USD remains soft but consolidation is threatened

Overview: The US dollar's recent retreat has been marginally extended today but it seems to be moderating. Still, the greenback is on the defensive, arguably ahead of tomorrow's BLS annual revisions of nonfarm payrolls, where there is talk that April 2023-March 2024 job growth could be slashed from 2.6 mln to 1.6 mln. And that is ahead of Friday's Jackson Hole address by Fed Chief Powell that is expected to be the strongest confirmation of a rate cut next month. As widely expected, Sweden's Riksbank cut its policy rate by 25 bp and the krona has strengthened. Emerging market currencies are mixed. Most of the Asian emerging market currencies advanced, except the Chinese yuan, while central European currencies are softer along with the South African rand and Mexican peso. 

The eighth consecutive advance in the S&P 500 and NASDAQ yesterday helped lifted Asia Pacific markets today. Among the large bourses, only China and Hong Kong fell. Europe's Stoxx 600 is edging higher. A higher close would be the sixth straight gain and the 10th rise in 11 sessions. US index futures enjoy a slightly firmer tone. Benchmark 10-year yields have edged up, with a notable exception of China. The 10-year US Treasury yield is little changed near 3.87%. Gold reached a new record high near $2525. October WTI extended yesterday's 2.5% decline to reach almost $72.50, its lowest level in two weeks. 

Asia Pacific

Minutes from the recent Reserve Bank of Australia (hawkish hold) revealed little new. The futures market continues to discount almost a 90% chance of a cut at the last meeting of the year (December 10). Moreover, the Australian dollar is underperforming the other dollar-bloc currencies today. Surprising no one, Chinese banks left the prime loan rates steady (one-year rate 3.35% and five-year 3.85%). With the yuan's recovery on the coattails of the yen, the official focus appears to have shifted from the exchange rate to the 10-year yield. It is trying to stem the rally that drove the 10-year yield to a record-low below 2.10% last month. It is now near 2.16%. The PBOC has threatened to borrow and sell government bonds, and although this has not been seen, large state-owned banks were sellers last week. In addition, officials encourage local banks not to settle their government bond purchases. Japan will report its July trade balance first thing tomorrow. The July trade balance typically deteriorates in from June (14 of 20 past July's). In the first half of this year, Japan has recorded an average monthly trade deficit of JPY540 bln (~$3.55 bln). In the first half of 2023, Japan's average monthly shortfall was JPY1.16 trillion. Exports in June were up 5.4% year-over-year (1.5% in June 2023), while imports were up 1.1% in June 2024, the same as in June 2023).

The dollar's range against the yen was set in the Asia Pacific session yesterday (~JPY145.20-JPY148.05) and it remains in that range today. The greenback recovered to around JPY146.70 near midday in NY yesterday. It has been capped near JPY147.35 today in the local session. The market lacks near-term conviction and BOJ Governor Ueda and Fed Chair Powell speak Friday. With the speculative future accounts now net long yen for the first time in nearly 3 1/2 years, this segment of market positioning has nearly been cleared. The gross short position is the smallest since March 2023. Unlike earlier this month, yen strength did not weigh on the Australian dollar. In fact, the Aussie extended its recent gains and reached nearly $0.6735 and edged marginally higher today. It settled above the upper Bollinger Band and has not re-entered it today (~$0.6715). The high in mid-July was near $0.6800 and the year's high set on January 2 was closer to $0.6840. The greenback settled at its lowest level this year against the offshore yuan. The yen's strength helped lift and offshore yuan continues to spend time stronger than the onshore yuan, which is a reversal of the pattern than dominated until recently. The US dollar fell slightly more than 3% from the high for the year set in early July near CNH7.3115 to about CNH7.0840 in early August. It traded to almost CNH7.12 before recovering today to around CNH7.1470. The PBOC set the dollar's reference rate at CNY7.1325 (CNY7.1415 yesterday), the lowest fix in almost three weeks. 

Europe

With Q2 GDP already reported, today's release of the eurozone's June's construction output (1.7%, strongest since January 2023) and current account (record 50.5 bln) euros) rightly had negligible impact. However, as we noted last week, the trade balance has recovered from the terms of trade shock and the Russian-inspiring disruption. The trade surplus averaged 18.1 bln euro in H1 24. It recorded an average deficit almost 678 mln euros in H1 23. In H1 22, the average monthly shortfall was almost 25.75 bln. The current account surplus averaged 15.1 bln euros in H1 23 and 39.5 bln euros in H1 24. Meanwhile, the only G10 central bank to meet this week, Sweden's Riksbank delivered its second quarter-point cut in the easing cycle that began in May. The policy rate stands at 3.50%. The swaps market had a little better than a 1-in-3 chance of a 50 bp cut. There are three meetings left in the year and the market has 77 bp of cuts discounted. The underlying measure of inflation the Riksbank targets has been below 2% for two consecutive months. The unemployment rate rose from 7.7% in December 2023 to 9.4% in June. The July figures are due at the end of the week. Year-to-date, the krona is off about 2.5% against the US, which puts it in the middle of the G10 currency performances. It has fallen by almost 2.60% against the euro. The krona appreciated about 1.5% against the Norwegian krone, even though the Norges Bank has not cut rates this year and is seen as among the least dovish central banks within the G10.

The euro set a marginal new high for the year of almost $1.1090 yesterday, a few hundredths of a cent above yesterday's high. The gains brought this month's advance to about 2.35%. If sustained; it would be the euro's best month since last November. After settling above the upper Bollinger Band yesterday, the euro is slipping back under it today. (~$1.1090). The momentum indicators are getting stretch suggesting the upside may be limited until a corrective/consolidative phase unfolds. Last December's high was near $1.1140 and the 2023 high set in July was about $1.1275. Sterling has rallied from $1.28 on August 15 and poked above $1.30 today (to almost $1.3015). The year's high was set on July 17 near $1.3045. It frayed the upper Bollinger Band ($1.3000). Initial support was found near $1.2975 today, but session low may not be in place. Additional support is seen in the $1.2940-50 area. Still, sterling has rallied in eight of the past nine sessions and near-term consolidation looks likely.

America

The only high-frequency US data point today is the Philadelphia Fed's non-manufacturing survey. Recall that last week, its manufacturing survey deteriorated more than expected (-7.0 from 13.9) and stands at its lowest level since January. Still, the non-manufacturing survey does not typically have much market impact. Fed Governor Barr and Atlanta Fed's Bostic speak today but they may not address the economy or monetary policy. Tomorrow may be more important. There is much interest in the BLS preliminary annual benchmark revisions to US payrolls. A large downward revision has been the subject of speculation. Separately, the FOMC minutes are due, and the bar to the first rate cut next month is seen as very low. The market is gradually shaving the odds of a 50 bp cut and ahead of Fed Chair Powell's speech at Jackson Hole (Friday). It is now around a quarter discounted. A week ago, it was 60% discounted. Ahead of the FOMC meeting on September 18, there is another jobs and CPI/PPI report. The PCE deflator, which the Fed targets is due on August 30, but the signal has already been delivered by the CPI/PPI. Canada reports July CPI today. Due to the base effect, a 0.4% rise in the month-over-month reading will still allow the year-over-year pace to slip toward 2.5% from 2.7%. The central bank puts more weight on the underlying measures and those likely eased as well. The market highly confident that the central bank will ease at the September 4 meeting again in late October. It has another cut nearly fully discounted for December. The Bank of Canada has already delivered two quarter-point cuts and its overnight lending rate sits at 4.50%. Mexico reports June retail sales today. The median forecast in Bloomberg's survey is for a 0.3% increase, which is the average of April and May. In Q1 24, retail sales fell slightly.

The Canadian dollar extended its recovery on the back of the broadly weaker US dollar. It reached its best level since July 15. The greenback recorded the high for the year in the market turmoil earlier this month near CAD1.3945. It traded slightly below $1.3635 yesterday and extended the losses slightly below CAD1.3615 in Europe today. Key support around CAD1.36. As of a week ago, the speculative market had a near record net short Canadian dollar position. Momentum indicators are getting extended, and the US dollar settled below its lower Bollinger Band, which is found near CAD1.3620 today. The Mexican peso underperformed yesterday. It was one a few emerging market currencies that did not advance against the weaker US dollar. The peso's weakness did not seem to reflect regional development. The Chilean peso and Brazilian real were the strongest in the EM universe after the Thai baht yesterday with around 1.5% gains. The Mexican peso is off a minor 0.3% this month but only the Russian ruble (-4.4%), Turkish lira (-1.85), and Argentine peso (-1.3%) have done worse. The dollar peaked near MN20.2180 on August 5 and has been consolidating for the past three sessions (~MXN18.60-MXN18.84).