Thursday, August 13, 2020

Capital Markets: "Dollar Remains Offered"

From Marc to Market:
Overview: The poor price action on Tuesday in the S&P 500 was shrugged off, and new highs for the recovery were made as the record high nears. The dollar, on the other hand, seemed to find plenty of sellers against most of the major currencies. The yen was a notable exception. The dollar traded above JPY107 for the first time nearly three weeks yesterday, but could not sustain the move today. The yen is also trading at new lows for the year against the euro. The soft yen gave Japanese shares a boost. Most markets in the region rose except Hong Kong and Australia. The MSCI Asia Pacific Index made new six-month highs today. European shares are slightly lower, and US stocks are flat. Bond yields are a little lower across the board, with the US 10-year pulling back three basis points to around 0.65%. New Zealand's benchmark 10-year yield fell nine basis points following yesterday's decision to expand its bond purchases. The dollar is on its back foot, slipping against all the major currencies but the New Zealand dollar. The euro, which tested support in front of $1.17 yesterday, is knocking on $1.1840, highs for the week. Among emerging market currencies, the Turkish lira remains under pressure as the government's defense has crumbled. Gold is firm, but below yesterday's $1950 high. Light sweet crude for September delivery is flat near $42.75. Last week's high was around $43.50, where the 200-day moving average is found.

Asia Pacific
The New Zealand dollar proved resilient to the central bank's decisions to boost its bond purchases and threaten negative yield and buying foreign bonds if necessary.
After falling to one-month lows near $0.6525, the Kiwi recovered to $0.6600 in the North American morning before consolidating. It found support near $0.6560 today. A decision will be made after the weekend about the election scheduled for September 19. The development of the outbreak and length of the needed lockdown will be better understood. Prime Minister Arden and the governing Labour Party is widely expected to win the election and is ahead in recent polls 55%-28% over the National Party. A decision to postpone the vote would have the National Party's support. The leader suggested a new date in November or even next year would be acceptable. Ostensibly, it would give the National Party time to muster a stronger campaign.

Australia created 114.7k jobs in July, half the revised 228.4k in June (210.8k initially). The unemployment rate edged up to 7.5% from 7.4% as the participation rate jumped to 64.7% from 64.1%. The median forecast in the Bloomberg survey called for an increase of 30k jobs, and in the actual report, the full-time positions rose by 43.5k after falling a revised 23.6k in June. Part-time employment rose by 71.2k after a 252k revised increase previously. The full impact of the outbreak and lockdown in Victoria will likely be seen in next month's report.

The People's Bank of China is one of the few major central banks that has not engaged in long-term asset purchases associated with quantitative easing. However, a small item in its balance sheet caught analysts' attention, and some argue this could represent bond purchases by the PBOC. More data due tomorrow may shed light on it. A category of sovereign bond ownership that includes central banks and clearing houses rose about CNY18 bln to CNY1.78 trillion ($256 bln) in July. While this could be PBOC helping to facilitate smooth auctions, we are skeptical. The amount is too small to be of policy significance. We are more persuaded by suggestions that it is likely the result of a foreign central bank buying Chinese bonds through its currency swap arrangement with the PBOC. China's 10-year bond yields 2.94%....
....After the markets close today, the Fed makes its weekly report. Recall that its balance sheet peaked two months ago and has fallen in six of the past eight weeks for a cumulative decline of about $223 bln. During the same eight week run, the ECB's balance sheet has grown by around 755 bln euros. The euro has appreciated against the dollar for the last seven consecutive weeks....