Overview: Position adjustments ahead of today's US CPI and FOMC
meeting are giving the dollar a modestly heavier tone today. Each of these
events are typically a source of volatility in their own right and together
they promise an eventful North American session. The yen is the only exception
among the G10 currencies, but even there, the dollar is holding below
yesterday's highs. Even sterling's relative resilience this week was unmarred
by the flat April GDP. Led by central Europe, most emerging market currencies
are firmer too. The beleaguered Mexican peso remains under pressures and has
taken another leg lower amid the political backdrop.
The sell-off of the French bonds slowed today. Last
Wednesday, the 10-year French bond yield was a little below 3% and it is
consolidating about 3.22%. The sell-off of French bonds weighed on the
peripheral bond markets too and widened premiums over Germany. However, the
markets are calmer today. Yields are 1-3 bp lower. The 10-year US Treasury
yield is a little softer and has slipped below 4.40%. Equity markets were mixed
in the Asia Pacific region, with Hong Kong off 1.3%, Japan down 0.6%-0.7%, and
Australia off 0.5%. Mainland Chinese shares were slightly higher. Europe's
Stoxx 600 is rising for the first day in four, and US index futures are
slightly firmer. Gold is trading a little softer after rising about 1% over the
past two sessions. It is in a narrow range mostly between $2311 and $2318. July
WTI continues its recovery from last week’s five-month low near $72.50. It is
trading at a new high for the month near $79 today. API reported a 2.4 mln
barrel drop in US inventories and this is being cited by accounts to explain
the firmer price, but IEA downgraded its estimate for demand growth this year
and warned of a persistent surplus.
Asia Pacific
Japan reported an acceleration of PPI. The 0.7% increase last month topped expectations and
was the largest increase since November 2022. The year-over-year pace more than
doubled to 2.4% from 1.1% in April. It did not seem to impact expectations for
the BOJ, which is expected to hike rates next month. The yield on the 10-year
JGB slipped by nearly four basis points from a little over 1% yesterday. Meanwhile
China reported unchanged consumer prices (0.3% year-over-year) and less
deflation in producer prices (-1.4% vs. -2.5% in April). The main narrative is
one of weak consumer demand, but it seems more complicated. Food prices are 2%
lower year-over-year, and this cannot be explained by shifts in demand. Non-food
prices rose by 0.8%, which is about what it has averaged this year. Consumer
goods prices were flat for the second month and services rose by 0.8%
year-over-year for the third consecutive month. Still, the soft CPI may spur
speculation that the PBOC cold cut the one-year Medium-Term Lending Rate
(2.50%) at the start of next week. Tomorrow, Australia reports May jobs
data. The unemployment rate has been volatile in recent months, rising from a
five-month low of 3.7% in February back to January's 4.1% rate in April, which
was the highest since January 2022. It is expected to have eased to 4.0% in
May. Separately, Indian begin to be including the JP Morgan EM bond index
starting this month. The RBI left rates on hold last week, but with two
dissents what is expected to be tighter fiscal policy under the new Modi-led
government, a cut could come as early as the next meeting (August). Tomorrow's
CPI May CPI is expected to have inched higher (4.85% from 4.83%), its first
increase this year, but is not a game changer, plus, it the RBI will see
another CPI report before it meets again.
The yen made little headway yesterday, despite the
nearly six basis point pullback in the US 10-year yield, which unwound Monday's
gain in full and ate a little into the surge spurred by last Friday's jobs
data. Since the BOJ intervened a
few hours after the last FOMC meeting on May 1, the greenback has not traded
above JPY157.70. Yesterday's session high was recorded in North American near
JPY157.40. It has held just below it today. The dollar has held above JPY157. At
the end of last week, the Australian dollar settled below $0.6600 for the first
time since May 8. It traded below $0.6600 on an intraday basis on
Monday and yesterday, but settled above it, almost as if the market is
rejecting the break. Still, it remained in the lower end of the recent range
and has not been able to resurface above $0.6615 until today, where options for
A$1.3 bln expire today. It has traded slightly above $0.6620 today, and the
intraday momentum indicators suggest the day's high may not be in place. The
dollar remains firm against the offshore yuan at the upper end of the recent
range but stalled near CNH7.2750. The PBOC set the dollar's reference
CNY7.1133 (CNY7.1135 yesterday) and the average CNY7.2544 (CNY7.2621). The
greenback has held above CNY7.25 today after moving above it for the first time
since last November yesterday.
Europe
The UK's economy stagnated in April after growing by
0.4% in March. The weakness was
widespread. Industrial output fell by a sharp 0.9% (median forecast in
Bloomberg's survey was -0.1% after +0.2% in March), with manufacturing output
collapsed by 1.4% (+0.3% in March), the largest decline since 2020. The index
of services rose by 0.2% (+0.5% in March) and was the positive sign. The trade
deficit blew out GBP6.75 bln from almost GBP1.1 bln in March. The construction
output, which had been expected to be flat plummeted by 1.4% after falling by
0.4% in March and 2.0% in February. Even if April's decline can be attributed
to the poor weather, it does not seem a very satisfying explanation. On a
quarterly basis, construction output has not risen since Q2 23. Still, the
expectation for a BOE cut in August (a move next week is all but ruled out) is
little changed slightly below 45%.
Yesterday's euro low was recorded in early North
American trading near $1.0720. It
had been trading near $1.09 before last Friday's US employment data. The
selling pressure eased the euro recovered to around $1.0750. It edged up to
nearly $1.0755 today and has held above $1.0735. Previous support we identified
(~$1.0785) now offers resistance. There is little technical reason to think a
low of any import is place, though the $1.0720 area corresponds to the (61.8%)
retracement of the euro's rally from the mid-April low (~$1.06). The momentum
indicators are falling, and in any event, did not confirm the highs set earlier
this month ("bearish divergence), and the five-day moving average has
fallen below the 20-day moving average. Sterling, on the other hand, is
buoyant. It rose through yesterday's high to reach $1.2760. Sterling
has recovered more than half of what it lost since Friday's US jobs data.
Still, the underlying technical tone looks soft. The momentum indicators have
turned down, and the five- and 20-day moving averages could cross tomorrow.
Perhaps sterling's resilience is from the bid it has on the crosses. The euro
slumped to a new low yesterday, slightly below GBP0.8420, approaching support
near GBP0.8400. It is little changed today. After falling around 2.7% against
the Swiss franc in late May and into early June, sterling has appears to have
based and is trading at a six-day high today. Against the yen, sterling closed
above JPY200 yesterday for the first time this month. The 16-year high was set
in late May near JPY200.75. It briefly traded above JPY200.70 today.
America
US May CPI is expected to have edged up by 0.1%, the
least since last October. While
the year-over-year rate may be unchanged, the three-month annualized rate would
ease to 3.2% from 4.4%. The core rate is expected to have risen by 0.3%, the
same as in April. The year-over-year rate may slip to 3.5% from 3.6%. The
three-month annualized rate would moderate to 4.0% from 4.4%. Such a report
would help reduce perceptions of the tail risk of new acceleration of
inflation, it is unlikely to move the Fed's needle. The focus of today's FOMC
meeting is not on what it does. The market has long given up ideas of a rate
cut today. Rather, the forward guidance via the new economic projections is
key, mediated, at least partly by comments from Chair Powell. Despite the
leading the central bank in its most aggressive tightening cycle in history, the
market often hears a more dovish message from Powell. The most important part
of the Summary of Economic Projections is the median forecast for the number of
rate cuts this year. In March, the median dot was for three cuts. This no
longer seems likely. It would not take a large swing for the median dot to fall
below two (cuts). The derivative market is pricing in one cut fully and little
more than half of a second cut. Can the Fed be more dovish than the market,
which priced in better than six cuts as recently as mid-January--more than
twice the Fed's median dot?
The US dollar reached its highest level against the
Canadian dollar yesterday in nearly two months but stopped slightly shy of
CAD1.38. There are options for around
$320 mln that expire there today. It reversed lower and briefly traded below
CAD1.3750. However, it managed to settle above that key level (and Monday's
low). The US dollar has edged lower to about CAD1.3740 today. Given the
momentum indicators, today's big events, and the largest two-year premium (85
bp now 90 bp before the weekend) since 2005, the Canadian dollar's recovery
looks more like consolidation than the start of a strong recovery. A recovery
in the Canadian dollar seems more likely to be fueled by a broader pullback in
the US dollar than domestic Canadian developments. The pressure on the
Mexican peso post-election persists. The dollar was confined to
Monday's range yesterday (~MXN18.2150-MXN18.6580). It did not trade much above
MXN18.58 yesterday, but today has pushed to MXN18.7250. Given the prior
positioning, and the news stream from Mexico, the adjustment does not appear
over. Because of the market's seeming imbalance, i.e., the weakness of the peso
buyers, the sellers step back to minimize the damage being done to the
remaining portfolio, the peso bounces, a little. The dollar remained firm
yesterday against the Brazilian real, trading inside Monday's range. It reached
almost BRL5.39 on Monday, its highest level since early last year. The slightly
higher than expected inflation report yesterday gave new fodder to the swaps
market, which continues to see the next move by the central bank as a hike and
about a two-thirds chance it takes place in the next three months.
Reviewed by Marc Chandler
on
June 12, 2024
Rating:
