Dollar Finds Traction

[Ben Graham]

Overview: After rallying in the second half of last week, the dollar spent the last two sessions consolidating at lower levels. It has come back bid today amid light news. The greenback is 0.25%-0.50% firmer against the G10 currencies. The exception is the Australian dollar, which is holding on to small gains, inspired by the firmer CPI reading and a downgrading of the chances of a cut by the central bank not only next week but the following meeting in November, as well. The US dollar also enjoys a firmer bias against emerging market currencies. 

Japan returned from yesterday's holiday, and despite last week's announcement that the BOJ will begin selling its equity ETF holdings, Japanese stocks joined China and Hong Kong in advancing earlier today. Most of the other large markets in the region fell. Europe's Stoxx 600 is giving back yesterday's gains, while US index futures are firm. Benchmark 10-year yields in Europe are narrowly mixed. The 10-year US Treasury yield is flat, slightly above 4.10%. Gold is consolidating in a narrow range, a little below the record high set yesterday near $3791. Similarly, November WTI is consolidating in the upper end of yesterday's range. A push above the $64.35-50 area lifts the near-term technical tone. 

USD: The Dollar Index slipped slightly below the (38.2%) retracement of the bounce seen last week, beginning with the Fed Chair Powell's press conference. That was found near 97.20. The consolidative/corrective phase continues. It has come back bid and tested the 97.60 area. A move above 97.80 could target 98.25. New Fed Governor Miran laid out his thoughts in an op-ed piece earlier this week, but it does not make him less isolated. His argument hinges on his assessment that the neutral rate is near zero making the current policy setting very restrictive. Fed officials who have addressed this issue disagree and see policy only a little restrictive. Growth continues to be above what is seen as a long-term non-inflationary speed limit. Nor is Miran's claim that the neutral rate has fallen due to President Trump's policies in the last eight months compelling. Which policies? He did not specify. Surely, he is not acknowledging that the tariffs are stealth consumption tax. Meanwhile, yesterday's reception to the $69 bln two-year auction was lukewarm, and today the US sells $28 bln two-year floating rate notes and $70 bln five-year notes with little concession. 

EURO: The euro has stalled near $1.1820, holding slightly below the (50%) retracement of the pullback in the second half of last week. It has been pushed to almost $1.1760 today. The US two-year premium over Germany has steadied after it narrowed to about 150 bp last week. This coupled with momentum indicators appearing to be curling lower, we have not given up on our idea of a retest of last week's lows near $1.1725.

CNY: The dollar has pushed higher against the yuan today. It reached CNH7.1285, its best level since September 12. It has risen through the 20-day moving average near CNH7.1215 and the greenback has not closed above it in a little more than a month. Beijing seems content to continue to shadow the dollar and the push back from the US has slackened. The PBOC set the dollar's reference rate at CNY7.1077 today (from CNY7.1057 yesterday). Yesterday, Beijing said it would no longer claim developing market status at the WTO, for which it receives special treatment. The concession has long been sought by Washington and may have implications in other multilateral institutions. 

JPY:  Japanese markets re-opened today after yesterday's equinox holiday. The US dollar was confined to a narrow range of about half of a yen below JPY148.00 and has risen to about JPY148.35 today. Options for almost $730 mln are struck at JPY148.50 expire today. A move above JPY148.55 lifts the tone. BOJ's announcement last week that it would begin selling its equity ETFs is unlikely to have much impact as the average daily amounts seem so small that it will take more than a century to unwind completely. However, the two dissents in favor of a rate hike have encouraged speculation of a hike as early as next month. The odds implied by the swap market have risen to around 53%, the highest in almost a month. The odds of a hike before the end of the year are above 70%. Today's preliminary PMI does not capture the local market's attention, but Tokyo's September CPI at the end of the week will, and an uptick will encourage the ideas of a hike. For the record, the manufacturing and services PMI slipped. The composite eased to 51.1 (from 52.1), its lowest reading since May. Lastly, Koizumi is taking an early lead in the LDP leadership contest.

GBP: Sterling stalled yesterday after briefly pushing above the 20-day moving average near $1.3525. Given the magnitude of last week's reversal, sterling needs to resurface the $1.3555-60 area to signify anything but a flattish consolidation. Instead, it relapsed and slipped slightly through $1.3475. Options for GBP1.3 bln at $1.35 expire today. A break of $1.3450 weakens the technical tone. The economic calendar is light. The market has concluded that another Bank of England rate cut is unlikely to be delivered before the middle of Q1 26 at the earliest.

CAD: The US dollar rose to CAD1.3850 yesterday. Options for $540 mln expire there today. It has extended the gains toward CAD1.3875 today. Nearby resistance  is seen in the CAD1.3890-CAD1.3900 area. Economic weakness has spurred the market to extend trajectory of the easier monetary cycle. The implied yield for the middle of next year has fallen by a little more than 20 bp since last week's rate cut. This is to say that the market understands what the Bank of Canada did was not bringing forward the last rate cut. Rather last week's move was a net additional cut in the cycle. Early this month, the terminal rate was seen around 2.40% and now it is seen closer to 2.15%. 

AUD: The Australian dollar found support early Monday near $0.6575, slightly above the (61.8%) retracement of this month's rally. It posed a key downside reversal in the middle of last week. After setting a new high for the year a little below $0.6710, it sold-off and lower lows were recorded in following three sessions. It has flirted with resistance near $0.6625 today, where options for A$575 mln expire. A convincing push above it targets the $0.6660 area. The uptick in the August CPI to 3.0% (from 2.8% in July and 1.9% in June), underscored the cautious tone expressed by RBA Governor Bullock, even though the underlying trimmed mean measure eased to 2.6% (from 2.7%). The futures market accepts that there is little chance of a change in policy at next week's meeting. After the CPI report, the market halved the chances of a cut at the following meeting (November) to about 33%. 

MXN: While the US was consolidating broadly, the interest rate appeal attracted funds to the Mexican peso, Brazilian real and Columbian peso. Meanwhile, the likelihood of US assistance helped spur gains in the Argentine peso. The greenback held above support seen around MXN18.30. It is in a narrow range today (~MXN18.34-MXN18.39). Last week's low, near MXN18.20, was a new low for the year. The dollar slipped briefly below BRL5.32 to record a new low for the year as well last week and returned toward it yesterday. The greenback was sold to a new low for the year against the Columbian peso yesterday (~COP3826). Mexico reported a minor gain (0.1%) in July retail sales (and the June series was revised to -0.1% from -0.4%). Still, the larger than expected decline in IGAE survey, which serves as a monthly GDP reading) illustrates the pressure on the central bank to cut interest rates when it meets tomorrow. Today, Mexico reports the CPI for the first half of September, Both the headline and core rates are expected to tick up, but the weakness of the economy is more pressing for Banxico. 

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