UK CPI Disappoints

Overview: A hawkish hold by the Reserve Bank of New Zealand and a firmer than expected UK CPI reading have allowed the New Zealand dollar and sterling to show resilience in the face of the US dollar's broadly firmer tone. And even there, the Kiwi and pound have seen their early gains pared. The Swiss franc is the weakest of the G10 currencies today and has fallen to a new 12-month low against the euro. Emerging market currencies are mixed. Central European currencies are mostly lower, along with the South African rand and Chinese yuan. The Philippine peso is the strongest ~0.30%) after the central bank threatened to intervene yesterday, and the Mexican peso has stabilized after falling by the most in three weeks yesterday.

Equities and bonds are mostly weaker today. Despite political divisions, Taiwan's Taiex rose by nearly 1.5% today on the back of the chip sector, but most equity markets in the region fell for the second day. Europe's Stoxx 600 is also trading heavier after losing about 0.2% yesterday. US index futures are trading with a softer bias. The 10-year JGB yield pushed above 1.0% for the first time since 2012. New Zealand (and Australian) benchmark 10-year yields are three basis point higher. In Europe, most eurozone 10-year bond yields are 3-5 bp higher, the UK CPI disappointment has lifted the 10-year Gilt yield by 10 bp. The 10-year US Treasury yield is about three basis points higher at 4.44%. Gold is consolidating after setting new record highs on Monday (~$2450). It found support ahead of yesterday's low near $2406. July WTI slipped below $77.50 for the third time this month. It has recovered back above $78. The contract has not closed below $77.50 in two months.

Asia Pacific

The Reserve Bank of New Zealand stood pat with the cash target rate at 5.50% but sounded hawkish. It discussed possibly hiking rates, and like the Reserve Bank of Australia decided against it. The market responded accordingly, reducing the amount of cuts expected this year from 44 bp to 31 bp. The New Zealand dollar rallied to around $0.6150 (settled closed to $0.6090 yesterday), its highest level since mid-March before pulling back about $0.6010. The target rate has been at 5.50% since the quarter-point hike in May 2023. In a year's time, the swaps market anticipates that the target rate will be 85 bp lower (~100 bp yesterday). The RBNZ's next meeting is July 10. Imagine the howls of protest over a weak yen when in the dollar last spent so much time above JPY150. Back in 1980s and through the early 1990s, the US trade angst was aimed at Japan (and to a lesser extent Germany). US protectionism in the form of "voluntary export restrictions" and "orderly market agreements" was more than GATT could handle and it gave birth to the WTO. The US and Europe were open to direct investment strategies (build and sell locally). The US seems more hostile to Chinese direct investment (though Trump seemed more sympathetic) and Europe, or at least parts, seem more open. Japan has run a trade deficit for the past three years. Japan's March surplus of JPY387 was the fourth monthly surplus since July 2021 and the largest since then as well. It swung back into deficit in April, and larger than expected (-JPY462.5 bln vs median forecast of JPY297 bln). Still, auto exports to the US and EU appear strong and demand for semiconductor chip equipment remains robust. 

Softer US rates may have encouraged the dollar's pullback to session lows in the North American session yesterday to around JPY155.85. Yet, the dollar was bought on the dip and recovered to almost JPY156.30. It is holding above JPY156.00 today and is knocking on JPY156.50 in the European morning. Sentiment toward the yen remains negative. The dollar has risen in nine of the past 12 sessions coming into today. Last week's high near JPY156.75 remains the immediate hurdle. The Australian dollar was bought yesterday on the pullback that tested former resistance that has become support (~0.6650). The buying drying up in front of $0.6680. The consolidative range is roughly $0.6650-$0.6700. The Aussie traded above the $0.6700 in two of the past four sessions but has not been able to sustain the breakout on a closing basis. The daily momentum indicators are in overbought territory. They have yet to turn down but look poised to do so. We think that the Australian dollar recovery from around $0.6365 to the recent intraday highs above $0.6700 and fulfilled the (61.85) retracement of this year's loss (~$0.6675) has exhausted, or nearly so, the move. Still, a convincing break of $0.6650 is needed for confirmation, which could signal another cent decline. The Chinese yuan remains under modest pressure. The PBOC set the dollar's reference rate at CNY7.1077, a new three-month high (CNY7.1069 yesterday). The average projection in Bloomberg's survey was CNY7.2372 (CNY7.2349 yesterday). The dollar held slightly below CNH7.25, which it has not traded above since May 1, but looks poised to take out shortly. 

Europe

The economic highlight from Europe today was the firmer than expected UK's April CPI. It rose by 0.3% on the month (instead of 0.1% as anticipated), which, given the base effect, pushed the year-over-year rate to 2.3% (from 3.2%). It is the lowest year-over-year print since July 2021. At an annualized rate, the UK's CPI has risen 3.6% in the first four months of 2024. There is scope for additional improvement this month, but then the base effect gets more challenging. In June 2023, the UK's CPI rose by 0.1% and in July it fell by 0.4%. Core prices are up 3.9% year-over-year (4.2% in March). The market had expected 3.6%. Still, it is the first sub-4% reading since October 2021. It has been trending lower and has not risen since last May (7.1%). Services prices were stickier, slipping only to 5.9% from 6.0%. The key issue is whether the data are sufficient to prompt the BOE to cut rates at its next meeting on June 20. And even though two MPC member (Deputy Governor Ramsden and external member Dhingra) dissented in favor of an immediate cut earlier this month, after the CPI report, the market quickly reassessed. The swaps market was a split market with slightly more than a 50% chance of a cut discounted, but it was fully discounted in August. Now, however, the market has less than a 15% chance of a cut priced in for next month and downgraded the chances of an August move from 100% to a little less than 55%. Sterling initially rallied, as one would expect, but it has not been sustained. Tomorrow's preliminary PMI may be less important than Friday's retail sales report. A 0.5% contraction is expected (median forecast in Bloomberg's survey) after a flat March reading and a 0.1% increase in February. The UK's economy may not be contracting as it was in H2 23, but the consumption remains weak. 

The euro consolidated yesterday in roughly a 15-tick range around $1.0860. It is in a slightly broader range of $1.0835 to $1.0895 for the past four sessions. It remains in that range but is recording lower highs and lower lows. The euro has rallied roughly three cents from the mid-April low, which stretched the momentum indicators. A break of $1.0825 would lend technical support to out idea that a near-term top is being formed in this consolidative phase. The euro settled the past two sessions below the five-day moving average, which it has not done since mid-April's bottom. It is slightly below $1.0860 today. The losses in the Europe today have stretched the intraday momentum indicator warning early North American participants to tread carefully. Sterling made a marginal new two-month high in Asia Pacific trading around $1.2760 after the CPI surprise. However, it has been sold over the last few hours to around $1.2720 in the European morning. There may be scope for a little more on the downside, but support is seen in the $1.2700-10 area. Yesterday's low was recorded in North America near $1.2685. Unlike the euro, sterling has not settled below the five-day moving average since May 9. It is found at almost $1.27 today. 

America

It is another session with a light US economic calendar. Existing home sales do not often capture the imagination of market participants. Some banks estimate that 80% of US mortgages are at 5% or less. The thinking the gap between these existing mortgages and new ones discourage existing home sales. The trough was reached last October (3.85 mln pace, seasonally adjusted, annual pace). Existing home sales reached 4.38 mln in February, the highest since February 2023, but slipped back to 4.19% in March. A small rise is anticipated in April. The FOMC minutes pose headline risk. Recall that the two-year yield fell from about 5% to almost 4.70% starting the FOMC meeting and the following two sessions. The Dollar Index was near the high for the year (~106.50) and fell to around 104.50 over the same time. Recent comments from Fed officials suggest a hawkish hold next month with the median dot moving from three cuts to less than two, probably.

The Canadian dollar was sold on the soft CPI yesterday. The softer underlying core measures spurred a reassessment of the odds of a cut at the June central bank meeting. The odds are now slightly below 60% from about 43% at Monday's close. The US dollar rose to a five-day high near CAD1.3675 and tested the 20-day moving average. The CAD1.3690 area is the (38.2%) retracement of the greenback's decline from the year's high set on April 16 (~CAD1.3845). The high in the European morning is near CAD1.3670. The next retracement (50%) is closer to CAD1.3720. There are options for $560 mln at $1.3680 and another set at CAD1.3725 for $675 mln that expire today. The greenback recovered from a fresh five week low a little below MXN16.53 and traded up to MXN16.6675. The peso was the weakest currency in the region yesterday. The peso's 0.40% decline was its largest here in May. The dollar bullish price action may have dented by its failure to settle above Monday's high (~MXN16.6415). Although the dollar pulled back to almost MXN16.59 today, the risk is on the upside and initial resistance is seen around MXN16.75, then last week's high near MXN16.90.

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