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Markets Look for Direction, Currencies in Narrow Ranges

, August 12, 2021, 0 Comments

The global capital markets are subdued today as investors wrestle with the rising virus, the shifting stance of several central banks, and a more tense geopolitical backdrop. Equity markets are struggling today.

markets-marketexpress-inMost of the large bourses in the Asia Pacific region, including Japan, China, Hong Kong, and Taiwan, moved lower, and Europe’s Dow Jones Stoxx 600 threatens to snap an eight-session advance. US futures are narrowly mixed.

The US 10-year yield that reached 1.37% yesterday is little changed near 1.35% today. Asia Pacific yields fell 1-3 bp, and European yields are edging higher. In the foreign exchange market, the Scandis are firmer, while the dollar bloc is softer. The euro, sterling, and yen are straddling unchanged levels. Turkey is leading most emerging market currencies higher. The central bank meets but with high inflation, is unlikely to cut rates and appease President Erdogan. The Mexican peso is also firmer ahead of its central bank meeting later today, where a rate hike is widely expected. The JP Morgan EM currency index is steady after rising the past two sessions. Gold is extending its recovery after the shellacking at the end of last week and the flash crash. The $1761 area corresponds to a (50%) retracement of the drop from the August 4 high near $1831, and Monday’s high was near $1765. September WTI marginally extended the two-day rally but stalled near $69.60. After ending a five-day slide yesterday, iron ore prices fall in China. We note that the September lumber futures in the US fell for the third day yesterday and are off nearly 10% so far this week to below $500, more than $1000 off the May high, for the first time since last November.

Asia Pacific

Japan’s July PPI rose by 1.1%, more than twice the projected gain, and lifted the year-over-year rate to 5.6% from 5.0%. However, this is unlikely to herald an end to the deflationary forces that have weighed on consumer prices. Indeed, next week’s July CPI is expected to show that deflation’s grip remains strong. Recall that the initial estimate for both the June headline and core CPI was a 0.2% gain year-over-year. They were subsequently revised to -0.5%. A small improvement to -0.4% is expected to be reported next week.

Japan has another challenge looming. While it has taken a strong stance vis a vis Taiwan and Tokyo seems focused on China, its territorial claims in the Northern Territories/Kurils are being challenged more forcefully by Russia. Russia had grabbed some Japanese territory at the end of WWII, and the territorial dispute has prevented a peace treaty between the two. China has in the past seemed sympathetic to Japan’s claims, partly because Beijing had its own territorial disputes, but more recently appeared to signal support for Russia’s claims. In June, Russia sent its airforce plans into the airspace around the disputed islands more than once a day on average. The US has been explicit that its security commitment to Japan covers the islands in the East China Sea that Tokyo claims. Russia is thought to be probing and seeing how the US responds. Putin is also likely playing to a domestic audience.

The spreading covid virus is beginning to have an economic impact on China. One of its largest ports was closed due to the contagion. A large number of flights have been canceled this week, and demand for jet fuel has slumped. There is increasing speculation that the PBOC will ease policy again, perhaps as early as next month. Separately, China has withdrawn its ambassador from Lithuania and sent the Lithuanian ambassador packing. As we noted previously, this issue was Lithuania’s decision to allow Taiwan to open a diplomatic office under its name rather than China Taipei. Even the US has not done that. The situation has not been resolved, and the office is to open in the fall.

The dollar peaked yesterday at JPY110.80, its highest level in a little more than a month. It reversed lower to around JPY110.30 and has been confined to about 20 ticks above it today. There is an option for ~$530 at JPY110.30 that expires today. Looking ahead, there is an option for $540 mln at JPY110.00 expiring tomorrow and a $920 mln option at JPY110.50. After recovering from around $0.7315 early this week, the Australian dollar peaked just shy of $0.7390 yesterday and is consolidating in less than a quarter of a cent range above $0.7355 today. It looks vulnerable and could find support in the $0.7330-$0.7340 area in North America. Today, the Chinese yuan is sporting a firmer profile, the third consecutive advance, which is the longest in a month. However, the intraday ranges remain narrow, and the CNY6.45-CNY6.50 trading range that has dominated for nearly two months remains intact. The PBOC set the dollar’s reference rate at CNY6.4754, tight to the median expectation in Bloomberg’s survey for CNY6.4758.


The UK economy expanded by 4.8% in Q2, in line with market expectations. It follows a 1.6% contraction in Q1. Strength was seen in consumption (7.3% vs. -4.6% in Q1) and government spending (6.1% vs. 1.5% Q1). Exports rebounded and grew 3% in the quarter after falling by 6.1% in Q1. Business investment was a disappointment, rising 2.4% instead of 6% that was expected after a 10.7% contraction in Q1. June data itself were mostly disappointing. Industrial output fell by 0.7% instead of rising by 0.3%, as economists expected, and the May series was trimmed to 0.6% from 0.8%. Construction output fell 1.3%, while the median forecast in Bloomberg’s survey projected a 1% rise. The trade balance deteriorated more than expected, and the May deficit was revised to show a bigger shortfall. The one bright spot appeared to be services that expanded 1.5% in June compared with expectations for a 0.9% gain, though May’s 0.9% gain was trimmed to 0.7%. The bottom line is that UK’s growth in Q2 was frontloaded, and the economy lost some momentum in June. Still, the July PMI suggests the economy may have accelerated again at the start of Q3.

Poland, which has not resolved its dispute with the EU over the independence of the judiciary and the civil rights of the LGBTQ community, has kicked up another storm, even though its government lost its parliamentary majority this week. In a back-and-forth session yesterday, Poland’s parliament finally passed (228-216) a law that while ostensibly prevents China and/or Russia from controlling its media, will force, in the first instance, a US company to divest of its network in Poland, which is the largest private television network in the country. US Senators and EU officials expressed outrage and frustration and frame it as another attempt by the Polish government to encroach on independent media.

Swiss officials objected to quotes on Chinese social media, citing a Swiss scientist claiming to be intimidated by the US and others for supporting the conclusions of the WHO investigation into the origins of the virus. The Swiss claimed the Swiss scientist was a fiction and several Chinese media sources apparently dropped the claim. Separately, recall that at the end of last week, the euro was sold to its lowest level against the Swiss franc since last November, near CHF1.0720. A shelf was carved there, perhaps with the help of the SNB. Today, the euro reached nearly a three-week high around CHF1.0827. This corresponds to roughly a (38.2%) retracement of the decline since July 1 high near CHF1.0990. The next target is around CHF1.0850, the halfway mark.

The euro has been confined to less than a fifth of a cent range so far today, and it is holding in the upper end of yesterday’s range. The single currency had edged a little closer to $1.17 before recovering a little above $1.1750. There is an option for about 1.15 bln euros at $1.1700 that will roll off today and another one for a billion euros at $1.1795 that expires, which also seems out of play today. Sterling is also consolidating in a narrow range slightly below yesterday’s high of almost $1.3890. There are GBP775 in options struck between $1.3850 and $1.3860 that are expiring today, but it is the breakout of the $1.38-$1.39 area that points in the direction of the next move.


Yesterday’s news that US July consumer prices stabilized will likely be echoed with today’s producer prices. The monthly increase is expected to be less than June’s, and due to the base effect, may see a lower year-over-year headline pace. The moderation of used car prices lent support to some arguments about the temporary nature of the elevated price pressures. The CPI has yet to pick up the sharp rise in house prices, and rents and owner equivalent rents remain modest. President Biden weighed in and urged OPEC+ to make more oil available. Many observers noted that the remarks offered a stark contrast to his greener thrust about weaning America off carbon fuels earlier in the week. The impact on OPEC+ is likely minor at best, and Biden’s comments seemed aimed at a domestic audience paying more for gasoline. The US also reports weekly jobless claims, which are expected to have slipped from 385k to 375k, and import/export prices. In general, US export prices have been rising faster than import prices, suggesting a favorable shift in the terms of trade.

Mexico’s central bank meets today, and it is widely expected to hike rates by 25 bp, the second move in the cycle. However, if the consensus is wrong, it is more likely that Banxico stands pat rather than hike by 50 bp. In June, the decision to hike was split, and one AMLO appointed member voted to hike, providing the 3-2 majority. While inflation remains elevated and above target, the problem is that the economy is weaker than expected, illustrated by yesterday’s news that industrial output, which was forecast to have grown by 0.1%, contracted by 0.5%, and the May increase of 0.1% was revised away. It is not just that the economy is weak, but Mexico is sick. It is experiencing a surge in the virus and reported the most deaths in four months related to covid. Hospital bed occupancy has surpassed 50%. While the vaccination effort has increased, less than a quarter of Mexico is fully vaccinated.

The US dollar is little changed against the Canadian dollar today, and here too, the exchange rate is confined to a narrow range. The greenback has held above CAD1.2500 and below CAD1.2525. There are two sets of expiring options that may help shape today’s range. One set is for a little more than $710 mln at CAD1.2500, and the other is for about $585 mln at CAD1.2540. The US dollar is at the lows for the week against the Mexican peso, around MXN19.89. Support near MXN19.80 looks formidable, and the MXN20.00 looks to be a reasonable cap now. Banxico’s decision is at 2:00 pm ET. Peru’s central bank’s decision is a few hours later. Pressure is mounting for a hike, but on balance, it looks like it will stand pat.