Dollar Performance Turns More Nuanced

The US dollar is firm, near the best levels of the week against the euro, yen, and sterling. However, against the dollar-bloc and several actively traded emerging market currencies, including the Turkish lira and South African rand, the greenback has given back some of yesterday's gains.  

Oil is snapping a four-day decline.  News that US output fell by 113k barrels a day last week, the biggest drop in eight months, coupled with a Canadian wildfire that is threatening as much as one million barrels a day in Canada are helping drive oil prices higher.  Several oil companies have announced cutting output in Canada and/or closing pipelines.  

Rising oil prices did Asian equity markets no favors.  The MSCI Asia-Pacific Index excluding Japan, which concludes its Golden Week holiday day with markets re-opening tomorrow, posted a fractional loss that was sufficient to extend the losing streak for a seventh session.  China's markets bucked the trend to post marginal gains.  European shares, on the other hand, are mostly higher, with the Dow Jones Stoxx 600 snapping a four-day decline with a 0.5% gain near midday in London.  The gains are led by telecom and energy sectors.

Asia-Pacific bonds were firm, but European bonds are trading heavier.  European bonds yields are mostly 1-2 bp higher as are US Treasury yields.   The US 10-year yield fell 10 bp over the past two sessions and is up two bp today.  There were conflicting employment signals yesterday.  The ADP estimate disappointed, but the jobs component of the service ISM, where the headline rose to four-month highs, reached its highest level in a year.   Initial jobless claims today, though no bearing on tomorrow's national report, may be given more weight than usual.  The four-week moving average, used to smooth out of the noise in this high frequency series stands its lowest level since the early 1970s.  

Nevertheless, the importance of the employment data may be lessening.  The continued recovery of the labor market may be necessary, but still insufficient to prompt the Fed to move.  The April FOMC statement acknowledged the improvement but cautioned that it was not lifting consumption, which drives the economy.   That said, the strong April auto sales suggest the US consumer may be returning in Q2.  

In addition to the weekly initial jobless claims, the North American session features speeches by four regional Fed Presidents (Bullard, Kaplan, Lockhart, and Williams).  Many investors may be confused by the cacophony of Fed voices.  We continue to advise that the clearest signals of intent and policies emanate from the Fed's leadership.  Three voices in particular should be monitored, Yellen, Fischer, and Dudley. 

Politics and economics are featured in the UK today.   The service PMI completed the monthly cycle and painted a consistent picture with the manufacturing and construction PMIS by disappointing expectations.  The service sector PMI fell to 52.3 in April from 53.7 in March.  The median forecast was for a 53.5 reading.  The combination of the three PMIs pushed the composite to 51.9, which is at least a three-year low, from 53.6.   The takeaway is that the gradual slowing of the UK economy that began near the middle of last year has continued into early Q2 16.  

British voters go to the polls today to elect local government officials, including the Mayor of London.  Typically, the opposition party picks up a few hundred local council seats.  It does not appear Labour will, and this is not particularly good news of Corbyn, the party's leader.  It might embolden a leadership challenge.  In any event, Labour does not look to be in a position to take maximum advantage of the sharp fissures in the Tory Party over next month's referendum.

The Australian dollar is the best performing major currency today, gaining about 0.4%.  It has recouped most of yesterday's losses but remains a cent lower on the week after the RBA's rate cut surprised many.  Economic data surprised on the upside today. March retail sales rose 0.4% (0.3% expected) after a 0.1% rise in February.  In volume terms, retail sales rose 0.5% in Q1, nearly matching the 0.6% gain in Q4 15.  

Australia's March trade deficit was smaller at A$2.16 bln, and revisions to the February imbalance saw a 10% cut in the shortfall.  These reports bode well for Q1 GDP forecasts ahead of the release at the end of the month.  Separately, new homes sales rose 8.9% in March, the largest gain since 2010 and offsets in full the 5.3% decline in February.  

The Australian dollar ignored news that China's Caixin services PMI slipped to 51.8 from 52.2.  Coupled with the softer manufacturing reading, the composite eased to 50.8 from 51.3. The average in Q1 was 50.5.   The Australian dollar needs to overcome resistance seen in the $0.7520-$0.7540 area to begin repairing the technical damage suffered earlier in the week.  

The euro is lower for the third session.  It is the first day this week that it has not traded above $1.15.  Although the upside momentum has faded, the downside is still being limited by support we pegged in the $1.1400-$1.1430 band.  Sterling is trading comfortably within yesterday's ranges.  The dollar is firm at the upper end of yesterday's range against the yen.  It is nearly two yen off the low set Tuesday near JPY105.55.  The dollar is bumping against resistance near JPY107.50.  A break could see JPY108.00.  

Given the criteria that the US Treasury outlined last week in its report on the international economy and the foreign exchange market, there is some speculation that the MOF could order intervention. Recall that intervention (boosting foreign reserves) by 2% of GDP and or persistent one-sided intervention would rise the ire of US officials.  This ostensibly gives Japanese officials a way to square the circle.   The rhetoric has escalated.  However, while we recognize the risk, we think that barring a new leg down for the dollar, Japanese officials will be reluctant to intervene ahead of the G7 meeting (Japan hosts) later this month.

We note that while the Turkish lira has recouped the sharp losses seen in thin dealings in the New York afternoon yesterday, the asset markets are under pressure today amid concern that the Prime Minister is set to resign after resisting President Erdogan's encroachment.   Equities are lower and bond yields are higher.   

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