China surprises with rate cut, GBP impacted by data

Headlines

* USD/JPY breaks above 145, previous area of intervention  

* China’s July retail sales and industrial output slide below forecasts

* Dollar firm, yuan hits nine-month low after unexpected China rate cut

* UK wage growth 8.2%, ex-bonus 7.8%, smashes estimates

FX: USD stayed firm hitting a six-week high as it benefitted from safe haven flows. Soft China data saw the yuan hit levels last seen in November.  The 10-year yield made fresh -nine-month highs at 4.215% in thin trading conditions.  The 2-year yield added 7bps to 4.96%, the highest since early July. Yields hit 5.12% on July 6, the highest since June 2007.

EUR is trying to find support around 1.09 after breaking down on Monday through the 100-day SMA at 1.0929. Focus on rising energy costs is sustaining some expectations that ECB policymakers could still raise the policy rate again after the summer.

GBP traded down to a low of 1.2616. It bounced off this level which is where the 100-day SMA resides. It’s a heavy data week with CPI tomorrow after the very strong wage growth figures this morning. Those figures were the highest since records began in 2001 and have pushed cable above 1.27. Peak rates have moved closer to 6% with a 25bp September rate hike now nailed on. We note there is some detail in the numbers pointing to slower earnings growth in July.

USD/JPY weakened past 145, hovering at its lowest level in nine months. This level saw Japanese authorities buy nearly $20 billion worth of yen to support the currency last September. Widening yield differentials have driven the major higher.

AUD was choppy but is trying to hold onto support at the previous May low below 0.65. It has shrugged off China-related headwinds and softer wage growth so far. USD/CAD is trading around its 200-day SMA at 1.3448.

Stocks: US equities were mostly positive with megacap tech names enjoying a decent session. The benchmark S&P 500 closed up 0.57% at 4489. The tech-heavy Nasdaq outperformed, adding 1.18% closing at 15,205. The Dow gained a modest 0.07% finishing at 35,307. Nvidia surged over 7% after Morgan Stanley named the stock a top pick ahead of earnings. Last week saw it notch its biggest loss in 11 months.

 Asian stocks traded mixed after disappointing China data and the surprise PBoC rate cut.  Chinese stocks were lower. The Nikkei 225 benefitted from strong GDP which showed the economy grew at the fastest annualised pace since the fourth quarter 2020. However, it was led by exports as private consumption contracted for the first time in three quarters.

US equity futures are marginally in the green. European equity futures are pointing to a higher open (+0.4%). The Euro Stoxx 50 closed up 0.2% yesterday.

Gold continues to struggle amid a solid dollar and surging bond yields. It is trading just above the 200-day SMA at $1902. Below here is the June low at $1893 and a long-term Fib level at $1894.

Day Ahead – Busy week ahead

It’s a jam-packed week, full of data including multiple CPI reports, the RBNZ meeting and US retail sales this afternoon and the FOMC minutes tomorrow night. US markets have embraced the soft landing theme and robust activity data has pushed the dollar higher. Tighter credit conditions are not hitting the consumer just yet, but this is expected to crimp activity towards the fourth quarter.

Upcoming data should support the goldilocks narrative and market sentiment. Today’s US retail sales look set to post decent numbers with a solid summer bounce as signposted by leading indicators. This is partly reflected by higher gas prices. But has also been helped by July 4th holiday spending, promotions like Amazon Prime Day and “movie mania”.

Chart of the Day – Dollar index pushed into the 200-day SMA

Data and the Fed minutes are expected to underpin support for the dollar. Hawkish sentiments are likely from a Fed wary of signalling an imminent peak in US rates. That would trigger a fall in yields that would make the inflation fight harder.

The USD (USDX) has bounced strongly since hitting lows in July around 99.57. The dollar index is up nearly 4% since then and has bumped into its 200-day SMA at 103.27. The highs from late June and early July also add to resistance near here at 103.54/57. Support should be seen at the near-term breakout level around 102.84.