Wednesday, August 23, 2023

Capital Markets: "Euro and Sterling Slump on Poor PMI"

From Marc Chandler at Bannockburn Global Forex, August 23: 

Overview: Poor European flash PMI pushed on open door, giving the market a new reason to do what it was doing and that buying the dollar. The euro has approached important support around $1.08 and sterling is approaching the lower end of its two-cent trading range (~$1.26-$1.28). The greenback is consolidating against the yen and holding above JPY145. The Chinese yuan is little changed while the Mexican peso is extending yesterday's gains.

Despite the poor economic news, equities and bonds are mostly higher. Chinese equities and South Korea were the main exceptions in the Asia Pacific region, while Europe's Stoxx 600 is advancing for the third consecutive session. US index futures are also enjoying a firmer bias, ahead of Nvidia earnings later today. The weak PMIs have sent European bond yields more than 10 bp lower today and the benchmark Gilt yield is off 13 bp. The 10-year Treasury yield is down 6 bp to 4.26%. European two-year yields are mostly 7-9 bp lower today, while the two-year US Treasury yield is hovering near 5%, down about four basis points. Lower yields are offsetting the stronger dollar to let gold edge higher. It appears to be forming a constructive rounded bottom. A move above $1908, the 200-day moving average would help lift the tone. Demand concerns are offset the private estimate of another drawdown in US oil inventories and October WTI is being sold back toward the lows set last week (~$78.60). While the low for the month was near $78.30, the (38.2%) retracement of the rally since late June is a little lower (~$77.75) and the next retracement (50%) is around $75.80.

Asia Pacific
While several small central banks in the region are believed to have intervened to support their respective currencies, there is much interest in the PBOC and the BOJ.
It is not clear that the formal and informal escalating action by Chinese officials is sufficient to turn the turn in light of the policy divergence and the large discount of Chinese rates. That said, Beijing has more tools it can deploy....