Bottom Fishing – Currency Thoughts
Bottom Fishing
August 6, 2024
After Monday’s historically sharp movements across many financial market types, investors overnight and early today took a chance on those movements being overdone but remained cognizant of the risk for aftershocks. The backdrop to Monday’s selloff remains pretty much intact, and today’s additional news hasn’t been particularly remarkable. One continuing concern is the potential for more carry trade reversals in which enormous previous borrowings at Japan’s zero interest rates deployed at much higher yields offered on U.S. and European assets are now being paid back.
Monday’s 1.4% plunge in the Japanese Nikkei-225 index was followed by a 10.2% rebound in Tuesday’s session. The yield on 10-year Japanese Government Bonds (down 16 basis points yesterday but up 11 bps today) and the dollar’s yen value (down 4.7% at one point yesterday but 2.4% above that low now) have also been whipsawed severely.
Compared to Monday closing levels, the dollar has appreciated 0.6% against the Turkish lira and sterling, 0.4% relative to the euro and Swiss franc, 0.3% vis-a-vis the Chinese yuan and New Zealand dollar, 0.2% versus the Aussie dollar, 0.1% against the Canadian dollar as well as 0.8% relative to the yen.
The 10-year U.S. Treasury and British gilt yields have climbed 6 and 3 basis points today, while comparable German, Spanish, French and Italian yields are down 1, 2, 3, and 3 basis points.
Along with the aforementioned double-digit rebound in Japan’s Nikkei today, a sampling of other Asian stock markets closed up 3.3% in South Korea, 3.4% in Taiwan, and 1.0% in Indonesia. European equities have edged marginally lower, and U.S. stock futures were up 0.4% shortly before today’s trading session was to begin.
Bitcoin‘s price rise of 1.9% today pales next to Monday’s steep plunge. Oil and gold have recovered just 0.4% and 0.3% today.
Investors remain hungry for central bank developments because the divergence of monetary polices is expected to be a major market driver over the rest of this year. In that regard, the decision today to leave the Reserve Bank of Australia’s 12-year high Official Cash Rate of 4.35% unchanged, while widely expected by investors, drew keen attention, especially in light of a hawkish released statement that stressed the priority of returning inflation to its 2-3% target range and dangled the possibility of a further rate increase if needed. While acknowledging softer growth with a rise of unemployment and facing continuing uncertainties, persistent inflation of 3.9% on the targeted trimmed mean index requires a tight policy stance:
Inflation in underlying terms remains too high, and the latest projections show that it will be some time yet before inflation is sustainably in the target range. Data have reinforced the need to remain vigilant to upside risks to inflation and the Board is not ruling anything in or out.
The Bank of Japan’s need to raise interest rates was underscored by a 4.5% year-on-year jump in Japanese average cash earnings during June, up from 2.0% in May and the largest increase in 329 months. Separately, real household spending posted a 1.4% on-year drop in June, marking its 15th decline in the past 16 reported months.
Retail sales volume in the euro area slid 0.3% in June, underwhelming expectations. Sales still rose 0.3% on average between the first and second quarters, but June’s level was also 0.3% below a year earlier.
A 3.9% rise in German factory orders during June broke a string of five straight month-on-month declines, and the resulting 11.8% year-on-year slide was the most steep in 22 months.
Swiss retail sales dipped 0.1% on month in June and fell 2.2% on year, its largest such drop so far in 2024. Seasonally adjusted Swiss unemployment of 2.5% in June was the highest in 32 months.
A parade continues of released July purchasing manager surveys.
- Ireland’s service sector index fell 0.6 points to a 3-month low but stayed comfortably above the 50 breakeven point at 53.6.
- Euroland’s construction PMI printed at a 6-month low and weaker-than-expected 41.4. The weakest reading since May 2020 was below this latest score by a mere 0.1 point.
- Within the euro area, a 23-month low of 45.0 in Italy and a 6-month low of 39.7 in France was partly mitigated by Germany’s 11-month high of 40.0.
- Great Britain’s construction purchasing managers index improved much more than anticipated, rising by 3.1 index points to a 26-month high of 55.3.
The U.S. trade deficit narrowed 2.5% on month in June to $73.11 billion. It still slightly exceeded analyst forecast and was 13% wider than the $64.6 billion goods and services deficit in June 2023. The first half deficit of $427 billion exceeded the year-earlier shortfall by 5.6%.
Canada recorded an unexpected C$ 638 million trade surplus in June due to robust exports led by increases in precious metals and oil. There still was a C$ 1.5 billion deficit experienced in the first half of 2024.
Today’s political news includes a meeting of U.S. President Biden’s national security team amid the rising possibility of Iran attacking Israel; a Ukraine bomb has struck a Russian warehouse full of planes and munitions; and Democratic presidential nominee Harris plans to reveal her VP choice this evening before a rally in Philadelphia.
Among other data out this Tuesday, same-store British retail sales were 0.3% greater in July than a year earlier.
Filipino consumer price inflation accelerated to a 9-month high of 4.4% in July from 3.7% in June and 2.8% in January.
Austrian wholesale price inflation of 1.4% in July was up from 0.5% in the prior month, a 2023 low-point of -7.3% and a 2022 high of +26.5%. Dutch consumer price inflation in July has been confirmed at the preliminary estimated 3.7%, which is the most in a year.
Romanian and Hungarian retail sales in June were 2.6% and 10.0% greater than a year earlier. Czech industrial production that same month was 3.4% lower in in June 2023.
Consumer confidence in Thailand fell to an 11-month low in July.
Copyright 2024, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: British and Euroland construction PMIs, Euroland retail sales, German industrial orders, Reserve Bank of Australia, U.S. and Canadian trade balances
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