The Dollar is bid but Ueda lends support to the Yen

Overview: The dollar is bid as the upside correction that began last week continues today. The greenback is trading above last week's highs against most of the G10 currencies. The yen is the notable exception. Comments by BOJ Governor Ueda has reiterated his intention to raise rates further provided the economy continues to perform as the central bank expects. The dollar has unwound yesterday's gains against the yen and is lower than last week's close (~JPY146.15). The Antipodeans and Scandis are the weakest in the G10, off ~0.5%-0.70%. Most emerging market currencies are heavier, with the Russian ruble and Mexican peso the exceptions. And despite the yen's gain and robust correlation, the Chinese yuan is softer today. 

Equities are biased lower, although Japanese and Chinese indices were mixed. India has extended its rally for a record-setting 11th session. Europe's Stoxx 600 is threatening its first back-to-back decline since early last month. US index futures are trading 0.4%-0.65% lower. Although the US Treasury is not selling coupons this week, there plenty of supply from Europe and Japan. Still yields are mixed today. The 10-year JGB yield is back above 0.90%, while European benchmark yields are mostly a little softer. The 10-year Treasury yield is little changed near 3.90%. Gold continues to straddle the $2500 area. It stalled in late August a little shy of $2532. October WTI fell for the third consecutive week last week and is off seven of the past eight weeks. It peaked last week near $77.60 and is now pushing below $73. Last month's low was slightly below $71. 

Asia Pacific

At the end of last week, Japan reported that Tokyo consumer prices rose more than expected, while unemployment unexpectedly rose to 2.7% from 2.5%. Industrial production recovered smartly (2.8%) in July, after contracting by 4.2% in June, but was well shy of 3.5% median forecast in Bloomberg's survey. July retail sales rose by 0.2%, but the median forecast was for a 0.4% gain following the 0.6% increase in June. Recall that last week, for the first time in 15 months the Japanese government upgraded its economic assessment, citing a recovery in consumption and housing construction. The most important data this week are the labor earnings and household spending. Ironically, the labor cash earnings are likely to slow, while in real terms, probably resumed their contraction, while household spending is expected to have increased after contracting a year-over-year basis in June. We also think it is instructive that rather than repatriate funds on the divergent policy trajectories, Japanese investors have been taking advantage of the yen's recovery to buy more foreign bonds and stocks. Australia's highlights increased Q2 GDP (~0.2% quarter-over-quarter after 0.1% in Q1), July household spending and trade figures. The futures market is gradually taking RBA's hawkish rhetoric more seriously. It is now discounting about a 2/3 chance of a cut this year, the least since the end of July. China's PMI was released over the weekend. It softer, with the manufacturing contracting for the fourth month in a row in August, and the minor gain in the non-manufacturing PMI (50.3 vs. 50.2) was not a sufficient offset, and the composite slipped to 50.1 (from 50.2). The Caixin manufacturing was reported yesterday. It edged up to 50.4 after dipping below it in July. The service and composite were released today. However, the market impact will likely be minimal. There is much speculation of new initiatives by Beijing after several large banks announced cuts in their forecasts for Chinese growth this year and next.

The dollar extended its recovery against the yen and rose for its fourth consecutive session. It reached slightly through JPY147.15 in the European afternoon yesterday. After reaching JPY147.20 today, the dollar has reversed lower and taken out yesterday's low (~JPY145.75) to fall to about JPY145.60. The JPY147.10 area is the (61.8%) retracement of the greenback's losses since the August 15 high (~JPY149.40). BOJ Governor Ueda reiterated that provided the economy evolves as expected, the central bank intends to lift rates further. The poor price action before the weekend saw the Australian dollar test the $0.6750 support area. It held and the Aussie recovered to $0.6795 yesterday. It has come back offered today and fell to $0.6730. A bounce late in the local session ran out of steam in front of $0.6755 and looks vulnerable. The momentum indicators are rolling over from over-extended territory. Despite the yen's gains today, the Chinese yuan is trading heavier. The dollar is trading at three-day high near CNH7.1250-75. Here in Q3, the yuan has risen seven of nine weeks for a cumulative gain of nearly 3%. A corrective phase could see the dollar rise toward CNH7.1300-CNH7.1400. The PBOC set the dollar's reference rate at CNY7.1112, (CNY7.1027 yesterday and CNY7.1124 Friday). 

Europe

European data this week is limited to the August PMI. The final manufacturing readings for the eurozone and UK were reported yesterday, and the services and composite will be reported tomorrow. There is not much new information. The key news at the end of last week was the preliminary August EMU CPI. Given the base effect, the 0.2% rise in August allowed the year-over-year rate to fall to 2.2% from 2.6%. The base effect makes for more difficult comparisons. In the last four months of 2023, eurozone inflation fell slightly (~0.1%). At a three-month annualized rate, eurozone inflation rose 1.2% through August. The core rate, slipped to 2.8% from 2.9%, the first decline since April. Separately and surprisingly, the eurozone reported that after being stuck at 6.5% since last November, the unemployment slipped to a new record low of 6.4% in July. Still, there has been no significant change in market expectations for the ECB to deliver its second rate cut on September 12. It is nearly evenly divided about the prospects for an October cut. In two east German state elections on September 1, support for the AfD garnered the most votes in Thuringia and second in Saxony. Still, the other parties shun the AfD and will form coalition governments without it. The euro was unaffected by the developments. Lastly, the soft Swiss inflation (flat in August on EU harmonized measure for a 1.0% year-over-year pace) gives the market little reason to doubt that the SNB will cut rates for the third time this year when it meets on September 26, despite the positive growth impulses (0.7% Q2 GDP, and 0.5% without the one-offs). 

Yesterday, the euro took out the pre-weekend low by a couple hundredths of a cent, to draw closer to $1.1040 before rebounding slightly above $1.1075. It snapped a three-day drop to test the lower end of a band of resistance, which extends to about $1.1105. The momentum indicators have rolled over, suggesting selling into bounces rather than buying dips may be preferred, the opposite of what had been the case since at least June. A marginal new low was recorded today near $1.1035 and the move it not over. Without recovering, it would settle below its 20-day moving average (~$1.1055) for the first time in a month. The next support is seen in the $1.0990-$1.1000 area. Sterling found support yesterday above the pre-weekend low (~$1.3110). The upticks stalled slightly north of $1.3150 and has returned to yesterday's lows. Sterling's momentum indicators are also turning lower, and the near-term risk may extend toward $1.3035-$1.3050. 

America

The US dollar and US rates rose in the second half of last week. We expect that trend to continue as the market focuses on the employment data at the end of the week and adjusts positions accordingly. To be sure, the increase in job growth and a decline in the unemployment rate, which we have been pointed to be the last couple of weeks, does not prevent the Fed from cutting rates on September 18. That is as done of a deal as these things get. However, the market is pricing in roughly a 30% chance it will be a 50 bp move. The Fed funds futures strip is discounting 99 bp of cuts over the last three meetings of the year. We suspect this is the market exaggerating as is its wont. While acknowledging that there is some risk of a 50 bp move, is it really nearly 100%? The manufacturing ISM, trade data, and even tomorrow's August auto sales may be more for economists fine-tuning Q3 GDP estimates than the market. Canada sees its August manufacturing PMI today, but it means little ahead of tomorrow's Bank of Canada meeting. There is little doubt that it will deliver its third cut in the cycle and bring the overnight target to 4.25%. The market has quarter-point cuts discounted for the last two meetings of the year and expects easing to continue through at least the first half of 2025. Mexico reported August survey data and July worker remittances (~$5.6 bln) yesterday. The August manufacturing PMI slipped to 48.5 from 49.6 and matches the lowest reading since February 2022. The IMEF surveys also pointed to weakening activity. The central bank's survey found that economists shaved this year's GDP forecast to 1.57% from 1.80% and the year-end inflation forecast edged up to 4.69% from 4.65%. The year-end exchange rate projection stands at MXN19.10, up from MXN18.70 in last month's survey. The dollar is seen at MXN19.52 at the end of 2025 from MXN19.28. Today features the July unemployment rate, which is likely to have risen fourth consecutive month. The high-frequency data is not the mover of the peso now. The main concern is politics as AMLO has a powerful majority in Congress for the next several weeks. Also, regardless of the data, the market is confident that the central bank will being to accelerate rate cuts, with the third cut seen likely at the September 26 meeting, a week after the Fed is expected to begin its easing cycle. What might not be appreciated is that the peso has gone from a low vol Latam currency (~8.5% in Q1) to among the highest (~17.6%). In important ways, volatility is risk and the increased risk, in turn, may impact hedging (and investment) decisions.

The US dollar bottomed against the Canadian dollar last week near CAD1.3440, its lowest level since March. The upside was far has been limited to the pre-weekend high around CAD1.3510. With holidays in the US and Canada yesterday, its inside day may not be surprising. Still, there greenback's recovery is continuing today, and it has tested initial resistance near CAD1.3530. We suggest the risk may extend toward CAD1.3600. The momentum indicators are turning higher. The greenback is consolidating within last Thursday's range against the Mexican peso (~MXN19.57-MXN19.96). The peso is vulnerable to domestic political developments and a broader risk off mood. The dollar peaked against the Brazilian real on August 5 near BRL5.8550. It backed off and fell to BRL5.3770 on August 19 but has been recovering. With last week's high (~BRL5.6920), it met the (61.8%) retracement, but did not close above it. Brazil's central bank announced two bouts of intervention before the weekend, one was direct intervention in the spot market to sell dollar and the other operation as the sales of 30,000 swaps (~$1.5 bln). Central Bank President Neto said that the intervention was aimed at offsetting the impact of the MSCI re-balance. Before the weekend, the government unveiled its 2025 budget proposals. It projects a balanced budget and assumes 2.5% growth (vs the IMF's 1.9% forecast). Pressure on the currency looks likely to persist.