Overview: Despite disappointing German
industrial output, where the 0.8% decline was twice expectations, the euro is
holding above $1.07, where large options exist that are expiring over the next
few sessions. The greenback is consolidating against the Japanese yen, where
the fear of intervention has increased. Sterling remains on its back foot after
yesterday’s seemingly dovish comments by Bank of England Governor Bailey. Emerging
market currencies are mostly lower, though of note, the Mexican peso has
reversed earlier losses and is now the strongest, up 0.3% in Europe. The
slowing of the decline of both imports and exports failed to help the Chinese
yuan, which has extended its recent losses. 

The MSCI Asia Pacific Index
fell for the third consecutive session. All the large bourses are in the red
but India. Recall that a six-day advance ended Monday. Europe’s Stoxx 600 is
trying to snap a six-day slide, but it may be difficult if the US market
extended the retreat seen in electronic trading. Benchmark 10-year yields are
mostly 2-3 bp lower in Europe, the Gilt yield is off seven basis points. The
10-year US Treasury yield is down a little more than a single basis point to
slightly below 4.27%. After falling nearly 2% in the past four sessions, gold
is stabilizing in a narrow range above $1916. October WTI is also consolidating
and is inside yesterday’s range, which was inside Tuesday range. It is in a
little more than a dollar range below $87.75 today. API reportedly estimated a
5.5 mln barrel drawdown, which is nearly twice what is expected from today’s
EIA estimate.

Asia Pacific

The 10-year JGB yield has
risen by about 25 bp so far this year and the 30-year yield has risen by around
six basis points. 
Contrary
to conventional wisdom, Japanese investors have returned to global bond markets
after being significant sellers last year. In the year through September 1,
Japanese investors bought almost JPY13.9 trillion (~$101.5 bln). In the same
period last year, Japanese investors were net sellers of JPY13.25 trillion of
foreign bonds. Japanese investors have sold foreign equities (JPY325 5.bln or
~$2.4 bln) after having been net buyers through early September last year. For
their part, foreign investors have been net seller of JGBs (~JPY2.1 trillion or
~$15.3 bln) after having been small buyers in the first eight months of 2022
but have bought JPY6 trillion (~$43.8 bln) of Japanese equities (sellers in the
year ago period).

China’s exports and imports
fell less than expected in August, and by less than in July.
Exports decline 8.8% in August from a year
ago after a 14.5% decline in the year to July. Imports contracted 7.3% in
August and had slumped 12.4% in July. The trade surplus came in at $68.36 bln,
down from $80.60 bln. China’s shipments to ASEAN countries and Europe continued
to grow strongly, while the export slump to the US moderated (-9.5% vs. -23.1%
in July, year-over-year). Separately, China reported its reserves fell by about
$44 bln last month, trimming this year’s gain to around $32.4 bln. Note that
China continued to buy gold and added roughly 29 tons last month, worth about
$1.9 bln. It holds about 135 tons of gold (~$9 bln) in its $3.1 trillion of
reserves.

The dollar has stalled for
the third day slightly above JPY147.80, as the risk of intervention is
perceived to be increasing.
Initial support is seen near JPY147.00. The 10-year US yield,
which put in a high that lasted 10-months, the same day that the BOJ last
intervened (October 21, 2022). The US 10-year yield has risen by 25 bp in the
past three sessions. The intervention last October came as the yield had surged
by almost 35 bp. The challenge is the US CPI report next week, which is
expected to see a strong monthly gain and back-to-back increases in the
year-over-year pace. The Australian dollar is consolidating its recent
losses, largely unaffected by today’s trade figures.
 A smaller than
expected trade surplus was the result of a decline in exports (second
consecutive month) and an increase in imports, recovering most of the decline
in June. The A$8.8 bln surplus was the smallest since February 2022. The
$0.6400-20 area continues to offer resistance. Sentiment still seems fragile.
It would probably take a move above $0.6460-80 to begin repairing the technical
damage. A three-day base has been forged near $0.6360. The dollar is
drawing closer to last year’s high against the Chinese yuan set near CNY7.3275
(November 1, 2022). 
The PBOC set the dollar’s reference rate a
smidgeon above yesterday’s at CNY7.1986. The average of the dozen responses in
Bloomberg’s survey after they exclude the high and low was CNY7.3124. That puts
the top of the 2% band at CNY7.3426. It has reached CNY7.3285 and is hovering
near there in late turnover.

Europe

Germany reported a 0.8%
decline in July industrial output, which was double what economists projected
in Bloomberg’s survey.
It
took the year-over-year decline to -2.1%. It was the third
consecutive monthly decline in German industrial production. France reports
July industrial output figures tomorrow. Many attribute the erosion of German
industrial production to the energy shock. However, France has experienced a
milder shock as it produces nuclear energy and was less dependent on Russia.
Yet, through H1, German industrial output rose by an average of 0.1% a month,
while it fell by an average of 0.1% in France. Spain will report its July
industrial production figures tomorrow. It has fallen by an average of 0.2% a
month in H1, which is the same as Italy, who makes its report next week. 

Bank of England Governor
Bailey sounded dovish in yesterday’s testimony. 
Yet, he seemed to confirm what the market
had already concluded, namely that the interest rate cycle is nearly over. The
odds expressed in the swap market of a quarter-point hike later this month fell
to 90% from 96% at the close of business on Tuesday and are a little lower
today. The UK’s two-year note yield fell by three basis points, which left it
virtually flat on the week. However, sterling fell by the most among G10
currencies yesterday (~0.45%) and saw a three-month low near $1.2480 and has
retreated by another fifth of a cent today. Next week’s employment report is
important, especially in this context. Wage growth reported last month saw
sterling rally and the market toy with the idea of a 50 bp hike. 

The euro continues to hold
just above $1.07.
 A
battle may be being waged there. Today, there are 1.72 bln euros in options
struck there that expire. Friday, there are options for more than 2 bln euros
struck there, and next week there are more. Resistance in the $1.0800-20 area
looks formidable. Sterling’s sell-off has surpassed the halfway mark of
this year’s range (~$1.1805-$1.3140) with today’s push below $1.2470 (the low
is slightly below $1.2460) 
The next area of support is $1.2400-25. The
$1.2580-$1.2600 is the key to sterling’s recovery.

America

Today’s US data typically do
not move the markets.
Unit
labor costs, and productivity are derived from Q2 GDP. Recall Q2 GDP was
revised lower last week (2.1% vs. 2.4%). All else being equal, that would
suggest productivity will be revised down from the initial estimate of 3.7%,
and unit labor costs will be revised up from 1.6%. Weekly jobless claims may
attract more attention but not much. Weekly initial claims have fallen for the
past three weeks to 228k. The four-week moving average is at 237.5. The
four-week moving average peaked this year in June near 257k. Recall that at the
end of 2019, the four-week average was at 235.5k. There are four regional Fed
presidents (three are voters:  Harker, Goolsbee, and Williams, and the
fourth is Bostic) that will talk while the market is open today, but views are
fairly clear. Fed Governor Bowman speaks shortly after the markets close and is
on a panel about the future of money. Although there is some variance in
opinion, actual dissents seem remarkably low.

The Bank of Canada met
expectations with its hawkish hold, after hikes in June and July (no meeting
last month). 
It
recognizes the ease of excess demand (though noted that final domestic demand
(excludes inventories and trade, rose in Q2 even though GDP contracted by
0.2%). However, if underlying inflation measures do not fall, the Bank
indicated it was prepared to raise rates. The swaps market puts the odds of a
hike before year end (October and December meetings) around 50%, settling
practically unchanged on the day. Today’s July building permits and August’s
IVEY survey are overshadowed by tomorrow’s jobs report. After losing 6.4k jobs
in July (all part-time, while full-time posts rose by 1.7k). a rebound is
expected. The median forecast in Bloomberg’s survey calls for a 17.5k increase.
While this is well below the monthly average through July of about 40.6k jobs,
the contraction in Q2 GDP may overstate the economic slowdown.

Mexico reports August CPI
(and the biweekly report) both are expected to show a continued moderation in
the pace of inflation. 
Still, it is unlikely to shake view that the central bank is on
hold for least the next couple of months. Although it gets less attention,
Mexico’s vehicle production figures will also be released. Through July, it is
up almost 23% this year. Mexico’s vehicle production was up almost 23% in the
first seven months of 2022 as well. This nearly returned Mexico to pre-Covid
levels. Consider that in Jan-July 2019 period, Mexico produced an average of
about 329k vehicles a month. In the first seven months of this year, the
average was nearly 312.5k, the most since late 2019. The export of said
vehicles has improved but not as much as production. Through July, vehicle exports
are up slightly more than 8% and were up 5% in the first seven months 2022. But
they ae down nearly 10% from the same period in 2019.

The greenback is
consolidating its recent surge against the Canadian dollar near five-month highs
. A close below CAD1.3600 would be the
first sign that the upside momentum is flagging. However, the price action does
not suggest that a top is in place. It is trading in a narrow range so far
today (~CAD1.3630-55). A break of CAD1.3700 could see CAD1.3800-20. Of
course, the dollar has bounced against the peso a few other times this year,
depending on how you measure, most have been around 4.25%-4.50%. 
The
dollar’s rally during the March banking stress was the largest of the year,
around 7.4%. The current advance is almost 6%. The greenback reached a
MXN17.7080 in Asia today and has reversed lower, falling through MXN 17.52 in
the European morning. It is re-entering the Bollinger Band. Initial support for
the dollar is seen in the MXN17.35-45 area. A close below yesterday’s low
(~MXN17.3960) would suggest that the carnage may be over. On the top side,
important resistance is around MXN18.00, a psychological level that has acted
as support and resistance this year and houses the 200-day moving average. Note
that Mexico’s ruling party picked the former mayor of Mexico City, Sheinbaum,
to its presidential candidate to succeed AMLO. She is running ahead in the
national polls and was seen as AMLO’s favorite.

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