US Dollar Punches Higher – Marc to Market

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Overview:  Disappointing
data in Asia and Europe has sent the greenback broadly higher. The strong gains
posted before the weekend were mostly consolidated yesterday when the US and
Canadian markets were on holiday. The rally resumed today. The Antipodeans and
Scandis have been hit the hardest (-0.7% to -1.25%) but all the G10 currencies
are down. The Swiss franc and yen are off the least (-0.35%-0.45%), and the
euro and sterling have taken out their recent lows. Emerging market currencies
have also fallen. So far, none have been spared. 

Most
of the large Asia Pacific bourses were under pressure, though Japan, Taiwan,
and India posted small gains. The Hang Seng and mainland stocks that trade
there suffered the most, with more than a 2% drop. MSCI’s Asia Pacific Index
snapped a six-day advance. Europe’s Stoxx 600 is off by about 0.25% in late
morning activity. It has fallen for the past four sessions. US index futures
are trading heavier, with the S&P futures off about 0.2% and the NASDAQ
futures down by around 0.35%. Bonds are also selling off. European benchmark
10-year yields are 2-3 bp higher and near 4.22%, the 10-year US Treasury yield
is up about four basis points. Higher yields and a stronger dollar are pushing
gold lower. After testing $1950 at the end of last week, it approached $1930
today. October WTI is steadying after pushing to $86 in early turnover. It is
now near $85.50.
 

Asia
Pacific

With
a steady stream of new measures to support the economy, Chinese officials
rendered less relevant today’s Caixin PMI. 
In any event,
the services PMI softened to 51.8 from 54.1 in July. Recall that the Caixin
manufacturing PMI had unexpectedly rose to 51.0 from 49.2. The August composite
slipped to 51.7 from 51.9. China’s CIS 300 snapped a three-week slide last week
(2.2% gain). It advanced 1.5% yesterday and gave half of it back today.
Tomorrow or Thursday, China is expected to report that the of decline in both
exports and imports slowed.

Japan
reported that household spending continued to fall on a year-over-year basis. 
The 5.0%
decline in July followed a 4.2% decline in June, twice as much as expected.
August will also likely show a sharp decline, but improvement is likely in Q4.
Japan also reported the final services and composite August PMI. The services
PMI was confirmed at 54.3 (53.8 in July), the first increase in three months.
The composite edged up for the second consecutive month to stand at 52.6 (52.2
in July). Still to come this week are July labor cash earnings (may have risen
slightly) and another look at Q2 GDP (which may be revised a little lower from
1.5% quarter-over-quarter, 6.0% annualized) in light of lower-than-expected
business investment. 

The
Reserve Bank of Australia stuck with it hawkish hold at Governor Lowe’s final
meeting. 
Last week, his successor Bullock, warned that interest rates may
be needed to rise further, and suggested the decision is on a month-to-month
basis. The market is less convinced and indicative pricing in the futures
market has about a 20% chance of a hike discounted by the end of the year. The
final August services PMI confirmed the fourth consecutive decline, but not as
steep as expected. It stands at 47.8, down from 47.9, which is the lowest since
January. The composite PMI stands at 48.0 (down from 48.2 in July), which is
the lowest this year, but better than the 47.1 preliminary estimate. Lowe
delivers a final speech on Thursday and steps down on September 17. Separately,
note that Chevron’s LNG export plants could be hit by strike activity as early
as Thursday. The two facilities accounted for around 7% of global LNG supply in
2022. Employees voted down the companies pay offer last week. Still, note that
Europe’s natgas benchmark fell by 9.8% yesterday (after a 17.25% surge at the
end of last week) and is off fractionally today, despite the strike risk and
the drop in flows from Norway. Higher-than-normal inventories and soft
consumption offset the supply issues. 

The
dollar’s pre-weekend gain was extended to JPY146.50 yesterday and is now
straddling the JPY147.00 area.
It has held a little below the year’s
high set on August 29 slightly above JPY147.35. Note that the upper Bollinger
Band is near JPY147.25. Initial support is near JPY146.80. After steadying
yesterday, the Australian dollar has been driven lower sharply lower today. It
settled slightly firmer yesterday (~$0.6460) after a poor finish last week. Today,
it has reached $0.6375, slightly above the August 17 low for the year
(~$0.6365). The measuring objective of the double top at $0.6900 (June and
July) is about $0.6300. Without out a broader pullback in the US dollar,
China will find it difficult to do more than slow the yuan’s descent.
 In
addition to market guidance, it has lowered the required reserves on foreign
deposits, and it has repeatedly set the dollar’s reference rate below market
projections. There have been reports of dollar sales by state-owned banks, but
their activity cannot be untangled from their own position-taking and execution
on behalf of commercial clients. The dollar settled near CNY7.2665 at the end
of last week and jumped to CNY7.3075 today, its highest level since August 21. The
PBOC set the dollar’s reference rate at CNY7.1783, well below the average of
the Bloomberg survey (CNY7.2739). That puts the upper end of the 2% band at
CNY7.3219.

Europe

The
final eurozone August services PMI confirmed the first break of the 50
boom/bust this year at 47.9, down from 48.3 down initial estimate and 50.9 in
July. 
It is also now below December 2022 (49.8). Indeed, it is the
weakest since February 2021. Dragged down by the poor manufacturing sector, the
composite has been below 50 since June’s 49.9 reading. At 46.7 (47.0 flash
estimate), it is the weakest since November 2020. Germany’s final PMIs were in
line with the preliminary estimates, while the final French services were
revised lower (46.0 from 46.7) as was the composite (46.0 vs. 46.6). Italy’s
and Spain’s service and composite PMIs softened. Italy’s composite was below 50
for the third consecutive month (48.2 vs 48.9), while Spain’s composite fell
for the fifth consecutive month and broke below 50 (48.6 from 51.7) for the
first time this year. Separately, note that yesterday, Germany reported a
smaller than expected July trade surplus (15.9 bln euros, down from 18.7 bln
and 17.8 bln expected). The decline in exports was less than expected (-0.9%
instead of -1.5%) but imports were up more (1.4% vs.0.5%). Lastly, the results
of the ECB’s survey showed inflation expectations were unchanged at 3.4% in one
year but 2.4% (up from 2.3%) in three years.

The
UK’s final August services PMI confirmed the break of 50 but not as poor as the
preliminary estimate of 48.7 (from 51.5) to stand at 49.5.
It peaked in
April at 55.2. The final composite reading of 48.6 (47.9 flash estimate). The
swaps market is slightly less than fully convinced of a 25 bp hike later this
month. It favors one more hike in Q4 that would bring the base rate to 5.75% by
year-end, where it is seen remaining well into 2024.

Yesterday,
the euro held the pre-weekend low, a little above $1.0770, which is just above
the low set in late August (~$1.0765) but slumped to almost $1.0740
today. 
The euro settled for the second consecutive session below the
200-day moving average yesterday (~$1.0820). The break brings the low from last
May near $1.0635 into view. There are 1.45 bln euro of options struck at
$1.0750 that expire tomorrow that may have also been a drag. The (38.2%)
retracement of the rally from last September’s multiyear low (~$0.9535) comes
in near $1.0610. Sterling’s price action looked a bit better than the
euro’s.
It settled back above $1.2600 yesterday, but today has been punched
below the gradual uptrend off the lows comes that came in around $1.2585 today.
Like the euro, the intraday momentum indicators are stretched, and sterling has
found bids after slipping below $1.2530 in early European activity. Initial
resistance may be seen in the $1.2570-80 area. 

America

The
markets continue to digest last week’s US employment data. 
However, the
odds of a hike later this month is less than 7% down from nearly 23% at the
start of last week. Arguably, more importantly, the odds of a hike in November
have fallen too. The futures market shows a probability of less than 40%, down
from nearly 70% last Monday. The jobs data were consistent with the labor market
becoming less tight. That said, increase in the average work week and the
participation rate is not typically seen late in the cycle. However, the
decline in temporary workers, and continued sharp downward revisions, and the
slowing of the hourly earnings increase to 4.3%, matching this year’s low,
which are the smallest year-over-year increases since June 2021, are what one
would expect as the labor market cools.

Today’s
economic calendar features factory orders, for which the 5.2% decline in the preliminary
estimate of durable goods orders is a good tell for weakness. 
The decline in
durable goods orders was concentrated in transportation equipment. Excluding
transportation and defense, durable goods orders eked out a 0.1% gain after a
0.4% decline in June. Tomorrow sees the July trade balance deficit,
the final PMI, and the services ISM. The Fed’s Beige Book, the anecdotal
survey, compiled in preparation of the September 19-20 FOMC meeting will be
released late tomorrow after the Boston Fed’s Collins and former St. Louis
Fed’s Bullard speak. In terms of Treasury supply, it is all bills this week
(about $233 bln without counting the 4- and 8-week bills), with the first
coupon sale (three-year note) not until September 11.

Canada
reports July merchandise trade figures today. 
A deficit in
line with the C$3.7 bln shortfall in June is expected. There has been a notable
deterioration in Canada’s merchandise trade balance. In the first half of 2022,
Canada recorded a merchandise trade surplus of near C$18 bln. The first half of
this year, it swung to a deficit of almost C$4.5 bln. This is a big week for
Canada. The Bank of Canada meets tomorrow, and after hiking rates at its last
two meetings, it will most likely stand pat. The unexpected contraction in Q2 GDP
removed practically whatever residual chance of a hike there may have been. The
odds of a hike began last week a little below 25% and finished the week at less
than 4%. Canada finishes the week with the August employment report. Canada’s
labor market is also slowing. In the first seven month, Canada grew an average
of almost 35k full-time jobs a month, almost a 25% less than the average in the
Jan-July 2022 period.

Mexico
reports August auto sales figures today. 
It is not a
market mover but does illustrate an element of the underlying resilience of
Mexico’s economy. Through July, Mexico’s vehicle sales are running nearly 23%
above the pace in the first seven months of 2022, which is roughly twice the
increase seen in the US. The highlight of the week are the CPI figures on
Thursday. The takeaway is that prices pressures continue to ease in Mexico and
the data for the second half of August shows the momentum has continued. 

After
posting a bullish outside up day against the Canadian dollar ahead of the
weekend, the greenback consolidated in a narrow range yesterday, with both US
and Canadian markets on holiday.
It is has been flirting with CAD1.36
recently but has not closed above it since late May, but this looks likely to
change today. The greenback is tested the highs from late April near CAD1.3670.
There is little meaningful chart resistance if ahead the trendline off last
October’s high (~CAD1.3975) and March’s high (~CAD1.3860) that comes in near
CAD1.3735 today. The Mexican peso bulls are being challenged by the reaction
to last week’s decision to wind down the central bank’s peso hedging facility.
Yesterday,
the dollar settled near MXN17.1740, its highest close in a month and
follow-through buying today lifted the greenback to almost MXN17.30. The July
and August highs were set in the MXN17.3950-MXN17.4250 area. Before the
weekend, Brazil reported Q2 GDP expanded by 0.9%, three-times more than the
median forecast in Bloomberg’s survey and a rise in the August manufacturing
PMI to 50.1 from 47.8 (first time above 50 since last October). It also
reported that while the trade surplus expanded by nearly 10% over July, and was
more than double the August 2022 surplus, the August 2023 trade surplus was
smaller than economists projected. Still, the Brazilian real could make little
headway against the dollar. The greenback spent August consolidating in a BRL4.84-BRL5.00
range. For the past three sessions the dollar has closed near session highs
between BRL4.9350-BRL4.9550. Lastly, Chile’s central bank is seen cutting its
overnight target rate at least 75 bp to 9.50%. It delivered the first cut in
the cycle in July of 100 bp.

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