Tokyo Returns and Yen Stabilizes after Yesterday's Jump

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Overview: The foreign exchange market is quiet. The greenback is narrowly mixed against the G10 currencies. Leaving aside thinner traded New Zealand dollar and Norwegian krone, the other currencies are mostly +/- 0.1%. Emerging market currencies are also mixed and mostly +/- 0.2%. The approaching August 1 expiration of the postponement of US "reciprocal tariffs" casts a pall of anxiety over the markets and spurs hope of last-minute deals. 

Asia Pacific equities today featured the return of Tokyo markets from a long-holiday weekend. Japanese equity indices were little changed, while China and Hong Kong extended their recent gains. South Korea and Taiwan's main indices fell over 1%. Europe's Stoxx 600 is off for the third consecutive session and the seventh session in the past eight. US index futures are sporting a softer profile. Bond markets are also under a little pressure. European benchmark 10-year yields are mostly 1-2 bp higher, and the 10-year US Treasury yield is 1 bp higher near 4.39%. Japan's 30- and 40-year bond yields were slightly higher. Japan is set to sell new 40-year bonds tomorrow. Gold edged a little higher today to reach near $3403 but was greeted by sellers that drove it to almost $3383 in late Asian turnover. After reversing lower before the weekend from nearly $69, it fell to about $66.50 yesterday and slightly more today. Last week's low was closer to $65.40. 

USD: The Dollar Index traded to a three-day low yesterday near 97.70, which nearly met the (50%) of this month's rally and approached the 20-day moving average. It has not been unable to resurface above 98.00 today and this keeps the downside pressure intact. The next retracement (61.8%) is near 97.35. Surveys from the Philadelphia Fed (non-manufacturing activity) and the Richmond Fed manufacturing index and business conditions will be reported. They are not typically market movers even in the best of times. And given that Fed officials are downplaying survey data, it is especially true now. The Fed has entered the blackout period ahead of next week's FOMC meeting, we should not expect any discussion of the outlook for monetary policy or the state of the economy from Fed Chair Powell in his opening remarks at the conference on the Fed's Integrated Review of the Capital Framework for Large Banks.

EURO: The euro's downside correction appears to have ended last week slightly ahead of $1.1555. It held above $1.1680 today and is holding slightly below yesterday and last week's high slightly around $1.1720. The $1.1725 area (the 61.8% retracement of the pullback from July 1) would lend credence a more constructive outlook for the euro. The eurozone calendar is quiet until Thursday with the flash PMI, which is expected to tick slightly higher and the ECB meeting. There is little chance of a change in policy. The swaps market is discounting the next cut in December, which would bring the deposit rate to 1.75%. Currently, the market suspects that it will be the terminal rate but has about a 1-in-3 chance of a cut next year discounted. 

CNY: Through the higher dollar fixes in recent days, the PBOC seems to be trying to slow the appreciation of the yuan. The PBOC set the dollar's reference rate higher for five of the past six sessions before today, but today's was not simply lower (CNY7.1460 vs CNY7.1522 yesterday) but it is a new low fix of the year. The greenback remains in the range set last Wednesday (~CNH7.1685-CNH7.1910) amid the heightened speculation at time that Fed Chair Powell's dismissal was imminent. A base appeared to have been carved that extends toward CNH7.1660. Many observers still do not appreciate that China's dominance of several important supply chains is a source of leverage. While rare earth exports jumped around 660% month-over-month in June after the US-China deal was clarified, a new front has opened. Beijing indicated it was adjusting existing restrictions in light of the evolution of the technology to require licenses for eight key technologies used in the manufacturing process for EV batteries. This puts at risk Ford's plans for an EV battery plant in Michigan. It had planned on licensing technology from China's CATL.

JPY: Many observers attributed the yen's sharp gains yesterday to unwinding carry trades, but the evidence was sketchy, and it seemed like a simple explanatory narrative. For example, if the yen was the funding currency, what was bought with it? Of the three best performing high-yielding Latam currencies (MXN, BRL, COP) the Mexican peso and Brazilian real appreciated yesterday. Speculators in the CME futures, as of the latest CFTC data (through July 15) are net long yen. The net long position reached a record of almost 180k contracts in late April but were pared back. Still, at around 103.6k contracts, the net long position would still be a record. We note that the US 10-year yield fell by nearly half-of-a-dozen basis points yesterday and is off 15 bp from last week's high. The rolling 60-day correlation between the changes in the exchange rate and the US yield is at its highest level in four months (~0.45) and the 30-day correlation of changes is slightly below 0.77, which remains near the year's high set last week, near 0.80. The dollar rallied from around JPY142.70 on July 1 to last week's high slightly shy of JPY149.20. The (38.2%) retracement is near JPY146.70. The dollar held above JPY147 yesterday and is consolidating in about a JPY147.25-JPY147.95 range today. The (50%) retracement is a little below JPY146. The 20-day moving average is a smidgeon above JPY146. 

GBP: Sterling reached a six-day high yesterday, slightly above $1.3510. Recall that it peaked on July 1, near $1.3790, and forged a low last week around $1.3365. The $1.3525 area is the (38.2%) retracement of this month's decline and the $1.3570-80 area houses the (50%) retracement and the 20-day moving average. It is in about a third of a cent range today below $1.35. The UK reported government finance figures earlier today, and although the market is aware of the fiscal straits of the Labour government, the monthly data prints tend not to be the focus. That said, government borrowing was greater than expected. The June deficit was GBP20.7 bln, which was about GBP6.6 bln more than a year ago and above the GBP17.5 bln median forecast in Bloomberg's survey. News over the weekend suggested that the government is considering selling cryptocurrencies previously seized. It is not clear how much the crypto is worth, but an estimate in the Telegraph that a single raid in 2018 netted 61k Bitcoins, making that alone worth about GBP5 bln (though Chinese victims of the investment fraud have asked that the BTC is returned).

CAD: Weaker Bank of Canada business surveys did not offset the broadly softer US dollar. The greenback pulled back to the shelf forged last week in the CAD1.3670-80 area. The 20-day moving average is found at the lower end of that range. The CAD1.3665 area corresponds to the (50%) retracement of this month's bounce and the (61.8%) retracement is around CAD1.3640. It is a quiet week for Canadian data, leaving it, arguably, at the mercy of the greenback's general direction. May retail sales are due Thursday and a drop in auto sales may have driven overall sales around 1% lower. Excluding autos, economists expect the third consecutive decline in Canada's retail sales. 

AUD: The Australian dollar traded firmly but inside the pre-weekend range yesterday. Last Friday's high was slightly above $0.6540 and yesterday's high was slightly below it. It is trading quietly between about $0.6505 and $0.6530 today. The $0.6540 area corresponds to the (61.8%) retracement of the leg down from this year's high recorded on July 11 (~$0.6595). The 20-day moving average is near there, as well. The minutes from the central bank meeting earlier this month confirmed what Governor Bullock said at the time. The unexpected decision to stand pat was a question of timing not the direction of policy. Most board members, and overall vote was reported for the first time (6-3 decision), that cutting rates for the third time in four meetings did not meet its forward guidance for proceeding cautiously and gradually. Undeterred, the futures market is fully discounting a quarter-point cut at the next meeting on August 12.

MXN: The dollar fell to a six-day low against the Mexican peso yesterday, near MXN18.6250. The greenback peaked last Tuesday around MXN18.8850. The low for the year was recorded on July 9 slightly above MXN18.5525. A move above MXN18.72-75 would suggest the corrective/consolidative phase has more work to do. Mexico reports May retail sales and the IGAE report on economic activity, which serves the function of a monthly GDP estimate. Retail sales slumped 1% in April nearly offsetting in full the cumulative increase in Q1. The median forecast in Bloomberg's survey is for a 0.4% increase. The IGAE report is expected to have risen by about 0.20. That would put the April (0.54) and May average somewhat below the Q1 average. The Mexican economy eked out 0.2% growth in Q1 after it contracted by 0.6% in Q4 24. The median forecast in Bloomberg's survey for Q2 calls for a 0.1% decline in output. It will be reported next week. 

    

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