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King Dollar Consolidates

Published 09/30/2021, 06:19 AM

Interest rates, ostensibly the fuel behind the dollar's surge, pulled back a little in the US yesterday. However, the greenback's rally continued, lifting it to new highs for the year against sterling, the euro, and yen. Some of the buying may have been related to quarter-end, and it came back a bit softer against most of the major currencies.

The Norwegian krone was struggling and the euro eased in the European morning. The Australian and Canadian dollars were leading the move higher, while the liquid, freely accessible emerging market currencies also enjoyed a firmer bias. The JP Morgan Emerging Market Currency Index was posting a gain for the first time in five sessions.

Benchmark 10-year yields rose in the Asia Pacific region but were narrowly mixed in Europe, with the periphery doing a little better than the core. The UK Gilt remained under pressure, and the yield was poking above 1% for the first time in three months. The US 10-year was little changed around 1.52%.

Equities were firm. Japan, India, and Hong Kong were notable exceptions, while Europe's Dow Jones Stoxx 600 rose for the second consecutive session, led by technology and real estate. Utilities and financials were lagging. US futures were trading around 0.4%-0.6% better, and the gaps created by Tuesday's sharply lower opening cast a pall over the price action.

Gold steadied after trading at its lowest level yesterday since mid-August (~$1722) but stalled near $1735. Oil was firm but within yesterday's ranges, with November WTI straddling the $75 area. Position adjustment ahead of the week-long holiday in China may have helped iron ore rise 6% in the mainland today. However, it was the fifth rise in the past six sessions. On the other hand, copper was falling for a third consecutive session, and the December contract was trading near its 200-day moving average (~$416).

Asia Pacific

Before starting the Golden Week holidays, China reported its September PMI. It offered a mixed picture. The manufacturing PMI slipped to 49.6 from 50.1. It was the first sub-50 reading since February 2020. However, the non-manufacturing PMI was better than expected, pushing back above 50 to 53.2 from 47.5 in August.

This translated into a rise in the composite to 51.7 from 48.9. It was the first gain in four months. The Caixin manufacturing PMI, which covers more small companies and exporters, rose to 50.0, having dipped to 49.2 in August. It was also the first increase since May. 

Beijing ordered silicon producers in the Yunnan province to cut silicon output by 90% until December to reduce energy consumption. This will likely boost the cost of solar panels. Meanwhile, some steelmakers in Jiangsu and Zhejiang province will increase output in October, according to reports, after production cuts to meet energy curbs. Beijing officials were also encouraging banks to support local government efforts to stabilize the housing market and ease mortgages for some home buyers.

Japan's data was dismal. August industrial output was expected to have fallen for a second consecutive month, but the 3.2% drop was considerably worse than the 0.5% decline that the median projection in Bloomberg's survey anticipated. Autos and electronics seemed to have been especially weak.

Compounding the disappointment, retail sales fell 4.1% in August, more than twice the anticipated decline. The good news was that the formal emergency was ending as Japan's vaccination rate continued to improve. As a result, August-September could mark the low point, and a stronger recovery is anticipated starting in Q4. Lastly, the MOF weekly portfolio flow report showed foreign investors sold JPY2.4 trillion of Japanese bonds last week, the most this year, perhaps anticipating the weakness in the yen.

The dollar was in a narrow range against the yen. It did not made much headway above JPY112.00, but it also hadn't fallen below JPY111.80. The greenback has risen for the past six sessions and was consolidating today. The upper Bollinger® Band was a little below JPY111.80, and the dollar closed above it for the four sessions.

The Australian dollar found support near $0.7170 yesterday and managed to rise back above $0.7200 today. There is a $0.7200 option that expires tomorrow for around A$1.3 bln. It looked poised to challenge initial resistance in the $0.7220-$0.7240 area.

The Chinese yuan ticked higher ahead of the holiday for the first time in three sessions. The reference rate for the dollar was set at CNY6.4854, a bit firmer than the CNY6.4847 expected. The PBOC continued to inject liquidity into the banking system (tenth consecutive day). The market will closely watch PBOC actions after the holiday to see if the liquidity provisions were seasonal or aimed at more systemic concerns. We suspect the former and anticipate less generous liquidity provisions.


The UK revised Q2 GDP to 5.5% from 4.8% after a Q1 contraction of 1.4%. Private consumption was revised slightly lower but more than compensated by the upward revision in government spending (8.1% vs. 6.1%) and fixed capital investment (0.8% vs. -0.5%). Total business investment rose by 4.5%, nearly twice the initial estimate.

Net exports were also revised higher. However, Q2 details seemed less important to investors than developments in Q3. The market will be reminded tomorrow that the manufacturing PMI fell for the fourth consecutive month in September. In addition, the energy crisis has been causing economic dislocations and will likely squeeze household consumption.

Tomorrow, the eurozone will report September inflation figures. Ahead of the report, we tracked the results from the large members. Spain reported yesterday a rise to 4% from 3.3%. German states have reported, and the national figure is due shortly. The harmonized measure may rise by 0.2% for a 4.0% year-over-year pace. It was 3.4% in August.

Italy reported a rise to 3.0%, in line with expectations, after a 2.5% pace previously. France reported a 0.2% decline in September, a little more than expected, and it still lifted the year-over-year rate to 2.7% from 2.4%. The aggregate report tomorrow is expected to show headline CPI rising to 3.3% from 3.0%, while the core rate is forecast to rise to 1.9% from 1.6%.

The euro was sold below $1.16 yesterday for the first time since July 2020. Its stabilization today looked fragile. It has not been above $1.1610. The next target we suggested was the (50%) retracement of the rally from the panic low last March (~$1.0635) to the Jan. 6 high near $1.2350, which was found slightly below $1.15.

Like the euro, sterling was holding above yesterday's low (~$1.3410), but the upside has been limited to the $1.3460 area. It may take a move above $1.35 to be encouraging. Meanwhile, the implied yield of the December short-sterling futures contract ticked high (at 22 bp).

It was the sixth session without a pullback. However, we continue to think that a rate hike this year was not very likely, given the current economic challenges over labor shortages (truck drivers and chicken workers), higher energy prices, which serve as a drag on consumption, and tightening of fiscal policy to be announced next month.

Meanwhile, the euro was trading heavier against sterling today after briefly poking above the 200-day moving average yesterday for the first time since January. Former resistance around GBP0.8600 was offering support.


Two US fiscal issues were pressing. The most immediate was the spending cap; without action, the government may shut down as early as tomorrow. The Senate will take up a bill passed by the House for a stopgap measure that authorizes new spending until Dec. 3, when the fight would begin anew. The debt ceiling was the second issue, and failure to lift it could see the US miss an interest rate payment. The Democrats tried to link it to the bipartisan infrastructure bill.

Contrary to what President Joseph Biden and House Speaker Nancy Pelosi appeared committed to, linking the bipartisan infrastructure bill to the larger "human infrastructure" initiative, the bills have been separated. What seemed to have been an effort to deliver the Republicans a fait accompli has been shifted to the progressive wing of the Democratic Party. It must support the bipartisan bill without assurances that the larger bill will not be compromised away or risk sinking the agenda of the Democratic president, whose support has waned. Republicans are favored to capture the House next year (~70% chance on PredictIt.Org).

The US reports weekly jobless claims. Economists expect a decline after back-to-back increases for the first time since March-April. Revisions to Q2 GDP were too historical to be important for investors as Q3 ends today. Canada has no economic data on tap today. However, Latam was active.

Rising price pressures and the peso's weakness were likely to see Mexico's central bank deliver a third rate hike today to bring the overnight target to 4.75%. Earlier, it looked as if Banxico would prefer to pause in the tightening cycle, but the data and market have not cooperated.

Colombia has not hiked rates for five years and will likely deliver a 25 bp move today to 2.0%. With CPI running around 4.4%, the central bank may couch the hike in terms of removing some accommodation rather than tightening monetary policy. Lastly, Brazil's central bank publishes its quarterly inflation report. Another hike of at least 100 bp is expected when it meets at the end of October.

The dollar's outside up day on Tuesday saw follow-through gains against the Canadian dollar yesterday that took it to CAD1.2775. The greenback's gains were being pared today; it seemed more like consolidation so far than a reversal. For that, a move through the CAD1.2670 area was needed. There is an option for $1.3 bln struck at CAD1.2755 that expires today.

The US dollar spiked to a three-month high yesterday against the Mexican peso of almost MXN20.65. The calmer tone and consolidative price action had the greenback hovering around MXN20.50 in the European morning. A band of support was seen between MXN20.28-MXN20.40.

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