The short-covering recovery in the has been extended today, but the momentum stalled in the European morning. The key issue is whether North American participants can extend it. We suspect that the market will turn more cautious now, ahead of tomorrow’s outcome, where many still expect at least one dovish dissent from the likely standpat decision and the estimate, which unexpectedly showed a net loss of jobs in June.
The greenback made a new high for the month today against the euro and sterling. Ahead of the start of the North American session, the greenback is off its earlier highs but still firmer against all the G10 currencies but the Norwegian krone. Emerging market currencies are also softer. The main exception is the Chinese yuan, which, despite a stronger dollar fix (third session in a row), is virtually flat against the greenback.
Japanese stocks fell for the third session, but the 0.90% drop in Taiwan was the largest in the region, perhaps linked to the US decision to deter the Taiwanese president from a layover in the US before next week’s trip to Latin America. The Taiwanese dollar is also the weakest of the emerging market currencies ~-0.60%), next to the Russian ruble (~-0.80%) where President Trump’s frustrations have surfaced.
Despite disputes over the US-EU trade agreement, the is up 0.60%, which if sustained, would recoup the losses from the past two sessions.
US index futures are firmer. Benchmark 10-year yields are narrowly mixed in Europe, while the yield hovers a little above 4.40%. found support yesterday near $3300 and is trading firmer today (~$3325) but inside yesterday’s range. September is firm and reached a seven-day high today, a little above $67.25, perhaps encouraged by the risk to Russian supplies amid US threats of “secondary sanctions” if there is no ceasefire within 10-12 days.
USD: The North American session extended the Dollar Index’s rally yesterday. It rose to almost 98.70, posting its biggest advance since early May. It has pushed a little higher and reached a marginal new high for the month slightly above 99.00. The next hurdle is the 99.20-45 area, where the June high and (50%) retracement of the decline from the May 12 high is found. A break of 98.40 could be the first sign that the short squeeze is ending. While there is a full slate of US reports today, given the data and events of the remainder of the week, it is unlike to be decisive.
Still, the US trade and inventory data will help economists finalize Q2 forecasts. House prices in May appear to have softened. On the FHFA index, it will be the second consecutive month, while S&P Corelogic measure of house prices in 20 large cities are seen falling for the third straight month. The on job openings surprised to the upside in the last two months, but the median forecast in Bloomberg’s survey anticipates a decline.
The Conference Board’s measures of pose little more than headline risk. Following yesterday’s $70 bln sales (that produced a small tail) and nearly $225 bln in bills, the US Treasury comes back seeking $30 bln for two-year floating rate notes, $44 bln of seven-year notes and another $80 bln of bills. Tomorrow brings the quarterly refunding announcement, the ADP private sector jobs estimate, the first government estimate, and the FOMC meeting decision.
: The euro ticked up in early Asia Pacific trading yesterday, in the initial response to the trade deal. It reached almost $1.1780 but was greeted with relentless selling that saw it push to $1.1585 in the NY afternoon. It was sold to nearly $1.1525 today, taking out the month’s low (~$1.1555). A close below $1.1550 area would weaken the technical outlook and suggest scope for at least another cent lower.
Given the context (trade deal with the US, Q2 GDP Wednesday and August CPI Friday), the ECB’s survey of inflation expectations was unlikely to have much impact. And the survey results showed little change (one-year outlook eased to 2.6% from 2.8%, and the three-year outlook was steady at 2.4%). Spain reported 0.7% growth in Q2 (0.6%) in Q1), which is slightly better than expected. The aggregate Q2 GDP is due tomorrow.
The latest estimates suggest a flat quarter is likely after 0.6% growth in Q1. Less government spending and weaker exports look like the main culprits. Lastly, the ratification of the trade agreement will require a qualified majority of members and possibly the European Parliament, which could be a challenge. Still, the energy and investment components look either too ambitious (energy) or outside the EU’s power to pledge (investment in the US).
: The dollar rose for the third consecutive session against the Chinese yuan yesterday. Against the , the dollar recorded the low for the year last Thursday near CNH7.1440. It reached almost CNH7.1830 yesterday and a pinch further today to almost CNH7.1840. The PBOC set the dollar’s reference rate at CNY7.1385 last Thursday, its lowest since last November. T
he dollar was fixed higher for the third consecutive session today (CNY7.1511 vs CNY7.1467 yesterday). The month’s high weas set on July 16, slightly above CNH7.19. The greenback has not traded above CNH7.20 since June 11. China’s economic calendar is light until Thursday’s PMI, which is expected to be little changed. The composite stood at 50.7 in June. The US made a concession to Beijing yesterday in not allowing Taiwanese President Lai Ching-te to stop in the US on his upcoming trip to Latam. It was seen as an effort to avoid derailing the push toward a Trump-Xi summit, but the US President denied it.
: The market is feeling more confident that the Bank of Japan will raise rates again toward the end of the year. As recently as July 8, the swaps market was discounting about 10 bp increase this year and now it has slightly more than 18 bp priced. The yen has derived little comfort from the shift. The dollar settled near JPY146.60 on July 8. It reached slightly above JPY148.55 yesterday and JPY148.75 today. The month’s high, ~JPY149.20, was the highest for the greenback since early April. Above there is the 200-day moving average (~JPY149.65), which the dollar has not traded above since mid-February. Meanwhile, today’s two-year bond auction drew the strongest demand in nine months (4.47x covered vs. 3.90x last month and an average of slightly less than 4.0x over the past 12 months).
: Sterling, which was turned back after it approached $1.3600 last week, fell to nearly $1.3350 yesterday, a new low for the month. The losses were extended to almost $1.3315 today. A close below $1.3365 could be a technically ominous sign. It may be the potential neckline of a head and shoulders topping pattern that projects toward $1.2940. The UK’s June consumer credit and mortgage lending improved sequentially, and by more than expected, but they are not the typically market movers.
: As is often the case in a firm US dollar environment, the Canadian dollar did relatively well yesterday. It was the strongest G10 currency, slipping less than 0.20% against the jumping greenback. The greenback rose slightly above CAD1.3740 and today reached CAD1.3760. The month’s high was closer to CAD1.3775, and CAD1.38 was the June high. The Bank of Canada meets tomorrow. There is little chance of a change in policy, and that is true not only of this week’s meeting but also the following meeting in September. The swaps market has slightly less than a 45% chance of a cut at the late October meeting but has nearly a 62% chance of a cut in December.
: After setting a new high for the year last Thursday (~$0.6625), the Australian dollar reversed lower and subsequently has been unable to sustain even modest upticks. It reached nearly $0.6510 yesterday and briefly and barely took out $0.6500 today. A trendline connecting the June and July low is found around $0.6485 today. Below there is the $0.6455 area; this month’s low. Australia’s quiet start to the week ends tomorrow with Q2 CPI. The headline pace is expected to moderate to 2.2% from 2.4%, and the underlying measures are also expected to moderate. Ahead of the report, the futures market has a cut nearly fully discounted for next month’s meeting and another cut in Q4. June retail sales are due Thursday. The 0.4% increase, the median projection in Bloomberg’s survey would be the most since January.
: The dollar was bid against the peso before Mexico reported a smaller than expected June surplus ($514.4 mln vs MXN950 mln expected and a revised $1.23 bln surplus in May, which was initially reported as $1.03 bln. Both exports and imports fell. The dollar rose for the third consecutive session and its nearly 1.15% gain was the largest since April. but only after it recorded a new low for the year (~MXN18.51). The greenback rose to nearly MXN18.7750 yesterday and MXN18.8360 today. This month’s high was recorded on July 15, near MXN18.8850. The JP Morgan Emerging Market Currency Index fell by nearly 0.75%; its third losing day in a row and its more than 0.70% decline also was the largest since April. The peso was the poorest performer in Latam yesterday. It appears that dollar carry-trades were pared. Mexico reports Q2 GDP tomorrow. The median forecast in Bloomberg’s survey is that the economy expanded by 0.4% quarter-over-quarter in Q2 after 0.2% in Q1.