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Consolidative Session As Markets Await Fresh Incentives

By Marc ChandlerForexOct 20, 2021 06:17AM ET
Consolidative Session As Markets Await Fresh Incentives
By Marc Chandler   |  Oct 20, 2021 06:17AM ET
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The markets lacked a clear direction today and awaited fresh incentives. After gaining almost 1% yesterday, the MSCI Asia Pacific Index slipped. Japan, Hong Kong, and Australia were among the few equity markets that rose. The Dow Jones Stoxx 600 was posting minor gains, while US futures were largely steady. The S&P 500 and NASDAQ have a five-day advancing streak in tow.

The US 10-year yield reached a five-month high near 1.64% yesterday and extended to 1.67% before consolidating. European benchmark yields were 1-2 bp lower, including the UK Gilts, despite the strong inflation report. Asia Pacific yields mostly played catch-up to yesterday's rise in rates, but the Chinese benchmark slipped slightly back below 3%.

The dollar was decidedly mixed. European currencies were softer, while the dollar-bloc currencies were posting small gains. Central and Eastern European currencies were also lower, while many Asian currencies were higher, as were the South African rand and Mexican peso. The JP Morgan Emerging Market Currency Index was little changed. It was alternating between gains and losses since the middle of last week. Yesterday, it rose by almost 0.2%.

Chinese officials reportedly were contemplating intervention to steady coal, while the LME opened an inquiry into copper and introduced some position rules and spread limits. Copper was trading lower for the third consecutive session. The 3.3 mln barrel build of US oil stocks estimated by API helped steady oil prices, and the November WTI contract trading within this week's range (~$81.80-$83.90). Gold was trading firmly but inside yesterday's range (~$1763-$1785), and just below $1780 near midday in Europe.

Asia Pacific

The strong seasonal pattern of Japan's trade remained intact as September's balance improved over August's (-JPY623 bln vs. -JPY637 bln). Exports and imports were stronger than expected. Exports rose 13.0% year-over-year in September, about half the pace seen in August. Imports were restrained by the disruption in the auto sector. Japan's auto shipments were off 40% from a year ago. Steel exports and sales of chip-making equipment to China offered some offset. Higher oil prices, and some observers cited the new iPhone as possibly boosting imports too.

China reported its first decline in house prices in six years. The fall was minor, but the direction, in light of the disruption in the property market, is notable. New house prices in 70 cities, excluding state-subsidized housing, eased by 0.08% last month. Existing house prices fell in about three-quarters of the cities. The slump in sales may be hiding an even larger decline in prices. According to some estimates, residential sales were off 17% last month, and existing home sales were off by nearly 65% in the first part of October. Separately, note that China completed its $4 bln dollar-denominated bond sales. There were four tranches (three years to 30 years), and at the short-end, China paid about six basis points above Treasuries and around 53 bp at the long-end.

Rising US yields seemed to be the most compelling explanation of the greenback's rise against the yen to JPY114.70 earlier today, a new four-year high. It was sold back down to JPY114.30 in late Asian turnover before catching a new bid in early Europe. The JPY115.00 area was expected to be formidable resistance.

The Australian dollar extended its recent gains and traded above $0.7500 for the first time in three months. Since the high was set, the aussie has held support near $0.7480. Note that the upper Bollinger® Band was by $0.7490, and the other momentum indicators were stretched.

The  PBOC set the dollar's reference rate at CNY6.4069 compared with the CNY6.4042 projection (Bloomberg survey). This was seen as a subtle protest of the yuan's strength, and the PBOC injected CNY100 bln into the money markets after providing CNY10 bln for the past nine sessions. The injection was linked to offsetting the drain created by tax payments and government bond sales. The dollar had fallen to almost CNY6.38 yesterday, its lowest level since June. It has been unable to resurface above CNY6.40 so far today.


There are two important developments from Germany today. First, as formal negotiations for a new government start in earnest, the Green's have come out strongly against certifying the Nord Stream 2 pipeline. The controversial pipeline has been completed and is waiting for the formal certification process to begin operating. German authorities and EU officials need to certify it. The German decision is not expected before January. Moscow has clearly indicated its preference and willingness to boost gas shipments beyond existing long-term contracts if the pipeline was operational.

Second, citing personal reasons, Bundesbank President Weidmann will step down at the end of the year. He is widely regarded as among the more hawkish members of the ECB. The contest for his replacement has begun though it is typically a subtle campaign. Picking Wiedmann's successor may give a new chit to Scholz's effort to forge a coalition with the Greens and FDP. 

The UK's CPI stabilized at elevated levels in September. CPIH, which includes owner-occupied costs, eased to 2.9% from 3.0%. Economists expected an unchanged figure. The month-over-month increase in CPI was 0.3%, slightly softer than the 0.4% projected. The core rate eased to 2.9% from 3.1%. The BOE has warned that the CPI could reach 4% by year-end.

On the other hand, the RPI used to calculate the payout of inflation-linked bonds rose to 4.9% year-over-year from 4.8%, a new 10-year high. It was expected to have softened to 4.7%. Producer prices accelerated, even if not quite as much as expected. Input price rose 11.4% year-over-year after a revised 11.2% pace in August (initially 11%), while output prices accelerated to 6.7% from 6.0% (initially 5.9%).

Separately, we note that the debate over next week's budget announcement by Chancellor Sunak has intensified. Meanwhile, the implied yield of the December 2021 short sterling futures contract eased for the second consecutive session. At slightly over 50 bp, it was 4.5 bp lower than Monday's close but 15 bp higher than last week's settlement.

The euro was turned back from almost $1.1670 yesterday and could not sustain gains above $1.1650 today. So far, it was holding above yesterday's low, slightly below $1.1610. A 410 mln euro struck at $1.1600 expires today. The consolidative tone may persist through the North American session. That said, a close below $1.1600 would likely be seen as a signal that the modest upside correction has run its course.

Sterling was also trading inside yesterday's range (~$1.3725-$1.3835). It was the first time since Sept. 17 that sterling traded above $1.38, but it was not able to sustain the move today. Support was seen in the $1.3740-$1.3760 area.


The US economic diary is light today. The main feature is the Fed's Beige Book out late in the session, and it typically does not move markets. Five Fed officials speak, including Quarles, whose term ended as Vice-Chair of Supervision. His term as governor continues into the next decade but is expected to step down next year after his term as head of the Financial Stabilize Board is over at the end of this year. Meanwhile, the Democrat leaders appear to be still moving toward a vote on the large infrastructure efforts.

Canada reports September CPI figures today. The year-over-year pace is expected to have accelerated to 4.3% from 4.1% in August. However, the underlying core measures are expected to be little changed at elevated levels. The Bank of Canada meets next week (Oct. 27). It will likely reduce its bond-buying further (to C$1 bln a week from C$2 bln). Since the last BoC meeting, the implied yield of the June 2022 BA futures jumped from about 66 bp to 114 bp this past Monday before consolidating. Governor Macklem has acknowledged that price pressure may persist longer than initially anticipated but remains convinced they will likely prove temporary. 

Since the last Bank of Canada meeting (Sept. 10), the Canadian dollar appreciated about 2.75% against the US dollar. The US dollar fell to about CAD1.2310 yesterday before recovering to session highs near CAD1.2370. The CAD1.2300 area was the initial objective of the head and shoulders pattern we had been tracking. Today, the greenback was consolidating between CAD1.2335 and CAD1.2370.

Mexico's economic calendar has been light recently, but it will pick up tomorrow with August retail sales (expected to have fallen for the third consecutive month). The peso was firm today after gaining about 0.8% yesterday, the fifth advance in the past six sessions. After peaking on Oct. 12, a little above MXN20.90, the greenback has unwound this month's gains to approach MXN20.2150. The MXN20.25, where a $411 mln option expires today, corresponds to the (61.8%) retracement of the dollar's rally since the middle of last month. The next technical area of note is around MXN20.17, where the 200-day moving average is found.

Consolidative Session As Markets Await Fresh Incentives

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Consolidative Session As Markets Await Fresh Incentives

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