Overview: The back-to-back surprise rate hikes by
the Australia and Canada spurred speculation that the Fed could hike next week,
and this lifted US rates and helped the dollar recover. The odds of a hike
increased, according to the indicative pricing in the Fed funds futures market
from about a 20% chance to a little above 35%. now. At yesterday's high, the
two-year yield was up a little more than 25 bp since the low before the US
employment data last Friday. It is little changed today near 4.55%. Still, the
greenback is softer against all the G10 currencies, but is mostly consolidating
in narrow ranges. Emerging market currencies are more mixed. Of note the
Chinese yuan is snapping a four-day fall, and after plummeting 7% yesterday,
the Turkish lira steadied, but is off about 0.6%.
While most large equity markets
in the Asia Pacific region fell today, Hong Kong and China's CSI 300 rose. The
Stoxx 600 in Europe has drifted a little lower. If sustained, it would be the
third loss this week. US equity futures are steady to slightly firmer.
Benchmark 10-year yield are mixed in Europe. Peripheral yields are 1-3 bp lower
while the core is flattish. UK Gilts and Swedish bonds are under more pressure
and yields are 3-4 bp higher. The softer US dollar is helping gold stabilize
after recording a bearish outside down day yesterday. It closed on its lows
near $1940 but has not taken it out, and it is held slightly below $1950. July
WTI reached $75 on Monday following the Saudi's unilateral cut of an additional
1 mln barrels a day in output (starting next month). However, it fell back to
$70 on Tuesday and is in near the middle of that $5-range today.
Asia Pacific
Japan revised Q1 GDP to 2.7%
annualized from 1.6%. The
revision was driven by stronger business spending (1.4% vs. 0.9% initially),
which was signaled by the stronger than expected capital spending (11%
year-over-year vs median forecast in Bloomberg's survey for 6.0%). The other
notable revision was with inventory accumulation. They boosted GDP by 0.4%
percentage points rather than 0.1%. Nevertheless, a poll by Bloomberg found
only 3 of 47 economists now expect a tightening move next week, down from 18 in
last month's survey. Now, a little more than a third of the respondents see
July as the more likely timeframe. A fifth look for a change after the summer,
up from 10% in the previous survey. Meanwhile, foreign investors continue their
buying spree of Japanese equities for the 10th consecutive week. Japanese
investor sales of foreign bonds last year were thought to be strategic, but it
looks increasing tactical. Last year, they sold about JPY21.7 trillion (~$165
bln). In the first 22 weeks of the year, Japanese investors have bought about
JPY12.1 trillion back.
The decline in China's May
exports and imports underscored concern about the world's second-largest
economy. After banks cut
deposit rates at the request of Beijing, the market was already primed for a
likely cut next week in the benchmark 1-year medium-term lending facility
(2.75%). Tomorrow's inflation data will likely confirm what we already know. Consumer
inflation is amazingly low (0.1% year-over-year in April) and producer price
deflation (-3.6% in April). May will be the eighth consecutive month of
negative year-over-year PPI. China's discount to the US on 10-year yields
widened to almost 108 bp yesterday. The low for the year was set in early April
near 114 bp. Last year, it reached almost 153 bp, the most since 2007.
Australia reported a 5% fall
in exports in April, the largest monthly fall since last July. Imports rose
1.6%, half of the March pace. The net result was a smaller than expected trade surplus of
A$11.16 bln. Last April, Australia recorded a trade surplus of A$12.95 bln.
Still, the trade surplus has grown this year, from A$41.7 bln in the first four
months of 2022 to A$51.1 bln this year. Of note, Australian exports of iron ore
and other metals fell in April (-10.4%). Canberra's trade relationship with
China, its biggest partner has improved and exports to China are up about 13.6%
in the January-April period. Inbound tourism, which has also been an important
component of Japanese consumption, rose by nearly 14% in April (travel
exports).
The 12 bp increase in the US
10-year yield yesterday helped the dollar post an outside up day against the
yen. After trading below
Tuesday's low, the dollar reversed and closed above its high. It held below
Monday's high (~JPY140.45). Yet, despite the bullish price action, there has
been no follow-through dollar buying. The greenback is trading quietly in a
roughly JPY139.65-JPY140.25 range. Watch US 10-year yields for the direction
cue in the North American session today. It is nearly flat just below
3.80%. The Australian dollar was sold yesterday after popping above
$0.7000 but reversed lower. Here, too, there has been no
follow-through US dollar buying, and the Aussie is consolidating in the
$0.6650-$0.6690 range. Options for nearly A$710 mln expire today at $0.6950. A
close above $0.7000 lifts the technical tone. We had thought the
CNY7.07-CNY7.11 was a reasonable target, but it has surpassed it. The next
nearby chart of note is around CNY7.16-CNY7.20. Recall that last year's high
(November 4) was near CNY7.3120. The dollar is snapping a four-day advance
today. Since May 5, it is only the fifth losing session. And even it is minimal.
The dollar settled near CNY7.1350 yesterday and held CNY7.1260 today. The
reference rate was set at CNY7.1280 today, a smidgeon below the CNY7.1282
median forecast in Bloomberg's survey.
Europe
The downward revision
in the eurozone's Q1 GDP to -0.1% from +0.1% doses not really change anything. The ECB meets next week and there is
little doubt in the market's mind about the outcome. A quarter-point hike will
bring the deposit rate to 3.25%. The swaps market fully prices in another hike
in Q3. The ECB will update its forecasts next week too. In March, it had
forecast this year's growth at 1.0% year-over-year. The median in Bloomberg's
survey is 0.6%. The World Bank is even more pessimistic with a forecast of
0.4%. The IMF and OECD are closer to the ECB at 0.8% and 0.9%, respectively.
The ECB published the
results of its April survey of consumer expectations yesterday. The 12-month outlook fell to 4.1%
from 5.0% in March. The three-year expectation eased to 2.5% from 2.9%. The
ECB's March forecasts had CPI rising 5.3% this year and 2.9% next year. The
median forecast in Bloomberg's survey is for CPI to be at 5.6% at the end of this
year and 2.5% at the end of 2024.
So far this week the euro
has chopped inside the range set last Thursday, before the US jobs report
(~$1.0660-$1.0770). More
pointedly, the euro has held below $1.0740, which was about the (38.2%)
retracement of the rally from the March 15 low near $1.0515. Although it enjoys
a firmer today, it is inside yesterday's range. There is greater uncertainty
around the Fed meeting and than the ECB meeting next week. There may be little
incentive ahead of the FOMC meeting (and CPI) for speculators to make a big
push in either direction. We note that after rising from below 120 bp in early
May to around 170 bp earlier this week, the US premium over Germany on two-year
money appears to be stabilizing. Except for spending Monday morning on its
back foot in Europe, sterling too is mostly consolidating within the range set
last Thursday (~$1.2400-$1.2540). It is enjoying a firmer bias today,
has held below yesterday's high near $1.25. Also, sterling's five- and 20-day
moving averages crossed higher for the for the first time in three weeks. Still,
unless it can rise above the $1.2500-40 area, sterling may be vulnerable.
Sterling has fared better than the euro, which had fallen from GBP0.8835 in
early May to about GBP0.8565 last week, the low for the year. It is straddling
the GBP0.8600 area today.
America
Today's US data, which
includes weekly jobless claims and wholesale inventories, are unlikely to have
much impact. The US
also sees the Q1 household net worth report. It does not move the market, but
it is important. Last year was the first year since 2008 that household net
worth did not increase. On the other hand, over the past five years (20
quarters), US household net worth has risen by $44.2 trillion. Over the last
ten years (40 quarters), it has risen by $75.8 trillion.
The market pushed the dollar
to a new seven-year low against the high-flying Mexican peso ahead today's CPI
report. Mexico reports
CPI for the second half of May as well as for the whole month. The headline
rate is expected to fall below 6% for the first time in nearly two years. In
the first four months of the year, Mexico's CPI has risen at an annualized rate
of almost 4.5%. The core rate is running nearly twice as hot. The central bank
is done raising rates and the swaps market is pricing in a cut before the end
of the year.
The Bank of Canada's hike
saw a quick drop in the greenback from around CAD1.3400 to CAD1.3320. Its lowest level in a month and the
US dollar has not traded below CAD1.33 since mid-February. However, the heavier
tone in S&P 500 and broadly firmer US dollar saw it recover to almost
CAD1.3400. Both ends of the recent range (~CAD1.33-CAD1.3650) have recently
been tested and they held. Prudence dictates that we assume the range holds
until proven otherwise and that means opportunities exist as the range extreme
is approached. The US dollar recorded today's low so far in the European
morning near CAD1.3335. Initial resistance is seen in the CAD1.3360-80
area. The greenback was sold to nearly MXN17.3055 yesterday and
recovered to settle around MXN17.3650. It has not been above MXN17.37
today. Although the exchange rate is at levels not seen since 2016, as the
dollar has fallen, volatility has eased. One-month implied vol is near 9.7% now
and is approaching the low for the year set in early February closer to 9.3%,
which matches the 2022 low. The relatively low volatility is an important
consideration for carry-trade strategies. By comparison, one-month BRL vol is
almost 13% and around 15.2% for the COP.
Reviewed by Marc Chandler
on
June 08, 2023
Rating:
