Overview: The new week has begun off quietly. The
dollar is in narrow ranges against the G10 currencies, +/- 0.15% as the North
American market prepares to open. The Dollar Index is trading inside the narrow
pre-weekend range. With softer US CPI, retail sales, and industrial production
due this week, we have a downside bias for the greenback. Most emerging market
currencies are firmer. A few Asian currencies, including the Chinese yuan and
Philippine peso are among the exceptions.
Equity markets are mixed. The
MSCI Asia Pacific Index was flat last week after rally more than 6% in the
previous two weeks. Japanese, Chinese, and South Korean markets traded heavier
today, while other large bourses in the region advanced. Europe's Stoxx 600 is
threatening to snap a six-day advance and is slightly softer in late morning
turnover. US index futures are a little firmer. The S&P and NASDAQ have
three-week rallies in tow. The BOJ offered to buy few JGBs, and this pushed the
10-year yield up a few basis points. China is preparing to sell CNY1 trillion
(~$138 bln) long-term bonds (20-50 years) starting at the end of the week. European
benchmark 10-year yields are off 1-2 bp. The US 10-year Treasury yield is a
little softer after settled near 4.50% before the weekend. Gold peaked before
the weekend near a three-week high ($2378.50) but is heavier now and trading
below last Friday's low. Nearby support is seen around $2334. June WTI is
recovering from a three-day low set earlier today near $77.80. It recorded an
outside down day before the weekend, having been turned back from $80. Consolidation
is the theme.
Asia Pacific
China reported April
inflation measures over the weekend. Consumer prices rose 0.3% year-over-year, an insignificant
change from the 0.1% reported in March. Month-over-month, CPI rose by 0.1%
after tumbling 1.0% in March. The conventional narrative sees weak demand as
the cause of low inflation in China. While there is a kernel of truth to it, it
is overstated and obscures other elements. For example, China's CPI is heavily
weighted toward food for which demand is not particularly elastic. Food at home
accounts for 8.7% of the US CPI, for example, bumped by the 2020 pandemic
behavior. In China, food is a fifth of the CPI basket. Food prices are of 2.7%
year-over-year. Excluding food and energy, core CPI rose 0.7% year-over-year in
April (0.6% in March). Also, frequently in China it appears that there is often
intense competition domestically and the price wars drive down prices. The
survivors are national champions and become global players. Producer price
deflation continues, but at a moderating pace. The 2.3% year-over-year decline
in April is the least since February 2023, and three-month average has slowed
for the past three quarters. Separately, China also reported lending figures
and aggregate financing show an unexpected and rare contraction. However, this
seemed to reflect technical issues and is unlikely to be the signal of the
direction of lending. The bank lending did increase to CNY10.19 trillion
year-to-date from CNY9.46 trillion. The PBOC sets the benchmark one-year
medium-term lending facility rate this week, but officials seem in no urgency
to cut rates.
There are three data points
in the region this week. Two take place on May 16 and the other on May 17. First is the
initial estimate of Japan's Q1 GDP. A small decline of 0.2%
(quarter-over-quarter annualized) is expected, but the weakness appears
broad-based. Consumption, business investment, exports, and industrial output
all likely contracted. However, economic activity seemed to pick-up and Japan
is likely returning to growth this quarter. Shortly after Japan's GDP,
Australia reports April employment. Australia averaged job growth of almost 41k
a month in Q1 24, which is the best quarterly performance since Q1 23. In the
first quarter of this year, full-time positions accounted for all the job
growth. The third set of data points comes from China. It will likely report
that that the economy is off to firm start to Q2. Retail sales, industrial
output, and fixed asset investment likely improved sequentially on a
year-over-year basis. However, the property sector remains a drag. New and used
home prices likely extended their decline and property investment and sales are
expected to have continued to decline.
The dollar rose by about
1.75% against the yen last week to recoup a little more than half of the losses
the previous week. It
closed firm, near the week's high of almost JPY156, which is about the halfway
mark of the intervention-inspired losses (~JPY160.15 to JPY151.85). Many market
participants are looking for near-term re-test on the JPY160 area. We are less
sanguine given the likelihood of softer US data this week. The BOJ announced it
would purchase fewer 5–10-year government bonds in its regular operation
(~JPY425 bln vs. JPY475.5 bln, or $2.7 bln vs. $3.02 bln). It is seen as a
protest against the weak yen, and the first such reduction since December. The
next retracement objective (61.8%) is around JPY157. On May 16, the day after
US CPI and retail sales, there are options for almost $2.5 bln that expire in
the JPY159.30-50 area. The dollar continues to hold below JPY156. The
Australian dollar consolidated last week and finished almost unchanged
(<0.10%). It had appreciated around 3% in the previous two weeks.
Except for a brief exception in the middle of last week, the Aussie was
confined to the range set with the May 3 US jobs data
(~$0.6560-$0.6645). It is near $0.6615 in the European morning. The
intraday momentum indicators are stretched in front of the pre-weekend high
closer to $0.6625. The PBOC set the dollar's reference rate at
CNY7.1030 (CNY7.1011 on Friday). The average in Bloomberg's survey was
CNY7.2261 (CNY7.2128, previously). Although we would attribute most of the
yuan's minor loss over the past two sessions to the weakness of the yen, some
observers attribute it to the US tariffs that reportedly will be announced
tomorrow on Chinese electric vehicles, solar panels, and batteries. Ironically,
some of the same observers think that China should be mounting a stronger
defense of its currency because it has a trade surplus. The US does not import
many EV (or steel) from China, so the new tariffs are likely preventative in
nature and more symbolic as nothing material will change. At CNH7.2380 the
dollar has recouped almost two-thirds (61.8%) of its losses against the
offshore yuan. It reached CNH7.2435 today. The CNH7.2500-50 area the next chart
resistance.
Europe
The eurozone reports its
second look at Q1 GDP and will provide more details on May 15. The initial estimate was 0.3%, its first
expanding quarter since Q2 23 and its strongest since Q3 22. Even though the
eurozone economy contracted in Q4 23, consumption recovered from the 0.3%
contraction in Q3, rising by 0.6%. It is seen matching that in Q1 24.
Government spending is expected to have risen, while business fixed investment
may have slowed. March trade data is not yet available (Due May 21), but the
current account surplus appears to have narrowed in Q1 24 from Q3 23. The UK
reports employment data on May 14. The data may pose headline risk but before
the BOE meets again on June 20, it will have seen two more inflation reports
and one more employment report.
The euro edged slightly
higher for the fourth consecutive week, but it went nowhere. In fact, the euro, like the Australian
dollar, traded within the range set on May 3 all last week, with one brief
exception in the middle of the week. It traded up to about $1.0810 on May 3.
The 200-day moving average is around $1.0790, which the euro is testing in
Europe. It has not closed above it since April 4. The downtrend line we have
been monitoring drawn off the March and April highs is found near $1.0780 today
and falls to falls to around $1.0765 at the end of the week. Instead of
consolidating, sterling fell last week. It recorded a two-week low
near $1.2445 on a dovish hold by the Bank of England. It recovered to post an
outside up day by closing above the previous day's high. Follow through buying
ahead of the weekend was aided by the stronger than expected Q1 GDP (0.6%,
double what was expected) and lifted sterling to a three-day high to $1.2540,
slightly below the 200-day moving average. That area is also the (50%)
retracement of the losses since the May 3 high near $1.2635. There are GBP725
mln options at $1.2530 that expire today and another set for GBP545 mln at
$1.2565 that also roll off today.
America
The US economy appears to
have lost some momentum at the start of Q2. This will likely be evident in this week's
reports. Consumer prices probably moderated, retail sales likely slowed
markedly despite the stronger auto sales, and industrial output and
manufacturing production probably softened. If true, it would push against
arguments that the economy is re-accelerating and that price pressures were
building. Headline CPI may slow to 3.4% year-over-year from 3.5% and the core
rate may ease to 3.6%-3.7%, depending on the rounding. To be sure, this will
not be sufficient to get the Fed to cut rates in June, but it could still weigh
on yields. On the other hand, housing starts likely bounced back from the heady
14.7% decline in March. It is too early in the quarterly cycle to put much
credence on the Atlanta Fed's GDP tracker (3.3%) and the median forecast in
Bloomberg's survey is for 1.6% Q2 GDP. The survey shows the median forecast
remaining under 2% on a quarterly basis through H1 25. The rise in inflation
expectations in the preliminary University of Michigan's survey before the
weekend spurred a backing up of US rates. However, a switch to more internet
surveying seems to be a factor. Internet surveys reportedly show higher
inflation expectations than telephone surveys.
The US dollar has been
trading between roughly CAD1.36 and CAD1.38 for the past month. The five- and 20-day moving averages are
hovering near the middle of that range. Net-net, the greenback is flat against
the Canadian dollar over the past two weeks. The low for the week was set after
the stronger than expected employment data ahead of the weekend near CAD1.3635.
But the dollar bounced back, as it did more broadly even if not deeply after
the uptick in the University of Michigan's preliminary May survey that showed
an uptick inflation expectations. The greenback settled virtually unchanged. Continued
consolidation may be the most likely near-term scenario. The Mexican
peso was a different story. The 1.15% gain in the peso was second to
the Chilean peso last week to lead emerging market currencies higher. New highs
in copper prices, as China producers try to organize a cut in output, may have
helped underpin the Chilean peso. Before the weekend, the Mexican peso reached
its best level in three-and-a-half weeks. The higher-than-expected CPI and
cautious central bank was greeted with peso buying. The carry remains
attractive and the implied volatility, which soared are the flash crash, is
calming. One-month implied volatility peaked near 14% on the flash crash (April
19) and ahead of the weekend it fell to about 9.6%, which is the lowest since April
12. The greenback is holding slightly above the pre-weekend low set around
MXN16.7215. The next target may be near MXN16.65.
Reviewed by Marc Chandler
on
May 13, 2024
Rating:
