China's politburo validates and extends pivot while the US Dollar sees yesterday's gains pared

Overview: After its recent losses were extended, the dollar reversed higher in North America yesterday. Technically, this looks to have ended the sharp drop over the last couple of weeks, but there has been no follow-through gains today and a consolidative tone emerged. G10 currencies are firmer today, led by the recovery in the Antipodeans. The Swiss National Bank delivered the expected 25 bp rate cut, but the Swiss franc is up about 0.25%. Emerging market currencies are mixed, though central European currencies are mostly firmer. 

China's Politburo threw its weight behind the new measures and seemed to signal more to come. This helped extend the CSI 300 gains by 4.3%, which was sufficient to turn it positive for the year. The Hang Seng and the index of mainland stocks that trade there also advanced by more than 4%. Japanese and South Korean markets rose more than 2.5%. Europe's Stoxx 600 is up over 1% and US index futures are poised to gap higher at the opening. European benchmark 10-year yields are 2-4 bp lower, and peripheral premiums over Germany are a little narrower. UK Gilts are bucking the move and are four basis points higher. The 10-year US Treasury yield is a little softer near 3.77%. Gold is firm near yesterday’s record high (~$2670). With Saudi Arabia seemingly committed to reducing its production restraint and constructive developments in Libya, oil is trading sharply lower. November WTI, which was near $72.40 on Tuesday, traded down to $67.15 today before finding bids. It is now around $68.50. Yesterday's low was near $69.25. 

Asia Pacific

Beijing has continued unveiling measures, with the Politburo formally saying that it seeks to stop the decline in house prices and promote employment. It is seen as validating and extending what appears to be a significant pivot in policy. Still, many will likely lift the forecasts for this year's growth back toward Beijing's target of 5%. Also, it will not go unnoticed that despite the tensions in Sino-American relationship and the efforts to de-risk/de-couple, the PBOC waited until after the Federal Reserve eased to significantly adjust monetary policy (reserve ratio and interest rate cuts). The yuan had already recovered and was higher on the year. The focus shifts to Japan. The Tokyo CPI is due tomorrow and due to the timing of the government's energy subsidies, a 0.4% decline in the headline and core rate on a year-over-year basis is anticipated. It would bring the headline rate to 2.4% and the core to the 2.0% target. Excluding fresh food and energy, Tokyo's CPI is expected to be flat at 1.6%. By late tomorrow, the LDP will have picked a new leader. Of the nine candidates, running, it appears to come down to three candidates. Takaichi, a defender of Abenomics and opposes additional hikes by the BoJ; Koizumi, the son for the former popular prime minister, is a neoliberal, emphasizing deregulation, and Ishiba, who has tried in vain four other times to become PM, is very strong on defense and has advocated an Asian defense alliance.

The Dollar posted a bullish outside up day against the Japanese yen by trading on both sides of Tuesday's range and settling above Tuesday's high. It also took out a month-old downtrend line. It reached JPY144.75 and follow-through buying today lifted it to JPY145.20, the highest level since September 3. It is back below JPY145 in the European morning, where $1.25 bln in options that expire today. Above there, the JPY145.55 area may offer resistance. The month's high was set near JPY147.20. The Australian dollar reversed lower after briefly trading above $0.6900 yesterday, its best level since February 2023. The last leg up began on September 11 (US CPI). It slipped through $0.6820 yesterday. That area held today and the Aussie it recovered to around $0.6870. The daily momentum indicators are about to turn lower, adding to the cautious technical tone. The greenback also rebounded smartly against the offshore yuan after briefly slipping below CNH7.0 early yesterday. It reached almost CNH7.0360. The dollar re-tested the CNH7.00 today and it held. Consolidation is threatened. The PBOC set the dollar's reference rate at CNY7.0354 (CNY7.0202 yesterday).

Europe

As widely anticipated, the Swiss National Bank became the third G10 central bank to deliver its third interest rate cut this year (Sweden did so yesterday and Canada earlier this month). The 25 bp cut brings the deposit rate to 1.00%. Say what one wants about how the new post-Covid era that will not see the return of the extremely low rate environment, but the swaps market expects the Swiss policy rate to be at 0.50% within in a year, and SNP President Jordan did prepare the market for additional cuts "if necessary." Meanwhile, eurozone money supply (M3) hardly captures the market's attention. It contracted year-over-year from July through November last year, and with the exception of January, has been accelerating. It reached 2.9% in August, up from 2.3% in June and July. Lending remains wea but slowly improving Loans to household are up 0.6% from a year ago (0.5% in July) and lending to businesses has increased by 0.8% (0.6% in July).

The euro rose to almost $1.1215 yesterday, its highest level since July 2023, but a wave of profit-taking was triggered. The single currency slumped to almost $1.1120. It held above Tuesday's low (~$1.1105). It is as if the euro's break out higher was premature and it fell back into the recent congestion. There has been no follow-through selling today and the euro is firmer in a narrow range of roughly $1.1125-$1.1160. Options for 1.5 bln euros at $1.1050 expire tomorrow. Sterling's price action was more negative. It reversed lower after reaching a new two-and-a-half-year high (~$1.3430) and closed below Tuesday's low (~$1.3330). Still, yesterday's low held (slightly below $1.3315) and it is making new session highs in late European morning turnover near $1.3360. This is stretching the intraday momentum indicators, warning that upside potential in the North American morning may be limited to the $1.3380 area. 

America

Revisions to Q2 US GDP are too historical to matter much as Q3 winds down, and in any event, changes are expected to be minor. As of September 20, the NY Fed GDP tracker puts Q3 growth at 3.0%, while as of September 18, the Atlanta Fed's tracker stands at 2.9%. The US reports August durable goods orders where the sharp decline in Boeing orders will weigh on the headline. Yet, even excluding transportation and military orders only a minor increase is expected after small contractions were recorded in July. Shipments will likely edge higher after falling by 0.3% in July. Weekly jobless claims may draw more attention than usual after last week's drop to the lowest level in four months. It covered the same week that the BLS surveys for the September jobs report were conducted. Some played the report down, noting the disruption around holidays. However, the four-week moving average fell to a three-month low, and here in Q3, weekly jobless claims have risen only four times. Estimates of nonfarm payrolls (October 4) are around 135k, little changed from August's 142k (pending revisions). Mexico's central bank meets today. The continued moderation of inflation, the Fed's 50 bp cut, and the recovery of the peso all favor a quarter point cut today. It will be the third cut this year and will bring the overnight target rate to 10.50%. The swap market sees it at 9.50% in six months.

The US dollar matched a six-month low against the Canadian dollar near CAD1.3420 before rebounding to a little above CAD1.3485, which is holding so far today. The Canadian dollar, which we have described as a laggard, fared the best among the G10 currencies yesterday, losing only about 0.4%. The US dollar has pulled back to CAD1.3465 today. Support is likely in the CAD1.3445-55. The Mexican peso got tagged for a nearly 1.6% loss yesterday, its largest this month. It was not simply the broad recovery of the dollar, but developments in Mexico that spook investors. Moody's warned that the judicial reform could impact Mexico credit worthiness, though a few weeks ago S&P said this was not the case. The Senate approved the constitutional reform that would give the military authority over the national guard, which has already been approved in the lower house. For its part, the lower house passed a constitutional change that would require minimum wage to increase faster than inflation. The peso's 1.4% decline yesterday was the most among emerging market currencies. It was the fifth session in the past six that the peso has fallen. The dollar rose to almost MXN19.6850 yesterday. It is also consolidating today with inside yesterday's range. The next target is around MXN19.75 and then MXN19.90, provided MXN19.50 holds.