Australia and New Zealand Move in Opposite Directions

Overview: The energy complex has become a key focus, with Brent oil holding above $75 and WTI above $72.  Natural gas, which reached seven-year highs yesterday, is giving back around half of yesterday’s 3.8% rally.  Rising energy prices play on fears of stagflation and also aggravate supply chain challenges.  Meanwhile, China’s Evergrande restructuring and the crackdown on casinos continue to sap the strength of mainland and Hong Kong equities.  Most major bourses in the region, with the exception of India and Australia, fell.  The US 10-year yield is firm near 1.31%, while peripheral European bonds are outperforming the core.  European shares are higher, led by information technology and energy sectors.  US futures are firm after yesterday’s recovery that saw the NASDAQ snap a five-day slide.  The greenback is enjoying broad gains today.  Among the majors, the New Zealand dollar is bucking the trend with the help of a strong Q2 GDP report that spurred speculation of a possible 50 bp hike when the RBNZ meets in early October.  Most emerging market currencies are lower as well.  The JP Morgan Emerging Market Currency Index is alternating this week between gains and losses.  Yesterday was an up day; today, down.  Gold’s outside up day on Tuesday went for naught, and the yellow metal is testing support in the $1780 area.  A break of $1779 could signal a move toward $1762-$1765.  Industrial metals are softer too.  China’s iron ore futures contract fell another 3% earlier today to bring the loss this week to almost 8%.  Copper is nearly 2% lower.  It is off nearly 3% this week, threatening to end a three-week 7% advance. 

Asia Pacific

Rising energy and commodity prices undermine Japan’s external balance. Rather than report a small trade surplus in August, Japan reported a JPY635 bln deficit.  It is the largest since May 2020 and may serve to dampen Q3 GDP forecasts.  Exports were weaker than expected, rising 26.2% from a year ago, down from 37% in July.  The median forecast in Bloomberg’s survey was for 34% growth. Auto exports were about half the pace seen in July. On the other hand, steel and semiconductor fabrication equipment exports remained strong.  Shipments to China grew at the slowest pace in six months, likely reflecting the slowing of the Chinese economy and the disruption of port activity due to the virus.  On the other hand, imports were stronger than expected, jumping 44.7% year-over-year (the biggest rise in more than 40 years), accelerating from the 28.5% pace seen in July.   

Japan’s Ministry of Finance reports portfolio flows every week.  Today’s data for last week showed Japanese investors continued to be strong buyers of foreign bonds.  The JPY1.76 trillion of purchases followed the JPY1.04 trillion in the prior week.  It is the biggest two-week buying spree of the year.  Japanese investors have been modest sellers of foreign stocks for three weeks running.  At the same time, foreign investors have been buying Japanese bonds. Over the past three weeks, they bought more than JPY2.8 trillion of Japanese bonds.  Foreign investors have been more modest buyers of Japanese stocks, though the Topix and Nikkei are near 30-year highs. Over the past three weeks, foreign investors bought about JPY575 bln of equities, the most since May.  

Australia and New Zealand are moving in opposite directions.  The New Zealand economy expanded by 2.8% in Q2, more than twice the pace expected by the median forecast in Bloomberg’s survey.  The market had been expecting a 25 bp hike at the next central bank meeting in early October.  After today’s report, the overnight index swaps market boosted the chances of a 50 bp hike.  Australia, on the other hand, disappointed with a 146.3k job loss.  The median forecast was for an 80k decline.  The job loss was nearly evenly split between full-time and part-time work (68k and 78k, respectively).  Some may see a silver lining in the fact that the unemployment rate eased to 4.5% from 4.6%, but this resulted from another disappointing aspect of the report.  The participation rate fell sharply to 65.2% from 66.0%.   

The dollar is consolidating in a narrow range against the yen after the JPY109.00 area held yesterday.  The greenback has not managed to regain the JPY109.50-level today, and there is an $880 mln option at JPY109.70 that expires today.  Note that there are large option expirations next Monday and Tuesday at JPY109.00.  The Australian dollar bounced off the $0.7300 support area yesterday and extended the recovery to almost $0.7350 today before the dismal employment report. However, it has returned to the $0.7300 area.  A break of $0.7290 could spur a move toward the next target near $0.7250.  The US dollar is up more than 0.2% against the Chinese yuan, the biggest advance in a month today.  However, it has not re-entered the CNY6.45-CNY6.50 range that had dominated since mid-June.  The PBOC set the dollar’s reference rate at CNY6.4330 compared with the median projection of CNY6.4325.  


Why has support for UK Prime Minister Johnson fallen to 35% in the latest YouGov poll?  Is it the same reason US President Biden’s support has waned?  Could new infections seem to be a better explanation than the tragic events in Afghanistan or other knocks?  Johnson is betting that a minor cabinet reshuffling will suffice to stem the tide.  If Foreign Minister Rabb was to take responsibility for the mess made of the evacuation and balancing work and family by delaying a return from holiday as the Taliban took Kabul like the press made it seem, then how does he become Justice Secretary and Deputy Prime Minister?  Trade Minister Truss will become the new foreign minister, but the real power rests at 10 Downing Street. Recall why Javid is not Chancellor of the Exchequer.  He was told he could not pick his own advisers. Javid is the current Health Minister as if that is where his expertise lies.  And that is the point. The cabinet reshuffle appears solely a cynical function of boosting support in the polls and positioning for next week’s Tory Party conference.  It is not really about setting the post-Covid agenda.   The shuffling of the cabinet posts is a distraction from the shift in market expectations.  At the same time that the government is boosting taxes against its election pledge, the Bank of England has turned more hawkish.  The market appears to have nearly fully discounted the first-rate hike around mid-2022.  

A new acronym has been created to capture that new security pact between the US, UK, and Australia:  AUUKUS.  Under the agreement, Australia will acquire nuclear-powered submarines.  They will carry conventional weapons, and Australia assures it is not seeking nuclear weapons.  The problem is that it means that the $66 bln deal with France for six conventional submarines will be canceled.  Paris is understandably upset, and the takeaway will reinforce its priors, namely that Europe needs to achieve strategic autonomy from the US.   

Switzerland will end the import tariffs on industrial goods, which include autos, bicycles, and textiles.  It will cost the government around CHF500 mln in revenue and may save consumers CHF350 mln a year.   Switzerland is not combatting inflation, but as a general tactic, reducing tariffs on imports could dampen price pressures elsewhere.  

The euro is trading near three-week lows as it convincingly broke $1.1800.  It approached the (61.8%) retracement objective of the bounce it has enjoyed since setting the low for the year on August 20, near $1.1665.  That retracement is found a little below $1.1760.  A break could initially see $1.1720, but the bigger target is the year’s low.  Note that there is an option for about 1.1 bln euros at $1.18 that expires tomorrow.  Sterling rejected the upper end of its range on Tuesday after poking above $1.39.  It briefly slipped below $1.38 yesterday before recovering to almost $1.3855.  It is back near $1.38 in the European morning.  A convincing break sets up a test on the $1.3725-$1.3750 area.  


Poor auto sales likely dragged last month’s US retail sales lower.  It would be the third decline in four months. The pullback by American consumers is more than an auto story.  The core measure, which economists use to forecast GDP, excludes auto, gasoline, building materials, and food services, is expected to be flat after falling 1% in July.  It has risen only once since the end of Q1.  

The US also reports weekly jobless claims.  They may have ticked up after the prior week’s 35k decline, the most since late June.  The Philadelphia Fed survey for September is also out today.  Recall that earlier this week, the Empire State survey unexpectedly ticked higher.  The US will release its monthly capital flow report (TIC) for July at the end of the session.   Canada reports its July portfolio flows earlier in today’s session.  

Canada goes to the polls Monday.  In recent days, it has reported better than expected jobs growth and stronger than anticipated price pressures.  Despite unexpected weakness in Q2 GDP, the Bank of Canada is confident of a renewed growth.  It stuck to its projection that the output gap will close around mid-2022.  The market had been leaning toward a further tapering announcement at next month’s central bank meeting and a rate hike in Q3 22.  The polls suggest that Trudeau’s Liberals will likely get the most seats in the House of Commons but fall shy of a majority.  The wagers on PredictIt.Org give Trudeau a greater chance to return as Prime Minister than Germany’s Scholtz replacing Merkel at the September 26 election.  

The US dollar reversed lower against the Canadian dollar yesterday as equities recovered.  The greenback fell from almost CAD1.27 to CAD1.2625.  It made a marginal new low today but held this month’s up trendline, which comes in a little above CAD1.26.  The CAD1.27 area may continue to offer resistance.  The rally in oil prices has done little for the Canadian dollar, which reinforces our sense its sensitivity to risk is trumping commodity prices in driving the exchange rate.   Meanwhile, the greenback is near the lower end of its range against the Mexican peso, around MXN19.85.  The upper end of the immediate range is around MXN19.93.  The US dollar needs to rise above MXN20.00 or fall below MXN19.80 to signal something important from a technical perspective.  


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