Yen Slips, Yuan Jumps, Dollar is Mostly Softer

Overview: The dollar is mostly a little softer today in thin market conditions, with Tokyo, Seoul, and London closed for holidays. The Japanese yen is the weakest G10 currency, losing about 0.5% and slipping through last Friday's lows. At first, after Fed Chair Powell did not endorse rate hike speculation, the market thought he was dovish. But after the softer than expected jobs data and weakness in the ISM services, the market shifted from doubting one cut to pricing in two. China's markets re-opened for the first time since last Tuesday. The Chinese yuan played catch-up and has appreciated by 0.45% today, to lead the emerging market currencies. The yuan reached its best level since late March amid speculation that Beijing may be considering a large devaluation (of which we are skeptical).

Equities are off to a constructive start this week after the strong US rally before the weekend. Of note, the Hang Seng extended its rally to a tenth consecutive session and mainland shares jumped nearly 1.5%. Most markets in the region advanced. Europe's Stoxx 600 is up about a third of a percent, recouping most of last week's loss. US index futures are firm. The pullback in US yields before the weekend spilled over into today's activity and benchmark 10-year yields are lower:  4-6 bp softer in Australia and 4-7 bp lower in Europe. US futures point to a slightly lower rates when the cash market opens. Gold is firm near $2018 but within the ranges seen most of last week. June WTI is consolidating last week's nearly 7% loss that brought it to slightly below $78. Cease-fire hopes have faded and June WTI is firm near $79. Initial resistance is seen around $79.50 but it is likely headed back into the $81-$82 area.

Asia Pacific

Japan remains on holiday today but the lingering aftertaste of the two bouts of material intervention last week has subdued the momentum traders and trend followers. The pain threshold of Japanese officials has been found. Breaking the one-way market that saw the dollar rise from JPY152.50 in mid-April to above JPY160 on April 29 is one measure of Japan's success. One-month implied volatility is still elevated near 10.4%. It was around 7.5% at the end of March and the 100- and 200-day moving averages converge near 8.8%, to give it some context. Last week's high, around 12.4%, was the highest since last July. Arguably the extreme volatility or disorderly market, which could justify intervention under the G7 and G20 statements no longer exists. Hence, the deafening silence from other governments or central bank in the face of Japanese intervention may not be unlimited. Indeed, comments by Yellen did hint in that direction, saying that "we would expect these interventions to be rare and consultation to take place." Also, one wonders why Japan did not coordinate the intervention with others struggling similarly, like South Korea, Malaysia, and Indonesia. And even in lieu of coordination, why those central banks did not, on their own volition, intervene around the same time.

China's markets re-open for the first time since last Tuesday. The Caixin April services PMI defied expectations, as did its manufacturing PMI reported last week. The composite PMI edged up as a result, and at 52.8 (from 52.7), it is the highest since the middle of last year. With the Third Plenary session planned for July, it is not clear what new initiatives, which many expect is needed to achieve this year's growth target (5%), can be announced ahead of it. Beijing has been a beneficiary of the Japan's action on the yen. The offshore yuan posted its biggest weekly advance of the year last week (~0.80%). It reached the best level since March 21. 

The dollar briefly traded below JPY152 after the disappointing employment data, the lowest since April 10. The five-day moving average (~JPY155) is slipping below the 20-day moving average (~JPY154.50) for the first time since mid-March. It has done a good job of signaling trend move, with a minimum of whipsaws for the past few years. Treasury Secretary Yellen calling intervention "speculation" also indicated she expected the intervention to be rare and the US consulted. This seemed to downplay significance and likelihood of persistent operations. The dollar rose to about JPY154. Friday's high was around JPY153.80. The Australian dollar reached its highest level in nearly two months ahead of the weekend, slightly shy of $0.6650. Resistance is seen near $0.6675. The Aussie has rallied three cents in a little more than two weeks. It frayed the upper Bollinger Band (~$0.6635). There is a band of support found between $0.6525 and $0.6555. The Aussie remains firm and near the session high of $0.6630. The RBA is expected to standpat tomorrow. The PBOC set the dollar's reference rate at CNY7.0994 (CNY7.1063 on April 30). The average in Bloomberg's survey was CNY7.2106 (CNY7.2432 on April 30). The offshore yuan strengthened by almost 1% while the mainland market closed for the May Day holidays on April 30. The dollar traded at its lowest level against the yuan since March 25 (CNY7.2065) and has steadied to hover around CNY7.21.

Europe

The eurozone saw its final service and composite PMI. Little new information is contained, though both the were revised slightly higher, we learned of other EMU members results, especially Italy and Spain. Recall that last week, Italy's manufacturing PMI unexpectedly slumped to 47.3 (from 50.4), a new low for the year. Maybe it was March that was the fluke; the first reading above 50 since March 2023. The services (54.3 vs 54.6) and composite PMI (52.6 vs 53.5) both softened. Spain, in contrast, showed improvement. The manufacturing PMI rose to 52.2 from 51.4, the highest since June 2022. The services and composite PMI also improved (56.2 vs 56.1 and 55.7 vs.55.3, respectively). The takeaway is that a recovery is taken hold in the eurozone. Government spending was an important factor. The economy expanded by 0.3% in Q1. Growth in Q2 and Q3 is seen around 0.2%-0.3%. The median forecast in Bloomberg's monthly survey puts year-over-year growth at 0.5% this year, which seems on the low side. The ECB is only slightly higher (0.6%) and the EC, which is due to update its forecast in the next week or two, projects 0.8% growth, the same as the IMF.

Last week, the final UK April manufacturing PMI was revised to 49.1 from the preliminary estimate of 48.7. This was still the first decline of the year (50.3 in March, the first reading above 50 since July 2022). The final service and composite reports were announced before the weekend. The service PMI stands at 55.0 from the flash reading of 54.9. This is the highest since last May. The composite PMI is at 54.1, a little better than the 54.0 initial estimate and 52.8 in March. It has finished last year at 52.1. The UK's Q1 GDP will be reported on Friday. The economy is seen expanding by around 0.4%, the first quarterly expansion since Q1 23 and it would be the strongest since Q1 22. Lastly, the Tories did about as poorly as anticipated in the local elections, but as was suspected no one is emerging to take what appears to be the poisoned chalice from Sunak.

Sweden's Riksbank meets on Wednesday and the Bank of England meets on Thursday. The Rikbank is seen as more likely to cut rates than the Bank of England. The swaps market sees it as almost a 50/50 proposition for Sweden. In March, the Riksbank signaled that it would likely cut rates in May or June. The softer than expected March underlying CPI (reported April 12) and the contraction in Q1 GDP (reported April 29) argue in favor of a rate cut. The argument against a rate cut is the weakness of the krona. Since mid-March, it has fallen by almost 6% against the euro and nearly 9% against the dollar.

The euro spiked to about $1.0810 after the US jobs report, its best level since April 10. It was turned back from the 200-day moving average (~$1.08) and the four-point downtrend line connecting the March and April highs. The low since the high was seen was around $1.0750. Support is likely in the $1.0700-25 area. There are also option expirations in this range (almost 1 bln euros today at $1.07, and about 875 mln euros tomorrow at $1.0725). Sterling surged to almost $1.2635 after the US jobs report. That was its best level since April 10, when the US reported slightly higher than expected CPI (hot?). However, it reversed its gains and settled little changed on the session. Recall, sterling set the high for the year in the run-up to the February jobs report on March 8. The rally at the end of last week overshot the (50%) retracement of the subsequent losses (~$1.26) but settled below it (and the 200-day moving average (~$1.2550). Sterling is firm $1.2580-5 in quiet European morning turnover. 

America

The market is in between the two (current) major high-frequency data drivers, employment, and CPI. The market responded dramatically to the last retail sales report as well, and April's CPI and retail sales will be reported on May 15. Both are likely to have moderated. Yet in terms of Fed policy, we do not think it was a game-changer. It probably does not reach the level of unexpected weakness from the Fed's point of view and May's jobs data will be seen before the June meeting. Chair Powell seemed clear at the post-FOMC press conference that it would take more than a couple of tenths of a percentage point in the unemployment rate to qualify as something that would get officials to re-consider policy settings. Given the general strength of the labor market, the Fed is more concerned about its other objective, price stability. After the press conference, conventional wisdom was that the Fed was dovish by not being more open to a rate hike. Now, after the softer employment report, the Fed funds futures reflect perceptions of a greater chance of a two rate cuts. The odds increased to about 85% chance, the most in three weeks, that the Fed cuts rates twice this year. That is up from 60% the previous day and around a 13% chance day before the FOMC meeting concluded. 

The Canadian dollar traded miserably. It was the only G10 currency unable to gain against dollar ahead of the weekend and, last week, more generally. The losses were minor, but the direction is notable. The greenback bounced smartly off the three-week low set after the US jobs report near CAD1.3610 and approached CAD1.3700, leaving a potentially bullish hammer candlestick pattern in its wake. Follow-through buying has been limited and a consolidative tone was seen in the thin trading so far today. Nearby resistance above CAD1.3700 is seen in the CAD1.3725-55 area initially. Last week's high was near CAD1.38. The US dollar recorded a lower low every session last week against the Mexican peso, but the settlements in the last three sessions were in a narrow range of about MXN16.9750 and MXN16.9950. The dollar fell by around 1% against the peso last week, but the scars from the last month's flash crash do not appear to have fully healed. Mexico reports CPI on Thursday, a few hours before the central bank meets. Banxico is expected to stand pat. Brazil's credit outlook was lifted to positive from stable by Moody's, but the currency was essentially flat on the week before the US jobs report. Brazil's central bank meets on Wednesday and is expected to cut the Selic rate by 25 bp (to 10.5%) after delivering 300 bp in cuts in half-point increments since last August. 

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