive session. The September copper price is also on the rise. If it continues, it would be the fifth gain in six sessions. It is at its highest level since June. September wheat is 1.1% less expensive. It rose in each session, averaging a gain of 4.25 span

Asia Pacific

In its quarterly report, the People’s Bank of China seemed to downplay any possibility of rate cuts or reductions of reserve requirement. CPI could rise up to 3%, according to the People’s Bank of China. It also disregarded large-scale stimulus. It did promise “high quality support”, which sounds like a targeted program. It indicated that it was not increasing its policy but it did indicate that there was still room for improvement. At the lower end, the 10-year Chinese yield is close to 2.74%. At 2.15%, the yield for the two year is slightly higher that the average six-month range. Yiwu was also locked down for three consecutive day due to Covid. This city is home to two million people south of Shanghai. It is a major manufacturing center.

South Korea experienced a 0.7% decline in technology exports during the past two year. This could be interpreted as a sign of global demand. The earnings reports from the chip sector indicate that there might be more. There may be more. According to South Korea’s data, the number of semiconductor equipment exported from China increased more than half (-51.9%) in July compared with July. China previously represented 60% of South Korea’s semiconductor equipment. Reports suggest that the main reason for this drop is US-China rivalry. China has seen a decline in semiconductor investments and South Korea announced that it would join the US Chip 4 alliance to produce semiconductors.

The economy of Singapore contracted unexpectedly in Q2. Initial estimates suggested that the economy was in stagnation. It contracted by 0.2%. It is often viewed as an entrepot economy because it is a microcosm of the global economy. The decline in retail trade services and the decrease in information and communication service output of both these sectors was nearly 7 percent. After receiving the data, the Ministry of Trade and Industry decreased the year’s forecast GDP by 3% to 4%. It was previously 3% to 5%.

Due to the fall in US 10-year yields, the dollar was beaten by the Japanese yen yesterday. The yield slump has not helped the greenback. Yesterday’s dollar was higher than JPY135; however, it fell to JPY132.00 this morning. Today, it is just half of a Japanese yen below JPY132.85. It was JPY135.50-60 at the end of last week. The 20-day moving average (JPY135.30) looks like formidable resistance. Keep in mind that the low for this month was JPY130.40. The Australian dollar is consolidating at roughly the same level as yesterday’s high of JPY130.40. This was the highest level in 2 months. Initial support could be found in the $0.7050 area. The next upside target is the $0.7150-70 region. This area houses the (50%) objective of retracing the Aussie’s fall since its April high ($0.766080), July low ($0.66808080), and 200 day moving average ($0.268080). It fell to CNY6.7235 yesterday, its lowest level in nearly a month. Despite its less dovish message, PBOC seemed not to want yuan strength. CNY6.7324 was the dollar’s reference rate. This is slightly lower than the median (Bloomberg Survey) of CNY6.7308.


Europe

The details of the next relief package are being discussed by Germany’s coalition government. Two support programs have been implemented by the center-left government to reduce living costs. They total approximately 30 billion euros. A third package is currently being created. FDP Finance Minister Lindner suggested that a component of the 10 billion Euro program be used to combat bracket creep. This is higher inflation that places households into a higher bracket. Greens demand a targeted effort to assist families with lower incomes. The package should be available by next month, although there are many things that need to be done.

According to the International Energy Agency, Russia’s oil production could fall by about a fifth because of the EU import ban. According to the IEA, Russian oil production could begin to decline as soon as this month. The agency estimates that 2 million barrels of oil per day will be stopped by 2023. The EU will ban all Russian oil in December. In February, all oil product exports will be stopped. The EU currently purchases about 1 million barrels of oil product and 1.3 million barrels crude oil per day. Russia’s oil production increased by 10.8 million barrels per day in the last month. The IEA reported that the PRC surpassed the EU in June as the largest seaborne oil marketplace (2.1 mln bpd vs. 1.8 mln bpd). Separately, the IEA increased its global consumption forecast by around 380k barrels per day over its previous forecast. This was mainly in Europe and the Middle East. The unusually warm climate has led to an increase in oil demand from the Middle East. This is where oil is used for electricity generation. There has been an increase in the use of natural gas to replace oil in Europe.

Yesterday’s US CPI data were lower than expected. The euro rose to $1.0370. It closed at $1.03. It currently trades at the highest level of this range. It traded at $1.0275. This is just below the $11.0295 high it reached last month. The European morning’s highest price was $1.0340. The trendline today is $1.04, which is the same as it was in February, March and June. It is falling by only half a penny per week. Yesterday’s sterling rally fell short of August 1’s high of $1.2295. It is still in the same area as yesterday’s settlement ($1.2220). Breaking $1.2180 would lead to a loss of half a cent, prior to tomorrow’s Q2 GDP. Bloomberg forecasts 0.2% contraction following a 0.8% increase in Q1.

 

America

The impact of the jobs data was reversed by slower than expected CPI readings. The market was less likely than 35% to experience another 75-bp increase on the eve. The market jumped to over 75% after the employment report but settled at just 45%. The Fed will first review a CPI report and an Employment report before making a decision.

The market has downgraded its chances of a 75-bp increase at the next month’s meeting but it expects that the Fed would raise rates by 115bp from now until the end of this year. The market knows that the Fed won’t stop tightening. The Fed will not stop tightening, no matter how many strawmen may be used. The market is actually leaning against certain Fed views. Evans, a Chicago Fed dove suggested that Fed funds could close next fiscal year at 3.75%-4.0%. This would be the terminal rate. Swaps market data suggests that the Fed funds terminal rates may be closer to 3.50% in the next six months. In the second half next year, Fed funds futures prices are expected to be reduced. Since June’s close, at least a 25-bp decrease was achieved. Many were shocked at Kashkari, the Minneapolis Fed President. Many regard him as a dove since he voted against rate rises in 2017. He is more hawkish than usual in this context and yesterday he stated that it was his “dot”, at 3.9% and 4.4% next years. These were his most extreme forecasts. He could be more hawkish than dovish. These labels are more accurate for him. Evans and Kashkari will not vote for the FOMC this year. However, they will vote next year. Although Daly, the San Francisco Fed President, seemed more open to slowing down tightenings, she still believes there is more to do. She will not vote in this or next year.

The headline CPI was unchanged in October. The core rate rose by 0.3%, which was lower than anticipated. Although the headline rate of 8.5% seems high enough for us to be content with it, the core rate at 5.9% suggests that we may not see much improvement in the near future. Shelter accounts for about one third of the CPI basket, and it is growing at 0.5% per month. It has increased 5.7% year-overyear. If all were equal, the CPI would rise to 2.2%. The US released July Producer Price data. The core and headline readings will likely slow down. The headline reached its peak in March, and was 11.6% more than last year. It was at 11.3% in June, and it is expected to fall to 10.4% by June. It is likely to experience its fourth consecutive decline. It was 9.6% in March, and it fell to 8.2% by June. Bloomberg’s survey showed that the median annual rate forecast of 7.7% was based on a Bloomberg survey. This is the lowest rate since Oct last year.

Mexico’s central bank will likely announce its second consecutive 75-bp rate increase late in the North American session. The overnight target rate will rise from 8.5% to 8.5%. Core was at 7.65% and core at 8.15, according to Tuesday’s July CPI Report. Over the next six months, the swaps market will see a terminal rate of 9.5%. Yesterday’s rally of 0.85% at JP Morgan Emerging Market Currency Index was fueled by subdued US CPI statistics. This is the biggest gain in nearly four weeks. The peso rose by 1.1%, which is a liquid proxy. For the first time since June, the greenback was below MXN20.00. The greenback traded at a strong level and closed below its lower Bollinger Band MXN20.08 for the first time since June.

Yesterday’s U.S. Dollar dropped to CAD1.2750, just under its 200-day moving average (CAD1.2745). This is its lowest level in almost two months. Since June 9, it has not traded below the 200-day moving mean. It is currently consolidating at the lower part of yesterday’s greenback range, like other pairs. Swaps market analysts downgraded the chances that the Bank of Canada would follow the 100-bp increase last month with a 75-bp move in September 7. It is possible it will occur at 30%. This is less than the 50% projections last week. Our estimates indicate that the US Dollar could recover to CAD1.2800-20 by today.