Quiet But Nervous Start To The New Week

The dollar has begun the new week on a firm note, rising against most major and emerging market currencies. Sterling and the Canadian dollar are the most resilient, while the euro has been sold back below $1.1700, and the greenback is nearing JPY111.00. The US 10-year yield is up another four basis points to 1.49%. European yields are also 2-4 bp higher.

Oil prices have risen to new highs, with November WTI straddling $75. Natural gas is up more than 3% for the third consecutive session. Gold extended its recovery but ran into a wall of sellers above $1760 and has returned to below $1750 near midday in Europe. Iron ore is traded higher in China for the third session, and it gained in Singapore for the fifth session. Copper has come back lower after gaining nearly 1% last week. Equities in the Asia Pacific region were mixed, with Tokyo, Shanghai, and Shenzhen lower. Europe's Dow Jones STOXX 600 snapped a three-week drop last week and is posting small gains today. US futures are trading with a modest upside bias.

Asia Pacific

China's "cultural revolution" may be turning to finance. Reports suggest the anti-corruption campaign will start "routine" inspections fo 25 financial institutions, including the four large asset managers, including Huarong. The focus reportedly is on "political awareness gaps."  Separately, the energy crisis is broadening. Households in several northern areas have suffered blackouts, and reports claim traffic lights were being turned off in Guangdong. Some provinces have orders industrial cuts to meet emissions and energy-use goals. For others, there is a genuine lack of electricity due to rising coal and natural gas prices. This could further weaken output measures of the world's second-largest economy and could excite price pressures.

Before the weekend, a deal was struck that allowed the release of Huawei's Meng and the two Canadian's that Beijing nabbed in retaliation (Spavor and Kovrig). Press reports say that China's Xi was directly involved, seemingly underscoring the political nature of the developments, but can it be forgotten that then President Trump said he would have the charges against Meng dropped in exchange for a trade deal. It seems the more relevant question is about the timing of the agreement. It follows the first call between Biden and Xi in several months. The US initiated the call and seemed to be the first to move on the "prisoner exchange."  It is also notable that the "swap" was made after the Canadian election.

This is a busy week for Japan, though it begins slowly. On Wednesday, the LDP will choose a new leader. Kono appears to be the favorite. However, there are two issues for which there seems to be a strong agreement. First, a large fiscal package that could be as large as JPY30 trillion (~$270 bln) will be assembled. While most other large economies are poised to reduce fiscal support, Japan is moving in the other direction. Second, several wings of the LDP have been advocating stronger defense for years, and China's aggressiveness in the region is providing a fresh impetus. The highlights of the high-frequency data this week include August industrial production, retail sales, employment, and on Oct. 1 in Tokyo, the Q3 Tankan Survey.

Rising US yields are helping the dollar extended its gains against the Japanese yen. The four-day rally has lifted the greenback from JPY109 to almost JPY111.00. The move is stretched as the dollar closed above its upper Bollinger Band last week and remains above it (~JPY110.75) now. The high for the year was set in early July, around JPY111.65. Initial support is seen around JPY110.25. The Australian dollar is steady and well within last week's range (~$0.7220-$0.7315). The intraday momentum indicators favor near-term gains back toward $0.7300. The Aussie has a three-week slide in tow. For the third time in four sessions, the dollar has moved less than 0.1% against the Chinese yuan. In times of uncertainty, the fall back in Beijing seems to be an even steadier yuan. The reference rate set by the PBOC was tight to expectations (CNY6.4695 vs. CNY6.4694). The PBOC continues to inject liquidity into the banking system, quarter-end, the week-long holiday starting Oct. 1, and the dislocations caused by Evergrande (OTC:EGRNY) (HK:3333) seem to be key considerations. About CNY50 bln of liquidity was injected yesterday (Sunday), and another CNY100 bln was provided today.

Europe

The German election was tight, as the polls warned. In the end, though, it appears that the SPD edged ahead of the CDU by a little more than 1.5% of the popular vote. However, the poor showing of the far-left means that the red-baiting of a vote for the SPD is a vote for "Die Linke" failed. Instead, the SPD will seek a three-way coalition with the Greens, who drew record support (14.8%), and the moderate Free Democrats (11.5%). The problem, of course, is that the Greens and FDP are at odds, and many observers are warning it may take months to work out an agreement. Yet, in the last election, the CDU was close to striking a deal with Greens and FDP. The Greens and FDP will first talk to each out before negotiating with the SPD (and CDU). Finance Minister Scholz hoped for an agreement by the end of the year. Laschet, who initially declared a mandate to form a new government, said he will still try, though he led the CDU to its worst showing ever. Still, the bottom line is that there are strong elements of continuity rather than a sharp break from the Merkel-era.

The French ambassador to the US returns today. However, there has been no rapprochement with Australia. Paris announced no plans to restore diplomatic relations. In his pique, Macron did not recall the ambassador to the UK. One explanation is that it was an insult signaling that the UK was irrelevant and did America's bidding rather than independent. Apparently, after UK Prime Minister Johnson attempted to make light of the situation, a call took place with Macron. The episode has become political fodder in France, where elections will be held next year.

The euro is soft and retested last week's low near $1.1685 in early European turnover. Recall that the low for the year was set on August 20 by $1.1665. Initial resistance is seen in the $1.1730 area, but only a move above $1.1750 will lift the technical tone. Sterling is trading quietly within the pre-weekend range (~$1.3655-$1.3735), which itself was inside the previous day's range (~$1.3610-$1.3750). Key support is seen around $1.3600. The hawkish tone of the BOE last week spurred a five basis point rise in the implied yield of the December 2021 short-sterling futures contract. The yield is edging slightly lower today as the market appears to have exaggerated the likelihood of a rate hike before the end of this year. If sustained, it would be the first slippage in the implied yield in four days.

America

With the FOMC meeting out of the way, the market turned its attention back to US fiscal policy. Not to put too fine a point on it, but it is a mess. There are three significant moving parts. The first is the infrastructure bill that Pelosi, Speaker of the House, will submit as early as today. The challenge here is that many of her members will not consider the $550 bln bipartisan package unless a vote is scheduled on the larger package. Second, the US government's authorized spending is nearly exhausted. Without a stop-gap measure, the government can close as early as this week. Third, the debt ceiling, which is how the government pays for the authorized spending, is expected to bite as early as mid-October. Finally, the Treasury Department is already using "extraordinary measures" but is running out of room to maneuver. These problems are entirely self-inflicted and breed cynicism about the US.

The US reports the preliminary estimate for August durable goods today. Transportation orders likely helped lift the headline after a 0.1% decline in July. However, excluding transportation (53 orders for Boeing (NYSE:BA) in August after 31 in July), the pace of durable goods orders may have slowed to 0.5% from 0.8%. Tomorrow, the US reports trade, house prices, and the Conference Board's (September) consumer confidence. Three Fed officials (Evans, Williams, and Brainard) speak today. Powell and Yellen testify before the Senate Banking Committee tomorrow. Canada has a light week, and the highlight is Friday's estimate of July GDP and the Markit manufacturing PMI. Mexico reports the August trade balance (deficit) today and unemployment tomorrow. Banxico makes its rate decision on Thursday, and all 16 respondents in the Bloomberg survey look for another 25 bp rate hike. September worker remittances and the manufacturing PMI will be reported ahead of the weekend. 

The US dollar fell to two-week lows against the Canadian dollar near CAD1.2610 in Asia today before bouncing back it is near CAD1.2665 near midday in Europe. The price action reinforces the importance of the CAD1.2600 area. It has not closed below there since September 6. It has come a long way since peaking a week ago near CAD1.2900. Initial resistance is seen around CAD1.2680 and then CAD1.2720. Similarly, the greenback bounced off MXN20.00 to trade closer to MXN20.10 in late morning turnover in Europe. The US dollar found sellers lurking near MXN20.20 last week. A move above MXN20.20 could spur a move toward the previous month's high north of MXN20.40.