Dollar Retreat Extended, but Turn Around Tuesday may have Already Begun

Overview:  Last week's dollar losses have been extended today. The yen is leading the move, encouraged by talk of a buying by a large US real money fund. The Dollar Index is off about 0.35% after sliding 1.8% last week. It is below the 200-day moving average for the first time since late August. As was the case last week, the Canadian dollar is the laggard. Emerging market currencies are also mostly higher. The Chinese yuan's 0.67% rise is the most since late July. Notably, the greenback's losses today come despite slightly firmer US rates. The 10-year yield is up almost three basis points to 4.46% and the two-year yield is up about couple of basis points to 4.90%.

The Nikkei reversed lower after setting a marginal new 33-year high. Hong Kong and mainland shares that trade there led the region led the regional advance. Europe's Stoxx 600 is edging higher after rallying 2.8% last week. European benchmark 10-year yields are mostly a little firmer, though Italy, where Moody's upgraded the outlook for stable, and Portuguese bonds, where Moody's lifted the rating to A3 from Baa2 have seen yields slip by 2-3 bp today. US index futures are slightly firmer. Gold is trading with a heavier bias today after stalling before the weekend near $1993.45. It fell to $1973.45 today. Initial support may be near $1970. Amid talk that OPEC+ will consider more or extended cuts to support prices is helping the January WTI contract build on the pre-weekend recovery. It is trading near a three-day high around $76.80. A move above there could see $78-$79. 

Asia Pacific

As widely expected, Chinese banks left their loan prime rates unchanged at 3.45% (for the one-year rate) and 4.20% (for the five-year rate). Beijing appears to be more focused on monetary quantities than prices. This was the takeaway from last week's benchmark one-year Medium-Term Lending Facility. The rate was left at 2.50%, but the amount offered, CNY1.45 trillion was nearly twice October amount and well above this month's maturing amount. This is part of the PBOC's aggressive liquidity provisions, complementing the new fiscal efforts by Beijing, which include a CNY1 trillion central government fiscal boost, special lending facility to help local governments cope with the debt stress, and there were reports suggesting another CNY1 trillion initiative to support public housing and urban renewal. Separately, note that Beijing announced it has approved the application of Mastercard's joint venture in China.

The idea that Taiwan's opposition could run a single candidate captured many imaginations. It was seen easing cross-strait tensions and reinforcing what many see as a thaw in US-China relations. However, the attempt faltered, and Ko Wen-je, of Taiwan's People's Party, announced he will be the presidential candidate, while the Kuomintang responded but saying that negotiations continue. Candidates must be registered by the end of this week. If the KMT's candidate, Hou Yu-ih runs as well, the risk is that the Democratic Progressive Party's candidate and current vice president Lai Ching-te would win. Today, as widely expected, Lai named Taiwan's former envoy to the US, Hsiao Bi-khim as his running mate. She has been the de facto ambassador to the US since 20220. Taiwan's main equity index has fallen once this month and is up about 7.6% so far this month, through last week. The MSCI Asia Pacific Index has risen about 6.8%. The Taiwanese dollar has appreciated by around 1.8% this month, which is around the median for active Asia Pacific currencies and leaves it about 3.6% lower year-to-date. In the region, outside of pegged Hong Kong dollar, only the Indonesian rupiah (~0.50%) and Philippine peso (~0.10%) have gained against the US dollar this year. Today, the Taiwanese dollar has traded higher, helped by a smaller decline in exports, while the equity market eked out a minor gain. 

The dollar tested the month's low near JPY149.20 ahead of the weekend. Some of the selling pressure may be option related. There are options for $770 mln that expire today at JPY149.25 and almost $1.4 bln at JPY149 that expire Thursday. Note that the five-day moving average has fallen below the 20-day moving average for the first time since late July, which illustrates the faltering uptrend. The low from late October was near JPY148.80 and the dollar cut through that to reach JPY148.20 in the European morning. This is the lowest the dollar has been since October 10. Amid talk of intervention, the dollar has recorded a low near JPY147.45 on October 3. The intraday momentum indicators are stretched. Initial resistance is seen near JPY149.00-20. The Australian dollar settled last week at $0.6515, its highest closed since August 10. The Aussie recovered from a three-day low (~$0.6455) ahead of the weekend and closed on its highs. Follow-through buying lifted the Australian dollar through last week's highs (~$0.6540) is the initial target to almost $0.6565. The $0.6585-$0.6600 may be more formidable resistance, housing the (50%) retracement of the decline since mid-July and the 200-day moving average. Still, the intraday momentum indicators warn the downside risks in North America. Initial support is seen the $0.6520-35 area. The greenback's broad decline has lifted the Chinese yuan. The yuan is trading at its best level since early August. The fell from the pre-weekend close near CNY7.2145 to CNY7.1640. The PBOC set the dollar's reference rate at the strongest in nearly three-months today (CNY7.1612). The average projection in Bloomberg's survey was for CNY7.2335. It is the fifth consecutive session that the yuan has risen and today gain about 0.67% is the most since late July.


With Eurostat confirming that the eurozone economy contracting by 0.1% in Q3, today's news that construction output in September rose by 0.4% after August's 1.1% decline shrugged off by the market. This week's calendar is light ahead of Thursday's preliminary November PMI. The PMI is seen stabilizing but at poor weak levels consistent with contracting activity. ECB officials have pushed back against speculation of a rate cut in Q2 24. The swaps market has about 76% chance of a cut discounted for April 2024, and 35 bp of cuts by the end of Q2 23.

Ahead of the weekend, Moody's offered good news to Italy. Moody's maintained it Baa3 rating sovereign credit rating, one step above junk, which is a notch lower than S&P and Fitch. However, it revised its outlook for stable from negative. The market is not surprised. Italy's 10-year yield fell by 21 bp last week to about 4.36%. It settled last month near 4.80%. Italy's premium over Germany reached a nine-month high in early October, a little above 205 bp. Last week, it fell to almost 170 bp, the lowest in two months. 

The euro posted an outside up day before the weekend, trading on both sides of Thursday’s range and settling above Thursday's high. Indeed, the euro settled at its highest level (~$1.0915) since August 30. The high from late August was about $1.0945, and the euro reached $1.0940 in early European turnover. The (61.8%) retracement of the drop from the year's high set in mid-July is found near $1.0960. In the CFTC reporting week that ended November 14, speculators in the futures market grew their net long euro position for the fifth consecutive week. At 108.9k contracts, it is the largest net long position in two months. The bulls added 8.7k contracts to their gross long position, the most since mid-July. The bears covered 11.1k contracts, in the sixth consecutive week of short covering. Sterling also posted an outside up day ahead of the weekend and also settled near its session high. Last week's high was near $1.2505, its best level since mid-September. Sterling reached $1.2510 today and has held above the 200-day moving average (~$1.2445). The next target is the (50%) retracement of its decline since the July high found near $1.2590. But momentum is has faltered in Europe and a test on the lows looks likely in North America. In the futures market, speculators have their largest net short sterling position (~27.7k contracts) since mid-January. Speculators were net long sterling futures from mid-April to until mid-October and have been net short since then.


While every business cycle is unique, this one is especially so. There have been many economic and financial indicators that seemed to signal a recession. Among these is the index of Leading Economic Indicators. It has not risen since February 2022. The six-month rate of change is at levels that were associated with recession conditions in the past. That said, it bottomed in March at -9.0% and has steadily improved to -6.7% in September. Despite the improvement, it is still consistent with an economic contraction. The past six recessions were declared with an average annualized six-month LEI decline of about 5.9%.

Fed Chair Powell observed that the Summary of Economic Projections are a snapshot of what officials are thinking at the time, and they become dated as the quarter progresses. Fair enough. Although Powell says it is too early to talk about rate cuts, it is not entirely true. The September dot plot pointed to two cuts in 2024 and June iteration pointed to four cuts (after two increases). The market now has about a 77% chance of the first cut in May 2024. The CME's FedWatch tool says that current pricing is consistent with about a 30% chance of 100 bp cut next year and a 26% chance of 75 bp reduction. In this holiday-shortened week for the US, only Richmond Fed President Barkin is due to speak (today at 12:00 ET on Fox Business). Barkin, a non-voting member of the FOMC this year, does get the vote next year. While Barkin has said that more work may need to be done to curb demand and inflation, he seems to be in no hurry to move again.

Canada reports October CPI and the government will provide its fall economic update tomorrow. Before the weekend Canada reported that foreign investors sold a net C$15.1 bln of Canadian bonds and stocks in September. It was the first back-to-back divestment since June-July 2020. In Q3, foreign investors sold about C$10 bln of Canadian securities. It edged out Q4 18, to be the largest quarterly net liquidation by foreign investors since 2007. Canada's October CPI is expected (median forecast in Bloomberg’s survey) to have risen by 0.1% after falling by the same amount in September. The base effect points to a decline in the year-over-year rate to about 3.1% from 3.8%. The underlying core measures may have slipped slightly. The swaps market has the first Bank of Canada rate cut fully discounted by the end Q2 24.

The US dollar traded inside Thursday's range (~CAD1.3680-CAD1.3775) ahead of the weekend. Initial support is seen near last week's low (~CAD1.3655). The low for the month was set on November 6 (~CAD1.3630). The line connecting these two lows is around CAD1.3665 today and about CAD1.3680 at the end of the week. The price action seems to be consistent with the possible forging a larger topping pattern and a convincing move below the recent lows would lend greater credence to this constructive technical case for the Canadian dollar. The US dollar snapped a five-day slide against the Mexican peso before the weekend but only after slipping briefly below MXN17.19, its lowest level since September 25. The dollar has been sold to MXN17.1530 today but the momentum is stalling. The key data point this week may be the CPI for the first half of November. The headline rate is expected to firm slightly, while the year-over-year core rate has scope to slip a little. Milei won the Argentina presidential run-off. The most liquid offshore bonds firmed in the European morning today. In the parallel markets, the peso fell by about 8% yesterday. Local markets are closed today.


Dollar Retreat Extended, but Turn Around Tuesday may have Already Begun Dollar Retreat Extended, but Turn Around Tuesday may have Already Begun Reviewed by Marc Chandler on November 20, 2023 Rating: 5
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