Overview: Disappointing flash May PMI readings in Europe and the Asia Pacific helped the US dollar stabilize after yesterday's drop. Asian currencies, including the yen, has been unsettled by reports that in bilateral trade discussions with the US, exchange rates have been discussed. This, coupled with extensive unhedged dollar exposure rocked several of the regional currencies in recent weeks. Yesterday's 1.6% surge of the South Korean won has been mostly though not fully unwound today. The dollar has edged lower against the Taiwan dollar for the third consecutive session today, and the sixth time in the past seven sessions. The greenback is higher against the all the G10 currencies today but the Japanese yen, which has also been impacted by fx-related talks.
Following the sharp US equity losses yesterday, Asia Pacific bourses tumbled today. Indonesia was the notable exception, and the rupiah, incidentally, is the strongest currency in the world so far today, rising by about 0.4% against the US dollar. Europe's Stoxx 600 is off nearly 1%. It would be the first back-to-back loss in the index in two weeks. US index futures are slightly firmer. Japanese bonds remain under pressure, and European benchmark yields are mostly have edged higher. After yesterday's surge, US two- to 10-year yields are 1-2 bp lower. Gold reached a nine-day high near $3345 before falling back to new session lows a little below $3305. July WTI spiked to nearly $64.20 yesterday amid report that Israel was considering a strike on Iran but reversed slow and settled near $61.35. Confirmation that OPEC+ was still planning on continuing to boost output may have encouraged follow-through selling today to around $60.40, where the 20-day moving average is found.
USD: The Dollar Index was sold through 99.50 yesterday, which is the (6.18%) retracement of the bounce from the three-year low set April 21 (~97.90). The bounce itself stalled near 102.00, a little ahead of the (6.18%) retracement of the losses from the late March high (~104.70). It is consolidating quietly but firmly between about 99.45 and almost 99.85 so far today. Resistance is seen in the 100.00 area. Still, the five-day moving average will fall back below the 20-day moving average today or tomorrow, and the momentum indicators have begun curling lower. Meanwhile, the fear of financial stress and the cracks beginning to appear in the labor market may become more salient. The US labor market is gradually slowing. The three-month average non-farm payroll increase was below the six-month average for the third month in a row in April. Job growth in the first four months of the year is almost 20% less than the same year ago period. Today's weekly jobless claims may draw some attention. The four-week moving average of weekly initial jobless claims is at its highest level since last October and the four-week average of continuing claims is at the highest for the year. The cooling of immigration, the government lay-offs, and the weak tourist bookings underscore the risk of continued slowing. Given Fed Chair Powell's contrast of weak survey data and more resilient real sector data, the preliminary May PMI is unlikely to have much impact. April existing home sales are expected to bounce back after falling nearly 6% in March.
EURO: After stalling near the 20-day moving average on Monday and Tuesday, the euro pushed through it (~$1.1280) yesterday and traded above $1.1360. The $1.1380 area is the (61.8%) retracement of the decline from decline from the $1.1575 area seen late April, which was the best level since November 2021. The momentum indicators are turning higher, and the five-day moving average is poised to shortly cross back above the 20-day moving average. But the euro is trading heavier today and new session lows have been recorded in late European morning turnover near $1.1290. Support is seen in the $1.1265-80 area. The preliminary May PMI disappointed. It showed the eurozone manufacturing continues to contract (49.4 vs. 49.0). It is the fifth consecutive month of improvement, but it has not been above the 50 boom/bust level since June 2022. More disappointing was the service sector. The preliminary PMI fell back below 50 (to 48.9) for the first time since last November. It was the fourth decline in the five months of the year and the largest of the year. The high for the year was set in January (51.3). The composite PMI was also dragged below 50 (to 49.5). It was at 52.2 in May 2024. In Germany, both the manufacturing and services PMI remained below 50 (48.8 and 47.2, respectively) and the composite (output) fell below 50 (48.6), the lowest of the year. Separately, Germany's May IFO survey saw a continued improvement in expectations (highest since last May), but the current assessment weakened for the first time in three months. France's manufacturing and services PMI also remained below 50 even though both edged up. The preliminary composite reading rose to 48.0 from 47.8. That matches this year's high. The market continues to be confident that the ECB will cut rates again when it meets early next month.
CNY: After reaching a six-day high near CNH7.2265 on Tuesday, the dollar's broad weakness pulled it back to slightly below CNH7.20 yesterday. Follow-through selling initially took it to CNH7.1940, a six-day low. It recovered to new session highs near CNH7.2080 in the European morning as the greenback found better traction more broadly. The PBOC set the dollar's reference rate at CNY7.1903. That was 0.05% lower than yesterday's (CNY7.1937), which is the largest change in over a week, and the lowest dollar fix since April 3. The lower reference rate limits the dollar's upside/yuan's downside.
JPY: The dollar fell against the for the third consecutive session yesterday and the sixth time in the past seven sessions. It extended its losses initially today to around JPY142.80, a new two-week low. The early denial that US Treasury Secretary Bessent and Japan's Finance Minister Kato did not discuss exchange rate levels, while acknowledging current levels reflected fundamentals, lifted the dollar to session highs near JPY144.40 but the gains were unwound and the greenback was sold to JPY142.80 in early European turnover. It recovered quickly but appears to be stalling around JPY143.50. The momentum indicators have turned down and the five-day moving average is crossing below the 20-day moving average today. The markets tend not react much to Japan's PMI, but for the record the preliminary manufacturing PMI edged up to 49.0 from 48.7. It has not been above 50 since May-June 2024. The services PMI weakened to 50.8 from 52.4. It was at 50.9 at the end of last year. The composite stands at 49.8 (51.2 in April). The sharp sell-off in long-term JGB yields is causing some consternation but not on Japanese bank shares. The Topix index of bank shares collapsed by 37% from late March through early April, but it has rallied strongly and has overshot the (61.8%) retracement target. It is up almost 40% from the lows. Insurance companies are thought to be more exposed to very long end of the Japanese curve. The index of Topix insurance companies crashed by more than a quarter in late March-early April swoon. It too recovered smartly but has begun falling again. It was off today for the fourth consecutive session and has lost more than 4% this week. The 40-year bond yield has risen by about 90 bp in the six-week advance coming into this week and it is up another 22 bp this week. The 30-year yield was up about 65 bp over the past six weeks and is up about 22 bp so far this week.
GBP: Sterling reached a new three-year high yesterday near $1.3470. The five-day moving average crossed above the 20-day moving average on Tuesday, and the momentum indicators have turned higher, but had not reached over-sold territory. A consolidative tone has emerged today. A break of the $1.3370 indicates a near-term corrective phase. The UK's preliminary May manufacturing PMI ticked down to 45.1 from 45.4. It has not been above 50 since last September. The services PMI had slipped below 50 in April (49.0) for the first time since October 2023 but returned to 50.2 in the preliminary May reading. However, the composite remained below 50 (49.4 vs. 48.5) for the first back-to-back sub-50 reading late 2023. The composite was at 53.0 in May 2024.
CAD: The US dollar fell for the third consecutive session against the Canadian dollar, its longest losing streak in a little more than a month. The greenback fell to about CAD1.3815, matching the May 8 low. It is held above CAD1.3845 earlier today and is testing the 20-day moving average in Europe near CAD!.3885. Yesterday's high was near CAD1.3920 and a move above it helps lifted the technical tone. Still, the daily momentum indicators are set to turn lower.
AUD: The Australian dollar fully recovered from the losses suffered at the hands of the dovish central bank. It reached a five-day high yesterday near $0.6470. A trendline off those two highs is near $0.6485 today. It is trading with a softer bias today but within yesterday's range (~$0.6415-$0.6470). It found support at the end of last week and earlier this week slightly below $0.6400, though last week's low was near $0.6355. The momentum indicators are not inspiring but broadly consistent with the consolidation that has dominated this month. Australia's manufacturing PMI rose every month in Q1 25 before slipping in April to 51.7 wand was unchanged in the flash May reading. The services PMI has been eased to 50.5 in May from 51.0 in April. It has not been below 50 since January 2024. The composite PMI ticked down to 50.6 from 51.0 in April. It finished last year at 50.2 and was 52.1 last May.
MXN: The dollar rose against the Mexican peso for only the fourth time this month. We suspect the sharp losses in the US equity market took a toll on the peso. Over the past 30 sessions, changes in the peso are about 0.60 correlated with the S&P 500 and are greater than the G10 currencies. It rivals the Brazilian real, which posted a small gain against the dollar yesterday. The peso's roughly 0.5% loss was the most among emerging market currencies. Mexico updates its Q1 GDP estimate (initially 0.2% quarter-over-quarter) today and the March IGAE economic activity report is due, which is similar to a monthly GDP estimate. They will be overshadowed by the CPI for the first half of May CPI. The year-over-year headline rate may rise above 4% (the upper end of the target range) for the first time this year. The core rate may hold a whisker below the threshold. Given the economic weakness, the firmer CPI is unlikely to impact expectations that Banxico will likely cut the overnight rate by another 50 bp when it meets next on June 26.
Reviewed by Marc Chandler
on
May 22, 2025
Rating:
