Yen Dumps before It Jumps

Overview:  The FOMC meeting, the US employment report, and eurozone CPI were to be the highlights of the week, but the Japanese yen stole the march to start the week. The dollar soared to almost JPY160.20 before falling sharply to JPY154.55 and then rebounding to almost JPY156.00. Intervention has not been confirmed and BOJ data will not cover it until next month. On balance, it appears that most think it was algo-trading in thin markets given the Japanese holiday. The dollar weakened against the other major currencies, and although it is still lower on the day, the downside momentum may have stalled. Emerging market currencies are more mixed. Turkey, South Africa, Hungary, and Mexico are leading, while Russia, Czech, and Indonesia are laggards.

Equities are off to a strong start. The MSCI Asia Pacific Index rally almost 3% last week, its best performance this year. China's CSI 300, Taiwan, South Korea, Indonesia, the Philippines, and India's Sensex rose by more than 1% today. Europe's Stoxx 600 snapped a three-week loss to rise by about 1.75% last week, the largest weekly gain since the end of January. US index futures are trading with a firmer bias today. Bond markets have rallied. European 10-year benchmark yields are mostly 4-5 bp lower, though UK Gilts are underperforming. The 10-year US Treasury yield is off about four basis points to slightly below 4.63%. The two-year yield is about two basis points softer, hovering below 4.98%. The US Treasury refunding announcement is Wednesday. Gold is up for the third consecutive session, but last week, it fell by 2.25%, its first week weekly loss in six weeks. June WTI rallied 2% last week. It reached nearly $84.50 before the weekend and fell to slightly through $83 today before stabilizing.

Asia Pacific

After reporting the April PMIs and Caixin manufacturing PMI on Tuesday, China moves to the sidelines and the mainland markets will be closed Wednesday through Friday. The bulk of Japan's data this week will also be reported tomorrow: employment, retail sales, and industrial production. Of the three, industrial output has been a key drag after the earthquake on January 1. After plummeting 6.7% in January, industrial production fell another 0.6% in February. The PMI warned that output may have slipped further in March. Last week's report of Tokyo's April CPI and BOJ Governor Ueda's comments following the central bank meeting seemed to show a fairly relaxed attitude toward the yen's weakness. There were three byelections in Japan yesterday, and the LDP lost all three (competed only for one). Australia reports retail sales tomorrow. Sales were off to a strong start in Q1, rising 1.1% in January and edged 0.3% higher in February. The futures market, which had two cuts and almost a 70% chance of a third cut this year in early Feb, is now not quite pricing one cut. Note that Japanese markets are closed today, Friday and next Monday. 

The dollar reached almost JPY158.45 ahead of the weekend. The BOJ did not seem as anxious about the yen's weakness as some Ministry of Finance officials. It is their intervention call, and their reveal preference is that they are not prepared to intervene quite yet. The dollar jumped to almost JPY160.20 in early Asia Pacific turnover. It steadied and after a couple of hours fell sharply in the second part of the session, and the dollar saw JPY154.55 before finding bids in the European morning. It is trading near JPY156. Volumes picked up, but it is not clear if there was material intervention, and Japanese officials refused to comment. Many participants had placed dollar bids lower to take advantage of possible intervention. The negative consequences of a weak yen seem contained and US protectionists are quiet (focusing on China for the most part instead). The Australian dollar stalled near $0.6555 before the weekend. It recorded higher lows every day last week. Friday's low was a little below $0.6520, and it has held today. The Aussie reached briefly traded above $0.6585. It is near the middle of its range in late morning turnover in Europe. Nearby resistance is seen near $0.6600 and then $0.6645, this month's high. The PBOC set the dollar's reference rate at CNY7.1066 (CNY7.1058 on Friday). The average in Bloomberg's survey was CNY7.2557 (CNY7.2460 on Friday). The dollar has been consolidating sideways against the offshore yuan after reaching about CNH7.2830 on April 16.

Europe

Tomorrow, the eurozone publishes its first estimate of Q1 GDP and April CPI. The eurozone economic activity contracted slightly the last two quarters of 2023. It appears to be off to a better start in 2024 and a 0.2% expansion would not surprise. The composite PMI rose from 47.6 at the end of last year to 50.3 in March (and 51.4 flash reading for April). Higher oil prices and a weaker euro warn of the CPI may not have moderated much from the 2.4% year-over-year pace seen in March. The core rate may have slipped from 2.9%. German states and Spain have reported their figures. On a harmonized basis, Germany's CPI may tick up to 2.4% from 2.3%, while Spain's firmed to 3.4% from 3.3%, as the government rolled back some energy subsidies. The core rate eased to 2.9% from 3.3%. Still, nearly everything is pointing to a June rate cut. The UK's economic calendar is light of market-moving data, featuring consumer credit and lending figures, alongside money supply. Politics are in focus with the local and mayoral elections on Thursday. There is some speculation that a sufficient drubbing for the Tories could see a leadership challenge but it not clear who wants the seemingly poisoned chalice. 

The euro reached almost $1.0755 before turning lower ahead of the weekend, the highest level in slightly more than two weeks. It was sold through the previous session's low (~$1.0680) but settled back within Thursday's range, neutralizing some of the negativity. It is trading inside the pre-weekend range today (~$1.0687-$1.0735). Still, a push below $1.0660 would likely confirm that the two-week correction has run its course. Initially this would target $1.06. We suspect that only a disappointing US jobs report at the end of the week would prevent such a test. Sterling also traded on both sides of Thursday's range before the weekend and the settlement was also within the range. Sterling edged slightly higher to approached $1.2550 today in Asia Pacific session, slightly shy of the 200-day moving average (~$1.2555). The momentum stalled and after approaching $1.2500 in the European morning, sterling rebounded to almost $1.2535.

America

There are two dominant US events this week, the conclusion of the FOMC meeting on Wednesday and the April employment report on Friday. Fed Chair Powell can be expected to suggest that the confidence needed to cut rates has not materialized, and indeed has been shaken by the stickiness of prices and the resilience of demand. While Powell's predecessors, Bernanke, and Yellen, often seemed to play down the significance of the Summary of Economic Projections (the dot plot), Powell has raised the importance as a communication tool. Still, he is likely to repeat his previous warning that they are simply a snapshot of views based the current information set and can become dated during between the quarterly updates. Meanwhile, the Fed will likely announce a tapering of its balance sheet reduction efforts, with the pace of the unwind slowing to around half of its current pace. The unexpectedly poor employment component of the April services PMI (47.3 vs. 51.5) is a cautionary sign for the momentum at the start of Q2 after robust Q1 activity. That coupled with the softer than expected Q1 GDP are two data points and a disappointing jobs report may qualify as a pattern. Canada reports February monthly GDP tomorrow and the disappointing retail sales reported last week (-0.1% headline vs. +0.1% expected, and the 0.3% decline in the ex-auto measure) warns that after a 0.6% expansion in January, the pace of activity likely slowed. Mexico reports Q1 24 GDP tomorrow. The economy eked out 0.1% growth in Q4 23 and the median forecast in Bloomberg's survey looks for it to be matched in Q1 24. If so, the year-over-year rate will edge lower (2.3% vs. 2.5%).

The US dollar fell to its lowest level against the Canadian dollar (~CAD1.3635) since April 10 ahead of the weekend. The day before its settled below the 20-day moving average for the first time since April 3. Although it recovered to almost CAD1.3700, last week's 0.6% decline in the greenback was the largest weekly loss of the year. Follow-through selling today has been limited to almost CAD1.3630. Still, the five-day moving average has fallen below the 20-day moving average for the first time since mid-March today. That said, the downside momentum stalled, and nearby resistance is seen in the CAD1.3680-CAD1.3700 area. Trading in the Mexican peso has remained choppy since the flash crash on April 19. The market's confidence is shot. The greenback rose by almost 0.2% against the peso last week. It was the third weekly advance, the longest streak since last September-October. Support is seen near MXN16.90. The carry remains attractive, but the volatility is elevated, and it will take more time for it to settle down. One-month implied volatility is near 11.9%. It began this month below 7.5%. Last week's low and the 200-day moving average of the one-month vol is near 11%.

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