Overview: The dollar is firmer against all the G10
currencies today. The market is somewhat less fearful of intervention and the
yen is extending yesterday's losses. It is rivaling the Australian dollar for
the weakest of the major currencies after the Reserve Bank of Australia left
rates on hold and played down speculation of possibility of a rate hike. Both
currencies are off around 0.4% in late European morning turnover. Disappointing
German factory orders shows the fragility of the nascent recovery. Emerging
market currencies are mostly softer, led by the central European currencies. The
Chinese yuan is also seeing yesterday's 0.45% gain pared. It is off about 0.15%
today. The offshore yuan is off for the second consecutive session and down
almost 0.45% this week after rising slightly more than 1% last week.
Japanese equities rose with the Nikkei
tacking on nearly 1.6%. The Hang Seng snapped a ten-session rally, falling by
about 0.55% today. Mainland shares that trade in HK fell 0.7%, while the CSI
300 was virtually flat. Europe's Stoxx 600 is about 0.7% higher. If sustained
it would be the third consecutive gain, the longest advance since late March.
US equities are narrowly mixed. Bonds continued to advance, pushing yields
lower. Most European 10-year benchmark yields are off 2-3 bp but 10-year Gilt
yields are off seven basis points following the British Retail Consortium
report that retail sale fell sharply in April (-4.4% vs. +3.2% in March). The
US 10-year Treasury is around two basis points lower near 4.46%. The US
Treasury sells $58 bln three-year notes today and $42 bln 10-year notes
tomorrow. Gold is trading about $10 lower today but still well within its
consolidation range (~$2275-$2335). Despite hopes of a Middle East truce
fading, June WTI is pinned near its lowest level in two months but is holding
slightly above the 200-day moving average (~$77.85).
Asia Pacific
Japanese markets reopened from the
four-day weekend, and officials cannot be pleased. President Biden lumped Japan with
China and Russia in claiming it was xenophobic and Treasury Secretary Yellen
comments seemed to take the sting from what is widely seen as two bouts of
intervention last week for around JPY9 trillion (~$59 bln). By saying that she
expects intervention to be rare, it could signal the end of the operation,
which in terms of size, was around the same as in September-October 2022. BOJ
Governor Ueda met with Prime Minister Kishida and underscored that the yen's
impact on prices is being closely monitored. Still, despite softer rates, the
dollar reached a three-day high against the yen near JPY154.65. It settled last
week slightly above JPY153.
As widely expected, the Reserve Bank of
Australia stood pat, leaving the cash target rate at 4.35%. The RBA hiked 25 bp last November, as the
new governor (Bullock) cast off aspersions that she was a dove. Firm Q1 CPI
(1.0%) sparked some talk of another hike, but this may be wide of the mark. The
RBA boosted the year-end's inflation forecast to 3.8% from February's forecast
of 3.2%. The forecast for the trimmed mean measure of inflation was lifted to
3.4% from 3.1%. Both measures are seen falling back to 2.8% by the end of next
year (i.e., back within the 2%-3% target range). The year-end implied futures
rate eased to its lowest level in two weeks. The three-year bond yields fell 10
bp to 3.92%.
Post-intervention, the dollar bottomed
ahead of last weekend near JPY151.80, having peaked at the start of last week
around JPY160.15. The
dollar reached JPY154.65 in the local session today and fell to about
JPY153.85. It is back near the highs in the European morning. The JPY155 area
represents the (38.2%) retracement and the halfway mark is about JPY156.
One-month implied volatility peaked near 12.5% at the end of April. It traded
to almost 9.3% yesterday. The 100- and 200-day moving average converge near
8.8%. The Australian dollar was trading at the upper end of a
four-month trading range. It has not settled above $0.6650 since
mid-January. Since recording the year's low near $0.6365 on April 19, the
Aussie has rallied almost three cents. That met the (50%) retracement of the
decline (from ~$0.6870 at the end of last year). It has traded on both sides of
yesterday's range. A close below yesterday's lows (slightly below $0.6600)
would be a bearish technical development. If so, the risk appears to extend
back toward $0.6500. The PBOC set the dollar's reference rate at
CNY7.1002 (CNY7.0994 yesterday) and the average in the Bloomberg survey was
CNY7.2148 (CNY7.2106). Against the offshore yuan, the dollar bottomed
at the end of last week (as it did against the yen) near CNH7.1655. It reached
almost CNH7.2235 yesterday and slightly higher today (~CNH7.2245). The
CNH7.2325 area is the (50%) retracement of the decline since the April 24 high
near CNH7.2740.
Europe
There were three data points to note in
Europe today, ahead of the Riksbank meeting tomorrow and the Bank of England on
Thursday. Consistent
with the modest recovery meme, eurozone retail sales rose by 0.8% in March. It
was the first increase since last November and is the largest since October
2021. It does not really change anything. The swaps market continues to price
in the strong chance of a rate cut next month, followed by a cut in Q3 and
another in Q4. Second, the UK saw the fifth consecutive increase in the
construction PMI. At 53.0 (up from 50.2 in March), it is the highest since
October 2022. Still, the drop in BRC April sales seemed to overshadow the
construction PMI. The UK reports Q1 GDP on Friday. The economy is expected to
have grown by about 0.4% after contracting roughly the same amount in H2 23.
The Riksbank is a close call after officials suggested a rate cut could be
delivered in May or June. The market sentiment has shifted toward a rate cut
tomorrow. The swaps market is discounting about a 60% chance of a cut, the most
in around a week and a half.
The third set of data points came from
Germany. It
disappointed with a 0.4% decline in March factory orders. The median forecast
in Bloomberg's survey was for a 0.4% increase. Adding insult to injury, the
February series was revised to -0.8% from 0.2%. Its construction PMI fell to
37.5 from 38.3. Lastly, Germany reported a 22.3 bln euro trade surplus, which
was in line with expectations. Exports rose by 0.9% (0.3% expected) and
February's 2% decline was shaved to -1.6%. Imports rose 0.3% (-1.0% expected)
and February's 3.2% gain was shaved to 3.0%.
The euro traded firmly yesterday reaching
almost $1.08 after having briefly traded to 3.5-week high near $1.0810 after
last week's US jobs data. It is trading quietly (~$1.0755-$1.0775) inside yesterday's range
(~$1.0750-$1.0790). A break of the $1.0740-50 area would weaken the technical
tone. Sterling did not sustain its push above $1.26 after the US jobs
data but is holding the low set at the end of last week near $1.2525. It is
finding support in early European turnover near $1.2530. A break of $1.25 would
be disappointing. Nearby resistance is seen in the $1.2560-70 area.
America
There are several reasons why the US
economy has outperformed. The US fiscal deficit seems to be a factor. Real wages increases
have helped underpin consumption, and that has been helped by productivity
gains (among the best in the G10). Today's high-frequency data point, consumer
credit, is another consideration that has helped consumption. In February,
revolving credit (think credit cards) rose by $11.3 bln, a three-month high.
Overall consumer credit rose by $14.1 bln. The median forecast in Bloomberg's
survey calls for a $15 bln increase in March. If accurate, that would put the
Q1 consumer credit growth a little above $46 bln, and that would be the largest
increase in three quarters.
Canada reports the IVEY PMI, but it is not
the market-mover it once seemed. The IVEY survey has generally outperformed the S&P PMI.
Consider that IVEY averaged about 51.7 in Q3 23, while the composite PMI
averaged 47.9. The Canadian economy contracted by 0.5% in Q3 23. The economy
recovered in Q4 23 (1.0%) and may have accelerated in Q1 24 (due May 31). The
IVEY survey average 54.8 in Q4 23 and almost 56 in Q1 24. The composite S&P
PMI averaged 45.4 in Q4 23 and 47.8 in Q1 24. The highlight of the week for
Canada will be the jobs report on Friday. Canada lost jobs (2.2k) and full-time
posts (less than 1k) in March. April is expected to be better, but the risk is
that the unemployment rate ticks up to 6.2% from 6.1%. It was at 5% last April.
Mexico reports vehicle production and
exports today. The
data is not scrutinized but it is notable that amid the talk of excess
capacity, Mexico's auto sector is often not included. In Q1, Mexico produced
about 945k vehicles and exported about 825k vehicles (~87%). Last year, Mexico
produced almost 3.77 mln vehicles and 3.52 mln. Mexico reports April CPI on
Thursday. The headline pace is seeing ticking up to 4.62% from 4.42%. However,
the core rate may have slowed to 4.4% from 4.55% in March. The central bank
meets later Thursday but is expected to leave rates unchanged at 11.0%. Brazil
central bank meets Wednesday and is expected to cut the Selic rate by 25 bp to
10.50%.
The US dollar turned down after
approaching CAD1.37 yesterday in the Asia Pacific time zone. The heavier Dollar Index, rising US
equities, and firmer oil gave the Canadian dollar favorable backdrop. Support
before the weekend near CAD1.3610. The CAD1.36 area is the (38.2%) retracement
of this year's greenback rally. The US dollar is trading within yesterday's
range (~CAD1.3650-CAD1.3700). Above CAD1.3700, resistance is seen around
CAD1.3720-40. The Mexican peso continues to gently trade with a firmer bias
as the flash crash volatility (April 19) recedes. Support for the
dollar is seen near MXN16.83 and then MXN16.75. The five-day moving average
(~MXN16.94) is slipping below the 20-day moving average (~MXN16.9415) for the
first time since mid-April, illustrating the improving of the technical
tone.
Reviewed by Marc Chandler
on
May 07, 2024
Rating:
