Overview: The US dollar is mixed, but the
spotlight is on the Japanese yen. It appears that with the market challenging
Monday's intervention, Japanese officials entered the market shortly after the
US equity market closed yesterday, as the Asia Pacific session got underway and
sold dollars again. Initial estimates suggest the intervention amount was
two-thirds of Monday's. The timing caught the markets wrongfooted. Tokyo
markets are closed Friday and Monday, but yesterday's operation will likely
make the market cautious about challenging Japanese officials without good
cause. Most emerging market currencies are firm, but central European
currencies are softer. The offshore yuan is trading stronger than the onshore
yuan for the first time this year. Mainland markets re-open Monday.
Japanese equities were little changed
while the Hang Seng led the region with a 2.5% rally, matched by the mainland
companies that trade in HK. Australia, New Zealand, and India saw small gains,
while South Korea and Taiwan shares slipped. Europe's Stoxx 600 is off for the
third consecutive session, which, if sustained would match the longest losing
streak of the year. US equity indices are trading stronger. European 10-year
bond yields are 3-5 bp lower and the 10-year US Treasury yield is near 4.61%.
The high for the year was set last week near 4.74%. Gold rebounded yesterday
from nearly one-month lows (~$2281) but stalled around $2329. It is trading
heavier today but in yesterday's range. June WTI broke down yesterday, falling
to almost $78.80, its lowest level since mid-March. It has steadied today but
so far has been unable to resurface above $80.
Asia Pacific
The market is digesting the meaning of
what looks to have been another round of BOJ sales yesterday shortly after the
US equity markets closed. The
dollar was trading near JPY157.50, not far from the session high around JPY158,
which as we noted was the (61.8%) of Monday's intervention-inspired losses.
Japan has a large war chest in the form of reserves, and a range of other
tactics than can be deployed, such as giving orders on an "all or
none" basis, which allows the banks to act as a force multiplier.
Although Japanese officials retain the strategic ambiguity and refused to
confirm or deny intervention, changes in the BOJ's current account balances
relative to expectations suggest that the intervention Wednesday
afternoon/Thursday morning may have been for about JPY3.5 trillion (JPY5.5
trillion Monday), or around $22 bln. The macro considerations have not changed,
but some market segments, like momentum traders and trend followers, may be
hesitant to challenge Japanese officials without fundamental cover. That
underscores the importance of tomorrow's US employment report. Strong jobs
growth may be dollar positive, while a disappointing report will make the MOF
look savvy.
Earlier this week, Australia reported
domestic consumption may have slowed in March, as retail sales fell by an
unexpected 0.4% (the median forecast in Bloomberg's survey was for a 0.2%
gain). Today, it
reported a smaller than expected trade surplus of A$5.0 bln (A$7.3 bln
expected). Exports rose by 0.1% in March, after the February drop was revised
to -3.2% from -2.2%. Imports rose 4.4% in February (4.8% originally) and 4.2%
in March. Overall, Australia reported a goods surplus in Q1 surplus around
$21.6 bln. That around 45% lower than the Q1 23 surplus of about A$38.6 bln. The
central bank meets on May 7 and is widely expected to stand pat.
The dollar stalled near JPY158, the
(61.8%) retracement of the likely intervention-induced losses. It fell to session lows amid a broader
pullback after the FOMC meeting. US 10-year yields fell on news of a
larger-than-expected tapering of the balance sheet run-off. It fell to near
JPY157. After the US equity market closed, the greenback tumbled to JPY153,
which was more than a yen below the Monday's post-intervention low. It
rebounded to nearly JPY156.30 and has steadily eased back to JPY155 in the
European morning where it appears to be finding new bids. The
Australian dollar rallied to $0.6540 yesterday, which met the (61.8%)
retracement of this week's decline. It has approached $0.6550
today. Above there, resistance may be around $0.6570-80. Initial support
is probably around $0.6500 and a break of $0.6480 would be disappointing. The
greenback fell to its lowest level against the offshore yuan in a little more
than a month (~CNH7.2165). Yesterday, it settled below its 200-day
moving average for the first time since March 21. Today, the offshore yuan
is trading stronger than the onshore yuan, for the first time this year. The
onshore market is closed, and the move reflects the dollar's pullback.
Europe
The eurozone flash April manufacturing PMI
was 45.6. and the final reading today is 45.7. It bottomed last July near 42.7. After
rising for three months through January (to 46.6) is has softened for the past
three months. Still, it appears to overstate the case. Consider that Germany's
manufacturing PMI finished last year at 43.3. It was at 42.5 in February, and
41.9 in March, even though industrial output (which includes construction) rose
by 1.3% in January and 2.1% in February. The March report is due next week. The
French manufacturing PMI remains well below 50 and industrial output rose by 0.2%
in February, and tomorrow's March series is expected to show a 0.3% increase.
Italy's manufacturing PMI rose above 50 in March for the first time since March
2023, but fell to 47.3 in April. Industrial output rose by 0.1% in February and
the March report, due May 10, is expected to be flat. Spain's manufacturing PMI
rose to 51.5 in February, its best level since June 2022. It was little changed
in March and rose to 52.2 in April. Industrial production is off to strong
start this year. The increase in January-February (~1.3%) is the best two-month
performance since April-May 2022.
The combination of the reassessment of the
trajectory of Fed policy and the better eurozone data are helping to spur an
adjustment of expectations for the ECB. There was an overshoot at the end of last year when the
swaps market discounted 190 bp of cuts this year. At the end of January, 160 bp
of rate cuts were still discounted. In early March, the swaps market still
anticipated near 115 bp of cut. Now, the swaps market sees around 68 bp of
easing this year. Still, the beneficial impact on the euro has been muted. The
US two-year premium over Germany reached 220 bp on April 15, the most since
before the pandemic. The euro recorded the low for the year, so far, the
following day ($1.06). The two-year differential is hovering around 195 bp now.
The euro has straddled the $1.07 level today for the eighth consecutive
session.
The UK holds local and mayoral elections
today. The immediate
market implications look minor. However, there could be implications for
national elections that are expected late this year. Prime Minister Sunak has
not been able to close the gap with Labour. There is speculation that Sunak
could resign or be replaced, especially if the Tories lose the Tees Valley and
West Midlands mayoral contests. Yet even that would not necessarily improve the
Tory's fortunes. The Tories have led the UK government since 2010. There is a
sense of fatigue, and some Tory supporters now seem to favor the Reform Party
(formerly the Brexit Party) and more than 60 Tory MPs are not running for
re-election. Meanwhile, Labour appears to have moved more centrist.
The euro recovered from a six-day low
($1.0650) but stalled just in front of the Monday-Tuesday high near $1.0735. There are two sets of expiring
options to note. First there are almost 2.75 bln euros in options between
$1.0750 and $1.0775. There are also 1.1 bln euro options at $1.0670 that could
be operative unless they were neutralized on move to $1.0650 yesterday. The
euro traded above the 20-day moving average for the fifth consecutive session
and settled a couple of hundredths of a cent below it (~$1.0715). The 20-day
moving average is slightly below $1.0710 today. For its part, sterling
recovered from a three-day low near $1.2465 to advance to $1.2550. Monday
and Tuesday's high was $1.2565-70. The trendline connecting the March and April
highs comes in near there tomorrow. Initial support now is near $1.2500, which
is also where about GBP315 mln in options will expire tomorrow, and then the
$1.2460-80 area. Lastly, note that the Czech central bank is expected to cut
its repo rate by 50 bp to 5.25% shortly. It would be the fourth consecutive cut
in the cycle that began at the end of last year from 7%.
America
The Federal Reserve met
expectations. The
futures market was pricing in 34 bp of cuts as of the end of last week and
settled yesterday discounting 35 bp. When CPI slowed to a 2% annualized
rate in Q4, the Fed's rhetoric changed. The median dot looked for three cuts
this year, but market sentiment, reflected in the Fed funds futures and swap
market, pivoted much more dramatically. Near the middle of January, the market
was pricing in more nearly seven rate cuts this year. That is not all on the
Fed. The FOMC statement recognized the lack of progress on inflation in recent
months while the economy continued to expand at a solid pace. Powell did not
endorse the talk of a rate hike, and this, arguably, encouraged the market to
stick to its priors, and react as if Powell was dovish. The tapering of
unwinding of its balance sheet was focused exclusively on Treasuries and the
pace will slow from a $60 bln cap to $25 bln. Many had looked for a halving,
but the MBS will continue to be reduced by up to $30 bln a month.
Today's non-farm productivity and unit
labor costs reports are derived from the Q1 GDP. Productivity is expected to slow
dramatically from the 3.3% pace seen in Q4 23 and commensurately, unit labor
costs likely jumped toward 3.5% from 0.4% in Q4. These quarterly numbers swing
around quite a bit. Taking a four-quarter moving average helps smooth out
volatility. In 2023, unit labor costs rose by an average of 2.5% after 4.5% in
2022. In 2019, unit labor costs average quarterly increase was less than 1%.
The earlier release of March durable goods orders takes away much of the
interest in today's revision and factory goods orders. The March trade balance,
on the other hand, could impact expectations for Q1 GDP revisions.
Canada reports March goods trade balance
today. A C$1.2 bln
surplus is expected, which would be smaller than February (~C$1.4 bln) but
considerably larger than the $22 mln surplus reported in March 2023. In fact,
last year, Canada recorded a C$2.1 bln goods deficit (after a nearly C$19.7 bln
surplus in 2022). A C$1.2 bln surplus in March would mean that Canada recorded
an average monthly surplus of C$1.06 bln in Q1, its best quarterly performance
since Q2 22.
Mexico reports April manufacturing PMI,
and the IMEF surveys today. Earlier this week, Mexico reported Q1 GDP grew by 0.2%, which was
a bit better than expected. The service sector expanded by 0.7%, while
industrial output shrank by 0.4%. Agriculture output fell by 1.1%. The
year-over-year rate disappointed falling to 1.6% from 2.5%. The median forecast
in Bloomberg's survey was for a 2.3% pace. In a seasonally adjusted basis, the
economy grew by 2% at an annual rate. The central bank had projected a 2.8%
expansion. Weaker public sector investment was a notable culprit, while
consumption was underpinned by low unemployment, higher real wages, and
government transfer payments. The central bank meets next Thursday and is
widely expected to stand pat with the overnight target rate at 11%.
The US dollar gave back
about half of Monday and Tuesday's gains against the Canadian dollar. It was turned back from around CAD1.3785
and found support near CAD1.3700. There are almost $700 mln in options at
CAD1.3740-50 that expire today and the adjustment may have contributed to the
price action yesterday. The next retracement (61.8%) is near CAD1.3690, around
the 20-day moving average. The week's low, set on Monday, was about CAD1.3630.
It is in a range of about CAD1.3700-CAD1.3745 so far today. The Mexican
peso's 0.80% rally was the best in the world yesterday. The dollar
traded at a five-day low near MXN16.9130 and it is holding today. Buying
materialized below MXN17.00 but the greenback managed to settle below it.
Today's high so far is slightly above MXN17.01. There are almost $340 mln in
options that expire at MXN17.00 today and twice that amount will expire on
Friday. Initial support is seen in the MXN16.85-90 area.
Reviewed by Marc Chandler
on
May 02, 2024
Rating:
