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Canadian Dollar Extends Gains, While Yen Slumps Further

Published 10/15/2021, 06:26 AM
Updated 07/09/2023, 06:31 AM
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The S&P 500 and NASDAQ gapped higher yesterday and closed strong, helped by robust earnings reports. This, coupled with Taiwan Semiconductor Manufacturing (NYSE:TSM) earnings and Beijing easing mortgage lending, helped lift the MSCI Asia Pacific Index for the third consecutive session. The returning Hong Kong market, Tokyo, and Taipei advanced more than 1% to lead the region.

The Dow Jones STOXX 600 gapped higher for the second consecutive session, and if it can sustain its gains, it will be the best week in six months. US futures indices are firm. Unlike yesterday, however, benchmark yields are moving higher. The US 10-year yield, which had been flirting with 1.50% yesterday, is at 1.54%, and European yields are 2-4 bp higher. The dollar is mostly lower but has pushed above JPY114.00.

Emerging market currencies are also mostly higher against the greenback, but after the purge of three central bank officials, the Turkish lira remains under pressure. The JP Morgan Emerging Markets Currency Index is poised to snap a five-week downdraft. Gold is being turned back from the $1800 area and the 200-day moving average and is testing the $1780 area.

Oil is extending its rally, and the November WTI is at a new high above $82. It is the eighth consecutive weekly advance. Natural gas has edged higher and is up about 3% this week, the seventh weekly advance in the past eight weeks. China's iron ore futures slipped, but copper is extending its advance to new four-month highs. This week's ~8.7% rally is the most in five years.

Asia Pacific

The weakness in Japan's tertiary (services) index in August (-1.7% vs. expectations -1.2%) seems dated by the easing of the formal emergency. We anticipate better data starting in September and in Q4. Next week's data highlights include the September trade balance and the preliminary October PMI. Also, a substantial supplemental budget is expected after the Oct. 31 lower house election.

Beijing is encouraging large banks to relax curbs and accelerate mortgage lending. This is seen as one way to blunt the impact of Evergrande (OTC:EGRNY) and other property developers. Early Monday in Beijing, China, will report Q3 GDP. The combination of intentional cuts in steel output to meet emission targets, the poor weather, including floods, and a flare-up of the virus point to weak growth. The median forecast (Bloomberg survey) is for a 0.4% quarterly expansion, which would see the year-over-year pace slow to 5% from almost 8% in Q2.

After moving sideways for the last couple of sessions, the dollar has taken another leg higher against the yen today and moved above JPY114.00. It is the fourth weekly gain for the greenback. The next important resistance area is seen in the JPY114.50-JPY115.00 band. At around JPY114.25, the dollar's 1.75% gain this week is the largest advance since March 2020. The Australian dollar made a new high for the month near $0.7440 but is struggling in the European morning to sustain the momentum. Initial support may be found in the $0.7380-$0.7400 area. Helped by a jump in the manufacturing PMI (51.4 in September from 39.7 in August) helped lift the New Zealand dollar to new highs for the month (~$0.7065). The Kiwi is extending its recovery against the Aussie and is at its best level for the week on the cross. The PBOC's dollar fix yesterday looked like a protest against the yuan's strength, but the market has shrugged it off and taken the yuan to new four-month highs against the dollar. The reference rate today with closer to expectations (CNY6.4386 vs. CNY6.4381). The greenback slipped slightly below CNY6.4265.

Europe

UK interest rates have surged as the BOE's recent comments seemed to encourage the market to price in a hike as early as the next MPC meeting on Nov. 4. Yes, the BOE is still engaged in its QE operations, and it would seem contradictory to be easing financial conditions and raising rates at the same time. When asked at his recent press conference about this possibility in the US, Federal Reserve Chair Powell explicitly reiterated the sequence of finishing bond purchases before hiking rates. Yesterday, two BOE officials seemed to play down the need for an imminent move. Mann recognized that supply issues may boost the pricing power of some producers but noted that the market has already tightened financial conditions. This seems to rely on rhetoric to get the market to do the heavy lifting. Mann seemed centrist, while Tenreyro, positioned as a dove, argued against a "self-defeating" hike to contain temporary price pressures. The implied yield of the December short-sterling futures contract slipped yesterday and a little bit more today. If sustained, it would be the first back-to-back decline in two months.

The energy crisis will remake the UK's fragmented industry. Some two million households are being forced to shift providers as more fail. There were around 70 different providers at their peak, and over a dozen have shut. Meanwhile, the power cable from France disrupted by fire is not expected to be fully operational again for a year. About half of the 2000 megawatt cable, though, could be functioning next week. The energy disruption is also part of a larger story in the UK, where Brexit is complicating the labor shortage being experienced. The UK is granting longer visas (6 months) for 800 butchers and is relaxing restrictions on truck drivers.

The euro is firm, but the momentum seen in the last couple of sessions has faded, and so far, it is confined to yesterday's range (~$1.1585-$1.1625). It stalled yesterday near the 20-day moving average, which it has not closed above since mid-September. The high in October has been roughly $1.1640. There is an option for 720 mln euros that expires at $1.16 today. Sterling is faring better and is trading at new highs for the week, representing a fresh three-week high near $1.3740. The $1.3730 area corresponds to the (38.2%) retracement of sterling's slide since early June when it last traded above $1.42. Above there, the next target may be the $1.3830-$1.3845 area that houses the 200-day moving average and the next (50%) retracement target. Meanwhile, the euro is trading at its low for the euro on the cross near GBP0.8450. The 2019 and 2020 low was around GBP0.8280 and is the next significant chart point.

America

US stock equity rally has been helped this week by solid earnings reports. It has not been limited to the financial sector, as Alcoa (NYSE:AA) and Walgreens (NASDAQ:WBA) also beat expectations. Many worry that higher input costs, including labor costs, will squeeze profits, but so far, there is no need to shed tears for large American businesses. Higher wages and the gap between CPI and PPI have not hurt earnings. Third-quarter data is not available yet, but unit labor costs, which account for wages, benefits, and productivity, fell in H1.

The US economic calendar ahead of the weekend is busy. While we already know that weekly initial jobless claims are falling in October, the Empire Manufacturing will be the first survey data for the month. It is expected to pare September's surge (to 34.3 from 18.3). Headline retail sales may be held back by another poor auto sales report (supply-side problems, not so much demand). Still, excluding auto sales, retail sales are unlikely to match the 1.8% gain seen in August. This will be the first consumption report since the expiration of the federal government's unemployment insurance program. September import and export price indices will continue to show that the US is experiencing a favorable terms of trade shock. The University of Michigan is expected to report a second consecutive increase in consumer sentiment, the first back-to-back gain since March and April. The 5-10-year inflation outlook matched the highest level in a decade (3.0%) in September and will likely draw attention if it moves above there. The Fed's Bullard (hawk) and Williams (centrist) speak near midday.

Canada reports wholesale trade and existing home sales. Neither is a market-mover. The highlight next week is September CPI and August retail sales. There has been a substantial interest rate adjustment. The implied yield of the June 2022 BA futures jumped 9.5 bp (to 0.995%) after an 8.5 bp last week. It is the sixth consecutive week that the rate has risen, and during this stretch, the implied yield rose almost 30 bp. Mexico's economic calendar is light. Next week features August retail sales and the bi-weekly CPI. The central bank does not meet again until Nov. 11. There seems to be a growing rise that Banxico hikes by more than 25 bp. 

The Canadian dollar is extending its gains to trade a new three-month high. The greenback is falling for the fourth session this week and the tenth session in the past 12. It has slipped beyond the (61.8%) retracement of the rally since the multi-year low on June 1 (~CAD1.20) found near CAD1.2365. The measuring objective of the head and shoulders pattern is around CAD1.23, and below there, support may be seen in the CAD1.2200-CAD1.2230 area. In a soft US dollar environment, the Canadian dollar often lags on the crosses.

The Aussie and Kiwi, and Scandis have outperformed the Loonie this week. After sliding by more than 1.5% against the Mexican peso over the past three sessions, the dollar is consolidating in a narrow range (~MXN20.53-MXN20.57) so far today. Support is seen near MXN20.50 and then MXN20.38. The greenback's four-week rise against the peso is poised to end this week, provided it remains below MXN20.70. The Brazilian real is virtually flat for the week coming into today.

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