Dollar Slide Extends

Overview: The selling pressure on the greenback, evident last week, despite a series of stronger than expected economic reports, carries over into the new week's activity.  The euro punched through the $1.20 cap that had blocked it last week, and the dollar is testing the JPY108 level, which it has not traded below since early March.  Most emerging market currencies are also firmer, and the JP Morgan Emerging Market Currency Index is moving higher for its fifth consecutive session after last week's 1% gain. The US 10-year benchmark yield is a couple basis points lower at 1.55%.  European yields are softer too.  Equities are more mixed.  Most Asia Pacific markets finished higher, led by China, Hong Kong, and Taiwan.  However, Tokyo was mixed, and the rising contagion in India has seen the Indian shares tumbled by nearly 2%, and the rupee is off 0.5% after selling off more than 2% last week.  European shares are edging higher, and the Dow Jones Stoxx 600 is trying to extend its advance into a fifth consecutive session.  US futures indices are nursing small losses.  On the back of a weaker dollar, softer rates, and increased volatility in the crypto space, gold is firmer.  At nearly $1790, the yellow metal is at its best level since late February.  Despite progress being reported in the talks to get the US and Iran back into treaty compliance, oil prices are steady  The June WTI contract is trading in about a 40-cent range on either side of $63.  

Asia Pacific

Japanese exports soared 16.1% year-over-year in March, reflecting the recovering world economy.  On a seasonally adjusted basis, exports rose 4.3% on the month.  Imports rose 5.7% year-over-year and almost 2% on a seasonally adjusted basis in March.  The net result was a JPY663.7 bln trade surplus, well above expectations.  Shipments to the US rose 4.9% and to the EU, 12.8%, which is the most in three years.  However, it was the recovery of exports to Asia that are most impressive.  Japan's exports to Asia jumped by nearly 22.5%, led by a 37.2% rise in exports to China.  While Japanese exports of autos, plastics, and semiconductor chips led the way, we continue to note exports of chip-making equipment to China, reflecting its capex cycle and drive to substitute imports with domestic production.  China's move is overdetermined.  It is partly a function of the larger import-substitution strategy and partly driven by US sanctions of China's largest chip producer (SMIC) and consumer (Huawei). 

Many reports in the western press have played up the threat posed by China's efforts to introduce a digital currency to the dollar's role.  We have played down such worries as symptomatic of a paranoia that exaggerates the demise of the dollar's role in the world economy.  Through the Great Financial Crisis, the Trump years of seeking a weaker dollar, and the shock of the pandemic, the dollar's role remains quite stable.  Li Bo, the Deputy Governor of the PBOC, indicated over the weekend that the digital yuan is, as we have suggested, more about domestic use rather than bolstering the yuan's internationalization. Central bank digital currencies are best to be thought of as a payment system than a separate currency.  The yuan is not convertible.  Chinese officials retain significant control over its fluctuation and use.  A digital form of the yuan does not overcome these restrictions.  

The dollar drifted lower against the yen for most of the Asian session but came under stronger pressure late in the session and in early European turnover.  The JPY108 level has held on the initial test, and that is where the lower Bollinger Band is found.  There is a $980 mln option struck there that expires tomorrow.  The JPY107.75 area corresponds to a (38.2%) retracement of the dollar's rally since the early January low near JPY102.60.  The (50%) retracement is near JPY106.80.  The Australian dollar initially took out the pre-weekend low (~$0.7725) before reversing higher and rising to around $0.7785, its best level in a month.  It has now met the (50%) retracement objective of the decline from the multi-year high in early January above $0.8000, around $0.7770.  The next retracement objective (61.8%) is found near $0.7825.  The Chinese yuan is strengthening on the back of a falling dollar. It extended its streak to the sixth consecutive session today, matching its longest advance of last year.  Foreign investors bought the most Chinese shares (~$2.5 bln) through HK Connect in 4.5-months.  The PBOC set the dollar's reference rate at CNY6.5233, in line with expectations.  The dollar's losses have pushed it below the 100-day moving average (~CNY6.5105) for the first time since March 24.  

Europe

Unanimity in decision-making in Europe is still too widely used to often allow for effective decision-making.  Ironically, the broadening of the EU to include more members, as the UK sought, eroded its veto power as more qualified majority voting was introduced, helping to fuel Brexit.  However, it has not gone few enough.  To wit:  Hungary is able to block the imposition of sanctions on China for the electoral changes in Hong Kong.  The EU foreign ministers, meeting today, hoped to secure unanimous support, but Budapest opposed several measures, including the suspension of extradition treaties with 10 EU states.  

UK and EU officials met at the end of last week, but there is still no resolution of the vexing Northern Irish border problem that was not resolved by drawing the trade border in the Irish Sea.  The EU has taken legal action following the UK's unilateral extension of waivers on custom checks for some goods, including food, that was entering  Northern Ireland from Britain.  The EU has removed a sense of urgency by announcing it would not immediately move forward on its legal case. 

Ten countries have yet to approve the EU's recovery plan. The intention was for the national approval process to be complete by the end of the month. This seems increasingly unlikely.  The German parliament approved, but the high court is considering a constitutional objection.  Another spanner was thrown in the works last week in Warsaw.  A junior coalition partner objected on the grounds that the common bond offering would leave Poland responsible for others' debt.  

The euro's dip in early Asian turnover through the pre-weekend low near $1.1950 was snapped up, and the single currency was driven above the $1.20 nemesis from last week and through the $1.2025-level that represented the (50%) retracement objective of this year's drop from the $1.2350 area seen in early January. The next retracement level (61.8%) is found a touch above $1.2100.  We expect the market to turn more cautious ahead of the ECB meeting on Thursday.  The $1.1990-$1.2000 area may offer initial support.  Sterling posted an outside up day before the weekend and is building on those gains today.  The pre-weekend low was near $1.3715, and now it is knocking on $1.39. The highs from earlier this month are closer to $1.3920, and the $1.3955 area corresponds to the (50%) retracement objective of the losses since the multi-year high was set in late February (~$1.4235).

America

The US Treasury delivered its latest report on currency practices. Although it tried to pull back from the more aggressive thrust of the Trump administration, it instead underscored the politicization and impotence of the current approach.  Recall that in 2019, the US cited China as a currency manipulator only to reverse itself a few months later, after Beijing signed on to a two-year trade agreement.  Among his last acts, former Treasury Secretary Mnuchin cited Switzerland and Vietnam as currency manipulators, but his successor concluded that there was insufficient evidence for such a conclusion.  These flip-flops do not bolster the credibility of the US report.  Many had expected Taiwan would be cited, but it was not, and instead, there would be intensifying talks between Taipei and Washington.  Ironically, part of Taiwan's bilateral trade surplus with the US stems from the semiconductor chips, the shortage of which is so acute that both Ford and GM have been forced to cut production.

In addition to the flip-flops, the Treasury's approach leads to a confusing "monitoring list," where three EMU members (Germany, Italy, and Ireland) are mentioned, but 19 countries share the European Central Bank and a common currency and currency policy. Moreover, although there is no fiscal union, the members' budgets must be approved by the EU, and the fiscal strictures have been relaxed under these emergency conditions. At the root of the US criticism is the demand that all countries accept Keynesian-demand management through fiscal policy.  Ordoliberalism, which no less than former ECB President Draghi said is the DNA of the central bank.  In addition to adding Ireland to the monitoring list, Treasury Secretary Yellen added Mexico to the "monitoring list," which now includes the largest economies in the world  (China, Japan, Germany, India, South Korea, Mexico) as well as several small and poor countries (Vietnam, Thailand, Malaysia).  

The US law is discretionary and requires a judgment to be made of motivation.  Is the purpose of the intervention to prevent a balance-of-payment adjustment (i.e., intervention to secure competitive advantage)?  There are several other reasons countries may prefer to have stabilized exchange rates, including financial stability. Why should hot money from foreign investors, who are often fickle, drive exchange rates?  If there is a large judgment component as we maintain, a non-self-interested party, like the IMF, should take the lead on this. When six of the world's largest economies are on America's watchlist and a country whose  GDP per capita is 1/25 of the US (Vietnam), perhaps the entire US approach needs to be re-thought.  

While we are at it, there is another issue that seems to be confusing many about last week's Treasury's International Capital (TIC) report.  Media accounts cited the official sales of $4.5 bln of US Treasury bonds.  Yet, the entire decline is likely accounted for by Japan, meaning the other central banks were net buyers in aggregate.  Japan's holdings of Treasuries fell by $18.5 bln, and the central bank is the largest holder by far.   The glass-is-half-empty crowd notes that February was the sixth month in the past seven that Japan has reduced its holdings.  However, what is left unsaid is that at nearly $1.26 trillion of Treasuries, It is more than $100 bln more than at the end of 2019.  Also, many observers make too big of a distinction between Treasuries and Agencies.  Both are reserves assets.  While foreign central banks sold $4.5 bln in Treasuries in February, they bought $11.2 bln in Agency bonds.  In January, foreign central banks bought $1.1 bln of Treasuries and $26.1 bln of Agency bonds.  

A light North American calendar today features Canada's first budget in a couple of years.  It is also likely to serve as an election platform of the Liberal minority government.  Among the initiatives that are expected are extended childcare benefits and green initiatives.  The expanding fiscal policy, while monetary policy may begin being pullback from its emergency QE setting that may be announced at Wednesday's central bank meeting, is a favorable mix for the Canadian dollar.  The US dollar has slipped through last week's lows near CAD1.2475.  The CAD1.2430 area may offer some support, but a return to the multi-year low set last month near CAD1.2365 is in sight.  Meanwhile, the greenback is extending its drop against the Mexican peso for the sixth consecutive session.  The softening of US rates makes Mexico's 4% T-bill (cetes) yield more attractive, despite the poor policy backdrop.  The US dollar peaked last month around MXN21.6350, and today's low is near MXN19.8325. There is little chart support for the beleaguered greenback ahead of the low set in January near MXN19.55.  

   

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