Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Hard To Be Sterling

By Marc ChandlerForexSep 29, 2021 06:25AM ET
www.investing.com/analysis/hard-to-be-sterling-200603411
Hard To Be Sterling
By Marc Chandler   |  Sep 29, 2021 06:25AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

Energy prices pulled back late yesterday, but it offered little reprieve to the bond market where the 10-year benchmark yields in the US, UK, Sweden, and Switzerland reached new three-month highs.

November WTI traded to almost $76.70 before reversing lower and leaving a potentially bearish shooting star candlestick in its wake. The US S&P 500 and NASDAQ gapped lower and did not recover, setting the stage for today's drop in Asia. All the major markets sold off but Hong Kong. However, the sell-off stopped in Europe, where the Dow Jones Stoxx 600 snapped a three-day slide. US futures indices were also trading higher.

The gaps created by yesterday's sharply lower opening may be key to the near-term outlook. They are found roughly between 4419-4436 in the S&P 500 and 14817-14865 in the NASDAQ. The US 10-year Treasury yield was consolidating and slipped below 1.50% in European turnover. European yields were softer, led by a 4-5 bp decline in Italy and Greece's 10-year benchmarks.

The dollar was mostly firmer, though the yen, Swiss franc, and the Canadian and Australian dollars resisted the pressure and post small gains near midday in Europe. Most of the liquid and freely accessible emerging market currencies were higher, and the JP Morgan Emerging Market Currency Index was trying to end a three-day downdraft.

Gold slipped below $1730 yesterday and was probing resistance a little above $1740 today. The 4.1 mln barrel crude build estimated by API saw November WTI slip to $73.75 today after trading a little above $76.65 yesterday. It was recovering to approach $75 in Europe. Industrial metals were mixed. The CRB Index had a six-day rally in tow coming into today.

Asia Pacific

Japan's Kishida edged out Kono to become the leader of the LDP. Next week (Oct. 4), the Diet will confirm him as the next Prime Minister. Like the other LDP candidates, he favors a large fiscal stimulus effort, which is likely to be presented ahead of the national election, seen in November.

We have identified another component of the LDP consensus, and that is a harder line toward China. Seeming unrelated to the LDP politics, Japan's Government Pension Investment Fund, citing settlement, liquidity, and stability concerns, announced it would not invest in sovereign Chinese bonds. Separately, in the face of a sharp drop in infections and a vaccination rate that has now surpassed the US, outgoing Prime Minister Suga announced the lifting of the state of emergency as of tomorrow.

Evergrande (HK:3333) reportedly has sold a stake in a banking unit to a local Chinese government for CNY10 bln (~$1.5 bln), but the proceeds are not expected to be used to service bondholders but to settle debts with the bank. Reports suggest that at least 10 banks told investors in recent weeks that they have sufficient collateral for loans.

Evergrande shares rose 15% today in Hong Kong, leaving it down around 80% for the year. The dollar bonds due next year fell and appeared to close slightly below 25 cents, a record-low close. Separately, China will report its PMI and the Caixin manufacturing PMI tomorrow before the week-long holiday begins on Friday.

The US dollar set a marginal new high for the year against the yen (~JPY111.65) before reversing. It found bids near JPY111.20 in early European turnover. The market did not appear done with the upside, and provided it holds above JPY111, where an option for about $360 mln expires today, the greenback still looked poised to test the JPY112.00 area. That said, dollar finished yesterday above its upper Bollinger® Band for the third consecutive session. It was found near JPY111.30 today.

The Australian dollar's trough appeared to forge last week, around $0.7220 was tested yesterday and today, and it held. The upside was limited to almost $0.7265. Resistance in the $0.7315-$0.7320 area needed to be overcome to signal anything notable.

The dollar gapped higher against the Chinese yuan and reached CNY6.4760 before slipping to CNY6.4635. Yesterday's high was slightly below CNY6.4620. The PBOC continued to set the dollar's reference rate tightly to expectations (CNY6.4662 vs. CNY6.4664). The central bank continued to inject liquidity into the banking system, and it has reached about CNY750 bln in the nine days of operations. Lastly, Chinese regulators want Chinese banks to provide faster fx quotes and tighter spreads.

Europe

Over the past month, UK rates have risen more than the US. Egged on by the Bank of England, the market boosted the chances of a hike before year-end. Yet, sterling is unloved. It was the weakest major currency this month and yesterday's drop of more than 1.1% was the largest in over a year. It eased further to test $1.35 today.

While tempting to attribute sterling's weakness to the dollar's strength, the pound has been sold to its lowest level in a couple of months against the euro. The euro closed above GBP0.8600 for the first time since July 20 and edged nearer to the 200-day moving average (~GBP0.8650), which it has not traded above since mid-January. The market seemed to be worried about a policy mistake. Monetary and fiscal policy was set to tighten, and the higher energy prices, in this context, were like another consumption tax.

Part of the energy shortage in the UK is also idiosyncratic and related to structural conditions of the labor market on this side of Brexit. Meanwhile, it antagonized Europe by granting only 12 of 47 applications for fishing licenses, and the debate over the Northern Ireland protocols appeared to be intensifying.

Today's Trade and Technology Council meeting in Pittsburgh between the US and EU is unlikely to resolve the steel and aluminum tariffs that the Trump administration imposed on national security grounds that remain in place eight months into Biden's term. The EU postponed its plan to double its retaliatory tariffs to give the US administration plenty of opportunities to resolve it.

The US has proposed a combination of a tariff and a quota, which the EU rejects as violating WTO rules. It wants a similar deal the US worked out with Canada and Mexico, which seems to be more about monitoring flow than protectionist tariffs. Moreover, the US steel industry appears to have overcome the pre-pandemic challenges.

The eurozone reports the August unemployment rate tomorrow, but the week's data highlight is the September CPI estimate on Friday. Ahead of it, Spain reported its EU harmonized measure jumped more than expected, rising 1.1% in September to lift the year-over-year rate to 4.0% from 3.3%. The median forecast in Bloomberg's survey was for a 3.6% rate.

German states report tomorrow, but Brandenburg said today that its CPI slipped by 0.1% to bring the year-over-year rate to 4.8% from 5.0%. As a whole, the country is expected to report that the EU harmonized measure rose by 0.2% for a 4.0% year-over-year pace (3.4% in August).

The euro was sold to a new low for the year today, slightly ahead of $1.1655. Since recording the low, the single currency has not been able to resurface above $1.1680, and there is a billion-euro expiring option that says it will not get above $1.17. Note that there is an even larger option there that expires tomorrow (~1.77 bln euros). A break of $1.1650 could spur a move toward $1.1600, last seen on the night of the US election last November.

Sterling was sold to $1.35, a new low since January. The year's low was set on Jan. 11 near $1.3450, which is the next target. Below there, the $1.3385 area corresponds to the (61.8%) retracement of sterling's rally since the low early last November (~$1.2855).

America

Many observers still seem confused about the US macabre fiscal policy. There are two distinct issues. The first is spending authorization. The federal government is not authorized to spend funds after Sept. 30. This could lead to a government shutdown on Friday unless a stopgap bill is authorized. As some have proposed, a short-term extension to early December will mean a new fight before the end of the year. The debt ceiling is about paying for the past spending that was authorized. This is the dine-and-dash analogy.

The failure to resolve by lifting or abolishing the debt ceiling leads to the risk of default. While the government and markets have some experience dealing with short government shutdowns (though not during a pandemic), default would be unprecedented. The root of the problem is not money but politics.

The Democrats want a bipartisan agreement to lift the debt ceiling, and the Republicans are not inclined to go along. Under Bush, then-Senator Biden and current Majority Leader Schumer voted against raising the debt ceiling, insisting that the Republicans who had a majority in both chambers did it on their own. The seats have changed, but this is what passes for politics in the US. The Senate Democrats have abandoned their attempt to link the stopgap spending bill from the debt ceiling, but the odds of success look narrow.

The looming debt ceiling may have encouraged some banks to avoid the T-bills that expire in mid-October and push more funds into the reverse repo facility, which saw record use yesterday (~$1.365 trillion). To stay under the debt ceiling, Treasury has allowed bills to roll off, exacerbating the squeeze that lifted the four-week bill yield to five basis points, more than double the yield of the three-month bill.

The US sold 2, 5, and 7-year notes this week. The results have been solid, even if not spectacular. The US reports pending home sales today, which tend not to move the market even in the best of times. Canada, Mexico, and Brazil also have light economic calendars today. Four Fed officials speak today, including Chair Powell at the ECB forum that also features Bailey, Kuroda, and Lagarde.

The US dollar posted an outside up day against the Canadian dollar yesterday, trading on both sides of Monday's range and settling above its highs. It was consolidating in a narrow range near yesterday's highs. We like it lower and initial support was seen near CAD1.2660, with a break allowing a return to the CAD1.2600 area. The expiring option at CAD1.2620 for $1.4 bln looked too far away to be impactful, but an option that expires Friday at CAD1.2600 for $1.8 bln could come into play.

Amid the equity drama yesterday, the greenback set a new high for the month, a little shy of MXN20.40. The weakness of the peso reinforces ideas that Banxico will hike rates again tomorrow. The dollar was consolidating and was down to MXN20.2835 so far. A close below MXN20.20 would help stabilize the peso's technical tone.

Note that the dollar spiked higher against the Brazilian real too and briefly poked above BRL5.45. Last month's high was closer to BRL5.4740. The short-term momentum indicators warned it was stretched. Initial support may be seen in the BRL5.38-BRL5.40 band. 

Hard To Be Sterling
 

Related Articles

Blake Morrow
Chart Of The Day: DXY By Blake Morrow - Jan 27, 2022

Following the FOMC this week, the U.S. dollar is poised for higher levels, while the index trades above the 96.92 level. The next resistance is the 127% extension of the November...

Hard To Be Sterling

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (1)
Honest Abe
HonestyPays Sep 29, 2021 9:14AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
excellent run down thnx!
John Mills
John Mills Sep 29, 2021 9:14AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
how are you
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email