Overview: ECB comments suggesting a rate hike as early as July may be gaining momentum and is helping extend the euro's gains to an eight-day high near $1.0935. In turn, it is buoying the central European currencies. The greenback is heavier against most of the major currencies, though after a bout of profit-taking yesterday, it is enjoying a firmer tone against the yen. The Chinese yuan's drop has extended for a third session. Chinese President Xi defended the Covid policy seemingly over economic support, and this continued to weigh on Chinese stocks. The CSI 300 is off for the fifth session and set to drop for the eighth week of the past nine. The large Asia Pacific markets outside of China, Hong Kong, and Taiwan advanced. Australian stocks extended their rally for a fifth session to reach record highs. European shares are extending yesterday's gains, and US futures are around 0.5%-1.2% better. Ten-year benchmark yields in the US and Europe are 2-5 bp higher, putting the US Treasury at 2.87%. Gold is inside yesterday's range but continues to trade heavily after being turned back from $2000 at the start of the week. June WTI held the $100 level yesterday, helped by a large drawdown of US inventories amid strong exports. It is extending its recovery today and is above $103. US natgas is lower for a third session, while Europe's benchmark is up more than 6% to reach its best level since the middle of last week. Iron ore fell to give back yesterday's gains, leaving it off nearly 5% this week with one session left. Copper prices are steadying after falling 3% over the past two sessions. July wheat is trading lower for the third consecutive session. It had risen nearly 12% over the past two weeks.
Asia Pacific
The Japanese government
upgraded its assessment of the economy for the first time in four
months. It
noted that Covid cases have fallen, and social restrictions eased (at the end of
last month). The outlook for consumption and public spending were
lifted. New measures to support the economy and cushion the blow of
higher fuel prices are expected before the end of the month. Meanwhile,
the BOJ started its four-day fixed-rate buying of the 10-year JGB, but there
wasn't a take-up and it bought JPY225.1 bln yesterday. Japan's Finance
Minister Suzuki warns about the negative impact of a falling yen, foreign exchange
was not a major topic at yesterday's G7 meeting. The head of the IMF's
Asia and Pacific Department weighed in and opined that the yen's decline
reflects economic fundamentals. Moreover, the official (Panth) said that
the decline has been orderly. He also seemed to play down the negative
implications of the yen's weakness, though did note it could impact
households.
The pact between China and
the Solomon Islands was reportedly signed earlier this week and some warn that
Chinese ships and aircraft could arrive next month. The US National Security Council's
Campbell is going to the Islands apparently to express concern. However,
it is a bit like closing the barn door after the horses bolted. The US
closed its embassy there in 1993. Strategically, it could be a coup for
Beijing. China is Australia's biggest trading partner, but Canberra has aligned
with the US. The AUKUS, nuclear submarine deal announced last year seemed to
have successfully checked China. This move does not neutralize AUKUS, but
it does give Beijing a presence it did not have before in an area that has
proved of great strategic value. It could have implications for
Australia's election next month. The polls show a close race.
National security was a key plank in Prime Minister Morrison's platform.
Labour's challenger Albanese, who has not run the most inspired campaign, is
calling it a "massive foreign policy failure."
The dollar is trading within
yesterday's range (~JPY127.45-JPY129.40) against the yen. It held above the five-day moving average
(~JPY127.65) and has not closed below it since April 1. A move above
JPY128.65 may signal a re-test of the highs. The Australian
dollar is consolidating after yesterday's recovery. The initial polls
suggest Labour challenger Albanese took the first debate with Prime Minister
Morrison ahead of next month's election. The $0.7465 area corresponds to
a (38.2%) retracement of the leg lower since the RBA-inspired high on April 5
near $0.7660. The New Zealand dollar was initially sold in response to the lower-than-expected
Q1 CPI (1.8% quarter-over-quarter instead of 2.0%) and fell to almost
$0.6765. It has recovered but is encountering new sales around $0.6800 in
the European morning. The Chinese yuan has fallen by about 0.4%
for the third consecutive session. The greenback traded above
CNY6.45 for the first time since last October. The PBOC set the dollar's
reference rate at CNY6.4098 today, slightly above the median projection
(Bloomberg survey) for CNY6.4097. In our weekend note, we suggest a break
of CNY6.40 could signal a move into the CNY6.50-CNY6.60 area.
Europe
If a consensus has been
formed at the Fed for an "expeditious" move toward neutrality, a
consensus has emerged at the European Central Bank for a hike as early as
July. Several
of the hawks, including German, Dutch, Austria, and Belgium appear to have
staked out the position, but what is new today is that the ECB's Vice
President, who is (nearly) always on message, De Guindos, seemed to endorse it
today. The swaps market has almost a 20 bp move discounted for the July
21 meeting and another 20 bp in September. There appears to be 30 bp
hike priced in for Q4, leaving the year-end rate slightly below 15 bp.
The US 2-year premium over Germany reached nearly 255 bp early this month and
has been consolidating over the past couple of weeks and is around 247 bp
today.
Israel announced a major
shift in it its reserve strategy. This would seem to provide evidence for the meme that has
emerged based on ideas that the sanctions on Russia will encourage a move away
from dollars and the IMF staff paper suggesting that the shift away from the
dollar is toward smaller currencies, not the typical alternatives, like euro,
yen, and sterling. However, the headlines seem misleading. It is
true that the dollar's share of Israel's reserves will be trimmed to 61.5% from
66.5%, which is still above global share, according to the IMF's COFER data as
of the end of last year. However, the bigger move is out of the
euro. Its share will fall to 20% from 30%. Sterling's share will
double to 5%, the same as the yen. The Aussie and Canada will have a 3.5%
allocation each and China will get a 2% share of Israel’s reserves.
The euro's recovery is being
extended into the third session today. It was bid to about $1.0935 in late Asian turnover
but has stalled in the European morning. The intraday momentum indicator
was stretched by the rally and has turned lower. Today's gain met the (38.2%)
retracement objective of the leg down that begun with the key reversal on March
31. That retracement target was near $1.0920, which is also where the
20-day moving average is found. Some euro buying may have been related to
the 2.5 bln euro option at $1.09 that expires today. The snap polls found that
Macron won the debate with Le Pen yesterday. It is the only debate ahead
of this weekend's run-off. Despite the anxiety about the closeness of the
race, Macron's lead has widened in recent days to around nine percentage
points. Sterling closed below $1.30 for the first time since 2020
on Tuesday before recovering to $1.3070 yesterday. It extended
the gains marginally today (~$1.3080) to test the 20-day moving average.
It has not closed above this average here in April. It found some sellers
in early European activity, but the upside may not be done. As long as
the $1.3040 area holds, we suspect it can have another run at
$1.3100.
America
The US 10-year yield fell by
nine basis points yesterday, the most in nearly a month, having been turned
back after nearing 3%. The 30-year yield pushed a little above 3% seemingly triggering
bond buyers who pushed the yield to a new low for the week near 2.86%.
However, the implied yield of the December Fed funds futures contract rose to a
new high of 2.525%. The swaps market sees the terminal Fed funds rate
between 3.0% and 3.25%. Depending on the assumptions, arguably around 3% on the long end may be fairly priced, but the two-year note, yielding around 2.57%
looks rich. We suspect the yield there needs to get closer to 3%. This
assessment seems perfectly consistent with the strong reception at yesterday
$16 bln sale of 20-year bonds. It produced the strongest bid-cover (2.8x)
in its brief (May 2020) modern history. Moreover, indirect bidders took
down a record share of almost 76%. Indirect bidders are often foreign
investors. It lends credence to our view that the strong dollar is not
yet curb on demand for US financial assets. The TIC data, out at the end of
last week, showed foreign demand for US stocks and bonds were a record in the
six-months through February.
The US reports the April
Philadelphia business survey. Recall that at the end of last week, the first of the
regional Fed surveys, the Empire State manufacturing survey was unexpectedly
strong (24.6 vs. -11.8 in March and expectations for a 1.0 reading). The
Philly survey stood at 27.4 in March and the median forecast (Bloomberg) is for
some slippage. Weekly initial jobless claims may draw more
attention than usual as this week's report covers the period in which the
non-farm payrolls survey is conducted. The highlight of the session
though may be Powell (and Lagarde) at an IMF panel around 1:00 pm ET today as
they talk about the global economy. To be sure, the market is fully
pricing in a 50 bp hike by the Fed in both May and June and leans strongly for
a similar move in July.
Canada and Mexico have light
economic calendars today. Canada reported stronger than expected March CPI figures
yesterday (6.7% from 5.7% in February) and the average of the underlying
measures also rose. The swaps market shows a strong leaning toward
another 50 bp hike at the next meeting on June 1. The market sees another 50
bp hike at the September 7 meeting as well.
The Canadian dollar rallied
more than we expected yesterday and there is follow-through buying today. The US dollar slumped to almost
CAD1.2470 yesterday after beginning the session above CAD1.2600 and toying with
the 200-day moving average (~CAD1.2630). The greenback has eased to about
CAD1.2460 today. Immediate resistance is around CAD1.2500, where a $1.2
bln option expires today. The US dollar posted an outside up day on
Tuesday against the Mexican peso and it is consolidating yesterday in a narrow
range around MXN20.00. It is still in a narrow range today, but firm and
looks set to challenge the highs seen earlier this month a little shy of
MXN20.20. Support is now seen near MXN19.95.
Disclaimer
Reviewed by Marc Chandler
on
April 21, 2022
Rating:
