Yield surge challenging risk but without large FX moves
USD: Large rate swings ahead of key jobs report
The rates markets moved substantially yesterday with data primarily from the US helping to fuel the move – a considerable move for the day before what is the key data release – the nonfarm payrolls. The 2yr UST note yield was at one stage up 14bps on the day yesterday but most of that was retraced highlighting the substantial swings in rates that have not really been replicated in the FX markets. A strong payrolls report today would likely see a further big sell-off that could have a bigger impact in lifting the dollar. The OIS market didn’t change much at the very front-end and the 2yr yield jump was more a reflection of removing further the easing priced in 2024. June 2024 fed funds implies little change in rates from today’s level over the next 12mths.
The catalyst for the substantial swing was the strong data from the US. The ADP employment increase of 497k was well above the market expectation of 225k and has raised the prospect of another strong NFP today after a large 339k increase last month. However, it is worth noting though that despite the consistent upside surprises for the NFP over the last 12mths (NFP has been stronger than expected every month), the impact on the dollar has been far less consistent. Covering a 6-hour period after the release of the NFP data, the dollar has advanced on seven occasions and weakened in five of the last 12mths. It highlights perhaps the importance of other aspects of the report including wage growth and the unemployment rate. In addition, the signalling reliability of the ADP is not particularly strong. In January, February and May this year, the two reports moved in opposite directions. Admittedly though, whenever there has been such a large MoM strengthening in ADP, the NFP has tended to follow which does raise the risk of a strong NFP. Still, ADP has been undershooting NFP consistently over the last 12mths so its also feasible the ADP reflected catch-up.
But it was not just the ADP that was strong. The ISM Services Index, the initial claims and the Challenger Job Cuts Announcements all showed strength which points to the FOMC hiking this month and the flow of data now likely means a very weak NFP is required to alter market expectations of a hike – closer to 100k than 300k.
The limited FX reaction to the US rates swings is a reflection of the move being replicated fully elsewhere. There has been big short-end rates moves in Australia, New Zealand and the UK this week. The 2yr EU-US swap spread has been drifting lower only gradually as Europe prices the higher-for-longer theme as well. The June 2024 EUR OIS has seen about 10bps of rate increases since Wednesday. Nonetheless, the spread move does point to the scope for EUR/USD to drop which leaves the risk bias today skewed in favour of the dollar strength.
EUR/USD RISKS SKEWED TO THE DOWNSIDE
Source: Bloomberg & Macrobond
CNY: Resistance to CNY weakness is building
The PBoC USD/CNY fix today was higher reflecting the broader US dollar move but once again the fix came in below the market consensus and there continues to be a notable divergence between the fix and the onshore spot level. The fix today was set at 7.2054, versus a market consensus of 7.2455 and the level was 0.50% below the current spot rate down from the 0.58% divergence yesterday. This degree of divergence has opened up since 26th June and is a clear sign of building opposition to the sustained uptrend in USD/CNY. The divergence was last as large or larger between September and early November last year just ahead of the USD/CNY peak at 7.3000. So based on that period, this emerging sign of opposition does not mean necessarily we are close to a peak but it could mean further steps could be taken if the move extends further. The authorities may wish to avoid a breach of the 2022 peak. What we do know is that if the authorities want to halt the move they have the capacity to do it. The official estimate of USD denominated corporate deposits in China is currently around USD 450bn although with companies actively hoarding dollars in anticipation of further CNY depreciation, market estimates are a lot higher. Interest rates are now being cut on both household and corporate dollar deposits which points to further measures to thwart USD strength by disincentivising the hoarding of dollars.
Crucial to any turnaround in USD/CNY will also be government action to boost growth. According to CCTV, Premier LI Qiang stated yesterday he would “spare no time” implementing “targeted, comprehensive and well-coordinated” policies to boost growth. With the Politburo meeting this month (when the top 24 Communist Party officials meet to discuss policy) there is anticipation of some announcement. If policy measures are announced it could reinforce other FX measures to forestall further CNY weakness. Of course today is a key moment globally too with the US jobs data likely to dictate very short-term momentum. We continue to forecast a peak in USD/CNY with policy measures and better incoming economic data helping to prompt a turnaround
PBOC STARTING TO FIX CNY STRONGER THAN MARKET CONSENSUS
Source: Macrobond
KEY RELEASES AND EVENTS
|
Country |
BST |
Indicator/Event |
Period |
Consensus |
Previous |
Mkt Moving |
|
UK |
08:30 |
BoE Gov Bailey Speaks |
-- |
-- |
-- |
!!!! |
|
IT |
09:00 |
Italian Retail Sales (YoY) |
May |
4.2% |
3.2% |
! |
|
IT |
09:00 |
Italian Retail Sales (MoM) |
May |
0.1% |
0.2% |
! |
|
UK |
09:30 |
Labour Productivity |
Q1 |
-1.4% |
0.4% |
! |
|
EC |
10:00 |
ECB's De Guindos Speaks |
-- |
-- |
-- |
!! |
|
UK |
11:00 |
Mortgage Rate (GBP) |
-- |
-- |
7.44% |
!! |
|
GE |
13:00 |
German Buba President Nagel Speaks |
-- |
-- |
-- |
!!! |
|
US |
13:30 |
Average Hourly Earnings (MoM) |
Jun |
0.3% |
0.3% |
!!!!! |
|
US |
13:30 |
Average Hourly Earnings (YoY) (YoY) |
Jun |
4.2% |
4.3% |
!!!!! |
|
US |
13:30 |
Average Weekly Hours |
Jun |
34.3 |
34.3 |
!!! |
|
US |
13:30 |
Nonfarm Payrolls |
Jun |
225K |
339K |
!!!!! |
|
US |
13:30 |
Participation Rate |
Jun |
62.6% |
62.6% |
!!! |
|
US |
13:30 |
Private Nonfarm Payrolls |
Jun |
205K |
283K |
!! |
|
US |
13:30 |
U6 Unemployment Rate |
Jun |
6.6% |
6.7% |
! |
|
US |
13:30 |
Unemployment Rate |
Jun |
3.7% |
3.7% |
!!!! |
|
CA |
13:30 |
Employment Change |
Jun |
20.0K |
-17.3K |
!!! |
|
CA |
13:30 |
Participation Rate |
Jun |
65.5% |
65.5% |
!!! |
|
CA |
13:30 |
Unemployment Rate |
Jun |
5.3% |
5.2% |
!!! |
|
CA |
15:00 |
Ivey PMI |
Jun |
51.5 |
53.5 |
!! |
|
UK |
15:30 |
BoE MPC Member Mann speaks |
-- |
-- |
-- |
!!!! |
|
EC |
17:45 |
ECB President Lagarde Speaks |
-- |
-- |
-- |
!!! |
Source: Bloomberg
