Overview: The dollar's losses scored after
yesterday's disappointing ISM manufacturing report were extended initially in
Asia Pacific turnover earlier today before it recovered. The recovery has
stretched the intraday momentum indicators, warning against expected strong
follow-through dollar buying in North America, without fresh impetus. Amid
position adjusting and crosses unwinding, the yen is resisting the dollar's
recovery and is the strongest of the G10 currencies. A slightly firmer than
expected Swiss CPI has seen the market shave the odds of a SNB rate cut later this month. This is allowing the franc to recover a little too. The other G10
currencies are lower. Most emerging market currencies are weaker, as well. The
South African rand and Mexican peso are off slightly more than 1%. Modi's
victory in India seems smaller than it did yesterday, and the rupee is also
among the weakest emerging market currencies today.
Indian stocks are giving back yesterday's
gains plus today, sliding more than 5%. Except for China and Hong Kong, most
bourses in the Asia Pacific region fell today. Europe's Stoxx 600 is off 0.8%
giving back the past two days of gains in full. US index futures are also
softer. Asia Pacific bonds played catch-up after the strong rally in the US
yesterday. European benchmark yields are mostly 1-2 bp lower. The 10-year
Treasury yield is flat near 4.39% after falling 11 bp yesterday. Gold recovered
yesterday and settled above $2350 but has come back heavier today and looks
poised to test yesterday's low (~$2315). July WTI that was testing $80 last
week has been sold below $73 to its lowest level since early February. Lastly,
natgas surged yesterday on Norway's plant outage, but it is recovering today. The
Dutch benchmark was up over 5% yesterday and is off almost 3.8% today. US
prices jumped 6.5% yesterday and are flattish today.
Asia Pacific
The 35th anniversary of Tiananmen Square
protests is reminder of the desire for political liberalization
and human rights in China. Xi's father reportedly warned China's leadership that funeral of
CCP General Secretary Hu needed to be properly managed or there would be chaos.
Hu had been a powerful reformer. Xi himself saw the student protests as
dangerous and drew parallels with the Cultural Revolution. Political reforms in
China since Xi's rule have been in the other direction. The Communist Party has
an increased role in society, government, and businesses. The balance of power
between the princelings, like Xi whose parent fought alongside Mao, and the
Communist Youth League of unconnected but ambitious people has been destroyed
in favor of the former. Mao's "iron rice bowl" of government support
has been dismantled and Xi shares with some in the US and Europe who disdain social
welfare programs. More immediately, the light economic schedule at the start of
this week ends tomorrow with the final PMI for Japan and Australia, China's
Caixin services and composite, and Australia's Q1 GDP (expected 0.2%, same as
Q4 23).
The drop in US interest rates after the
disappointing ISM manufacturing survey took the dollar broadly lower, and it
was pushed below JPY156 for the first time since May 21. Follow-through selling today took the
greenback below the trendline connecting the two spike lows in May that
came in today near JPY155.90. The dollar recorded a bearish outside day
yesterday, trading on both sides of the pre-weekend range and closing below its
low. It has been sold to JPY155.00 today. Nearby support is seen around
JPY154.80. The intraday momentum indicators are stretched. The
JPY155.90-JPY156.00 may now offer resistance. The Australian dollar has
not settled off the $0.6600-handle since May 8. It has nearly covered
the range in the past three sessions. It had traded below $0.6600 on an
intraday basis on May 30 and reached $0.6695 yesterday, amid the greenback's
broad losses. It made a marginal new high today but held below $0.6700 and has
reversed lower to approach yesterday's low below $0.6640. The sell-off has also
stretched the intraday momentum indicator, suggesting that support in the
$0.6625-30 may be sufficient to hold back steeper losses today. Many
observers get caught up in precisely how the Beijing manages its
currency. Since we suspect it changes and evolves over time, and is
purposely opaque, we think that for most market participants, it is not the
point. What the yuan does is more important than how. Most importantly, we
think that Beijing has resisted the magnitude of depreciation that market
forces alone were driving, and it is not using the exchange rate to promote
exports. Indeed, China appears to be shifting toward a foreign direct investment
strategy and a stronger yuan is more desirable than the speculation of a major
one-off devaluation suggests. The PBOC set the dollar's reference rate at
CNY7.1083 (CNY7.1086 yesterday). The average in Bloomberg's survey was
CNY7.2295 (CNY7.2399 yesterday). The dollar has not closed below CNH7.25 since
for nearly two weeks. A similar trendline as the one we identified with the yen
is found today near CNH7.2535. Today's low so far has been CNH7.2490, and the
dollar has made a lower high for fourth session.
Europe
The news stream from Europe is subdued
today. The final
services and composite PMI are due tomorrow, as is the April PPI. A few hours
before the ECB meeting outcome on Thursday, the aggregate April retail sales report is
due. A pullback after the 0.8% gain in March. Switzerland's May PMI yesterday
was mixed. The manufacturing PMI rose to 46.4 from 41.4 in April, and the
services PMI slumped to 48.8 from 55.6. Today, Switzerland reported May CPI.
The EU harmonized measure ticked up to 1.5% from 1.4%. The Swiss National Bank
meets quarterly, and they became the first G10 central bank to cut rate in
March. The swaps market a little more than a 50% chance of a follow-up cut on
June 20. It was near 60% yesterday, i.e., before today's CPI. Last week, the
euro rose to CHF0.9930, its best level since April 2023, but reversed lower and
snapped a three-week advance. It approached CHF0.9750 yesterday, the (50%)
retracement of the rally from April 19, when the cross was initially driven low
(~CHF0.9565) when Israel retaliated against Iran. Follow-through selling today
has seen nearly CHF0.9720. The next retracement (61.8%) is near CHF0.9700.
The euro rallied on the back of the softer
US manufacturing ISM. After
bumping against it repeated in the North American afternoon yesterday, it
finally pushed above $1.09. for the first time since March 21. Its gains
were initially extended to about $1.0915 but sellers emerged and took it to
about $1.0870 by early in the European session. Given the intraday momentum
indicators, we suspect that support near $1.0850-60 may be sufficient. The
euro's gains amid the high probability of an ECB rate cut on Thursday and solid
US job growth Friday (the median in Bloomberg's survey has crept up in recent
days to 190k), surprised us. We did not expect a breakout. Still, we recall
that market has done this before, i.e., rally the euro ahead of the US jobs
report only to sell off afterward. On Thursday, shortly after ECB's press
conference, there are options for about 2.8 bln euros almost evenly divided
between $1.09 and $1.0915 that expire. Sterling recovered from a dip
slightly below $1.27 to a little above $1.28 on the back of the US dollar's
retreat. Sterling peaked slightly above $1.28 last week, a two-month
high. It took it out yesterday by a few hundredths of a penny. It closed above
$1.28 for the first time since March 11. It approached resistance ahead of $1.2820
and slumped back to $1.2760 in the European morning. With oversold intraday
momentum indicators, sterling found was stabilizing in late European morning
turnover. There are options for about GBP370 mln at $1.2860 that expire
Thursday.
America
The ISM again trumped the PMI. The US May manufacturing PMI was revised
to 51.3 from the initial estimate of 50.9. Recall that the median forecast in
Bloomberg's survey for it was initially 49.9. This is the say that the market
had looked for the third consecutive decline and it came in stronger and was
revised higher. The ISM manufacturing survey was reported shortly after the
PMI. It was weaker than expected at 48.7 (from 49.2). It has been below the 50
boom/bust level since November 2022 with the sole exception this past March (50.3).
In the first four months of the year, it average 49.1. Prices paid rose at a
slow pace (57.0 vs. 60.9) and new order continued to fall (45.4 vs. 49.1). New
orders are the weakest since last May. Employment rose to 51.1 from 48.6. It is
the first reading above 50 in eight months. Still, US yields fell on the ISM
report and took dragged the dollar lower. The Atlanta Fed's GDP tracker fell
sharply in yesterday's update to 1.8% from 2.7%. Today's April JOLTS report is
expected show job openings falling (~130k) and gradually normalizing. They fell
by about 400k in Q1 24 and almost 420k in Q4 23. April factory orders are also
on tap. April durable goods orders have already been reported, though subject
to revision today, rose by 0.7%. Factory orders are expected to rise by 0.6%.
The focus in Canada is the central bank meeting on Wednesday. The market
perceives a greater chance of a rate cut than a week ago (~80% vs. 65%).
Mexico's President-elect Sheinbaum will be inaugurated on October 1. Among
investors there are two fears. The first is over what AMLO may do in the
intervening months and the second is the constitutional changes which will be
possible during the Sheinbaum administration. She might not be able to address
the former, but a clear statement from her committing to support the
independence of the judiciary and central bank could help ease investor
anxiety.
The dollar held CAD1.3600 in
yesterday's setback. It
has not settled below CAD1.36 since April 9 and the recent price action
underscore the significance of that area. On the top side, the greenback has
not closed above CAD1.3750 since the end of May. The Canadian dollar was the
only G10 currency not to gain on the US dollar yesterday. The US dollar is
approached CAD1.37 today. Last week's high was near CAD1.3735/ The
Mexican peso's fell by nearly 3.8% yesterday, its largest decline in nearly
four years. The US dollar highs were recorded in North America near
MXN17.75, not in thin Asia Pacific markets as was the case with the "flash
crash" in April. The dollar's gains were extended to almost MXN18.00
today, before stabilizing. It is trading around MXN17.88 (up ~1%) in late
European morning trade, finding only little consolation in Sheinbaum's sticking
with AMLO's finance minister. Initial support is seen in the MXN17.60-70 area.
Reviewed by Marc Chandler
on
June 04, 2024
Rating:
