China's trade surplus swells and the market awaits US CPI

Investors are wary of the unwinding one of the most crowded trades, long the AI ecosystem.  Despite cracks, the market remains resilient. So far, the rise in interest rates has not derailed the narrative. The dollar’s fortunes also seem to be to some extent linked the AI. It seems clear that the significant US current account deficit has been largely financed by foreign flows into the US equity market. While some observers see shades of the tech bubble, it is notable that while the Nasdaq Composite peaked in February 2020 and the S&P peaked six months later, the Dollar Index did not peak until July 2001. Even then, the sharp dollar decline did not begin in earnest until April 2002.  

The Dollar is mixed.  The Australian dollar and Norwegian krone are the strongest in the G10, gaining 0.3%-0.4%. The euro, Japanese yen, and Swiss franc are slightly softer.  The euro has derived little support from the easing of the tensions within European bond markets. The French premium, for example, as narrowed from over 150 bp to about 135 bp today, while the euro remains trapped in its trough, having recorded new lows for the year on Monday, slightly below $1.1155.   Meanwhile, India has engineered a short squeeze of the rupee and the PBOC continues to encourage a gradual appreciation of the yuan through its daily fix.  

Prices 

G10

The euro consolidated yesterday but was unable to rise above Monday’s high (~$1.1220). The tone remains fragile.  It is in a narrow range today ahead of the US CPI (~$1.1195-$1.1210). A move above $1.1235 would help improve the technical tone, but the $1.1280-$1.1300 area offers more important technical resistance. 

The dollar is consolidating against the yen at the upper end of where it has been since early September. It is in less than half of a yen range today but is bid note JPY158.50 in late morning European turnover. It stalled yesterday after it settled above the 200-day moving average on Monday for only the second time since September 2. If the JPY158.75 represents the near-term high, support is seen in the JPY157.50 area. 

For the better part of three weeks, sterling has been in a roughly $1.3180-$1.3310 trading range. The lower end held on Monday, and sterling reached almost $1.3260 yesterday. The gains have been extended to $1.3275 today. A push above the 20-day moving average (~$1.3265), which it has not settled above since late August could be promising. 

For nearly two weeks, the US dollar has been chopping between CAD1.42 and CAD1.43.  It tested the upside at the end of last week, following the disappointing jobs report and yesterday, it approached the lower end of the range. It slipped slightly below CAD1.42 in Asia Pacific turnover today but returned to around the CAD1.4220 area in the European morning.  The Canadian dollar has been weighed down by a wide policy rate differential and reflected in the two-year interest rate differential.  The greenback’s momentum indicators are stretched, and we favor a downside break but remain concerned that the policy gap may persist well into next year.  

The Australian dollar recovered from a three-day low yesterday (~$0.6950) but still held below Monday’s high near $0.6995. Follow-through buying today lifted it above $0.7000 for the first time this month. It is probing the $0.7010 area and a convincing move above it would be constructive, but the Aussie must re-establish a foothold above the $0.7030-40 area to boost confidence a low has been forged. 

EM 

After the dollar held MXN18.20 on Monday, it rebounded against the Mexican peso yesterday and reached almost MXN18.40. The dollar edged up slightly through MXN18.42, but it is making new session lows in Europe near MXN18.3550. Most Latam currencies slipped yesterday. The Colombian peso was the notable exception. It rose by almost 0.6% and briefly edged above last week’s highs.  

The dollar traded quietly against the offshore yuan yesterday.  It traded on the CNH6.69-handle. It remains there today. We note the decoupling of the offshore yuan and broadly dollar move.  As recently as early September, the 30-day correlation between changes in the Dollar Index and changes in the USD vs. CNH was about 0.74. It is now around 0.25, the lowest since February. The PBOC set the dollar’s fix at a new low today, CNY6.7249 from CNY6.7298, yesterday. It is the fourth consecutive lower dollar fix in the five sessions since the mainland markets re-opened from the Golden Week holidays. 

The dollar gapped lower against the Indian rupee on Monday and Tuesday as the Reserve Bank of India engineers a powerful short squeeze.  The dollar approached INR97 last week and INR95 yesterday. The dollar gapped lower again today and fell to almost INR94.75 today. However, the greenback recovered, closed the opening gaps and returned to above INR95.00.

Other markets

US equities settled a little lower yesterday. Still, both S&P 500 and Nasdaq settled above opening levels.  Asia Pacific equities traded heavily today.  Among the large bourses, only Taiwan and New Zealand expanded. Europe’s Stoxx 600 is up around 0.6% in late morning turnover. If sustained, it would be the third gain in four sessions. The US index futures are trading with a slightly firmer bias. 

Benchmark 10-year yields continue to pullback today.  Most European yields are 1-3 bp lower and the peripheral premiums are narrowing slightly.  Bank of England Chief Economist Pill was skeptical over the market pricing in four BOE rate hikes, and this appears to have helped support UK Gilts, where the 10-year yield is off five basis points (to 5.39%). The 10-year US Treasury yield is off 1.5 bp to slip back below 5.20%.

Gold held below Monday’s high (~$4217) yesterday and slipped to session lows in the North American afternoon near $4147. It slipped to around $4141 in Europe today and may retest last week’s low (~$4066) broad consolidation continues.  Silver looks heavier and has taken out last week’s low (~$58.50). The next area of support is seen in the $55-$56.50 area.

November WTI reached a new two-week high yesterday, slightly above $95. It settled a little lower and has not closed above $95 since September 18.  It reached $95.40 today but has pulled back to a little below $94.40 in Europe. Market sentiment has soured and optimism has been replaced with fear that the war will persist.  The March 2027 WTI contract rose to $90.55 yesterday, a new contract high. It settled a little below $83 on September 14. 

Data

The focus is on today’s September US CPI. According to the median forecast in Bloomberg’s survey, the headline rate may have risen by 0.6% (0.4% in August) for a 3.6% year-over-year pace. In August it was 3.4%. The core rate is seen rising by 0.2% (0.3% in August for a 2.5% pace (2.4% previously). Expectations of an October Fed hike peaked in late September around 70%. Encouraged by comments from the Fed’s leadership, though not Chair Warsh, market expectations have retreated to around 20%, where they continue to hover. 

China reported that September CPI edged up to 0.9% (from 0.8%) and PPI rose 5.0% (from 3.8%). Food prices continue to fall. The 1.7% year-over-year decline matches the most this year. Non-food prices rose 1.5%, matching the most since May. Core CPI was flat at 1.0%. The September trade surplus widened to $133.5 bln from $119.1 bln in August. Exports were up 36.3 year-over-year (25.0% in August), while imports were up 31% (28.2% in August).  Lastly, aggregate financing in September rose a little more than expected. On Monday, China reports Q3 GDP.  The quarter-over-quarter pace is expected to tick up to 1.0% from 0.9%.