Overview: Yesterday's dollar surge has stalled. It is
consolidating its gains and is softer against all the G10 currencies. After
popping above JPY140 yesterday, there were no follow-through greenback buying
in Tokyo. Most emerging market currencies are also firmer, including the South
African rand, which plummeted by 2.8% yesterday on the back of the central
bank's warning of downside currency risks as it delivered a 50 bp hike. The
Chinese yuan is also firmer to snap a four-day fall.
Reports suggest that the partisan forces in the US are negotiating a two-year debt ceiling/spending deal. This is part of the drama, and a last-minute agreement remains the most likely scenario. Most of the large equity markets in the Asia Pacific advanced, though Hong Kong was closed. Europe's Stoxx 600 is steady to slightly higher. It has fallen for the past three sessions. US equity futures are narrowly mixed. European 10-year bond yields are 1-2 bp softer, including Gilts yields, which had risen by more than 30 bp this week coming into today. The 10-eyar US Treasury yield is off four basis points to about 3.78%. Gold was sold through support at $1950 yesterday and briefly slipped through $1937 today before catching a bid to recovery back to $1957. A move above $1960 would help lift the tone. July WTI is also stabilizing after plummeting nearly 3.4% yesterday. It dipped below $71.00 yesterday and is in almost a dollar range above $71.50 today. It settled near $71.70 last week.
Asia Pacific
Pressure continues to mount on the Bank of Japan to act. Yesterday, the Japanese government revised
higher its economic assessment for the first time in ten months. It was upbeat
consumption, production, and exports. Earlier today, Tokyo's May CPI was reported.
The headline and core (excluding fresh food) rates slowed to a 3.2%
year-over-year pace from 3.5%, which is slightly less than expected. The
underlying rate that excludes fresh food and energy ticked up to 3.9%, a new
cyclical high. The yen has been trending lower and fell to new lows for the
year yesterday before steadying today. The yen has declined for seven of the
past eight weeks. The yield on the 10-year JGB, which approached 0.35% last
week and set a new high for the month earlier todays (0.45%) to draw near the
0.50% cap. At the same time, the 10-year breakeven (the spread between the
inflation-linked security and conventional bond) has shot up from below 60 bp
in the middle of last month to almost 100 bp now. Meanwhile, there is still
speculation that Prime Minister Kishida is considering snap elections to take
advantage of his bump in the polls. A new wrinkle has emerged, though in Tokyo.
The problem arises because of the population shift toward the cities from the
rural areas has led to re-drawing of districts. The junior partner in the
national coalition (Komeito) and the LDP are fighting over which should run new
candidates in the new districts in Tokyo. An agreement remains elusive and
Komeito will not cooperate with the LDP in Tokyo, but the national coalition
remains intact.
Australia's
April retail sales were flat, disappointing expectations for a 0.3% increase. Australian retail sales rose by an average
of 0.6% last year and averaged 0.2% in the three months through April. The
squeeze on Australian households may intensify in the coming months as
mortgages issued during the early days of the pandemic will begin floating. The
highlight next week is the April CPI figures. The newly minted monthly series
has been moderating this year after peaking last December at 8.4%. It was at
6.3% in March and may have slipped below 6% for the first time since April
2022. The central bank meets on June 6 and the market sees little chance of a
hike. However, it is not convinced that the RBA is finished either.
The
dollar kept knocking on JPY140 yesterday until it gave late in the session. Stops appeared to have been
triggered, which may have also been related to the $1 bln of options expiring
there today. The jump in US 10-year yields, above 3.80% for the first time in
two-months helped spur the greenback's gains. Still, there were no further yen
sales in Tokyo today and the dollar is consolidating and found support in early
European turnover near JPY139.50. On the top side, the next important chart
area is around JPY142.50. That said, the dollar's run-up has stretched the
momentum indicators. Also, given the one-way nature of the recent move, words
of warning from Japanese officials are increasingly possible. Our base case is
that US yields are also near the end of their recovery and softer economic data
next week (jobs and auto sales) will help cap both. The Australian
dollar was sold through $0.6550, was the (61.8%) retracement of the dollar from
the multi-year low set in the middle of last October near $0.6170. Follow-through
selling pushed it briefly below $0.6500 earlier today before recovering to
almost $0.6530. There appears to be little chart support ahead of $0.6400.
Momentum indicators are stretched here too. Of course, they can remain oversold
for some time, but it suggests the bulk of the move is over. PBOC
officials cautioned banks about the exchange rate movement at the end of last
week. Still, the yuan fell in the first four sessions this week and
extended its losses into today before recovering. The dollar reached almost
CNY7.08 before reversing and falling to nearly CNY7.0450. State-owned banks
reportedly were the featured dollar sellers in the offshore market and when
they pulled back, the greenback recovered toward CNY7.0650. The dollar's weekly
gain of around 0.75% matches the gains seen in each of the past two weeks. It
is the sixth weekly advance in the past seven weeks. The PBOC set the dollar's
reference rate at CNY7.0760 (CNY7.0756 median projection in Bloomberg's
survey). The dollar has entered our target band of CNY7.07-CNY7.11.
Europe
UK retail sales improved in May after falling a revised
1.2% in March (initially -0.9%). The 0.5% gain in May was a little better than expected.
Excluding gasoline, retail sales rose by 0.8%. The UK reports its retail sales
in volume terms. Investors are still reeling from the stronger than expected
April inflation report. The 10-year Gilt yield may snap a seven-day increase
today. During this run, the 10-year yield has by about 50 bp. The swaps market
sees the year-end policy rate a little over 5.50%. It is a little softer today
after rising consistently for the past seven sessions.
The
eurozone highlight next week is the preliminary May CPI. The base effect suggests the pace will
likely slow from April's 7.0% year-over-year rate. Last May (and June) eurozone
CPI rose by 0.8% month-over-month. These will drop out of the 12-month
comparison. Consumer prices are expected to have risen by 0.3% this month. This
would see the year-over-year rate slow to around 6.4%, which would be the
lowest since February 2022. The core rate is stickier. It slowed in April (to
5.6% from the cyclical high of 5.7% in March). It was the first decline since
last June. A small decline in May is expected, which would be the first
back-to-back slowing of the core rate since June-July 2021. The ECB meets on
June 15 and the market is highly confident of a quarter point hike (to 3.50%)
and sees the terminal rate closer to 3.75%.
A
convincing break of $1.07 could spur a euro move toward March low near $1.0515. The year’s low was set on January 6 close
to $1.0485. It has already come off almost four cents from its high and the
downside risk may be another two cents. Momentum indicators are stretched, and
the euro has settled near session lows in recent days. At this point, it may
take a close back above $1.08 lift the tone. The euro has been confined to a
narrow range of about a quarter-of-a-cent below $1.0745. There are some large
month-end options expires at $1.0675 and $1.0750. Two-and-a-half weeks
ago, sterling was approaching $1.2700, its best level since last June. The
outside down day on Wednesday from a high near $1.2470 took it to about
$1.2360, and yesterday's follow-through selling brough it to almost $1.2300.
The break of our $1.2345 target opens the door to around $1.2240. If that is
violated, it could spur another cent move. As one might expect with nine losses
in the past 11 sessions coming into today, the momentum indicators are
oversold. Sterling held yesterday's low so far today but may stall in front of
$1.2380.
America
The US debt ceiling morass continues and Fitch's threat
to downgrade its credit rate had little impact. There are reports today suggesting a
two-year deal may be in the works. US yields through the curve are softer
today. The dollar extended its three-week rally that carried it to new
highs for the year against the yen, yuan, and the Australian and New Zealand
dollars yesterday. It reached its best level against the euro in two months and
US markets are closed on Monday and its best level against sterling since early
April. The Dollar Index rose above 104.00 for the first time since St.
Patrick's Day, surpassing the (61.8%) retracement of the bank-stress induced
slide that saw it fray the 101.00 area.
The
market's outlook for the June 14 FOMC meeting is fluid. The odds of a hike were more than halved
to less than 20% after Fed Chair Powell spoke at the end of last week. The odds
gradually rebuild this week and is back around 40% chance of a quarter-point
hike. When the bank stress peaked in mid-March, the implied policy rate at the
end of Q3 briefly fell by 4%. By the end of last week, it was a little above
5.0% and it reached 5.30% yesterday before easing back to around 5.22%. In
addition, the Fed funds futures imply year-end effective Fed funds rate of about
4.90%. Coming into today, it has risen in 13 of the past 15 sessions. It began
the advance with an implied yield of 4.11% on May 4. We suspect the interest
rate adjustment is nearly over, and weaker jobs growth and auto sales due next
week may persuade others.
A
bevy of US data will be released today. Personal income is expected to have increased by 0.4% in
April, matching the Q1 average. Personal consumption expenditures were flat in
March after the 2% surge in January and a 0.1% gain in February. The median
forecast in Bloomberg's survey projects a 0.5% increase. The Fed targets the
headline deflator at 2% on average. A 0.3% increased that is expected
translates into a nearly 4% annualized pace through the first four months of
the year. (vs. ~3.3% in the previous four months. The year-over-year rate is
expected to edge up to 4.3% from 4.2%. The core deflator may have held steady
at 4.6% year-over-year. The advanced estimate of goods deficit in April is
expected to have edged slightly higher to near $86 bln from $84.6 bln in March.
It was around $106.3 bln in April 2022 and $86.3 bln in April 2021. A drop in
Boeing orders in April (from 60 in March to 34 in April) can be expected to
weigh on durable goods orders. Still, when defense and aircraft (and parts) are
excluded, durable goods orders are expected to have fallen for the third
consecutive month. A bright spot could be that core durable goods shipments may
have risen for the first time since January. The final University of Michigan
survey is also due. Market participants pay more attention to the inflation
expectations than to the consumer confidence. Recall that the preliminary
results showed the 5-10-year inflation expected rose to 3.2% (from 3.0%), which
represented a new cyclical high. Note that the Atlanta Fed's GDP tracker will
be updated after the data dump. The last iteration saw the US economy tracking
about 2.9% annualized growth in Q2. This may be the best it gets for the next
several quarters.
The
US dollar reached CAD1.3655 earlier today, its best level this month but a
little below the high seen at the end of April (~CAD1.3670). There are options for about $360 mln that
expire today at CAD1.3665. The greenback retreated to around CAD1.3615 in the
European morning. Support is seen in the CAD1.3580-CAD1.3600 area. The US
dollar is trading within yesterday's range against the Mexican peso
(~MXN17.7530-MXN17.8790). It has found a base over the last couple of
sessions near MXN17.75. It may take a break of this week's low (~MXN17.7250) to
boost confidence that the shake-out is over. The greenback closed near
MXN17.7860 last week.
Reviewed by Marc Chandler
on
May 26, 2023
Rating:
