Soft German ZEW Survey Weighs On The Euro

Overview: After the big sell-off in gold and oil yesterday, the markets have stabilized today. The yellow metal is in a $5 range on either side of $1733, while September WTI is near $67.50 after holding key support near $65.As China moves to curb steel production, the price of iron ore in China has fallen sharply. The five-day losing streak has shaved 12% of the price. It is off more than a quarter since mid-July. The CRB index itself fell 1.3% yesterday, down for the sixth time in the past seven sessions.US equities struggled yesterday, with only the NASDAQ closing higher. It did not matter much to the Asian Pacific markets that most moved higher, except South Korea and Taiwan. China's CSI 300 and the Hang Seng rose by more than 1% to lead the region. Europe's Dow Jones Stoxx 60 is up for the seventh consecutive session and continues to set new record highs. US futures are little changed. The 10-year US Treasury is also hovering around unchanged levels with a 1.32% yield. European benchmark yields are narrowly mixed. The dollar is mostly firmer. The Scandis and sterling are posting minor gains, while the euro, yen, and Swiss franc are struggling. Emerging market currencies are mixed, but the JP Morgan Emerging Market Currency Index is lower for the sixth consecutive session.  

Asia Pacific

Japan returned from the long holiday weekend and reported a slightly better than expected June current account surplus. It stood at JPY905 bln, down from JPY1.98 trillion in May. True to the seasonal pattern, the balance-of-payments means that the trade balance narrowed in June from May. With the current account data, Japan includes portfolio investment. In June, Japanese investors were large buyers of US Treasuries (JPY1.5 trillion or ~$13.7 bln). They have been net sellers in May (~JPY500 bln) but had been buyers in March and April. On the other hand, Japanese investors were net sellers of European bonds and sold the most Italian bonds since November 2011 and the most British Gilts since 2018. They were also sellers of Australian bonds.  

Three separate polls (Yomiuri, JNN, and Asahi) all found that the Olympics did little to bolster public support for Prime Minister Suga and his cabinet. New record lows were set. The LDP holds a leadership contest next month, ahead of the general election that has yet to be confirmed in October. The opposition to the LDP remains weak, so the real contest is within the LDP.  

The dollar, which had fallen to almost JPY108.70 in the middle of last week, is pressing against JPY110.50 today, its highest level since July 26. Nearby resistance is seen in the JPY110.60-JPY110.70 area. The five-day moving average has crossed above the 20-day moving average for the first time since July 8. The key remains the US Treasury yield. The Australian dollar edged lower to almost $0.7315, its lowest level since July 21. Two chunky options may be in play today. One is for about A$920 mln at $0.7300, and the other is for about A$710 mln at $0.7350.A move above yesterday's high near $0.7365 would help lift the tone. The greenback has surrendered yesterday's minor gain against the Chinese yuan. With a brief exception, the dollar remains confined to the CNY6.45-CNY6.50 range since the second half of June. The PBOC set the reference rate at CNY6.4842, tight against expectations (CNY6.4845 in the Bloomberg survey). The central bank's quarterly report called inflation "controllable," which fans expectations for easier policy, perhaps another cut in reserve requirements. 


Germany's August ZEW survey was weaker than forecast. The expectations component fell to 40.4 from 63.3. This brings it back to last November levels, which itself was the weakest since April 2020. Still, it stood at 26.7 in January 2020, on the eve of the pandemic. The assessment of the current situation edged up to 29.3 from 21.9. It missed expectations for 31.0. It may look unimpressive, but with the virus on the march and the flood, it is still resilient and at its best level since December 2018. 

Norway's central bank meets next week, and it is expected to edge closer to a rate hike, which is expected in September or early Q4. The high-frequency data gives little reason to have second thoughts. Yesterday's June industrial production report showed the first increase in three months, and today's reading of July CPI was slightly firmer than expected. The 0.9% monthly increase lifted the year-over-year rate to 3.0%. It has been at or above 3% in four of the last seven months after finishing 2020 and 2019 at 1.4%. That said, underlying inflation, which adjusts for tax changes and excludes energy, rose 1.1% from a year ago. It has eased from 2.7% in each of the first three months of the year. The 1.1% matches the lowest rate of underlying inflation since 2017.  

The disappointing ZEW survey provided the market with the latest reason to sell the euro. The losses were extended to almost $1.1720. The low for the year was set at the end of March near $1.1700.Below it, there is little chart support until the $1.16 area seen on the eve of the US election and the low from last September. On the upside, the $1.1740-$1.1760 band offers the nearby cap. Sterling also slipped to a marginal new two-week low (~$1.3835). It recovered in Europe, perhaps related to the GBP335 mln option that expires today at $1.3840, to almost $1.3875 before meeting new sellers. A break of the $1.3825-$1.3830 area that holds the 20-day moving average and the (38.2%) retracement of the rally since late July targets the $1.3770-$1.3780 area the (50%) retracement objective and the 200-day moving average.  


The US JOLTS report confirmed what was well known. The supply of jobs in the US exceeds demand for the first time since the pandemic struck. Attention today turns to Q2 productivity and unit labor costs, which Fed Chair Powell cited at his recent press conference. These data points are derived from the Q2 GDP report. Unit labor costs, which combine productivity with wage and non-wage compensation, jumped by 6.5% last year, the most since 1982. A 1.0% rise in unit labor costs in Q2, following a 1.7% rise in Q1, puts the H1 increase around 2.7%, which matches the five-year average. The five-year average through 2019 was slightly less than 1.6%.  

Yesterday the Fed's Rosengren and Bostic put their markers down, favoring a tapering announcement shortly and a rate hike in 2022. Today, it's Cleveland Fed's Mester who is on tap. Her speech, shortly after the opening of the equity market, will discuss inflation risks. She is perceived to lean toward the hawkish side. The first Fed funds futures contract that has a 25 bp hike fully discounted (25 bp hike plus 10 bp for the current level= 35 bp) is in February 2023. The contract barely trades. We have preferred the December 2022 Eurodollar futures contract. It implies a 46 bp yield. The September 2022 contract implies a 31 bp yield. The cash market is near 13 bp. 

Canada and Mexico have light diaries today. Mexico reported July CPI figures yesterday, and the 5.81% year-over-year increase was slightly more than expected. Nominal wages will be reported today. They rose by 5% from a year ago, lagging behind inflation. June industrial production is due tomorrow (~0.1% increase is expected) ahead of the central bank meeting on Thursday. A 25 bp rate hike is widely expected. Brazil reports its IPCA inflation measure today. It is expected to rise to almost 9.0% from 8.35% in June. The central bank meets next on September 22 and has signaled its intention on delivering another 100 bp hike to the Selic rate to 6.25%.  

The US dollar continues to bump against resistance a little below CAD1.2600 and is flirting with the 200-day moving average (~CAD1.2575). A move above the CAD1.2615 area, the (50%) retracement of its pullback from CAD1.2800 on July 19, targets the CAD1.2660 area. A break of CAD1.2530, where an option for about $465 mln expires today, would help lift the Canadian dollar's tone. The greenback is firm against the Mexican peso and is holding above MXN20.05 so far today. Yesterday's high was around MXN20.1245, and the 200-day moving is close to MXN20.1360. They offer initial resistance. Last month's high was set near MXN20.25.  

Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

How did you like this article? Let us know so we can better customize your reading experience.


Leave a comment to automatically be entered into our contest to win a free Echo Show.