Markets Consolidate after the Big Moves Before the Weekend

[Ben Graham]

Overview: The US markets responded dramatically to Federal Reserve Chair Powell's speech at Jackson Hole before the weekend. In today's late August session devoid of much news, the markets are consolidating. The dollar is in narrow ranges, and there may be some more corrective upticks in North America today. Emerging market currencies are more mixed. The PBOC set the dollar's fix lower by a relatively large amount (~0.23%) to a new low for the year and index of Chinese property developers rose as much as 3% earlier today amid expectations of new measures to support the real estate sector.

The Fed funds futures market is discounting now only the high probability of a Fed cut next month but also another one before the end of the year and at least three cuts next year. Moreover, the early forecasts for the next US jobs report (September 5) project another weak report and another rise in the unemployment rate. With London closed, the cash Treasury market awaits the US open, but the futures market points to slightly firmer yields. Most European benchmark 10-year yields are 2-3 bp higher. All the large equity market in the Asia Pacific region report, led by 2% gains in China's CSI 300 and Taiwan's Taiex. South Korea's Kospi and Hong Kong's Hang Seng rallied more than 1%. Europe's Stoxx 600 and US index futures are nursing small losses. Gold rallied almost 1% before the weekend, to almost $3379, but is softer near $3367 in Europe. October WTI has crept up to extend its advance for the fourth consecutive session. It is near $64 after putting in a low last week, near $61.50. 

USD: The Dollar Index posted a bearish outside down day ahead of the weekend, in reaction to Fed Chair Powell's comments. It made a new low for the month slightly below 97.60 and settled below the up trendline drawn off the July and earlier August lows. It is trading quietly, consolidating in a narrow range (less than 30 ticks below 98.00). The US economic calendar is light this week, and when everything is said and done, the derivatives market is still pricing in a high probability (~85%) of a rate cut next month and has two quarter-point cuts priced in for this year. Rather than the high frequency economic data, the market may be more sensitive to the Fed officials speaking, including Dallas Fed President Logan, who speaks today, and some have suggested she may be under consideration to succeed Powell as chair. NY Fed's Williams also speaks today. His comments often reflect the leadership of the Fed. Governor Waller, who dissented in favor of a cut last month, speaks on Thursday. He is also thought to be under consideration for the chair, but his unambiguous endorsement of the central bank's independence may jeopardize his chances, especially if Governor Cook's seat becomes vacant. The coming weekend is extended due to the Labor Day holiday, and then the August jobs report comes into focus. The early estimates suggest another soft nonfarm payroll rising by about 85k. The unemployment rate is seen rising to 4.3% from 4.2%. 

EURO: This week's highlights include M3 and the lending figures, confidence surveys, and the ECB's inflation expectations survey. The euro is not particularly sensitive to these reports. The euro posted large outside up day ahead of the weekend. It made a new high for the month, near $1.1745. The high from late July was near $1.1795 but the multi-year high set on July 1 was closer to $1.1830. Not only did US rates tumble before the weekend, but the US two-year premium over Germany settled below 175 bp its lowest since early April. The euro trading in a narrow range in the upper end of last Friday's range (~$1.1690-$1.1735). The lack of follow-through buying could see some more late longs get squeezed out. Support may be in the $1.1660-80 area. Before the weekend, Germany's Q2 GDP was revised down to -0.3% quarter-over-quarter from -0.1%. The August IFO survey showed a new high in expectations component since the Russian invasion of Ukraine, but the current assessment (86.4 vs. 86.5) has been practically flat for the last several months. 

CNY: The PBOC is threading the needle. It has steadily lowered the dollar's reference rate, introduced more flexibility into setting of said reference rate, and the yuan remains broadly stable against the greenback. With a couple minor exceptions, the dollar has been in a CNY7.15-CNY7.20 trading range for nearly three months. Today was another exception. The greenback briefly slipped below CNY7.1490, a new low for the year, encouraged by a sharply lower dollar fix. The PBOC set the dollar's fix at CNY7.1161 (CNY7.1321 before the weekend). The setting of the daily reference rate is one of the chief ways that Beijing manages the exchange rate. Yet, the Chinese hawks want to talk about intervention as if all of the state-owned bank activity is "stealth" activity on behalf of the central bank, as if trade flows (estimates suggest a large portion is still conducted in dollars) and capital flows do not require currency conversion. After surging to CNH7.2240 before the poor US employment report on August 1, the greenback settled into a CNH7.1680-CNH7.1980 range in recent weeks. It was frayed before the weekend, as the greenback set a low near CNH7.1665. After today's fix it fell to nearly CNH7.1490. 

JPY: The hawkish anticipation for Powell and the rise in US yields helped lift the dollar to almost JPY148.80, its highest level since August 1, before Powell spoke. The greenback reversed course and fell to a new low for the week, slightly below JPY146.60. It posted its lowest settlement since July 23. Initial support is around JPY146. In today's consolidation, the dollar has been confined to about JPY146.80-JPY147.55. The corrective pressures do not appear exhausted, but the JPY147.70-JPY148 may be sufficient. The highlight this week comes on Friday: August Tokyo CPI (expected to have moderated) and a drop in July industrial production, while Japanese consumers continued to shop, with a smaller gain in retail sales after the 0.9% jump in June.

GBP: Sterling looked weak. It had slipped below $1.34, for the first time in two weeks. Then Powell spoke and sterling rallied to almost $1.3545. It posted its biggest gain in three months. The high from late July and mid-August, around $1.3600. Sterling has not traded above $1.3535 today and may be headed to the $1.3450-60 area as some momentum traders move to the sidelines. It is a quiet week for UK data, mostly housing data, consumer credit and supply. 

CAD: The US dollar rose to CAD1.3925, a three-month high before Powell spoke. It was sold to CAD1.3815 before the weekend. It is in almost a 25-tick range above CAD1.3820 so far today. Nearby support is around CAD1.38, where the (61.8%) of the rally from the month's low (Aug 7 ~CAD1.3720) and the 20-day moving average converge. Still, corrective pressures could see a move toward CAD1.3850-60. Canada is among the last of the G10 countries to report Q2 GDP. The first estimate is due at the end of the week. Bloomberg has two surveys. The first (ECFC) shows a median forecast in its survey of a 0.5% contraction. The second (WECO) shows a median forecast of a 0.7% contraction. The monthly GDP contracted in both April and May by 0.1%. According to the median forecast (WECO) the economy may have grown by 0.1% in June. 

AUD: The broad setback for the greenback arrested a four-day slide by the Australian dollar ahead of the weekend. The Aussie had fallen to $0.6415, the low for the month. It proceeded to recover and briefly traded slightly above $0.6500, a four-day high, and settled above the 20-day moving average (slightly above $0.6485). It is one of the best performing G10 currencies today and made a marginal new high to about $0.6505, while holding above $0.6470. Initial resistance is seen in the $0.6510-20 area. Tomorrow's minutes from the Reserve Bank of Australia's meeting earlier this month, when it delivered a quarter-point cut will be looked at for clues about the timing of the next move.

MXN: The dollar had been coiling in narrow ranges against the peso most of last week. Then with Powell's comments at Jackson Hole, the dollar broke lower. It fell to a new low for the week near MXN18.57. It held earlier today, and the greenback has approached MXN18.65. It may not have completed the squeeze higher, but we suspect it has come close and anticipate resistance closer to MXN18.70. Ahead of the weekend, Mexico reported lower than expected inflation figures for the first half of August. The headline rate fell (0.02%) for the first time this year, while the year-over-year pace edged up to 3.49% from 3.48%. The core rate rose by 0.0%, a smidgeon less than expected and the year-over-year rate was shaved to 4.21% from 4.22%. Mexico reports the Q2 current account today. Since the pandemic, Mexico runs a trade deficit (though this year it has swung into surplus). Its current account deficit averaged less than 0.3% of GDP in the past two years and is projected to be about that size this year. The average current account deficit in the 2017-2019 period was almost 1.4% of GDP. As a consequence of US immigration policies and environment, worker remittances (average $5.4 bln a month last year) have already begun to trend lower. 

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