FX Market Quiets While Equity Markets Head South

FX Market Quiets While Equity Markets Head South

  • The Japanese yen is drawing support, as it often does, from the drop in global equities and the decline in US yields
  • The return to stability in the dollar-yuan rate makes many suspicious of China’s intention
  • The flash PMIs in Asia have not been particularly helpful for sentiment, but eurozone flash PMI was better than expected
  • Tensions on the Korean peninsula have flared up, and although it may have weighed on Korean won and stocks, it seems to be contained
  • Poland is starting to move backwards on its economic programs

Price action: The US dollar is little changed against most of the major and emerging market currencies as North American traders return to their posts to close out the difficult week. The euro failed to breach the $1.13 level overnight and is now at $1.1280. The dollar has fallen below the ¥123 level against the yen, but is especially weak against the Swedish krona on the day, falling to just above SEK 8.4500. On the EM side, the usual suspects are lower on the day, TRY, RUB, MYR and MXN. This is largely due to the continued fall in oil prices, down to $41 for WTI futures this morning. It’s also worth noting that the Brazilian real outperformed yesterday, with the dollar falling to BRL 3.4590, near the bottom of its two-week range. Negative sentiment towards equities continued, but was pared back somewhat during the European session compared with the open. The Shanghai Comp closed down 4.3% while other major EM Asian indices were 1-3% lower. The Nikkei fell 3%. EuroStoxx are down 1.0% and US futures are flat.

  • The Japanese yen is drawing support, as it often does, from the drop in global equities and the decline in US yields.   The dollar has been sold through ¥123.00 to test the 50% retracement of the rally from the July 8 low near ¥120.40 to the high earlier this month near JPY125.30.    That is found at JPY122.85.   Below there the next target is JPY122.30, where the 100-day moving average is found and the next retracement target.
  • Global equities are following yesterday’s US drop.  The Shanghai Composite is off almost 4.3% to cap the 11.5% decline this week.  The Nikkei gapped sharply lower and settled on its lows.  It fell nearly 3% and finished the week off 5.3%.  The MSCI Asia-Pacific Index is off about 2.3% on the day and is at its lowest level since early 2014. The European markets opened sharply lower, though have stabilized, perhaps awaiting the US open.  Of note, the DAX gapped lower but has subsequently filled the gap.  The Dow Jones Stoxx 600 is off nearly 0.7% near midday in London.
  • Asian bonds, but JGBs rallied to catch-up to the US Treasury move that brought the US 10-year yield below 2.1% and the German bond yield below 60 bp.  European bonds are mostly quiet, though news that an election looks probable in Greece (other parties in parliament have a right to try to put a government together).  There has always been an implementation concern and the seemingly political disruption only adds to that.  Moody’s said as much, as well.    This has added pressure on Greek bonds and stocks.
  • We note that the dollar-yuan was fixed at CNY6.3864, down from CNY6.3915.  It finished the Shanghai session at CNY6.3889 compared with CNY6.3891 the previous day. The return to such stability in the dollar-yuan rate makes many suspicious of China’s intention.  If market forces are to have more sway, the pair would be more volatile.   Japan’s Finance Minister Aso warned China today against frequent interventions, though welcomed its efforts, as did the IMF and the US, if this is truly a step toward greater liberalization.
  • China’s intervention is thought to be a major factor that has draining liquidity from the banking system and pushing up key short-term rates.  China has pumped in the equivalent liquidity via reverse repos and loan and deposit auctions of a 25 bp cut in required reserves, and still yields have risen.  Many suspect that additional monetary support will be provided as early as next week.
  • While the main focus is the drop in equity prices and oil, the flash PMIs in Asia have not been particularly helpful.  Japan’s flash PMI is probably the least followed.  It rose to 51.9 from 51.2.  It is the fourth consecutive gain and sits at its highest level since January.  On the margins, it may boost confidence that the contraction in Q2 is not being repeated in Q3.  China’s flash Caixin manufacturing survey was the most disappointing.  It was expected to rise to 48.2 from 47.8, but instead it fell to 47.  This is a new cyclical low.
  • The eurozone flash PMI was better than expected.  The composite rose to 54.1 from 53.9.  The market had anticipated a small decline. The manufacturing PMI was unchanged at 52.4.  It is as if the better Germany report (53.2 from 51.5–highest since April 2014) neutralized the French disappointment (48.6 from 49.6–whereas the market expected a small gain).
  • The fact that EMU service PMI was reported at 54.3 up from 54.0 is surprising.  The German measure slipped to 53.6 from 53.8, a little worse than expected.  The French reading slipped to 51.8 from 52.0.  It seems to be putting much weight on the periphery (especially Italy and Spain) service sector.  Separately, the PMI reports show the price of goods rose for the third month while services prices fell for the 45th month.  It seems that this is in contrast to the US where service inflation is running higher than for goods.
  • Tensions on the Korean peninsula have flared up, and although it may have weighed on Korean won and stocks (Kospi off 2%), it seems to be contained.  We note that gold prices, for example, have reversed their earlier gains on the news.  The four-day rally through earlier today lifted gold prices by a little more than 5%.
  • The key to psychology going into next week rests not so much on the only data of note from the US today, the flash manufacturing PMI), but if the equity market can stabilize after yesterday’s shellacking.   Canada reports both retail sales (consensus is for a 0.2% headline increase and 0.5% excluding autos) and CPI (consensus is for 0.1% on the month and 1.3% year-over-year, with the core rate up to 2.4% from 2.3%).   The stabilization of the two-year interest rate differential and oil prices is helping the Canadian dollar consolidate its recent losses.  The Canadian and Australian dollars are the only major currencies weaker against the dollar this week.
  • The Canadian dollar has rallied of the test on the $1.1020 area seen Tuesday and Wednesday.  It was turned back from the initial push toward $1.13, but the market does not look done yet.  The May and June highs in the $1.1435 and $1.1465 area beckon.   Meanwhile, sterling was bid through $1.5700, but once again met sellers there has it has down each session since Monday.   Only a break of the $1.5660 area now says the short-term market has given up.
  • Poland is starting to move backwards on its economic programs. Recently elected President Duda has proposed a referendum to reverse the increase in retirement age. The idea is to reduce the retirement age for women by 7 years and by 2 years for men. It’s unclear if the referendum will be approved by parliament, but it still shows the direction Duda’s Law & Justice party is going. General elections will be held on October 25. There has been little market reaction to the news, probably because markets already began to price in a populist shift of the Polish government.
  • Brazil reports its mid-month inflation readings later on today. IPCA-15 for August is expected to tick higher to 9.57% y/y, compared with 9.25% previously. This will be the highest print since early 2004. Inflation continues to rise in Brazil, but it is likely to start peaking soon. The continued weakness in the currency does create some upside risks, but this is mitigated by the downside risk to economic growth, along with crippling interest rates and political uncertainty. The surprisingly high unemployment rate released yesterday was a case in point.
  • The Colombian central bank announces its decision on today. Although last meeting’s decision to hold rates at 4.50% was not unanimous, the bank is widely expected to keep rates at the same level.  Pass-through inflation is now a big concern for policy members after the Colombian peso lost nearly 40% of its value over the last 12 months. Still, it doesn’t seem as if we are at the breaking point yet for a majority of board members. Separately, the trade balance for June will be released. Markets are forecasting a relatively unchanged figure of -$900 mln. Note that the trade deficit bottomed in January at $1.8 bln.