Dollar Extends Gains as China's Exports Slump

The US dollar is broadly higher, extending last week's recovery. In addition to the strong technical momentum, the greenback has been bolstered by shockingly poor Chinese trade data, which crushed currencies linked to commodities from Australia to South Africa to Latin America. The Russian ruble bucks the trend and extends its recovery, helped by the Brent testing $60 a barrel.

China's trade surplus collapsed to $3.08 bln from $60.6 bln in February. The consensus forecast was for a $40 bln surplus. Imports were of 12.7% year-over-year after having fallen 20.1% in February. The market anticipated an 11.3% decline. The bigger surprise was on exports. They fell 15% on a year-over-year basis after rising 48.3% in February. The consensus was for a 9% increase. China has begun reporting its trade figures in yuan terms, but given the limited change in the yuan over the past year (less than 0.5%), the difference between the dollar measure and the yuan measures is minor.

There are two channels through which the trade disappointment is felt. First, it may reflect a sharper slowing of the Chinese economy. There are some who are suggesting that the PBOC will respond with monetary measures, especially given that the IPOs are also tying up liquidity. Some suggest that China could embrace a weaker yuan. However, if it is too overt, it may undermine its efforts to be included in the IMF's Special Drawing Rights (SDR). The second channel is the knock on effects on the countries that export to it, and on commodity prices more generally.

The dollar-bloc currencies have been the hardest hit of the majors, with the Aussie off nearly 1.6% and the Kiwi down 1.4%. The Canadian dollar is off 0.6%, perhaps helped by the higher oil prices. Australia reports jobs data latter this week, and expectations are running high for a May rate cut. There is talk of over-supply of milk that could weigh on prices at next week's global dairy auction. The Bank of Canada meets this week, and although most do not expect it to cut rates, such a move cannot entirely ruled out.

Hong Kong continues to lead Asian equity markets higher, helped by a flood of mainland funds. However, European bourses are mostly lower, and US shares are trading lower in Europe. US and European bonds are lower as well. Ten-year gilt yields are five bp higher, leading the move, driven primarily by political uncertainty. 

The US 10-year Treasury yields are three bp higher to 1.97%. The busy US economic calendar this week, which features retail sales and CPI, begins off slowly with only the monthly budget to be reported today, and no Fed official speeches scheduled. As the earnings seasons gets further underway, attention turns this week to the banks, which do not seem as exposed to the economic headwinds of weather or the West Coast port disruption.

The multi-year low in the euro set last month just below $1.0460 is coming back into view. Bottom pickers appeared to have been largely squeezed out last week, but it difficult to see much in the way of chart support ahead of parity. Sterling was sold to fresh five year lows last week and saw those extended earlier today to almost $1.4565, where it found a small bid. Resistance is now pegged near $1.4640.

The dollar has edged higher against the yen to almost JPY120.85, which is its best level since March 20. The market has shrugged off the stronger than expected machinery orders (-0.4% vs -2.2% consensus).  The BOJ minutes from last month's meeting suggest that, at least before the Tankan survey, officials voiced confidence that it was succeeding in steering the economy to a better path. The implication is, as we have suggested, the bar is relatively high for the BOJ to ease policy more. Indeed, the US Treasury's report on foreign exchange and international economy, released last week, essentially took the BOJ's stance that the monetary easing needs to be complimented with fiscal and structural reforms.  Resistance is seen in the JPY121.20 area.  

Given the relatively large moves in Asia and the European morning, after the strong dollar showing in North America before the weekend, and the light schedule in North America today, a consolidative remainder of the session is likely.