Overview: The record-long yen slide has stalled just
shy of JPY129.50, even though the Bank of Japan defended its Yield-Curve
Control cap on the 10-year bond and will continue to do so for the next four
sessions. The greenback fell to almost JPY128 before steadying. China
again defied expectations for lower rates (loan prime rate), the yuan's
sell-off accelerated and slide to its lowest level since last October. Chinese
and Hong Kong shares fell, but most of the other large markets Asia Pacific
advanced. The Stoxx 600 is firmer in Europe, but US futures are off
0.5%-1.0%. The Swedish krona and Australian dollar lead the major currencies, all of which are stronger against the greenback through the European morning. Central
European currencies may be aided by the euro, but other emerging market
currencies are heavier today. The US 10-year yield is off six basis points to around 2.88%. European yields are also 5-8 bp lower. Gold was sold to a seven-day low near $1940 before recovering, and
June WTI is consolidating in the $102-$103.65 area after being turned back from
approaching $110 earlier this week. US and European natgas are
diverging. US natgas is off for a second session after falling 8.25%
yesterday, it is at a four-day low. Europe's benchmark is up 2.3% today
after yesterday's 7.75% gain to trade at a five-day high. Iron ore is
steady after falling almost 5% yesterday. Copper is lower. It fell yesterday
to snap a four-day advance. July wheat is steady.
Asia Pacific
After last week's decision
to keep the benchmark 1-year Medium-Term Lending Facility rate unchanged, the
odds of a cut in the loan prime rate today fell. However, some thought it was still likely,
and were disappointed by today's decision to keep the one-year and five-year
rates steady (3.7% and 4.6%, respectively). Chinese officials seem to be
continuing to struggle of how and when to support the economy. The nearly
two dozen measures announced yesterday were largely micro measures to ease the
pressure on households and small businesses. More is going to be
needed. In the meantime, as we anticipated,
a weaker exchange rate, is also a shock absorber that could be used with little
pushback given the broad greenback gains. The yuan's two-day drop of
about 0.7% may not sound like much, but it is the largest two-day decline since
last June.
There continues to be lots
of talk about challenges to the role of the dollar and diversification of
reserves. Japan,
with the second largest holdings of reserves, has an opportunity. The
one-way market in dollar-yen, 13-sessions coming into today, is not healthy,
and Japanese officials have repeatedly expressed concern about the pace of the
move. If Japanese officials wanted to reduce their dollar holdings, reduce
their reserves, which had been built up in the 1980s and 1990s through
intervention, isn't this an ideal time? The dollar is trading around 30-year
highs against the yen. The dollar has risen almost 12% against the yen this
year already. Central banks, it has been said, are long-term
counter-trend speculators. Central banks accumulate dollar assets when
the dollar is weak not strong.
This is not to suggest
actual material intervention is likely. Officials would take a few more steps up the
intervention escalation ladder, such as shifting the focus from the pace to the
level. They would also likely ratchet up the rhetoric to talk about
"disorderly markets" and "excess volatility". These
are the conditions under which intervention can be justified. The relative
strength of the yen over time has forced many industries in Japan to
restructure their business to operate in a reasonably strong yen world.
The yen is the most under-valued in more than 30 years against the
dollar, according to the OECD's measure of purchasing power parity
(-33.2%). If the yen's weakness is sustained, another major adjustment
will prove necessary over time.
Japan still runs a current
account surplus; it is just not driven by the trade balance. In fact, Japan reported a larger than
expected March trade deficit earlier today. The JPY412 bln shortfall
reflected slower exports and stronger imports. Although the JPY130 area is
now widely recognized as the next important chart point, we suspect that it is
no line-in-the-sand for Japanese officials. The argument in some circles
that the BOJ's cap on the 10-year yield is weighing on the yen is refuted, or
at least challenged, by today's developments. The BOJ offered to buy an
unlimited amount of 10-year bonds at 0.25% today and indicated it would stand
ready to do so over the next four-sessions. The yen recovered as some
late shorts covered. This would seem to suggest that if the BOJ were to abandon
its yield curve control, after an initial adjustment period, the yen could
weaken again. One key seems to be the cost of hedging and setting the
currency hedge ratios. Another consideration is the appetite from non-currency
hedged exposure.
The proximity of the JPY130 psychological
level may have made dollar bulls a bit nervous and eager to lock in some
profits. The
dollar fell to almost JPY128 before bouncing, but the rally fizzled near
JPY128.75. It still looks vulnerable and a break of JPY127.75 would
signal the next leg down. We suspect there may be potential toward
JPY126.75. After testing the $0.7345 area in the past two
sessions, the Australian dollar caught a bid and jumped to the $0.7430 area
today. Our initial target is the $0.7465 area, which corresponds
to the 20-day moving average and the (38.2%) retracement of the drop since the
April 5 high near $0.7660. The dollar gapped higher against the
Chinese yuan and traded to almost CNY6.42. It is above the 200-day
moving average (~CNY6.4035) for the first time since last August. In our
weekly note, we suggested a move above CNY6.40 could spur a move into the
CNY6.50-CNY6.60 area. Although the PBOC had appeared to shy away from
using the daily fix to guide the market, it came back today. The wide gap
between the reference rate (CNY6.3996) and the median projection in the
Bloomberg survey (CNY6.3895) was seen as a signal to sell the yuan.
Europe
UK Prime Minister Johnson's
apology yesterday was carefully worded to avoid acknowledging that he knowingly
misled Parliament, which likely would have added pressure for his
resignation. In
any event, there will be a vote tomorrow to turn the issue over to a committee
on Parliament standards. With an 80-seat majority, Johnson does not have
to worry about losing the vote. Still, the defection of some Tories may
capture the attention of the media. The police investigation is not over,
and reports suggest the Prime Minister may be subject to additional
fines. The key now is the May 5 local elections. A poor showing by
the Tories, which seems likely, may raise questions about Johnson's ability to
lead the party to victory in 2024.
In France, Macron and Le Pen
are in a nationally televised debate tonight. Both know how to play to the
audience. The latest polls suggest Macron's lead has widened in recent
days. While France has a strong presidential system, the parliamentary
election in June may ultimately shape the next presidency. Meanwhile, reports
suggest France has offered a security guarantee for Ukraine, but Kyiv cannot
count on it yet. France is a NATO member. For it to extend a
security guarantee to Ukraine is a backdoor into NATO, without the
formalities. It will likely be seen that way in Washington and
Moscow. It will not help end the war.
Since early last year, there
has been a dramatic deterioration of the eurozone's trade balance. Consider that it recorded an average
monthly trade surplus of 18.6 bln euros in 2019 and 19.5 bln euros in
2020. In the last six months of 2021, the average monthly surplus fell to
1.7 bln euros. Earlier today it reported a 9.4 bln euro deficit for
February, its fifth consecutive shortfall. The six-month average stands
at a 4.6 bln euro deficit and almost a 9.7 bln euro deficit average over the past
three months. The surge in energy prices is the main culprit.
The euro is bouncing today
after successfully testing the ECB-induced low from last week (~$1.0760). It is at a four-day high in Europe,
having approached $1.0845. Initial resistance may be in the $1.0860 area
now, but the high from last week's ECB meeting near $1.0925 may be more
important. The failure to hold above $1.08 negates the constructive price
action. Sterling settled below $1.30 yesterday for the first time
since November 2020. However, there has been no follow-through
selling today and the sterling briefly traded above yesterday's high
(~$1.3040). Still, it needs to resurface above $1.3065 to lift the
tone.
America
The resilience reported
yesterday of US housing starts and permits in the face of rising interest rates
appeared to help lift US equities, and the rally appeared to have been led by
other interest-rate sensitive sectors. Today's attention remains focused on the
housing market. First, mortgage applications, which have fallen for five
consecutive weeks through April 8, will be reported. Falling mortgage
applications and reports of slower foot-traffic warn of some deterioration, as
one would expect, and may indeed be taking place below the surface. The US
also reports March existing home sales. The median forecast (Bloomberg
survey) looks for a 4.1% decline after a nearly 7.25% fall in February.
Existing home sales rose almost 6.6% in January after a roughly 3.8% decline in
December.
The Federal Reserve, which
does not meet until May 4 is also front and center today. At least three Fed officials speak today
(Daly, Evans, and Bostic), and the Beige Book will be released later
today. Powell is speaking on an IMF panel tomorrow with the ECB's Lagarde.
The market understood the signal by Fed officials and has fully discounted a 50
bp hike in May and is nearly there for June as well. Note that the Atlanta
Fed's Q1 GDP tracker was lifted to 1.3% yesterday from 1.1% previously. The US
publishes its first estimate of Q1 GDP next week (April 28) and the median
forecast (Bloomberg survey) is for 1% growth.
Canada reports March CPI
today. The
headline is expected to have accelerated to above 6% from 5.7% in
February. The central bank's underlying measures also likely
accelerated. Last November, the average of the three underlying measures
was 2.86%. It has steadily rise to 3.47% in February. Earlier this month,
the Bank of Canada become the first G7 country to hike by 50 bp. The
swaps market has a strong leaning of another 50 bp move when it meets next on
June 1.
For the better part of two
weeks, the US dollar has been consolidating in choppy fashion against the
Canadian dollar, mostly in a CAD1.2550-CAD1.2650 range. It is threatening to breakout to the
downside today. Initial support may be seen in the CAD1.2520-CAD1.2540
band, but better support is around CAD1.2500. Still, the move from
yesterday's high, the upper end of the range to the lower end of the range
today, is stretching the short-term momentum indicators. The takeaway is
to be careful about chasing the greenback lower now. The US
dollar posted an outside up day against the Mexican peso yesterday by trading
on both sides of Monday's range and closing above Monday's high. However,
rather than signal a breakout, the price action, including the lack of
follow-through dollar buying today suggests the broad consolidation seen this
month is continuing. Look for initial support near MXN19.90, though the
bottom of the range is closer to MXN19.75.
Disclaimer
Reviewed by Marc Chandler
on
April 20, 2022
Rating:
