Dollar is Softer Ahead of the Employment Report

Overview: The greenback is trading with a softer bias ahead of the US jobs report. Solid, even if not spectacular job growth, is expected. However, recent survey data warns of the downside risks. Moreover, counter-intuitively, the dollar has not often rallied this year into the employment data, but frequently has in response. The dollar is softer against the G10 currencies. The Norwegian krone is the strongest, up about 0.6% after the central bank delivered a hawkish hold, by warning that rates may need to stay restrictive longer than it has previously anticipated. Also, of note, the greenback made a new low for the week against the yen near JPY152.75, which is also a new three-week low. Emerging market currencies, but the Czech koruna and South African rand are also firm against the dollar today, and the offshore yuan firmed to its best level since mid-March. 

Asia Pacific equities are mixed, but the highlight is the ninth consecutive rally in the Hang Seng, and over the run it is up almost 14%. The mainland shares that trade in HK have risen in eight of the past nine sessions and has also risen nearly 14%. Europe's Stoxx 600 is rising for the first time since Monday, and it needs some follow-through gains to negate this week's decline after rallying 1.75% last week. Encouraged by some corporate earnings, US index futures are extended this week's gains, but the US jobs report is key. Benchmark 10-year yields are slightly softer in Europe and are little changed on the week. The 10-year US Treasury yield is near 4.57%, off about four basis points this week. Gold is consolidating quietly, straddling $2300. It looks to be the first back-to-back loss since February. June WTI is consolidating after falling about 6% in the past four sessions. It reached nearly $78.40 yesterday, its lowest level since March 13. It has fallen by about 5.8% so far this week, which is the largest decline in three months.

Asia Pacific

Chinese and Japanese markets are closed for national holidays today. Next week, Japanese highlights include March labor earnings and household spending. Cash earnings continue to lag inflation but using the same sample base, cash earnings are faring slightly better. The weakness in March retail sales (-1.2% vs. median forecast in Bloomberg's survey of a 0.2% decline) warns of continued weakness in household spending. On a year-over-year basis, Japanese household spending last increased in February 2022. The Japanese economy appears to have contracted slightly in the first quarter. Note that Japanese markets are closed on Monday. In this week's rounds of intervention, Japanese officials took advantage of thin market conditions to boost the impact of its operations. The prospect of another bout of intervention may keep many participants cautious. 

China's Caixin service and composite PMI will be reported early Monday. China is due to report its foreign reserves. The decline in the other reserve currencies in April (-4.1% JPY, -1.2% Euro, and -1.0% GBP) suggests a decline in the dollar value of China’s reserves from $3.245 trillion in March, which was the highest since the end of 2021. Lending and trade figures are also due. The April price gauges will be reported next Saturday, May 11. Beijing recently announced that the third plenum (third since the 2022 when the current central committee was selected. Many expected the third plenum would be held last October-November but it was not. It is typically devoted to economic issues. The main topic, according to the state press, will be "deepening reforms and promoting modernization." 

The Reserve Bank of Australia meets on May 8. At the end of last year, the futures market was pricing in almost two rate cuts this year. The market has not been fully discounting even one cut since around mid-March. However, since the slightly firmer than expected Q1 CPI on April 24, the market has priced in a risk of a hike this year (slightly less than a 25% chance). The Reserve Bank of New Zealand meets on May 22. The swaps market shows little chance of a change in stance, but it still is discounting a cut this year and it is fully discounted at the last meeting of the year (November). The pricing in the swaps market is consistent with a quarter-point cut and a 40% chance of a second one. 

The dollar swung from a post-Thursday intervention high near JPY156.30 to nearly JPY153 in the North American afternoon yesterday. It was sold to about JPY152.75 in the thin Asia Pacific session today. The JPY152.55 area corresponds to the (38.2%) retracement target of this year's dollar rally. The halfway mark is around JPY150.20. Although implied volatility has fallen this week, historic or actual volatility has risen. One-month historic vol is above 12% from 7.6% at the end of last week when the spike to JPY158.45 spooked officials. It was around 4.7% the previous day (April 25). The Australian dollar extended Wednesday's recovery to reach almost $0.6575 yesterday and is testing the week's high set on Monday near $0.6585. Nearby resistance is in the $0.6600-$0.6625 area. Note that there are options for A$1.2 bln at $0.6625 that expire Monday. Initial support is seen around $0.6650. The US dollar plunged to CNH7.1950 yesterday, its lowest level since the Ides of March. Follow-through selling today has seen nearly CNH7.1855 before steadying. The dollar has fallen by a little more than 1% against the offshore yuan this week, ahead of the US jobs report. If sustained, it would be the largest weekly loss since last November. Assuming that the onshore yuan will open sharply higher on Monday, it underscores our sense that the weakness of the yuan was more a reflection of the US dollar's broad strength rather than Beijing seeking export advantage through the exchange rate.

Europe

The eurozone March unemployment was steady at 6.5%. It was between 6.5% and 6.6% last year. Eurozone unemployment has not been lower under monetary union. US unemployment is also low, but the economy has been strong (above trend growth). The eurozone economy has been week and contracted in the second half of last year. Next week, the EC updates its economic forecasts. Its last forecast was for 0.8% growth this year and 2.7% CPI. The ECB's March forecast saw growth at 0.6% and CPI at 2.3% this year. Lastly, the eurozone will also see March retail sales. With Q1 GDP already reported, March retail sales report is not a market mover. However, the recovery in German retail sales (1.8% vs. -1.5% in February). French retail sales saw the first year-over-year gain since May 2022. Spanish retail sales disappointed falling by 0.5%. Italy does not report March retail sales until after the aggregate figure is out, but household consumption looks to have been a drag on Q1 GDP.

The UK reported the final services and composite PMI today. Recall that on Wednesday, the final manufacturing PMI was reported. It was revised to 49.1 from 48.7 but did not appear to have much market impact. The services PMI was revised to 55.0 from 54.9 (53.1 in February). The composite PMI edged up to 54.1 from 54.0 flash reading and 52.8 in February. It was at 52.1 at the end of 2023 and 54.9 last April. There are two highlights next week, the Bank of England meeting on May 9. The swaps market has the first cut priced in for September (though there is nearly an 80% chance of a cut in August). The market has one cut and about a 60% chance of a second cut discounted before the end of the year. Separately, the results of yesterday's elections are still being tallied. The results will be released today and tomorrow. The initial results seem to be in line with polls showing Tories losing broadly with Labour, Liberal Democrats, Greens, and independents doing better. Still, it does not seem like much of a market factor today. 

The euro reached $1.0730 in the North American afternoon yesterday. Every day so far this week, the euro has been capped at $1.0730-35 but today it has reached almost $1.0750. Last Friday, it approached $1.0755. The $1.0745 area is the (50%) retracement of the euro's decline from the high set last month (~$1.0885). The (61.8%) retracement is near $1.0775 and the 200-day moving average is around $1.08. Sterling has chopped between about $1.2465 and $1.2570 this week. It remains in that range today, though approaching the high. The $1.2555 area corresponds to the (61.8%) retracement of sterling's losses from last month's high (~$1.2710). The downtrend line from the March and April highs comes in today near $1.2575. The intraday momentum indicators of both currencies are extended in the European morning. Lastly, we note that as widely expected, Norway's central bank left its deposit rate unchanged at 4.50%. The swaps market is not pricing in a rate cut until next year. Sweden is a different story, and the Riksbank could become the second G10 central bank to cut rates (after Switzerland) next week.

America

It is about the US jobs report today. Some survey data warns that the economy may have lost some momentum and warn of the risk of disappointing employment data today. The ADP private sector jobs estimate was slightly better than expected but is not material. Consider that through Q1, ADP estimated that private sector job growth averaged 158k while the BLS said 212k, and average miss of 44k. The median forecast for private sector job growth in Bloomberg's survey average about 168k in Q1. However, last year, the BLS reported private sector job growth averaged 192k a month, while the ADP estimate averaged 208k. California's minimum wage for fast-food workers rose by more than 25% to $20 an hour. Economists expect average hourly earnings rose by 0.3% last month for a 4.0% year-over-year pace, which if true, would be the slowest since June 2021. The unemployment rate is expected to hold steady at 3.8%. Next week, the calendar turns quieter. The senior loan officer survey and the preliminary University of Michigan survey, alongside the quarterly refunding, are the highlights. 

Canada sees the services and composite PMI today. They stood at 46.4 and 47.0 in March, respectively. The reaction to the US employment report will likely overwhelm the Canadian PMI. Next week, Canada reports its April employment data. The market is looking at slightly better jobs creation, but another tick up in the unemployment rate (to 6.2% from 6.1%). Last April it was at 5%. Turning to Mexico, it reports April domestic vehicle sales. Through March, they are up about 4.7% year-over-year. US vehicle sales rose by about 4.5% in the first quarter. Several hours before the central bank makes its rate announcement on May 9, Mexico will report April CPI. The improvement appears to be slowing, and the central bank is widely expected to standpat after cutting rates at its last meeting (March).

The risk-on mood and the US dollar's broad pullback helped the Canadian dollar recoup the losses seen earlier this week. The unexpected deterioration of Canada's March trade balance (C$2.28 bln deficit compared with the median forecast in Bloomberg's survey for a C$1.2 bln surplus) and the sharp downward revision to the February surplus (~C$0.50 bln vs. C$1.4 bln) did not seem to impact the Canadian dollar. On Tuesday, the greenback surged from about CAD1.3660 to CAD1.3785. It pulled back to CAD1.3700 on Wednesday and CAD1.3670 yesterday. It eased to about CAD1.3655 today. The US dollar saw CAD1.3635 last Friday and almost CAD1.3630 on Monday. A break of CAD1.3620 could spur a leg lower toward CAD1.3550-CAD1.3565. Initial resistance is seen around CAD1.3720. The US dollar fell to a new two-week low against the Mexican peso yesterday (~MXN16.9020). But again, the greenback was bought and recovered back above MXN17.00 in late dealings, though settled near MXN16.9850. A break of MXN16.88-MXN16.90 may bolster sentiment. Other Latam currencies performed considerably better. The Brazilian real’ nearly 1.6% rally led emerging market (and G10) currencies. The Chilean peso was a close second, rising 1.5%. The Peruvian sol's nearly 1% gain rounds out the top three currencies against the greenback yesterday.

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