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European Gas Jumps, While The Euro And Yen Slump

Published 11/17/2021, 06:12 AM
Updated 07/09/2023, 06:31 AM

The prospects that the 6.2% CPI will prompt the Fed to move quicker continue to underpin the dollar. The euro fell to about $1.1265, its lowest level since last September, and the Japanese yen slumped to a fresh four-year low. The JP Morgan Emerging Market Currency Index tumbled 1% yesterday, the largest decline since February. A more stable tone was evident in Europe, as the euro recovered above $1.13, and the JP Morgan Index was paring yesterday's losses. The dollar was holding just below JPY115.00.

Asia Pacific equities did not fare well. Only China and Taiwan markets, among the large regional markets, managed to rise. Europe's Stoxx 600 was edging higher for the sixth consecutive session. Recall it had fallen only once since Oct. 27. US futures were narrowly mixed.

The bond market was quiet, with the US 10-year hovering around 1.62%. European yields were a little softer. Gold slid below $1850 yesterday but snapped back today to test the $1860 area.

Crude oil was heavy, with the January WTI contract around $78.80, unable to resurface above $80 amid talk that the US and China may coordinate the release of strategic holdings. Gas prices were up another 7% in Europe today after surging 16% yesterday and 9% on Monday. Due to "unplanned maintenance," a Belarus pipeline to Poland was shut down, which may last three days.

Iron ore prices were giving back around half of yesterday's 1.2% gain, for the third loss in four sessions. Copper was off for a third session, losing after dropping 2.2% in the past two sessions.

Asia Pacific

Japan's October trade data disappointed. Exports and imports were weaker than expected, and this resulted in a smaller deficit. Exports slowed to 9.4% year-over-year, down from 13% in September, defying expectations for a small double-digit increase. Imports were up 26.7% from a year ago, off the heady 38.2% pace seen in September and below the 31.8% projected. The resulting trade deficit of JPY67.4 bln was about a fifth of what economists anticipated (Bloomberg survey). It is the third consecutive monthly deficit. In the first seven months of the year, Japan recorded two deficits. A year ago, Japan recorded a JPY840 bln surplus.

Reports suggesting that the possibility that the US and China coordinate the drawdown of strategic oil reserves were light on details, but the suggestion itself was enough to weigh on prices. Still, the International Energy Agency yesterday echoed the broad assessment of America's EIA in anticipating that the tightness of the oil market could ease shortly. Increased output in the US, Saudi Arabia, and Russia may account for half of the 1.5 mln barrel a day anticipated increase in supply.

Nevertheless, the acting head of the EIA warned tapping the US Strategic Petroleum Reserve would have a short-term impact, for which other dynamics would quickly overshadow it. Separately, note that the API estimated a slight build of 655k barrels in US stocks this past week, while gasoline inventories fell.

In other regional developments, Australia's wage price index rose a modest 0.6% in Q3 for a year-over-year pace of 2.2%. This was in line with expectations. It would seem to support the RBA's argument that it need not be in a hurry to raise rates. The June 2022 T-bill yield settled last month at 69 bp and was near 40 bp.

Separately, China appeared to be allowing "high quality" property developments to return to the asset-backed securities market to raise capital after a three-month hiatus. Lastly, reports suggested Beijing was moving ahead with its import substitution plans to reduce dependency on foreign technology.

The dollar approached JPY115.00, where an option for almost $610 mln expires today. The dollar has not traded above there since March 2017. Since the dollar broke above JPY112.00, we have suggested that JPY114.50-JPY115.00 may mark the top of the new range. While this has worked for the past month, the risk was on the upside. A convincing break of around JPY115.50 would target the JPY118.00 area. Initial support was seen near JPY114.70. Note that the upper Bollinger® Band was slightly below JPY114.80.

The Australian dollar was trading near its lowest level since Oct. 6, near $0.7265. It was holding above a trendline connecting the August and September lows, which was found near $0.7250 today, but little stands in the way of a test on the $0.7200 in the coming days. An option for a little more than A$800 mln at $0.7300 is set to expire today.

After posting a key upside reversal yesterday, the US dollar consolidated against the Chinese yuan today, and no follow-through buying materialized. Instead, it seemed that the local market took advantage of the pop above CNY6.39 to sell the greenback, which was straddling CNY6.38 in late dealings. The reference rate was set at CNY6.3935, just below the bank projections (CNY6.3936, according to the median in the Bloomberg survey). We note that the yuan was also at its best level since 2015 against the trade-weighted CFETS basket the PBOC uses.

Europe

On the heels of a strong employment report, the UK reported a larger than expected increase in the October CPI. The preferred measure, which includes owner-equivalent housing costs, jumped to 3.8% from 2.9%. The older measure rose to 4.2% from 3.1%. On the month, consumer prices rose 1.1% rather than the 0.8% economists forecast (Bloomberg median). Flattered by increasing gas and electricity prices.

Core prices rose 3.4% year-over-year, accelerating from 2.9% in September and defying forecasts for a 3.1% pace. Separately, producer prices, both input and output, also rose more than expected. Lastly, UK house prices rose 11.8% year-over-year in September, up from a revised 10.2% in August. The recent peak was 12.6% in June, which was the highest since 2004.

European gas prices were at one-month highs. Belarus stopped pipeline to Poland, claiming unplanned maintenance issues, while the border tensions and earlier threats raised suspicions of a political move. Separately, the German regulator suspended the certification process of the controversial Nord Stream 2 pipeline as corporate assets were rearranged. Separately, a German court yesterday dismissed an environmental challenge to the pipeline. Lastly, we note that the virus flare-up continued in Europe, and Germany and the Czech Republic reported a record number of cases.

The euro surpassed our $1.1290 Fibonacci target and did not find bids until the $1.1265 area in Asian turnover. The single currency had been in a tight range in Europe, holding above $1.1300. Initial resistance was seen around $1.1330 now. A move above yesterday's high, near $1.1385, was needed to lift the tone. We suspected the near big target was closer to $1.10.

Sterling slipped to a three-day low, slightly below $1.34, but shot up to the session high near $1.3375 on the inflation news. However, the momentum was not sustained, and sterling was little changed in late morning European turnover near $1.3430. The euro briefly traded below GBP0.8400 for the first time since March 2020 but snapped back. An 840 mln euro option at GBP0.8445 expires today and another for about 620 mln euros at GBP0.8450 expires tomorrow.

America

US retail sales surged last month, and the 1.7% rise was the best since March. After slowing in Q3, consumption was off to a strong start in Q4. Industrial production was also much stronger than expected, rising 1.6% compared with the 0.9% gain anticipated by economists (median, Bloomberg survey). The US reports October housing starts today, and they are expected to have recovered from the 1.6% decline seen in September. Housing starts fell in Q3 but were seen rising in Q4, encouraged by an easing of some supply chain issues.

In fact, on several fronts, there were preliminary signs that the disruptions were dissipating. Some reports suggested that the shortage of semiconductor chips may be passed, and US auto sales rose in October for the first time in six months. Both the EIA and IEA have forecast a more balanced oil market, and some measures of shipping costs have moderated. The Los Angeles port has reportedly reduced the number of empty containers by around a quarter this month as six news sweeper ships have been brought into operation.

In addition, we note that the re-opening of US borders means immigrant workers may begin returning. There was still much debate, of course, on the extent that the elevated price pressures were the result of supply chain disruptions. A report by the Bank for International Settlements estimated that without the supply problems, US inflation would be closer to 2.5% and eurozone inflation near 1.5%.

President Joseph Biden is expected to make his Fed announcements in the next few days, according to reports, but it could slip into early next week. Powell was still the favorite, and he had Treasury Secretary Yellen's in support. Yellen warned that action was needed soon on the debt ceiling. Her efforts may be exhausted early next month.

Lastly, San Francisco Fed President Daly opined she was more bullish on the economy than a year ago. This seemed backward to us. A year ago, the vaccine was announced, and fiscal stimulus was anticipated after the US election. Going forward, there will be less monetary and fiscal stimulus.

The pent-up demand ("excess savings") is projected to be exhausted by early next year, and, as we have noted, the doubling of the price of oil has preceded the last three recessions in the US. We suspect that there was sufficient stimulus and need to rebuild inventories to sustain reasonably strong growth for the next few quarters, but by the second half of next year, sub-3% growth will return as the norm. 

Canada reports October CPI figures today. The headline was likely to rise to 4.7% from 4.4% in September (Bloomberg median). However, the base effect pointed to a further rise this month and December, when in 2020, the CPI rose 0.1% and fell 0.2%, respectively. The underlying core rates were also increasing.

The Deputy Governor of the Bank of Canada cautioned about the high degree of uncertainty around potential structural shifts in the labor market that made it challenging to gauge full employment with any degree of confidence. He pointed to economic areas that still show slack. The market was expecting the first hike next March/April. Note that tomorrow, the "Three Amigos" (Biden, Trudeau, and AMLO) meet in the US amid concern that the US "Build Back Better" has strong nationalistic elements, including for electric vehicles.

The US dollar posted an outside up day against the Canadian dollar yesterday, and follow-through buying lifted to around CAD1.2585. At the end of last week, the high set was slightly above CAD1.2600, which closely approximated the (50%) retracement of the greenback's decline since the Sept. 20 high near CAD1.29. The next retracement (61.8%) was found by CAD1.2665. Still, we expect that a firm CPI report will lend the Loonie some support. The session low, set in late Asia, near CAD1.2540, may be protected a CAD1.2545 option for $600 mln that expires today.

The greenback was consolidating against the Mexican peso today after rallying yesterday from about MXN20.56 to nearly MXN20.85. The high from earlier this month was near MXN20.98. It has not been above MXN21.00 since March. Initial support was seen around MXN20.60.

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