Overview: The US dollar has come back bid today. It
is rising by 0.25%-0.50% against all the G10 currencies. The Canadian dollar is
the most resilient today, which is often the case when the greenback is firm. The
Australian dollar is off the most after reaching its strongest level since late
February yesterday. Sterling is a middling performer today ahead of the
anticipated Bank of England rate hike. The dollar is also firmer against most
emerging market currencies, with central European currencies down the most,
dragged lower by the euro, which fell slightly through $1.1920 to reach its
lowest level since April 19.
Equities struggled in the Asia
Pacific region but are firm in Europe, where the Stoxx 600 is up about 0.5% as
it tries to snap a two-day decline. US futures are also trading higher. Benchmark
10-year yields in the Europe and the US are a little softer. The 10-year Gilt
yield is off a little more than two basis points to 3.77%. That still leaves
the yield up a dozen basis points. The 10-year US Treasury yield is off
slightly to 3.43%, which is about five basis points higher over the past week. A
firmer dollar and softer rates are taking the shine off gold today. It is
holding above a three-day low near $2020. June WTI also continues to consolidate
in a $71-$74 range. The consolidation looks constructive from the technical
perspective. An upside break could target $76-$78.
Asia Pacific
China reported April
consumer and producer prices today. The trends remain intact. Consumer inflation slowed to 0.1%
year-over-year from 0.7% in March. The median forecast in Bloomberg was for a
0.3% pace. It is the lowest since February 2021. A year ago, it stood at 2.1%.
Most observers seem to attribute the low inflation to weak demand, but this
seems too simple by far. First, the soft food prices (0.4% year-over-year),
which play an important role, are not about demand. Second, it is also a
function of excess capacity, which is a form of surplus savings, which seems
often overlooked for the sake of portfolio and direct investment. The excess
capacity in autos, for example, encourages exports, and is leading to price
competition at home. Producer prices have been falling, not just rising slowly,
for seven consecutive months through April. They fell by 3.6% year-over-year, a
larger decline than expected and the weakest since May 2020. Was it so long ago
that some bank economists argued that China's producer prices fed into US
consumer prices? Falling producer prices is also partly a symptom of excess
capacity, but they also translate into pressure some sectors' income and
profits. Separately, China also reported a steeper slowing of lending. Aggregate
lending slowed to CNY1.22 trillion in April, well below the CNY2 trillion
expected. The combination of weaker price pressures and slower lending boosts
speculation that officials will ease policy before midyear.
Japan's current account
recorded a nearly JPY2.3 trillion surplus in March, a little smaller than
expected. In March
2022, the surplus was JPY3.24 trillion. In March 2019, before Covid, the
current account surplus was near JPY2.84 trillion. Japan's surplus is not
driven by its trade account. In balance-of-payment terms, it recorded a JPY455
bln trade deficit. In fact, it has been running a trade deficit without
disruption since November 2021. Forty years ago, Japan was the large Asian
country that American policymakers and economists argued was the cause of the
US trade deficits. Some of the arguments have changed, but substitute China for
Japan, add the ideological dogma, and the same general story is told.
Fast-forward, and one can imagine Chinese and foreign companies shift some
production out of China. Its trade surplus falls, while the US deficit remains
and possibly grows.
Some tried linking
yesterday's sharp dollar losses against the yen to reports that a couple of
Japanese lifer insurance companies were selling US Treasuries. Yet the foreign exchange impact
should be minimal as it was clear in the report that they were selling bonds
that were hedged. The investment plans of the sector were largely known in
March and April. Instead, the sharp decline in US rates after the CPI report
offers a more robust explanation, it also aligns with the action better. The
dollar's drop began around the CPI and the lifer insurer story broke (Nikkei's
tweet) almost two hours later. The dollar made a marginal new four-day high
yesterday near JPY135.50 before selling off. It reached almost JPY134.10 in the
North American afternoon, around the same time US 10-year yields bottomed,
about 10 bp off the high. It recovered from a five-day low slightly below
JPY134.00 to reached JPY134.85 in the European morning. Options for $1.23 bln
at JPY135 expire tomorrow. The Australian dollar rose to almost $0.6820
yesterday, the highest since late February, but was again unable to settle
above $0.6800. It has been sold back to around $0.6720 today, (200-day
moving average is ~$0.6625). Nearby support is seen near $0.6700 and then
$0.6670. The greenback rose to new two-month highs against the Chinese yuan
today near CNY6.9420. It is the fourth consecutive advance, which follows a
five-sessions decline. The PBOC set the dollar's references rate at CNY6.9101
compared with expectations near CNY6.9120. Lastly, note that the Hong Kong dollar
rose to seven-week highs before succumbing to the US dollar's strength. A rise
in Hong Kong's interbank rate to the highest in more 15 years renewed the
attractiveness of the HKD.
Europe
The Bank of England is
center stage today. The
swaps market is nearly as confident of a 25 bp hike as it can be, and it has a
better than an 80% chance of another hike at the June 22 meeting. The two hikes
would bring the base rate to 4.75%. What happens after June is less clear. The
market leans toward a final hike to 5.0%, but it is only about half discounted.
The BOE may revise away or at least soften its recession talk. Stagnation may
be a more apt description. Consider the quarterly GDP reads for the last three
quarters: Q2 22 0.1%, Q3, -0.1%, and Q4 0.1%. Tomorrow is the first
estimate of Q1 23 GDP, and yes, it looks to be around 0.1%. It seems ironic
that it appears that it was government spending that helped the UK economy to
avoid a contraction in Q1, especially given last September's turmoil during
Truss's brief stay at 10 Downing Street. The monthly GDP data showed a
better-than-expected 0.4% expansion in January (after a 0.5% contraction in
December 2022) and flat February. March's figure will also be reported
tomorrow, and it may have been flat too.
Sterling's grind higher has
been impressive. Yesterday,
it rose through last May's high, near $1.2680. It is approaching the $1.2760
target, the (61.8%) retracement of sterling's slide the $1.4250 area seen in
June 2021 to the record low in last September near $1.0350. In the following
quarter, it recovered to almost $1.2450 but did not rise above there until
April. The next important chart area is around $1.30. It has been knocking on
the upper Bollinger Band for the past couple of weeks, which is found now around
$1.2670. Other momentum indicators are also getting stretched. In the 11 weeks
since the end of February, sterling has risen in nine. It has been sold to
about $1.2565 today in the run-up to the BOE meeting. Sterling also looks
overplayed against the euro as well after highs for the year yesterday. A
convincing break of $1.2550 could signal a test on the $1.2475-$1.2500 area in
the coming days. The euro's technical tone has weakened, with two closes below
the 20-day moving average and the five-day moving average falling below the
20-day moving average. The euro held support near $1.0940 yesterday but has
been pushed slightly below $1.0920 today. It has not been at these levels since
April 19. The next area of technical support is in the $1.00875-$1.0900 area.
America
The US April CPI was in line
with expectations and the dollar was sold. In the absence of an upside surprise, many
participants feel more confident about a Fed pause in June (and finished with
the tightening cycle that began in March 2022). The headline rate rose by 0.4%
for a year-over-year rate of 4.9%, which is down from 5% in March. The core
rate also rose by 0.4%, but its 12-month rate is a bit stickier at 5.5% (down
from 5.6% in March). The measure that Fed Chair Powell frequently cites, core
services excluding housing rose by 0.1% for a 5.1% year-over-year pace, the
slowest since last July. Looking ahead to the May and June reports, there is
good reason to expect the headline pace to fall toward 3.5% by the end of the
first half. Recall that in May and June 2022, CPI rose by 0.9% and 1.2%
respectively. Assume for the sake of the argument that the monthly rate
averages 0.4% in both months, then the year-over-year rate could fall by 1.3
percentage points. However, there are two caveats. First, the base effect for
the second half of the year is considerably less favorable. This means that the
slowing of inflation may stall. Second, the annualized pace of CPI will still
disturb many Fed officials. The headline rate has risen at a 5.2% annualized
rate (core rate equivalent is 5.1%) through April.
Today's producer price
report typically has less impact than CPI even though some components are
inputs into the PCE deflator. PPI peaked last March at the same time that the Fed began to hike
(~11.7%). It is seen slipping to 2.5% from 2.7%. last month. In April 2019, it
was at 2.4%. Producer inflation sure looks temporary. Weekly initial jobless
claims may get passing notice, but after last week's monthly employment report,
it is unlikely to add substantively to the information set. The four-week
moving average stood near 239k in the last week of April. It has been hovering
around 240k for the last several weeks. At the end of 2019, the four-week
moving average was about 235k. Fed President Kashkari and Governor Waller speak
this morning. Both are seen among the most hawkish voices at the Fed now.
The US dollar has found a
base in the CAD1.3300-35 area. It has pushed a little above yesterday's CAD1.3415 high. A
move above the CAD1.3435 area would re-target CAD1.3500. The Canadian dollar
typically does better on the crosses in a firm US dollar environment. The
greenback finished last week near CAD1.3375. Meanwhile, the irrepressible
Mexican peso edged to a new six-year high, with the greenback slipping to
around MXN17.5350. It has caught a bid to approached MXN17.60 in the
European morning. It is in obvious technical need to consolidate, and a move
back toward MXN17.75 would be constructive. The low from 2017 is near MXN17.45.
Next week, the central bank meets, and the softening of inflation and the
strength of the peso may encourage a pause (end) to the tightening cycle that
has lifted the overnight target rate to 11.25%, with headline CPI at 6.25%.
Reviewed by Marc Chandler
on
May 11, 2023
Rating:
