Overview: The tone in the foreign exchange market
today is mostly consolidative. The two notable exceptions are the yen and yuan.
Despite higher JGBs yields amid speculation that the BOJ will scale back bond
purchases, as it did yesterday, to support the yen, the greenback is at its
best level since the suspected intervention. The next important technical area
is near JPY157.00. The US is set to announce a new set of tariffs on a wide
range of Chinese goods later today. Expectations that policy is about to be eased,
coupled with the yen's weakness, appears to have helped push the yuan to new
seven-day lows. Softer UK labor data weighed on sterling, but it recovered
after the $1.25 area held. There are GBP1 bln of options that expire there
today. Most emerging market currencies are firmer but a handful of Asia Pacific
currencies and the South African rand.
Equities are mixed. Outside of China, Hong
Kong, and Australia, most large bourses in the Asia Pacific region edged
higher. The longest rally in Europe's Stoxx 600 since October-November 2021 is
being challenged today. The benchmark is flat near midday, with a seven-day
advance in tow. US index futures are little changed. The 10-year JGB yield rose.
It held slightly below 1%, its highest level since last November. The soft
labor market report is helping UK Gilts shine, with a nearly two basis point
decline in the 10-year benchmark. That is the most in Europe today, where
yields are mostly softer by less than a single basis point. The 10-year US
Treasury yield a little lower near 4.73%. Gold is firmer near $2346 after
falling 1% yesterday. June WTI is flattish near $79. It continues to
consolidate, mostly between $75 and $80 so far in May.
Asia Pacific
Japan's April PPI is of little
consequence. The
year-over-year rate of 0.9% was unchanged from March (revised from 0.8%). The
challenge in CPI, which is likely to rise as the household subsidies for energy
roll-off this month and next. China set the benchmark one-year Medium-Term
Lending Facility rate first thing tomorrow. It is expected to be steady at
2.5%, while the volume may increase from CNY100 bln to CNY150 bln. The focus is
on yen following the recent bouts of intervention and the BOJ's decision
yesterday to buy fewer JGBs. Meanwhile, reports suggest that the US could
announce new steep tariffs on China's electric vehicles, and some other
elements of the new economy (solar panels and batteries).
The dollar pushed above JPY156 in North
America yesterday. It
reached JPY156.25 and follow-through buying today brought to JPY156.55, its
best level since post-intervention low of about JPY151.85.
While the JPY156 represented the halfway mark of the dollar's drop from nearly
JPY160.20 on April 29, the (61.8%) retracement is about JPY157. The dollar's
gain against the yen were recorded despite the slippage in US rates, the greenback's
heavier bias, and a rise in JGB yields. The Australian dollar traded on both
sides of the pre-weekend range but settled little changed. It is
continuing to consolidate within May 3 range (US jobs day) of roughly
$0.6560-$0.6645. The Aussie has not closed above $0.6650 since mid-January. A
break of $0.6550 would warn of a near-term top. A tight range is prevailing
today (~$0.6598-$0.6612). There are options for about A$2.1 bln at $0.6590 that
expire today. The PBOC set the dollar's reference rate at CNY7.1053
(CNY7.1030 Monday). The average projection in Bloomberg's survey was
CNY7.2309 (CNY7.2261 yesterday). Against the offshore yuan, the dollar settled
yesterday above its 200-day moving average (~CNH7.2380) for the first time
since May 1. The next resistance area may be in the CNH7.2480-CNH7.2550
area.
Europe
A modest recovery seems underway in the
eurozone and UK after a poor H2 23. Germany's ZEW survey for May improved for the third consecutive
month in May (current assessment) and is at its best level since last August.
The expectations component also improved, but as one would expect, it is
leading the current assessment. It has risen without fail since last August,
and May's reading is the best since Russia's invasion of Ukraine. At the end of
last week, the UK reported that the economy expanded by 0.6% in Q1 24, which
was above expectations and followed two contracting quarters. It was the
strongest growth since Q4 21 and is a bit exaggerated. It is expected to grow
by around 0.2% here in Q2. Still, the labor market seems gradually to be
softening. This was seen in slightly slower average earnings growth, continued
decline in payrolls, and a tick up in unemployment. There is about 60% chance
of Bank of England rate cut next month. That is roughly twice the probability
seen at the end of April.
The euro did not trade below $1.0780 in
North America and set a new session high slightly above $1.0805 in early
dealings. Today may be
another day of constructive consolidation. Yesterday was the second time this
month that the euro traded above $1.08 intraday but failed to close above it.
The momentum indicators appear favorable, and the five-day moving average is
above the 20-day moving average. The softer US data that are expected in the
coming days may help lift the euro. The immediate target is $1.0835 but maybe
there is potential to last month's high, slightly below $1.09 this week. Sterling
extended its recovery off last Thursday's BOE-inspired low near $1.2450. It
reached almost $1.2570 in early North American turnover. After holding above
$1.2550 after the high was set, it was sold to almost $1.2500 earlier today. The
selling pressure did not appear sparked by the employment data as much as by
the BOE's Chief Economist Pill who seemed to confirm a summer rate cut. The
thin markets in early European turnover may have contributed to the slump and
quick recovery back to the $1.2545 area. The are options for GBP1 bln at
$1.2500 that expire today.
America
The markets typically are not particularly
sensitive to US producer prices, though health care and portfolio management
components feed into the personal consumption expenditures. Shortly after the PPI, Governor Cook
speaks a NY Fed event, but the highlight is Fed Chair Powell, who speaks at a
Dutch bank event (~10 am ET). Consistent with the "US economic growth is
moderating” theme that we think is unfolding we note that April NFIB Small
Business Optimism Index is due. It is expected to have declined for the fourth
consecutive month. It already was at its lowest level in more than a decade.
There were reports last week that the Biden administration may announce new
tariffs on China's electric vehicles, batteries, solar cells, legacy
semiconductors, ship-to-shore cranes, and rare earths, as early as today. Treasury
Secretary Yellen expressed hope that Beijing will not retaliate in the way one
may hope that one's provocative actions have not negative consequences.
The US dollar traded quietly within the
pre-weekend range against the Canadian dollar (~CAD1.3635-CAD1.3690) and it
remains inside yesterday's range so far today. The greenback is hovering slightly below
the middle of the CAD1.36-CAD1.38 range more-or-less seen this month. The
momentum indicators are mixed and continued broad consolidation appears to be
the most likely scenario. The greenback has been trending lower since the
flash crash of the peso saw it spike to MXN18.2135 on April 19 (from ~MXN16.92).
Before the weekend and again yesterday, dollar bids emerged below MXN16.75. Yesterday's
high was near MXN16.8260. It is holding below there today. Beyond it,
resistance is seen around MXN16.90. Recall last week's high was near
MXN17.0340. Meanwhile, the dollar appears to have entered a new and higher
range against the Brazilian real. For the past month, the greenback is holding
above BRL5.05. Nearby resistance is seen near BRL5.20, which it has not traded
above since April 22.
Reviewed by Marc Chandler
on
May 14, 2024
Rating:
