The is consolidating yesterday’s gains today. An off-ramp to the Middle East conflict seems increasingly elusive. After surging more than 9% yesterday, the front-month and futures contracts are up 3.6%-4.6% today. There are three developments in the US that will be closely monitored today. First, the June is due. It looks to have moderated a little, but given Governor Waller’s comment yesterday, a sticky could boost the perceived chances of a hike later this month. Second, Chair Warsh testifies before the House Financial Services Committee (10:00 AM ET). Third, the US earnings season gets underway with several large bank reporting today.
Japanese government bonds have rallied today despite continued rally in oil prices and a soft yen. Last week, Finance Minister Katayama suggested that Japanese pension funds boost their domestic allocation. Today, she advocated adding government bonds to the individual tax-free investment vehicles. Meanwhile, the dollar is holding above JPY162.00. Lastly, China reported a larger than expected, $125.6 bln June trade surplus, which will likely increase the tension with the US and Europe.
Prices
G10
• The escalation of the hostilities in the Middle East helped strengthen the dollar broadly and the fell to its lowest level (slightly below $1.1380) since the disappointing US jobs data were reported on July 3. Yesterday’s low held but the euro is struggling to re-establish a foothold above $1.1400, where options for nearly 3 bln euros expire today. A break of $1.1360 could signal a return to the euro’s low (~$1.1325) recorded on June 24.
• The absence of formal efforts to make Japanese pension funds boost domestic allocation and the rise in US rates weighs on the . The dollar reached almost JPY162.50 in the North American afternoon. It is holding today, but the greenback has not traded below JPY162 today. Last week’s high was near JPY162.70, and the 40-year high from July 1 was near JPY162.85.
• reversed lower after it reached $1.3450 before the weekend and appears to have posted a bearish shooting star candlestick. Follow-through selling yesterday brought it to a three-day low slightly below $1.3350. It slipped to almost $1.3340 today before catching a bid. But the intraday momentum indicators are stretched as sterling approaches $1.34, where options for almost GBP400 mln expire today. A break of last week’s low slightly above $1.3320 would signal a correction is at hand after rallying from about $1.3140 on June 24.
• The was resilient yesterday, in the face of the risk-off and jump in short-term US rates but was confined to a narrow range. Canada’s two-year yield jumped as well, and the differential moved a little in Canada’s favor. For the first time since around mid-May, the five-day moving-average crossed below the 20-day, but the price action was more consolidation that Canadian dollar strength. The US dollar traded in a 25-tick range on both sides of CAD1.4150. Still, for the second consecutive session, the greenback settled below the 20-day moving average (~CAD1.4175 today). Follow-through US dollar selling today has approached support near CAD1.4080. The intraday momentum indicators are stretched, but the next important chart area is around CAD1.3980-CAD1.4000.
• The traded poorly after it reached a two-and-a-half week high before the weekend. It was sold to a three-day low a little below $0.6915 yesterday in North America. This area held and the Aussie recovered to a little above $0.6950 and reclaimed the 20-day moving average (~$0.6940). Options for about A$475 mln at $0.6960 expire today. Monday’s high was near $0.6970 and overcoming that would strengthen the technical tone.
EM
• Most emerging market currencies weakened yesterday amid the risk-off and jump in US rates. The was no exception. It lost about 0.30%. The dollar traded inside the pre-weekend range (~MXN17.4655-MXN17.5460) and it is trading within yesterday’s range today. The dollar is holding above the 20-day moving average (~MXN17.4765 today).
• The dollar was little changed against the yesterday as it consolidated in last Friday’s range (~CNH6.7765-CNH6.7960). It remains inside that range today. After setting the dollar’s reference rate at new three-year lows for the past two sessions, the PBOC fixed the greenback a little higher today (CNY6.7990 vs. CNY6.7927 yesterday).
• The remained under pressure today. The dollar gapped higher for the second consecutive session. Before the weekend, it settled near INR95.3250. It reached almost INR95.8590 yesterday and INR96.24835 today. It is the highest in almost two months. The dollar’s record high was recorded on May 20 near INR96.9650.
Other Markets
• Higher interest rates and oil, coupled with the ongoing rotation in the tech sector, dragged equity markets mostly lower yesterday. While the S&P 500 was confined to last Friday’s range, the Nasdaq, which settled on session highs before the weekend, and at its best level in nearly three weeks, posted its lowest close in three sessions yesterday and below the five- and 20-day moving averages. Both settled below opening levels. US banks formally kick off the earnings season today. Most of the large markets in the Asia Pacific region bounced back today, with a 2.15% rise in China’s CSI 300 leading the way. Taiwan and India were notable exceptions. Europe’s Stoxx 600 is lower for the second consecutive session after falling three days last week. It is off about 0.5% in late morning turnover. Meanwhile, the Nasdaq futures are trading higher (~0.4%), the S&P and Dow futures are slightly heavier.
• Benchmark 10-year yields jumped yesterday, helped by the rally in oil prices and fear that the war in the Middle East may underpin price pressures for longer. Yields are higher 2-4 bp higher in Europe. What may have been the anticipation of a “peace dividend” has been reversed. The 10-year Treasury yield pushed above 4.60% yesterday for the first time since May 21. The two-year yield rose to new highs for the year, encouraged by hawkish comments by Federal Reserve Governor Waller who warned that the Fed may need to hike rates in the near-term if underlying inflation continues to signal general price pressures. Andrew Burnham is most likely to become the next UK prime minister in a week, and reports suggest there is talk in his camp about merging the annual budget (October-November) with the department-level spending reviews (which are usually separate events). The 10-year Gilts surged 10 bp yesterday, followed by Italy seven basis point increase. The 10-year Gilt yield is up almost five basis points today. Japan’s finance minister floated a new idea to reduce JGB yields. Katayama suggested that government bonds could be added to the tax-free Nippon Individual Savings Accounts. Demand at the 20-year bond auction was strong.
• The prospect of a prolonged disruption from the Middle East war may extend the pressure of some central bank to sell Treasuries and/or gold. Gold was tagged for nearly 3% yesterday, its largest decline in a little more than a month. The yellow metal slipped through $3984 today before it recovered to about $4034. Silver shed around 3.7% yesterday after falling nearly 4.10% last week. It reached almost $57.25, less than ten cents above this month’s low. It was sold slightly through $56.90 today before stabilizing. The low for the year was recorded on June 24, near $55.60. It is near $58 in late European morning turnover.
• August WTI jumped yesterday in reaction to the weekend developments. The 9.4% surge was the largest of the war. It approached $78.60 a barrel, its highest level since June 17 and settled above the 20-day moving average (~$72.80 today) for the first time since June 3. The five-day moving average is crossing above the 20-day moving average today for the first time since late May. Follow-through buying today lifted the contract to $81.25. The $79.65 area corresponds to the (38.2%) retracement of the decline from the contract high on May 18 ($100.10). The (50%) retracement is around $83.55.
Data
• The median forecast in Bloomberg’s survey anticipates the first decline in the monthly headline US CPI since May 2020. Given the base effect, the year-over-year rate would fall to 3.8% from 4.2%. The core is stickier and is expected to rise by 0.2%, leaving the year-over-year rate steady at 2.9%. The other notable event is Fed Chair Warsh testifies before the House Financial Services Committee (followed by the Senate Banking Committee tomorrow). On the working hypothesis, the Warsh is channeling Greenspan, he is unlikely to break new ground today. Still, investors are still trying to get the measure of the new chair. The Fed’s Beige Book also will be released tomorrow ahead of the FOMC meeting later this month. The Fed funds futures have about 10 bp of tightening discounted, which is one assumes the choice is between standing pat and a 25 bp hike, a 40% chance of a hike is discounted. Nearly 42 bp of tightening is discounted by year-end, compared with about 38 bp on June 17, when the last FOMC meeting concluded with a hawkish hold.
• China’s June trade surplus rose to $125.6 bln from $105.4 bln in May. That brings the surplus in H1 26 to a little more than $570 bln, down from $583 bln in H1 25. In dollar terms, exports have risen 27% year-over-year, while imports are up 36%. Emerging markets appear to be absorbing a greater share of Chinese exports. Machinery, electric products, transportation equipment, and chemical product exports are rising, while textiles, apparel, footwear, furniture, and toy exports have declined. China’s goods exports reached a record $412 bln. China reported a record trade surplus with the EU (+27% year-over-year) to almost $33 bln in June. China’s exports to the US rose by nearly 14% to $43.5 bln in June, while imports from the US rose by 25.8% to $14.6 bln. China’s trade surplus with the US rose to $28.9 bln from $26 bln in May.
