Overview: Recent data showed Japanese investors taking advantage of the yen’s strength to buy foreign bonds and stocks last week. Weekly U.S. jobs figures fell to their lowest in four weeks, suggesting that the labor market slowdown continues to slowly advance. There is no disaster. With Japanese bank stocks down 28% in the first three sessions of the month, stress in Japan was acute, but Japan’s official actions seemed limited to a deputy central bank governor speaking in the first person. Moreover, the market continues to trend toward a hike before the end of the year. Calls for a 50 basis point Fed rate cut next month seem overblown. Heightened volatility is already calming down, the VIX has nearly halved since Monday’s high, and the concession that U.S. notes and bonds failed to make before redemption is coming back. Still, geopolitical risks remain high, with the immediate focus remaining on the Middle East. The Iranian attack that seemed so imminent at the beginning of the week has still not occurred.
The dollar is consolidating in tight ranges against the G10 currencies today. Not much more than +/- 0.10% has changed today. Emerging market currencies are mostly firmer. Asia-Pacific equities rallied, with the Chinese markets being the notable exception. The Stoxx 600 is up about 0.8% around midday in Europe, up week-on-week (~0.5%). US index futures are trading on a firmer bias, but remain down 2-3% week-on-week. European 10-year benchmark yields are down 2-5 basis points, while the US 10-year Treasury yield is down three basis points to about 3.96%. Gold is trading in a relatively tight range (~$6 range either side of $2423) near yesterday’s high. September WTI is also in a tight range (~$75.85-$76.40) near yesterday’s high and slightly below the 200-day moving average (~$76.55).
Asia-Pacific
China reported an insignificant change in the disinflation/deflation picture. The Producer Price Index (PPI) for July was unchanged year-on-year at -0.8%. The Consumer Price Index (CPI) for July was 0.5%, up from 0.2%. While the conventional narrative focuses on weak demand, which is certainly part of the problem, it seems overemphasized and fails to recognize the role of food prices (which are more about supply than demand) and competitive pressures, such as in autos, electronics and appliances, in driving prices down. Food prices were unchanged in July after falling 2.1% in the 12 months to June. Core prices, which exclude food and energy, rose 0.4%, reaching their lows for the year in January. Next week, China reports high-frequency data for July (e.g. lending, retail sales, industrial production, real estate investment and prices for new and existing homes). However, in the tightly controlled currency regime, the data should not be expected to affect the exchange rate. For this, the yen may provide a better guide. Next week, Japan is expected to report that its economy grew 0.6% in the second quarter, after contracting 0.7% in the first quarter. Consumption and business investment contributed to growth after the first quarter decline, and net exports appear to have been less of a drag. This will likely have little impact on expectations for the Bank of Japan. If it was previously concerned about the inflationary impact of yen depreciation, it should be less so now. Australia reports employment data for July. Employment growth is expected to slow by half after rising by 50,000 in June, but the participation rate (66.9%) and unemployment rate (4.1%) could remain unchanged. The swap market is pricing in a just over 70% chance that the Reserve Bank of New Zealand will be the last G10 central bank to initiate an easing cycle.
The dollar remained firm against the yen yesterday, albeit within Wednesday’s range. Today it is in the tightest range of the week so far: ~146.70 JPY-147.80 JPY. The weekly high was reached on Wednesday at 147.90 JPY. There is room for further short-term gains. The 148.45 JPY area is half the dollar’s decline since the July 30 high (~155.20 JPY) and the next correction (61.8%) is around 150 JPY. Daily momentum indicators are expected to continue rising, suggesting that the panic is probably behind us. The Australian dollar had a bullish outside-up day, hitting its best level in two weeks yesterday with a session high near $0.6595. Today, the price rose slightly and briefly traded above $0.6600, but it is struggling to maintain the upward momentum. It has recovered half of its losses from the multi-month high (July 11, ~$0.6800) at $0.6575. The 200-day average is at the bottom of the previous range at $0.6600. The (61.8%) retracement is just above $0.6625. Daily momentum indicators have been trending higher. It looks like there is still room to run. As the yen declined following its recent rise, the Chinese yuan also weakened. Similar to the yen, the dollar remained below Wednesday’s high of 7.1945 CNH against the offshore yuan. The offshore yuan is arguably a better funding currency than the yen. It is less volatile and the PBoC still has room to ease its monetary policy while the market continues to assess the likelihood of another rate hike by the BOJ. The dollar can rise to 7.20-7.22 CNH in the short term. The PBoC raised the dollar’s reference rate to 7.1465 CNY, a new high since last November, from 7.1386 CNY on Thursday. Last Friday’s reference rate was 7.1376 CNY.
Europe
The Eurozone and Great Britain end the week with light economic data. The highlight was the fall in French unemployment in Q2 from 7.5% to 7.3% and a drop in wage growth from 1.3% to 0.6%. The market reaction was muted. While the loose calendar in the Eurozone continues next week, the UK reports several market-relevant data, including an update on the labor market and Q2 GDP with details for June. The market remains confident that the ECB will cut rates next month and continues to reduce the likelihood of the BOE taking action. At the end of last week, the swap market was pricing in almost half of a quarter-percentage point cut, now it is closer to 40%.
The euro had a big underdog day yesterday, but closed well within Wednesday’s range, keeping the consolidating tone intact. The euro is trading in an extremely tight range of about a fifth of a cent above $1.0910. Yesterday the euro held support at $1.0880, a new weekly low, and recovered to the $1.0920 area. Last week the euro was at $1.0910. The pound looks more constructive, with the possibility of a major trend reversal to the upside. The pound sold off Wednesday’s low, falling to its lowest since July 2 (~$1.2680) but holding above the 200-day moving average (~$1.2660). The pound recovered to trade above Wednesday’s high (~$1.2735), and closed above the 5-day moving average (~$1.2740) for the first time since late July. Today, it edged up to $1.2770. Short-term potential could extend to the $1.2810-$50 range and then to $1.29.
America
In the US, the results of the New York Fed’s consumer inflation survey and the monthly federal budget balance are taken into account. Neither is moving the markets. Many are talking about the US budget deficit, which remains high despite above-average economic growth and historically low unemployment, although it has risen in recent months. Yet this seems to be ignored by both parties. Through June, the ninth month of the fiscal year, the US federal government has accumulated a deficit of $1.27 trillion, compared to $1.39 trillion in the October-June 2023 period. Next week, a slight year-on-year decline in headline and core CPI is expected, a further decline in consumption (retail sales) when the recovery in auto sales (after the June computer glitch) is taken into account, and stagnant industrial production. Canada’s July employment report is due out today. In terms of the total number of jobs created this year, this figure is almost 200,000, slightly lower than the roughly 265,000 in H1 23. However, the slowdown in the labor market is more evident when looking at the growth of full-time jobs, which has slowed to about 55,000 this year, slightly more than 200,000 in H1 23. The unemployment rate, which was 5.4% in June 2023, was 6.4% in June 2024. In addition, the labor force participation rate has fallen from 65.7% to 65.3%. On the other hand, wage growth for permanent employees has increased to 5.5% year-on-year from 3.9% in the middle of last year. The central bank meets in early September and the market has fully priced in the third cut in the cycle. Economists and traders were divided over the outlook for yesterday’s Central Bank of Mexico meeting, and contrary to our expectations, the central bank cut its benchmark interest rate by a quarter of a percentage point to 10.75% in a 3-2 decision. The cut came shortly after the government reported a 1.05% increase in headline CPI, the biggest increase since late 2022. The central bank revised up its forecast for headline inflation, but cut it for core inflation. The swap market is expecting cuts of nearly 75 basis points over the next six months.
The US dollar consolidated yesterday at the lower end of Wednesday’s range against the Canadian dollar, mostly between CAD 1.3730 and 1.3765. Today, it has dipped a little below the CAD 1.3720 level ahead of the employment report. However, the move seems to be ongoing. Momentum indicators are falling and the 5-day average is expected to fall below the 20-day average early next week. It is as if the market is taking a breather after hitting the (61.8%) retracement target of the rally from the false break of the CAD 1.36 support on July 11, which is located at CAD 1.3725. The US dollar hit new session lows of MXN 18.92 before Banxico announced the rate cut. It rose to around 19.10 MXN before selling to a new session low of 18.86 MXN. The dollar’s losses today were estimated at 18.7750 MN. The 18.91 MXN is the (50%) retracement of the dollar’s rise from lows of 17.60 MXN in mid-July. The next retracement (61.8%) is at 18.60 MXN.
