Tokyo Escapes Deflation, Leaving The Greenback Trapped Between Two Expiring Options Against The Yen

Overview: New record highs in the S&P 500 and NASDAQ yesterday helped lift most Asia Pacific markets today. China and Hong Kong led the regional gains and were sufficient to lift the MSCI regional benchmark to halt a two-week drop. European equities are little changed but will rise for the fifth week in the past six, barring a sharp sell-off ahead of the weekend.US indices' futures are firm. The bond market is quiet. The US 10-year benchmark is hovering around 1.48%, little changed on the week. European yields are firmer on the day but are also flattish on the week. After last week's exaggerated rally, the dollar drifted mostly lower this week. The yen is the notable exception, with the Scandis and dollar-bloc leading the move. On the day, the greenback is softer, with sterling the only major to be underwater. Emerging market currencies are also mostly firmer against the dollar, and the JP Morgan EM FXIndex is up for the fifth consecutive session. It is the first week since February that has risen every session of the week. The Mexican peso is firm after being propelled higher yesterday by the surprise rate hike by the central bank. Russia announced export tariffs on several industrial metals (steel products, nickel, aluminum, and copper) estimated to be around $2.3 bln for the fourth quarter. Many industrial metals traded higher today, including copper, which is paring yesterday's loss, the only decline this week. August WTI is little changed in a narrow range around $73.00.Crude oil prices are up about 3% this week and have only fallen one week in the past two months. Gold is firm near $1783 after peaking in the middle of the week near $1795.  

Asia Pacific

Tokyo reports consumer prices before Japan as a whole. Tokyo CPI defied expectations and did not show another month of deflation. All three measures, headline, core, which excludes fresh food, and another measure that excludes fresh food and energy, rose to zero from deflation. It is the first time the headline rate was not negative since last September. The core rate has been negative since last July. Japan's economy appears close to bottoming out. Next week's Tankan survey is likely to reflect this, with all major sectors likely improving, including capex plans.

Despite the increase in the required reserve for foreign currency deposits, Chinese banks are awash with dollars.  Reports suggest their holdings have surpassed $1 trillion. While some observers may claim this is a reflection of stealth intervention, there also is a less nefarious explanation. Chinese banks acquire dollars from Chinese exporters. Most Chinese trade is conducting in US dollars. This is one of the implications of the low usage of the yuan on SWIFT. Also, the portfolio inflows leave banks with foreign currencies, often dollars. Separately, the decline in US oil inventories has been cited as a supportive factor for crude. Today, reports suggest China's oil inventories are at their lowest levels since February. OPEC+ meets next week, and an increase in output seems likely. Lastly, next week China reports the June PMI. It is expected to have softened a little amid more speculation that the world's second-largest economy may be near a peak.  

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Read more by Marc on his site Marc to Market.

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