Overview: The dollar is mostly softer today, ahead
of tomorrow's employment report. The ECB meeting and President Lagarde's press
conference are main events today. There is little doubt that it will cut rates
today and do so ahead of the Federal Reserve for the first time. The ECB's
forward guidance may be the key to the market's reaction. That said, the euro
is in the upper end of its recent range, near $1.09. The Mexican peso, which
was crushed at the start of the week following the election results, held
April's flash crash low and is trading at a three-day high, with the dollar
near MXN17.45. Nearly all the emerging market currencies are also a little
firmer today, with the Polish zloty and Hungarian forint's small losses the
exception.
After falling around 36 bp in
the past five sessions, the 10-year US Treasury yield has stabilized. The
two-year yield has dropped almost 30 bp to nearly 4.70%, the bottom seen twice
in May. We think it is a bit exaggerated and may be a key to the dollar's
recent weakness. Both are slightly firmer today. European bond yields are 1-2
bp firmer. The new S&P and NASDAQ records helped lift Asia Pacific equities
today, especially Taiwan and South Korea. Chinese equities were unable to join
the advance. Europe's Stoxx 600 is up about 0.7% today to a new record high and
has rallied in four of the past five sessions coming into today. US index
futures are narrowly mixed. Gold rose to a two-week high near $2374 on the back
of the softer dollar and lower rates, but the momentum stalled, and the yellow
metal is trading near $2360 late in the European morning. July WTI set a four
month-low on Tuesday slightly below $72.50 and stabilized yesterday. It
recovered to about $75 today where news selling emerged. OPEC+ recent decision
to boost supply in Q4 weighs on sentiment as inventories build and questions
over demand linger.
Asia Pacific
China will report its
politically sensitive trade figures in next couple of days. The average shortfall in the first four
months of the year was about $63.9 bln, slightly less than the average in the
first four months of 2023 (~$66.5 bln). Last year, the average monthly surplus
was $68.5 bln compared with $69.8 bln in 2022. In yuan terms, a slightly
different picture emerges. The average surplus this year has been about
CNY454.5 bln about CNY3 bln less than the average in the first four months of
2023. In yuan terms, the trade surplus was slightly larger last year than 2023
(average of nearly CNY482 bln from CNY466 bln in 2023. The PBOC is expected to
report May reserves figures in the coming days. Given that other reserve
currencies appreciated against the dollar last month, the thinking is that
reserves likely grew in dollar terms, even if there was no formal intervention.
While the PBOC continues to accumulate gold, the official gold holdings appear
to be something on the magnitude of a sixth of its Treasury holdings. Australia
reported its April trade balance, and it was not sufficient to negate weakening
trend. The A$6.5 bln surplus was larger than expected, as imports fell faster
than exports. It has reported a A$28 bln surplus in the first four months of
this year compared with A$48 bln in January-April 2023. Lastly, the Japan's
weekly portfolio data lent credence to our argument that rising Japanese rates
does not yet mean weaker Japanese demand for foreign bonds. In the past four
weeks, they bought JPY2.8 trillion (~$18 bln) of foreign bonds. That is the
most since last September, which was driven by a one-week surge of JPY3.6
trillion. Outside of that, Japanese investors bought the most foreign bonds
over the past four weeks since last June.
The dollar recorded its high
against the yen yesterday near JPY156.50, though, according to Bloomberg, about
1/100 of a yen below Tuesday high. It took place roughly at the same time that the US 10-year yield
traded higher after the stronger than expected ISM report. As US yields pulled
back, the dollar stalled, but did not trade below JPY156. The dollar is
consolidating so far today in a JPY155.35-JPY156.35 range. The near-term
outlook depends on the reaction to the US jobs data tomorrow. We suspect the
more than 35 bp drop in the US 10-year yield is a bit excessive, and barring a
poor employment report, a recovery in US rates could help lift the greenback
toward JPY157.00-20. The Australian dollar remains stuck between
$0.6600 and $0.6700. Its little changed near the middle of the range,
having been up to $0.6685 earlier today. The Aussie has not closed outside
of that range for a month. Benchmark three-month implied volatility is
near 8.5%. It has rarely been lower since the pandemic. The year's high set in
January was slightly above 10%. The PBOC set the dollar's reference
rate at CNY7.1108 (CNY7.1097 yesterday). The average in Bloomberg's
survey was CNY7.2434 (CNY7.2421 yesterday). There appears to be increased
speculation that recent uninspiring data could prompt the to cut the one-year
Medium-Term Lending Facility rate (2.5%) and boost the among available on June
16. We are not convinced yet, but much data will be reported before then and
now. Meanwhile, the US 10-year premium over China has narrowed from a multiyear
high of nearly 245 bp in late April to less than 200 bp yesterday, the least
since the end of March.
Europe
Today's ECB meeting is
historic. In its
relatively brief history, it has never cut rates ahead of the Federal Reserve.
Today it will. Still, we suspect officials will try to deliver a hawkish cut,
by which we mean, framing the move to avoid the market driving down interest
rates. ECB President Lagarde may be explicit that the reduction of restraint
will be gradual, and policy needs to remain restrictive for some time as
official confidence that inflation is indeed on a sustainable path back to
target. With the economy recovering from the H2 23 contraction, unemployment at
record lows (in aggregate), and a Fed cut still several months off, ECB
officials need not be in a hurry. The updated economic forecasts may lift this
year's growth and lower inflation projections made in March (0.6% and 2.3%
respectively). These revisions may be technical in nature; little change to the
2025 and 2026 forecasts would also send a signal about the need for patience
and gradualism. Note that the European Parliament election begins today and
extends to June 9. This will produce a new European Commission, though von der
Leyen seems to be the favorite for another term on a center-right (EPP)
majority. However, a final decision is not expected until the European Council
(heads of state) on June 27-28.
The euro recorded session
highs in early North American activity yesterday, slightly above $1.0890. It was sold in response to the stronger US
ISM and fell to about $1.0855. Ahead of the ECB meeting, it is in a
quarter-cent range below $1.0895. The low for the week was set on Monday
slightly below $1.0830, and the 20-day moving average is near $1.0840. It has
been up to about $1.0915 earlier this week. The next area of resistance is seen
around $1.0935-50. Sterling fared a bit better, trading in about a 20-tick
range around $1.2775 yesterday. Today, it is trading between about $1.2775
and $1.2810. The economic diary is light until next Tuesday's employment report
and April's GDP (and details) the following day (a few hours ahead of the FOMC
decision). That said, tomorrow's US jobs data tends to be impactful. Sterling
remains the only G10 currency that has gained against the dollar this year
(~0.35%).
America
Today's US data pale in
comparison to tomorrow's employment report in terms of market impact. Q1 productivity and unit labor costs are
derived from Q1 GDP. The recent downward revision to Q1 growth warns that the
0.3% gain in productivity may be revised away and unit labor costs tweaked
higher. The US trade balance is also not capturing the imagination of market
participants. Despite the growth differentials and overvalued dollar on nearly
any metric, the US trade deficit narrowed last year. The Q1 24 shortfall
averaged $68.8 bln, while in Q1 23, it averaged $66.7 bln. These are nominal
number, and for GDP purposes, it is the real (inflation adjusted) balance that
matters. In a larger picture, May's survey data, barring the ISM manufacturing,
is better than April. May auto sales (15.9 mln saar) were the strongest since
last April. The Atlanta Fed's GDP tracker has little May data to work with so
far, but that will change with tomorrow's employment report. Canada also
reports April (merchandise) trade balance. Canada's March shortfall was the
largest in nine months at nearly C$2.3 bln. It had reported small surpluses in
January and February, but the average in Q1 24 was -C$466 mln, compared with an
average surplus of nearly C$500 mln in Q1 23. The Bank of Canada delivered the
widely expected 25 bp cut yesterday and signaled more will be forthcoming as
inflation moderates. The May CPI is due June 25. After the meeting and press
conference, the market feels more confident that there will be another two cuts
in H2 24. Meanwhile, the political anxiety is still running high for investors
after the stunningly large victory of the Morena party and allies in Mexico.
Today's data, auto production and exports, may not move the market ahead of the
tomorrow's CPI. Yet, we note that Mexico is exporting around 80% of the autos
it builds. Its excess capacity is acceptable to Americans as their companies
are largely responsible. In proportionate terms, China exports a fraction.
Foreign brands, using China as an export platform, appear to be responsible for
the lion's share of China's auto exports.
The US dollar ran up to
CAD1.3740 following the Bank of Canada rate cut. The greenback has not settled above
CAD1.3750 since the end of April. The gains were pared, and the US dollar
slipped below CAD1.3700. It has not been above there today but has also found
support near CAD1.3665. The near-term fate of the Canadian dollar may depend
more on the jobs data tomorrow and whether the Dollar Index can move
convincingly through 104.50. The Mexican peso rose yesterday for the
first time since the weekend election. The dollar peaked on Tuesday a
little above MXN18.19, which we note is slightly below the high from April's
flash crash (~MXN18.2135). It set a three-day low earlier today near
MXN17.4465. The MXN17.40 area is the (61.8%) retracement of the post-election
dollar rally. Given the 11% overnight interest rates in Mexico, it is expensive
to be short without the peso falling. The Bolsa also rose yesterday. In the
past two sessions, it has gained a bit more than 5% after losing slightly more
than 6% on Monday. Mexico's 10-year dollar bond yield has fallen for the past
five sessions, as has the 10-year US Treasury yield. However, while the US yield
has fallen 32 bp, Mexico's has fallen almost 20 bp.
Reviewed by Marc Chandler
on
June 06, 2024
Rating:
