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The Dollar Turns Mixed Ahead of the Jobs Report

Summary:
Overview:  The dollar is narrowly mixed and bid ahead of the jobs report. The Scandis lead advancing major currencies, while the yen and Australian dollar are the laggards. Among emerging market currencies, the Turkish lira and the Russian ruble are off the most (~0.45%), while the South African rand is the top performer (~0.45%).  The JP Morgan Emerging Market Currency Index has turned positive after posting declines in the previous four sessions. China's markets re-opened from the long holiday, and the CSI 300 advanced by more than 1%, as did Tokyo.  Among the large stock markets, South Korea and Taiwan's declines stand out.  Europe's Dow Jones Stoxx 600 is paring yesterday's gains, while US futures are narrowly mixed.  Bond markets are under pressure, and the US 10-year yield is

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The Dollar Turns Mixed Ahead of the Jobs Report

Overview:  The dollar is narrowly mixed and bid ahead of the jobs report. The Scandis lead advancing major currencies, while the yen and Australian dollar are the laggards. Among emerging market currencies, the Turkish lira and the Russian ruble are off the most (~0.45%), while the South African rand is the top performer (~0.45%).  The JP Morgan Emerging Market Currency Index has turned positive after posting declines in the previous four sessions. China's markets re-opened from the long holiday, and the CSI 300 advanced by more than 1%, as did Tokyo.  Among the large stock markets, South Korea and Taiwan's declines stand out.  Europe's Dow Jones Stoxx 600 is paring yesterday's gains, while US futures are narrowly mixed.  Bond markets are under pressure, and the US 10-year yield is hovering near 1.60%.  European benchmark yields are 2-4 bp higher.  Crude oil has extended yesterday's dramatic recovery.  November WTI is near the multi-year high set early this week, slightly below $80.  Gold is steady in a narrow range, mostly between $1750 and $1760.  Industrial metals are firmer.  The CRB Index begins today with a 1.7% gain for the week.  It would be the seventh consecutive weekly advance. 

Asia Pacific

As China's week-long holiday ended, there was a pleasant surprise in the form of a strong Caixin service PMI.  It rose from a lowly 46.7 in August to 53.4 in September.  The median forecast (Bloomberg survey) thought it would remain below the 50 boom/bust level.  Recall that Caixin's manufacturing PMI rose to 50 from 49.2, which was also stronger than expected and contrasts to the "official" measure, which slipped to 49.6 (from 50.1). Consequently, the composite Caixin PMI rose to 51.4 from 47.2.  

Japan reported a sharper than expected drop in household spending in August.  It fell for the fourth consecutive month.  The 3.9% decline reflected few purchases of food, clothing, and transportations.  Household spending was off 3% from a year ago.  On the other hand, cash wages rose by 0.7% from a year ago.  It was the sixth month that the year-over-year rate was positive.  It fell from April 2020 through February 2021.  Lastly, Japan's August current account surplus narrowed by about JPY250 bln from July, which is more than accounted for by the swing in the trade balance from a JPY622 bln surplus to a JPY372 bln deficit.  The portfolio flows show Japanese investors were large sellers of Australian bonds (fourth month of sales) and sold US Treasuries in back-to-back months for the first time since May 2020.  

The Reserve Bank of India surprised investors by suspending its version of QE, but as expected, it kept its key repo rate unchanged at 4%.  Many had anticipated the RBI to have tapered its purchases, but it ended them.  The central bank shaved this financial year's inflation forecast to 5.3% from 5.7% while maintaining the growth forecast of 9.5%.   

The Wall Street Journal reported that the US has covertly had Marines and "special forces" in Taiwan for over a year, ostensibly for training purposes.  The Journal concludes that the presence is evidence that Washington is concerned about Taiwan's tactical preparedness.  Among the first questions is whether Beijing knew?  If it did, that could help explain the escalation of China's aerial harassment of Taiwan and strengthen the hardliners successfully expanding the PLA capabilities.  If it did not know, there is a significant intelligence lapse. The US does not have a mutual defense treaty with Taiwan. It does not even have a free-trade agreement with it.  Beijing may try to determine which of three types of advisers and trainers did the US send.  Are they simply military advisers developing local tactical capability?  Are they like the advisers that the US sent to Vietnam that morphed into a military commitment and engagement?  Or are they like tripwire, for which an attack brings on the full force of the US military?  Some reports suggest that this is not the first such training mission, but when reports circulated last November in the Taiwan press, it was denied by local and US officials.  If so, what is the purpose of allowing it to become public now?  

Earlier this week, Biden told reporters, "I have spoken with Xi about Taiwan.  We agree to abide by the Taiwan agreement."  How will Beijing respond? We may get a sense over the weekend.  First, on Saturday, Xi is expected to talk about Taiwan, which he apparently has not addressed formally in a couple of years.  Beijing's position is clear:  It wishes for peaceful unification, but it will not rule out the use of force.  It is opposed to foreign forces interfering with the domestic dispute, and it is deadset against Taiwan's independence.  Sunday is the anniversary of the Wuchang Uprising, which Taiwan celebrates as its National Day.  

The dollar is pushing against JPY112. The year's high, set late last month, is closer to JPY112.10.  Last year's high, set in late February, was slightly below JPY112.25, and the 2019 high was near JPY112.40.  A break above there could signal a move into the JPY114.50 -JPY115.00 area.  Rising US yields appear to be the key driver.  The Australian dollar closed above $0.7300 for the first time since September 15, but yesterday's break was premature.  There was no follow-through buying, and that the Aussie has spent most of today below there.  There is an option for about A$1.07 bln at $0.7300 that expires today.  Support is seen in the $0.7270-$0.7280 area. A band of resistance above $0.7300 is seen from $0.7325-$0.7340.  On its return, the onshore yuan softened slightly (~0.05%).  The PBOC set the dollar's reference rate at CNY6.4604, firmer than the median bank model (Bloomberg survey) of CNY6.4589.  The central bank injected CNY10 bln of liquidity, allowing CNY330 bln in past operations to roll off.   

Europe

As the OECD gathers, Ireland acquiesced and accepted the 15% minimum corporate tax.  There are a couple more holdouts, but Ireland's acceptance is significant.  The tax applies to companies with at least 750 mln euros in annual turnover.  The Irish government estimates that the tax will impact 56 Irish companies that employ about 100k workers.  It will also apply to the 1500 foreign multinationals that employ about 400k Irish workers.  Meanwhile, the current 12.5% tax rate will still apply to the 160k Irish companies that employ around 1.8 mln.  Ireland adopted the 12.5% tax rate in 2003, which is a little less than half of the OECD average (~23%). 

The tension between Warsaw and Brussels is set to rise.  Poland's Constitutional Tribunal effectively ruled against the primacy of EU law.  The ruling puts at risk pandemic aid from Europe for the pandemic (~36 bln euros).  There are three main issues, judicial independence, freedom of the press, and LGBTQ rights, for which the Law & Justice governing party rejects the liberalism of Brussels.  The opposition party (Civic Platform) has called for demonstrations this weekend to protest the court ruling.  

Following poor factory orders and industrial production reports in recent days, Germany hits a trifecta of sorts with a sharp decline in its August trade surplus.  Economists had expected that the 18.1 bln surplus in July was not sustainable.  It was revised to 17.9, but the real shocker was that the August surplus fell to 10.7 bln euros, not the 15 bln expected.  It is the smallest surplus since May 2020.  We suspect that the disruption in the auto sector is a major culprit.  Exports, which economists had expected to rise by 0.5%, fell by 1.2%, the most this year.  Imports rose by 3.5%, roughly double the pace expected.  

The euro is trapped in a narrow trading range of about a fifth of a cent before the US jobs report.  It remains, as it did yesterday, well within the range set on Wednesday (~$1.1530-$1.1605).  There are options for 1.65 bln euros at $1.16 that roll off today.  We have noted that the $1.1490 area corresponds to the (50%) retracement of the rally from the March 2020 pandemic low to the high set on January 6.  As it has done all week, sterling continues to straddle the $1.36 area.  This week's highs are just shy of $1.3650.  The week's low set on Monday (~$1.3530) was retested on Wednesday (~$1.3545).  A break of the range may point in the direction of the next cent move.   

America

The disappointing August jobs report did not deter the Fed from signaling intentions to taper as early as next month.  In fact, a few more Fed officials anticipated a hike next year in September than in June.  At his press conference following the last FOMC meeting, Chair Powell explicitly said he would be watching the report closely, and that like many of his colleagues, he thought that the conditions for tapering had been met or nearly so.  Because weight is given to the cumulative nature of the improvement of the labor market, Powell said the bar was not very high for the September report.  The median forecast in Bloomberg's survey has crept up 500k.  In August, the initial figures suggest the government sector lost 8k jobs and in September is expected to have added 50k.  Excluding education jobs, state and local governments have about 400k fewer workers than before the pandemic.  Their payrolls shrank by 0.6% this year through August, while private-sector jobs have grown by almost 3.5%.   

Several million people saw their unemployment benefits end, and many hypothesize that this was holding back improvement in the labor market.  Even though the states that dropped out of the Federal program earlier did not provide evidence, some observers still expect it to be seen in today's non-farm payroll report.  It would suggest a strong rise in the labor force participation rate, which has stalled in the 61.6%-61.7% range since the end of Q1.  The median forecast (Bloomberg) does not look for a surge but for the smallest of gains to 61.8%, which would be a new high since the pandemic.   At the end of 2019, it stood at 63.3%, the highest since June 2013.  

Canada also reports September employment figures.  An overall employment gain of 60k is expected after 90k in August.  That August figure was led by a 68.5 increase in full-time positions.  It was the second month of gains after Canada shed about 176k full-time jobs in the April-June slump.  The unemployment rate is expected to dip below 7% for the first time since the pandemic stuck.  Canadian unemployment was at 5.7% at the end of 2019.  The participation rate may have ticked up last month to 65.2% from 65.1%.  It stood at 65.5% at the end of 2019.  Lastly, we note that Bank of Canada Governor Macklem's rhetoric has appeared to become more hawkish, and the June 2022 BA futures reflect it.  Since mid-September, the implied yield has risen by around 20 bp to 0.85%, the highest since mid-July.  

November WTI had begun stabilizing after yesterday's pullback from nearly $80 took it briefly below $75.  It had bounced to around $77 before US Energy Secretary Granholm denied that tapping the Strategic Petroleum Reserves was being considered to relieve pressure on prices.  It was not necessary.  When asked, she should have left it as all options are on the table and that as part of a previous budget agreement,  Congress instructed it to sell 260 mln barrels by the end of FY26.  She could have said that those sales could be made opportunistically.  Instead, the flat denial helped lift prices to new session highs (~$78.60) and further today (~$79.65).   

The US dollar is trading at its lowest level against the Canadian dollar in a month (~CAD1.2545).  We have identified a potential head and shoulders topping pattern with a neckline near CAD1.26 and a measuring objective of around CAD1.23.  The next key chart points are the 200-day moving average near CAD1.2515 and last month's low slightly below CAD1.2500.  The greenback has swung in a wide range over the past two sessions against the Mexican peso (~MXN20.4620-MXN20.8860).  The rise in CPI reported yesterday to 6% and a small acceleration in the core rate likely means that Banxico, which says it is data-dependent, will likely continue its tightening cycle when it meets again next month. Separately, Peru's central bank delivered a 50 bp hike yesterday, its third hike in as many meetings.  Its key rate stands at 1.5%, while inflation is running above 5%.  


Disclaimer



Marc Chandler
He has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.

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