Marc to Market
Risk Appetites Return Bigly
Tue, 18 May 2021 03:32:39 PDT

Overview:  In Asia, equities markets rallied strongly, led by the more than 5% gain in Taiwan, the most in over a year as Monday's 3% drop was more than overcome.  The Nikkei gained more than 2% despite the deeper than expected contraction in Q1 GDP.  Hong Kong, South Korea, and India also rose more than a 1% gain as tech came roaring back.  In Europe, where equities have edged higher, the focus seemed to shift to the foreign exchange market, and the dollar was sold off, with the euro climbing above $1.22 and sterling pushing above $1.42.  Only the Canadian dollar, Swedish krona, and Japanese yen rose less than 0.3%.  Emerging market currencies, led by eastern and central Europe, are broadly higher, and the JP Morgan Emerging Market Index is up for the fourth consecutive session.  The Turkish lira, a notable exception, is sporting a softer profile.  US yields continue to deny the greenback much support.  The 10-year benchmark is hovering around 1.65%, little changed on the day, while European yields are slightly softer.  Gold traded at four-month highs today over $1870 and is consolidating in the European morning.  Oil prices are also higher, with Brent testing $70 and July WTI probing $67.   

Asia Pacific

Japan's economy contracted by 1.3% in Q1 quarter-over-quarter, which is a somewhat larger contraction than economists anticipated.  As the recent retail sales report hinted, consumption held up better than feared, falling 1.4% instead of -1.9%.  However, the big miss was on business spending.  It was expected to rise by 0.8% and instead fell by 1.4%.  The deflator was -0.2%, which was also deeper than expected.  Inventory accumulation was a little stronger than expected.  Net exports shaved 0.2% off GDP, in line with expectations, and a good reminder that Japan is not an export-driven economy.  Net exports contributed an average of 0.1% to growth over the last four quarters and the last 20.  With the third state of emergency covering 40% of the economy set to continue through the end of the month, the current quarter is challenging.  

The minutes from the Reserve Bank of Australia's meeting failed to shed fresh light on the policy outlook.  Upcoming economic data and financial market developments are the keys to the next policy decision of whether to roll over the yield curve control target of the next three-year bond and extend QE. The RBA meets on June 1, but the officials have already pointed to the July 6 meeting as the timing of its decision.  Meanwhile, the trade agreement with the UK, hoped to be concluded by the G7 meeting next month, is reportedly running into a debate in London over Australia's agriculture imports.  

The dollar is trading lower against the yen for the fourth consecutive session.  It is testing the 20-day moving average near JPY108.85, after peaking in response to the jump in US rates after last week's CPI report, around JPY109.80.  Trendline support off the April and early May low comes in around JPY108.70 today, and a break signals a test on the recent lows by JPY108.35.  The Australian dollar traded at a four-day high of almost $0.7815 after $0.7750 held, which is where a A$1 bln option is struck that expires today.  Initial support now is around $0.7680, and the next upside target is the high from the middle of last week, just shy of $0.7850.  Chinese officials may not like it, but the yuan is back to almost last week's highs, which had seemed to elicit a signal from officials to go slowly.   The dollar dipped below CNY6.42 for the first time since the low for the year was set on May 10 near CNY6.41. The PBOC's dollar fix at CNY6.4357 was a bit more than average away from the median bank model forecast in Bloomberg's survey (CNY6.4369).  However, officials cannot lean too hard against the broad pressure for fear of not only antagonizing the US but also potentially spurring discontent among foreign portfolio managers who anticipate yuan gains in their investment in Chinese bonds, where premium over US Treasuries remains below 150 bp after having begun the year around 220 bp.  


The UK data showed that after a poor January and February, the British economy's rebound began in earnest in March.  Today's employment data provide more evidence of that pattern. The claimant count fell by 15.1k in April, and March's increase of 10.1k was revised to show a decline of 19.4k.  Employment rose by 84k in March (three months over three months), well above the median forecast in Bloomberg's survey for a 50k increase and February's 73k drop.   April's CPI will be reported tomorrow, and the base effect is expected to drive the year-over-year rate higher.  The BOE, except for the outgoing chief economist, has argued, like the Fed and ECB officials, that the rise in price pressures is most likely to prove temporary. 

The eurozone's March trade surplus of 13 bln euros was a third smaller than expected, but this was offset by the upward revision of the February surplus to 23.1 bln euros from 18.4 bln.  This left Q1 GDP unchanged at -0.6% from the preliminary estimate.  Separately, the German constitutional court rejected an attempt to re-visit last year's decision that did not block the Bundesbank's participation in the ECB bond-buying program.  Last year, it required that the German parliament and central bank review the impact of the bond purchases.  

The euro stalled around $1.2180 last week, backed off to almost $1.2050.  From there, it had a running start at $1.2200, which it has pushed above in the European morning to reach nearly $1.2225 today.  This was its best level since late February, when it traded to almost $1.2245.  Above there, little resistance is seen ahead of the year's high set in early January, near $1.2350.  The note of caution for North American traders is that the euro is above its upper Bollinger Band (two standard deviations above the 20-day moving average). The intraday momentum indicators are over-extended.  Initial support is now seeing in the $1.2180-$1.2200 area.  Sterling has poked above $1.42 for the first time since it recorded three-year highs in late February around $1.4235, which is the next immediate target.  It, too, has pushed through the upper Bollinger Band (~$1.4205), and intraday momentum studies are stretched.  Rather than chase it higher, look for a pullback toward $1.4170.  


The three-month dollar LIBOR was fixed at a record low of a little less than 15 bp yesterday, and the downside pressure does not appear exhausted.  The driving force is the reduction of T-bills, which force participants to other short-term instruments, including commercial paper.  The abundance of short-term funds looking for a home also explains the heavy use of the Fed reverse repo facility.  The T-bill paydown is a function of two chief considerations.  First, parts of the stimulus were funded initially with T-bills and now is being rolled out.  Second, and arguably more important, the Treasury is reducing its cash position ahead of the end of the debt ceiling waiver.  When will the Fed raise the rate of interest on reserves (pays on all reserves, not just excess) or the rate on the reverse repos£  In the past, the Fed has acted when the Fed funds slip to five basis points above the floor, in this case, zero. Fed funds began the year around 9 bp and fell to 8 basis points around mid-February, but by the end of the month, it was trading at 7 bp.  Since late April, the effective average has been six basis points. 

As there is a shortage of bills, there may be a shortage of 10-year TIPS.  This shortage relative to demand is one of the distortions of the break-evens.  More than that, the shortage facilitates a vicious cycle.  The shortage drives prices higher and breakevens wider, and the wider breakevens, in turn, fuel more concern about inflation and increases the demand for TIPS.  On Thursday, US Treasury will sell $13 bln 10-year TIPS.  Tomorrow, Treasury sells $27 bln 20-year bonds.  It is the 20-year bond that seems to be more volatile of the longer-term yields for more than a month and the most challenging auctions.  The head of the Fed's System Open Market Account, Logan, had suggested in early April that the Fed could adjust its purchases to reflect issuance in the coming months.  In this context, the market thought it meant more buying of the 20-year, but it has not materialized, and the market grows impatient.  

The US reports April housing starts and permits today.  The expected small decline is hardly a sense of weakness or loss of economic momentum.  Activity is still around its best level since 2006.  That is the takeaway:  the US housing market is strong and residential investment remains robust.  We note that yesterday's March TIC data showed foreign investors bought a record amount of long-term US securities (~$262 bln), though, given the shape of the curve and relative rates, the cost of hedging out the dollar's currency risk is sufficiently low as to mean that the demand for long-term US assets is not equivalent to the demand for dollars.  Only the Fed's Kaplan is scheduled to speak today among Fed officials, while Treasury Secretary Yellen addresses the Chamber of Commerce.  Canada and Mexico have light economic calendars today.  

The US dollar drew closer to key support near CAD1.20 today to set a new six-year low (~CAD1.2015).  The lower Bollinger Band is close to CAD1.1960. Initial resistance is seen in the CAD1.2030-CAD1.2040 area.  Since the Bank of Canada announced its tapering and brought forward to H2 22, when the economic slack would be absorbed on April 21, the US dollar has fallen by about 5% against the Canadian dollar.  The dollar has edged lower against the Mexican peso, and near MXN19.72 is at its lowest level since the second half of January. The year's low was recorded then by MXN19.55, which is the next important target.  Initial resistance is seen by MXN19.80.  


US and Europe may Announce Tariff Truce
Mon, 17 May 2021 03:53:47 PDT

Overview:  There are two general developments as the busy week gets underway.  First, despite accelerated price readings in the US (CPI, PPI, import prices, and University of Michigan survey), US rates are soft.  The 10-year yield is near 1.61% after rising to 1.70% after the CPI surprise last week.  This, in turn, appears to be limiting the dollar's ability to recover much. However, it is trading a bit firmer against the dollar-bloc currencies and the Antipodeans.  Emerging market currencies are consolidating the pre-weekend losses, while the Turkish lira and Hungarian forint are modestly higher.  Second,  equities are heavy.  China's data did not inspire, but Chinese equities led the mixed Asia Pacific session higher, along with Hong Kong and India.  Japan, South Korea, and Taiwan equities fell.  Both Singapore and Taiwan are tightening social restrictions, and although Singapore shares advanced, Taiwan's nearly 3% decline adds to last week's nearly 8.5% drop.  Europe's Dow Jones Stoxx 600 slipped 0.5% last week and is struggling at slightly lower levels today.  The S&P 500 rose 2.7% in the last two sessions, but the futures are trading with a slightly heavier bias now.  Even with the Colonial Pipeline re-opening, oil prices remain firm, and the July WTI contract is holding above $65.  It has a three-week advance in tow.  Lower rates and some suggest the sell-off in leading tokens in the crypto space is lifting gold prices above $1850 and the 200-day moving average for the first time since early February.  

Asia Pacific

China's data is difficult to read as the year-over-year comparisons are distorted.  Today's flurry of data generally missed expectations, but the recovery seems intact and underscores the official recognition that the economy is "unbalanced and unstable."  April industrial output rose 9.8% after a 14.1% pace in March.  Compared with the same period last year, fixed asset investment increased by 19.9% in the first four months of the year.  It missed the median forecast in the Bloomberg survey barely.  It had grown by over 25% in Q1 21 over Q1 20.  Property investment remained strong, rising 21.6%, which was a little better than expected.  Unemployment fell to 5.1% from 5.3%, which was also lower than economists anticipated.  The biggest miss was retail sales, which rose by 17.7% year-over-year, well off the 25% pace that the median forecast projected.  We suspect there is no major policy implication.  Officials have curbed lending but do not seem to be in any hurry to raise rates.  

Japan's third state of emergency went into effect yesterday.  The area covered by the emergency (Tokyo, Hiroshima, Okayama, and Hokkaido) covers roughly 40% of the world's third-largest economy and runs to the end of the month.  The seven-day average of infections is at a new high for Japan. There will be economic and political consequences.  Japan reports Q1 GDP first thing tomorrow in Tokyo, and there is little doubt that the economy contracted after growing at an 11.7% annualized rate in Q4 20.  The issue is Q2 growth, and the median forecast in the Bloomberg survey of a 4.5% annualized expansion appears optimistic. 

A political consequence is Prime Minister Suga has a limited window to improve his standing ahead of the LDP conference in September and a possible leadership challenge ahead of the October general election.  His support for the Olympics has not helped.  It is not so much about it being a super-spreader event, it could be a costly and dangerous distraction, and it is terribly unpopular. The marathon, for example, is to be run in Hokkaido. The US nation track and field team canceled a workout nearby Tokyo for health concerns.   Still, opposition to the LDP is weak and fragmented.  Its leadership contest will likely decide the next prime minister.  

The US dollar is trading slightly heavier against the Japanese yen for the third consecutive session. However, the losses have been modest. After peaking near JPY109.90 last Thursday, the greenback recorded a three-day low near JPY109.15 today.  It appears to have found a bid in the European morning, and nearby resistance is seen in the JPY109.40-JPY109.50 area.  The Australian dollar initially edged higher, reaching about $0.7785, before faded and slipping lower.  There are options for around A$1.4 bln struck in the $0.7755-$0.7760 area that expire today.  Initial support is seen around $0.7735.  The Chinese yuan slipped marginally lower after snapping a five-week advance.  The PBOC set the dollar's reference rate at CNY6.4307, back in line with market expectations, after seemingly using it to lean against continued yuan strength.  The PBOC money market operations rolled over maturing amounts, which seemed supportive of the interest-rate sensitive financial assets.   


Although the vaccines appear to be effective against the rapidly spreading Indian mutation of Covid 19, it impacts the UK.  It reportedly will cut the time between the first and second doses to eight weeks from 12.  The next phase of the re-opening, though, goes into effect today with looser restrictions on indoor and outdoor activities.  The UK plans are for economy-wide re-opening on June 21, and there is some fear that the mutation will change push it back.  However, the political will is strongly in favor of going forward, and instead are encouraging to speed up the vaccine availability in hard-hit areas.  Meanwhile, the DUP's newly elected leader Poots vowed to strip away parts of the Brexit trade pact that imposes custom checks between Northern Ireland and Britain.  

The first pushback against the US support for a global minimum corporate tax appears to be coming from the UK.  Chancellor of the Exchequer Sunak is concerned that the 21% rate may be too high, even though he has proposed raising the UK corporate tax rate to 25%.  Instead, the UK's Treasury wants the multinational companies to pay more taxes in the countries in which they sell their products and services.  

The Deputy Governor of Hungary's central bank put the market on notice today that it could raise rates as early as next month.  It is not clear if Virag speaks for the majority.  The central bank meets on May 25, and it should help clarify the outlook.  However, the Deputy Governor also suggested that QE could continue and even at higher levels if necessary.  April CPI was 5.1% higher than a year ago, well above the 2%-4% target range.  It was a little above the central bank's forecast and is the most in the EU.  The Czech Republic is also expected to raise rates in August as it too deals with rising price pressures. 

The euro is extended its pre-weekend gains as it turns better bid in the European morning.  As it went through $1.2150, some demand, perhaps related to the expiration of a nearly 2 bln euro option there that expires today, helped the single currency edge closer to last week's highs, a little above $1.2180.  Still, that might be a bridge too far today as the intraday momentum indicators appear stretched. Sterling is straddling the $1.41-level in dull dealings.  Last week's high was set near $1.4165, which also does not seem to be under threat today.  The euro had fallen to around GBP0.8560 last week but recovered in the last few sessions and today has held above GBP0.8600.  


Two weeks before, Europe was going to double to 50% the retaliatory tariffs on US goods levied to counter the 2018 steel and aluminum tariffs Washington imposed on many countries on national security grounds.  Brazil and South Korea cut separate deals, and the USMCA ended the tariffs on Canada and Mexico. A US-EU truce has been declared.  The EU will not double its tariff and will enter talks with the US about excess capacity in the steel industry.  Although many economists talk about surplus savings, they usually refer to the part that stays in the circulation of capital. Still, the redundant investment was classically understood as a form of surplus capital.  A reduction in tariff schedules could theoretically help ease price pressures, but we are suspicious of how much would actually be passed on to the end-user.  Still, April import prices were reported before the weekend and jumped more than expected.  The 0.7% increase lifted the year-over-year rate to 10.6% from 7.0% in March.  Through April, import prices have risen at an annualized rate of around 14.5%.  Excluding oil, import prices have risen by around 9% at an annualized pace this year.  

The University of Michigan's consumer confidence survey was reported on the heels of the import price jump. The 5-10 year inflation expectation rose to 3.1%, to match its highest level since August 2008.  After the earlier larger than expected rise in April CPI and PPI, some astute Fed watches emphasized the importance of inflation expectations in the Fed reaction function.  It is true, inflation expectations/forecasts feature prominently in the official commentary.  That said, we argue that there has been a subtle shift that has downgraded the role of inflation expectations/forecasts.  This is not a normative claim (what ought to be the case) but a descriptive claim (what is the case).  Various Fed officials have expressed this in different ways. Still, Chair Powell speaks for the Fed when he said, "The fundamental change in our framework is that we're not going to act pre-emptively based on forecasts for the most part, and we're going to wait and see actual data."  To us, this may be more important operationally than adopting an average inflation target, as the "average" has not been defined.  Instead, it looks as if it is a ploy to preserve maximum flexibility for the Fed in this unprecedented time.  But the emphasis on actual data (not eschewing expectations but downgrading them) helps explain the Fed's patience now.  

The US reports the May Empire State manufacturing survey, and late today the April TIC data.  Neither are likely typically market movers, though the Empire State survey is one of the first data points for the new month, which is barely half over.  Among Fed officials, Clarida, Bostic, and Kaplan speak, but no new insight is anticipated after all three have spoken recently.  Canada reports housing starts, new home sales, and its equivalent of the TIC report.  The highlights of the week include CPI on Wednesday and retail sales on Friday.  Inflation is expected to tick up while retail sales are forecast to be strong even if half the 4.8% gain seen in February.  The week's highlight for Mexico comes at the end of the week in the form of March retail sales as well.  A 1.6% gain would match the February increase.  

Last Tuesday and Wednesday, the US dollar traced out a CAD1.2045-CAD1.2200 range.  It subsequently has been confined to that range.  Initial support now is seen around CAD1.2100, and a break could see CAD1.2080.  Near-term consolidation seems to be the most likely scenario. The greenback fell to four-month lows against the Mexican peso before the weekend (~MXN19.7540).  It is in around an MXN19.86-MXN19.95 range so far today.  Within the consolidation phase, it can trade into the MXN19.98-MXN20.04 area without changing the technical tone.  Recall Mexico holds local elections on June 6.  


Treasuries Call the Tune in FX
Sun, 16 May 2021 04:30:24 PDT

The higher than expected US CPI spurred a jump in rates and the greenback, but it proved to be little more than a bull trap.  The dollar's upside momentum faded even before the large miss on retail sales ahead of the weekend.  Yes, if one averages some recent data and squint in just the right way, the reports don't look so bad,  but the point is not so much about fine-tuning Q2 GDP estimates, which are easing from still strong levels.  

Rather, the key questions are whether it moves the Fed's needle or encourages the market to do the Fed's heavy lifting.  And both are being answered in the negative.  Without higher US rates, both relative to other countries and in absolute terms, it is difficult in this context to see the dollar mounting a strong and sustained bounce.  Moreover, the miss on both jobs and consumption suggests that Chair Powell's consensus is not likely to unravel at next month's meeting.  More will come around to the view that the Jackson Hole Fed confab and the September FOMC meeting are the next windows of opportunity for a policy adjustment.  

Ironically if high-frequency data are not likely to sway the Fed for another quarter, and if the bond vigilantes adhere to the maxim about not fighting the Fed, technical factors may have greater sway in the foreign exchange market. It is with that in mind that we turn to our weekly look at the price action.    

Dollar Index:  The CPI-higher rates sparked a rally in the Dollar Index that stalled at the (61.8%) retracement objective (~90.90) of the decline from the high seen in the middle of the previous week, which is also where the 20-day moving average is found.   The Dollar Index has not closed above its 20-day moving average in over a month.  A break of 90.00, near where the lower Bollinger Band starts the news week, signals a test on the February low near 89.65.   Beyond that is the low for the year set in early January by 89.20, a three-year low.  The momentum indicators seem somewhat supportive, but the weak close ahead of the weekend means that they may play catch-up. 

Euro:   The euro rose last week to its highest level since the end of February, just above $1.2180.  The pullback brought it to almost $1.2050, where the March and April lows trendline intersected.  It ended the week with strong momentum, and a test on the $1.2180-$1.2200 resistance area looks likely.  Above there, the late February high was close to $1.2245.  The MACD and Slow Stochastic are not generating strong signals and understandably so given that the single currency has been in a two-cent trading range (~$1,1980-$1.2180) for a month.  

Japanese Yen:  The dollar's movement against the yen closely tracked the US 10-year yield.  When the yield was near 1.70%, the greenback rose to around JPY109.80, its best level since mid-April.  As rates pulled back, the dollar slipped to JPY109.20 ahead of the weekend.  A break could signal a return to the JPY108.35-JPY108.65 area. However, the momentum indicators give little reason to expect a break of the JPY108-JPY110 trading range.  While some chartists may draw attention to a possible head and shoulders topping pattern, with a neckline near, we are suspicious because of the downsloping neckline and the position of the momentum indicators.

British Pound:  Sterling stalled last week near $1.4160, ahead of the late February high near $1.4235. However, the five-day moving average is at a new three-year high, a little below $1.4100.  The momentum indicators look constructive, but the upper Bollinger Band comes in near $1.4135 to start the new week.  Although sterling closed above the band in the first part of last week, it was not sustained.  If some of sterling's strength has derived from ideas of the rapid economic recovery that BOE Governor Bailey talked about that was predicated on the rapid re-opening of the UK economy, some pushback is possible if the new Indian variant of Covid pushes out the planned economy-wide re-opening n June 21. Initial support is seen near $1.3960 if $1.40 gives way.  Trendline support off the mid-April and early May lows is a little below $1.3900 at the start of next week. 

Canadian Dollar:  The Canadian dollar was the only other major currency besides sterling that rose against the US dollar last week. The weaker than expected April employment data did not generate the consternation that the US miss did. Bank of Canada's Macklem comments about not wanting the strength of the Canadian dollar to adversely impact exports spurred a little more than a one-day wobble.  The central bank has begun tapering and says the economic slack will be absorbed in the second half of next week.  The June 2021 BA futures yield is about 44 bp.  The implied yield of the December 2022 BA futures is above 1.0%.  This is arguably a more significant consideration than Macklem's comments.  That said, the Canadian dollar has risen for the past six weeks, and the momentum indicators over-extended. The Slow Stochastic looks poised to turn higher.  Yet last week's back-to-back declining sessions, the first in a month, were seen as a new buying opportunity ahead of the weekend after the US April retail sales disappointed.   Canada's economic highlights next week include April CPI and March retail sales.  

Australian Dollar:  The Aussie was the poorest performer among the major currencies last week, falling almost 1% against the US dollar, and that is after it bounced back around 0.5% before the weekend.  The Australian dollar reversed lower at the start of the week after reaching its best level since late February, near $0.7900. It dipped below $0.7690 before finding a good bid and finishing the week by $0.7770.  Resistance is seen in the $0.7790-$0.7815.The recovery came despite the setback in commodity prices, including iron ore, following Beijing's concerns about the rapid increase. The momentum indicators are not impressed and still are headed lower. A break of $0.7675 signals a retest of $0.7600.  

Mexican Peso:  Before the weekend, the dollar fell to its lowest level  (~MXN19.7540) against the Mexican peso since late January. It has fallen for seven of the past 10 weeks. The exchange rate seems particularly sensitive to US rates.  The correlation between the dollar-peso exchange rate and US 10-year yields (60 days, percent change) is nearly 0.45, a four-year high.  Banxico, while recognizing upside risk to inflation, still anticipates convergence with its target by the middle of next year. However, the market is moving in the other direction.  The one-year cetes yield 4.9%, compared with the current cash target of 4%. It has risen by more than 30 bp since the end of April. The MACD and Slow Stochastic are falling. A break of the MXN19.73 area signals a test on the year's low (~MXN19.55).  The greenback's high last week was around MXN20.2135, which seems far away.  The MXN19.90-MXN20.00 offers a nearby cap.  Mexico reports March retail sales next week.  A flat January was followed by a 1.6% gain in February.  Bloomberg survey's median forecast is for a similar rise in March.  

Chinese Yuan:  Others shared our observation that the gap between the PBOC's daily dollar fixing and the expectations was a subtle signal of possible PBOC displeasure with the yuan's gains that had lifted it to new highs for the year on May 10 (~CNY6.4380). However, the broadly heavier dollar appeared to neutralize the signal, and the yuan finished higher in the last two sessions.   Nevertheless, the die was cast, and the yuan ended a five-week advance. The yuan has been tracking other emerging market currencies.  The correlation (30-day, on levels) between CNY and the JP Morgan Emerging Market Currency Index is 0.95.  The CNY6.40 area is the next important chart area. We have suggested potential toward CNY6.20 this year.  China reports April retail sales, industrial production, fixed-asset investment in the coming days.  The data is expected to be strong even if not accelerating.  Beijing's expression of concern about the rise of commodity prices spurred dramatic losses in the last three sessions.  These developments will continue to command attention.  Other factors also contributed to the retreat in the CRB Index, which snapped a five-week rally with a roughly 1.75% pullback.  


Macro Features in the Week Ahead
Sun, 16 May 2021 06:51:57 PDT

We are halfway through the second quarter.  Interest is not so much on Q1 data, even though Japan will report GDP for the January-March period. April data may also get short shrift as May reports begin tricking in.  Even the May data may be overwhelmed, but the growing sense that the investment climate is changing.  

Investors accept that the vaccine rollout plus fiscal and monetary support to varying degrees and pent-up demand will give the major economies a near-term lift. However, as the recent US employment data seemed to suggest, the recovery, even under the best of circumstances,  is likely to be bumpy and uneven,  driven by a lack of uniform re-opening and supply chain disruptions.  Strong demand in some sectors is coming at the same time some supply constraints (e.g., shortages, bottlenecks, low inventories, and geopolitical issues, including the cyber-attack on the largest US gasoline pipeline and blacklisting of Huawei and  SMIC, China's largest chip manufacturer). 

To be sure, it is not just in the US that inflation expectations are elevated.  Germany's 10-year breakeven is at the upper end of where it has been for the last seven years.  It was last below 1.0% on February 22 and approached 1.50% last week.  Since the end of Q1, the UK's 10-year breakeven moved above 3.50% for the first time since 2008.   Japan's inflation expectations are nothing to write home about, but with the 10-year breakeven it 20 bp is back to pre-Covid levels.  

The UK reports April CPI on May 19.  A small month-over-month increase will lift the year-over-year rate to about 1.0%, matching the high from last July.  Last April, UK headline CPI fell by 0.2%.  That speaks to the base effect, for which we are now all familiar.  However, there is another element of the current inflation that we need to monitor, supply chain and bottlenecks.  

To capture that, we have been tracking the three-month annualized pace.  For example, in the US, the January-through-April CPI rose at an annualized rate of a little more than 6%.  In the UK, the Q1 headline was less than 1% at an annualized pace.  Indeed, the UK's CPI in Q4 20 was the same as in Q1 21. In contrast, in Q4 20, US headline CPI rose at about a 2% annualized pace.     

Despite large budget deficits, gross debt, and a central bank balance sheet that is a multiple of the Fed's (~130% of GDP vs. ~36.5%), Japan has still not arrested deflationary forces.  Headline inflation was -0.2% year-over-year in April.  It has not been above zero since last August, and it has not been above 1% since October 2018.  The core rate, which in Japan excludes fresh food, was at -0.1%  year-over-year in March. It was last above zero in March 2020.  Although the formal target is 2%, it has not been over 1% since March 2015, and even that is not all that it appears to be.  In April 2014, the sales tax was hiked from 5% to 8%., temporarily lifting the measured inflation. 

Japan will report Q1 GDP on May 18 in Tokyo.  A resurgence in covid and the response means that the world's third-largest economy contracted around 1% quarter-over-quarter after growing by 2.8% in Q4 20.  However, the market badly underestimated March household spending. This suggests that the private consumption component of GDP, which the median forecast in Bloomberg's survey projects to be -1.9%, may be a bit better.   Still, the economy is struggling, and a stronger recovery may have to wait for the second half of the year.  The GDP deflator, another measure of price pressures, is expected to have returned to negative territory (year-over-year) for the first time since Q4 18.  

Economists expect that Japan's net export function was a small drag on GDP.  Japan's trade surplus averaged JPY182.2 bln in Q1.  In Q2 20, the average monthly trade surplus was near JPY652 bln, the largest three-month average surplus since April 2010.  Japan reports its April trade balance on May 19.  There appears to be a strong seasonal component. Over the past 20 years, Japan's trade balance deteriorates March to April in all but three years.  May is even worse.  In the last 20-years, May's trade balance has improved on April's twice, and once was last year. Improvement is nearly always seen in June (only one deterioration in the past two decades).  

Several central banks, not only the Federal Reserve, emphasize the labor market's performance in calibrating monetary policy settings.  Following the dramatic miss in the US and Canadian April employment reports, attention turns to Australia and the UK's latest labor market readings.   Last week, we learned that although the UK economy contracted in the first quarter, it was primarily because of the dramatic hit related to the new covid related restrictions. The economy accelerated with strong momentum going into Q2.  Economic activity is picking up, and the UK is on track for economy-wide re-opening on June 21.  The UK's furlough program is still in full gear.  The government pays for 80% of employees' hours that cannot be worked. In July, that share falls to 70%, and employers are responsible for 10%.  In August and September, when the program ends, the government will pay 60% and employers 20%.  

Australia's April job data will be reported early on May 20 in Sydney. The Australian labor market has performed amazingly well.  Consider three metrics. First, Australia lost 400k full-time positions in the March-June 2020 period.  It has recouped 365k full-time jobs since then.  Second, it shed 533k part-time posts (in April and May 2020) and has subsequently added 610k. Second, the unemployment rate peaked last year at 7.5% and has since fallen back to 5.6%.  It was at 5.1% in November and December 2019.  Moreover, the participation rate stood at 66.3% in March compared with 65.9% at the end of 2020.   

In addition to the real sector reports, May survey data will roll out.  It began with Germany's May ZEW survey last week that showed investors more optimistic about the future and less pessimistic about the current situation. After that, the US Empire State and Philadelphia Fed's manufacturing surveys are released, but the big one is the preliminary PMI reports.  In the current context, which is characterized by stronger growth in most high-income countries, the PMI is really more about expectations of the pace of growth than the absolute numbers themselves.  The other notable element is the relative strength of the manufacturing PMI and service PMI.  For example, in the US, UK, and China, the service PMI is above the manufacturing.  This seems to reflect the re-opening, while in Japan and the eurozone, where the vaccine rollout lagged, the manufacturing PMI is about the service PMI. 

Two other reports are noteworthy.  First, the US reports April housing starts and new home sales.  Don't let the noise hinder the signal.  The housing market is strong.  Housing starts surged by 19.4% in March to reach nearly 1.74 mln unit seasonally adjusted pace.  Such activity was last seen in 2006.  To put it in perspective, it was about 1.57 mln in December 2019 and 1.67 mln in December 2020.  The pullback economists are looking for is small and ought not to detract from the underlying strength.  

The same is true for existing home sales.  Even after falling in February and March, existing home sales are still at loft levels, not seen since 2007.  Anecdotal reports suggest a critical headwind is supply.   In March, there were 1.07 mln homes for sale, which is more than a quarter less than a year ago.  That means that around the current pace of sales, there are a little more than two months of supply.  In the industry, anything less than five months is regarded as a tight market.  This imbalance is most immediately addressed by rising prices and fast turnover.  The National Association of Realtors reported that the average property was on the market for a historic low of 18 days, and nearly 85% of houses were on the market for less than a month.  

The second noteworthy report comes from SWIFT.  We share two observations. First, the yuan's share has trended higher in recent months and in March was just shy of 2.5%.  That is its greatest share in six years.  There is much consternation over China's introduction of a digital yuan, which Niall Ferguson has said was Beijing "minting the money of the future."  Yet, the yuan's low use is not a function of technology but of restrictions, lack of transparency, and the fact that the currency is not convertible.  A digital form of the yuan does not change the facts on the ground. 

Also, the monthly SWIFT report is a good reminder that mainstream digitalization is well advanced, without crypto. For example, consider that trade payment and portfolio flows are already largely digitalized as electronic messages on SWIFT that instruct banks to credit and debit specific accounts. Ransomware demanding crypto payment reinforces official misgivings about how crypto is being used outside of a trading asset.  

Once again, buying the pullback appears to be serving short and medium-term participants well.  The NASDAQ dropped nearly 9% from the end of April's high through last week's lows and came roaring back.  European bond yields rose to the year's high last week, and are rising faster than US yields.  The flurry of Fed officials that spoke in recent days concurs it is too early to even begin talking about tapering.  It is difficult for the greenback to find much traction with this backdrop.   The bond vigilantes that made a fuss after the CPI were quieted and the significant miss on retail sales may drive them back into hibernation.  


Softer Yields = Softer Dollar
Fri, 14 May 2021 03:23:58 PDT

Overview:  The surge in consumer prices reported on Wednesday saw rates jump and the dollar push higher.  Stronger than expected producer prices yesterday, and news of wage increases (average 10%) at Mcdonalds and for 75,000 people Amazon wants to hire, saw rates ease and the dollar's upside momentum stall.  Before the week draws to a close, the US reports April retail sales and industrial production figures.  US stocks recovered smartly from the stomach-clenching sell-off on Wednesday, which helped lift sentiment in Asia and Europe.  The largest markets in the Asia Pacific advanced mostly 1%-2.3%.  New social restrictions in Singapore as the contagion reached a 10-month high saw the Strait Times Index drop 2.5%.  Europe's Dow Jones Stoxx 600 recovered yesterday, though finished off less than 0.2%, and helped by stronger gains in consumer staples and financials, is posting modest gains today. US future indices are trading broadly higher.  The US 10-year yield briefly poked above 1.70% yesterday for the first time in a month but pulled back to around 1.64% now,  shrugging off a lukewarm 30-year bond auction (despite higher rate, low bid coverage).  The softer US yields were are doing little to European benchmark 10-year yields, which are extending yesterday's push to the year's highs.  As go US interest rates, so goes the dollar.  After rallying on Wednesday, its gains were pared against most of the major currencies and remains under modest pressure today, with the Norwegian krone leading the way (~+0.85%), while sterling, yen, and the Australian dollar lagging (~+0.1%).  On the week, only sterling is higher (~+0.50%), while the Antipodeans and Scandis led the decline (~-0.8% to -1.3%).  Emerging market currencies are also trading higher today, led by eastern and central European currencies.  After falling in the first half of the week, the JP Morgan Emerging Market Currency Index is extending yesterday's minor gains and for the week is off about 0.65%, after gaining nearly 1.8% last week.  Gold is extending its recovery after dipping below $1810 yesterday and is near $1833 near midday in Europe.  Crude oil prices are stabilizing in yesterday's trough after June WTI slid 4.3% yesterday.  Near $64.50 a barrel, it is off a little less than $0.50 this week.  

Asia Pacific

China's Premier Li Keqiang called for measures to address the surge in commodity prices yesterday, and the market took it to heart. The materials sector underperformed in the Chinese equity rally today.  Iron ore prices, for example, had risen by nearly 18% in the five sessions through Wednesday.  Prices for the September futures contract fell by nearly 3.6% yesterday and another 6.4% today.  Copper prices are off for the third consecutive session today.  It is off 2% this week after a five-week, 19.5% rally.  Steel rebar futures had rallied nearly 12% in the five sessions through the middle of the week, and the cumulative decline between yesterday and today is around 5.5%.  The resumption of US pipelines that was hacked and indications that some 700 barges on the Mississippi held up by cracks in a highway bridge may able to continue their journey over the weekend also contributed to the 2.4% decline in the CRB index, its largest fall in nearly two months, and will likely snap a five-week advance of nearly 11%. 

With the Olympics set to start in Tokyo in a little more than two months, Japanese business executives have stepped up their criticism of the Suga government for the slow vaccine rollout.  Reports suggest around 2% of Japan has been vaccinated, putting it at the bottom of the OECD.  Separately, despite the Topix falling nearly 2.6% this week, its largest decline in nearly two months, and the biggest three-day decline since last June, the BOJ did not intervene and buy ETFs.  It appears to have bought ETFs only one day (April 21) since the start of April as its new rules came into effect (scrapping the JPY6 trillion target of ETF purchases).  

The dollar stalled yesterday at its highest level against the yen in a month near JPY109.80, as US rates pulled back.  Initial support near JPY109.25 is being tested in the European morning, and a break could signal a test on JPY108.90. The key ahead of the weekend is the bond market's response to the US data.  The intraday technical readings appear to be bottoming in late European morning turnover.  The Australian dollar is approaching the $0.7750 area, which holds an expiring option for A$1 bln.  The $0.7765 is the (38.2%) retracement of this week's decline (~$0.7890-$0.7690).  The next retracement (50%) is at $0.7790.  If the intent of Chinese officials was to steady the yuan after its recent advance, it appears to have succeeded.  The yuan gained a little more than 0.25% against the broadly softer greenback today, making it the strongest in the region, but it is virtually unchanged on the week.  The PBOC set the dollar's reference rate at CNY6.4525, in line with the bank models in Bloomberg's survey.  


The week is winding down quietly in Europe.  There are two main talking points today, and they both involve the UK.  First, Northern Ireland's Democratic Unionist Party will pick a new leader today.  Donaldson, who heads up the DUP members of the UK parliament, is seen to have an inside edge over the region's Agriculture Minister Poots.  Both are critical of the Northern Ireland Protocol, which controversially instituted custom checks on Northern Ireland's border with Britain, seemingly violating the Good Friday Agreement.  This and Scotland's independent-minded majority will be a persistent pressure on UK Prime Minister Johnson.  

Second, BOE Governor Bailey said that inflation was being watched closely and noted the elevated readings in the US.  Bailey sounded increasingly optimistic about the UK economy.  He said it was rapidly recovering and that the labor-intensive sectors that had been the hardest hit are poised for a fast recovery.  The economy is on track for a full reopening on June 21.   The Bank of England slowed its bond purchases this week and aims to complete them by the end of the year.  

The euro fell to almost $1.2050 yesterday and has rebounded to about $1.2130 today, which is roughly the (61.8%) retracement of the loss from the $1.2180 week's high seen on May 11. However, the buying appears to have dried up in the European morning, and initial support is in the $1.2080-$1.2100 band.   After gaining 1.2% last week, helped by that shockingly disappointing US jobs report, the euro is off about 0.4% this week (near $1.2115). Sterling held $1.40 support yesterday and has stalled today near yesterday's high, just shy of $1.4080.  It gained almost 1.2% last week, and near $1.4065 is up about 0.6% this week.  It is poised to finish above $1.40 this week for the first time since mid-February. 


It will be difficult for the April retail sales to match the March gain of 9.7%.  We know that auto sales were among the strongest in history last month (18.51 mln unit seasonally adjusted annual pace).  However, anecdotal reports suggest fleets were particularly active and maybe driving up used car prices too (where a 10% jump in April accounted for a third of the increase in headline CPI).  The economists surveyed by Bloomberg seem particularly bearish on the core retail sales, which exclude food services, autos, gas stations, and building materials.  The median forecast is for a 0.4% decline, and the average estimate is -0.17%.  However, of the 23 economists, 11 look for an up number. April industrial output is widely expected to have expanded further after the 1.4% increase in March.  Two of the 62 economists surveyed look for a decline.  The median and average forecasts are near 1%.  

Three data points today will feed the investors' anxiety about inflation. First, April import/export prices are expected to rise by 0.6% and 0.8%, respectively.  Due to the base effect, these gains, notable in their own right, will appear as a year-over-year surge of 10.2% and 14.0% for import and export prices, respectively.  This hints at positive terms of trade developments working in the US favor even if masked by a record trade deficit.  Second, the utilization rate of US industrial capacity says something about the slack in the economy.  The capacity utilization rate peaked since last year's trough in January at 75.3%.  The poor weather in February saw the utilization rate fall to a little below 73.4%.  It bounced back in March and is expected to have moved to 75% in April.  In 2019, with inflation still too low for the Fed's comfort, it was chopping around 76%-78%.  Third, the University of Michigan consumer survey also asks about long-term (5-10 years) consumer inflation expectations.  It stood at the end of 2019 at 2.2% (which admittedly was a bit of an outlier and averaged 2.4% in the last few months of the year). At the end of last year, it was at 2.5%.  This year it has been 2.7%-2.8%, which is the highest since 2014.   

Over the past month and year-to-date, the Canadian dollar is the strongest of the major currencies (3.1% and 4.8%, respectively), driven arguably by the tapering Bank of Canada's bond purchases and the dramatic rise in commodity prices. However, yesterday, it posted its first back-to-back decline in a month.  Yesterday's pullback was blamed by some on the pullback in commodity prices, but note that the Bank of Canada Governor Macklem's comments also may have spurred some profit-taking.  He said he wanted to ensure that the appreciation of the Canadian dollar did not disrupt its exports.   Last week, Canada did report a C$1.14 bln trade deficit in March after a C$1.4 bln surplus in February.  However, the source of the deterioration was not so much a function of exports, which edged up 0.3%, but the surge in imports (5.5%).  Indeed, in Q1 21, exports rose by 8.3% to C$153 bln, their highest value since Q2 19. However, Macklem did play down an early rate hike, saying he wanted to see the number of employed surpass the pre-pandemic level by 200k to indicate a full recovery.  

The central bank of Mexico left the target rate at 4.00%, as widely anticipated.  The Banxico statement indicated that even though inflation has accelerated faster than expected, it has not given up on the idea that it will still converge to the 3% target by the middle of next year.  Like the Federal Reserve and the European Central Bank, Banxico views the higher inflation prints (headline CPI nearly 6.1% in April, with the core a little above 4.1% and the non-core prices rising almost 12.35%.  After sketching out both upside and downside risks, the central bank concluded, "The balance of risks that might affect the anticipated path for inflation within the forecast horizon is biased to the upside."  The market seems to think those upside risks will, in fact, materialize, and the swaps market about 50 bp in rate hikes in H2 21.  Banixco's next meeting is on June 24.  

The US dollar is trading inside yesterday's roughly CAD1.21-CAD1.22 range.  There is an option for $365 mln at CAD1.2125, just below the low seen in Europe.  A break of CAD1.21, which is also the (61.8%) retracement of the Wednesday-Thursday bounce,  would likely signal a retest on the six-year low set this week near CAD1.2045.  The greenback reversed lower against the Mexican peso yesterday after setting the week's high around MXN20.2135.  It is extending the pullback today and looks poised to challenge the week's low (~MXN19.8275).  The peso sold off the first three sessions this week but has bounced back and is now higher on the week (~0.25%).  The peso has fallen only one week of the past seven.  


Long Lost Bond Vigilantes Sighted, Gives Dollar Fillip
Thu, 13 May 2021 03:24:13 PDT

Overview: It is as if the bond vigilantes were pushed too far.  US inflation is accelerating more than expected, and it cannot all be attributed to the base effect, and the Federal Reserve, to many investors, is tone-deaf.  With powerful fiscal stimulus, nominal growth above 10%, and the economy re-opening, albeit unevenly, does the monetary accelerator need to be fully engaged£  The US 10-year yield jumped, providing a nice concession at the quarterly refunding and lifted the dollar broadly.   Stocks got hammered, and still no safe-haven bid for Treasuries.  Near 1.70%, the yield is almost 25 bp above the post-jobs disappointment low.  The sharp sell-off in US shares, which continues today, with the futures indices off 0.3%-0.5%, knocked Asia Pacific bourses 1%-2% lower and the MSCI Asia Pacific Index is now nearly flat on the year.  Europe's Dow Jones Stoxx 600 appeared resilient yesterday but is off about 1.3% today to bring the week's drop to almost 3%.  Bonds have yet to see safe-haven demand. The US 10-year yield is steady, near 1.69%, while European yields are 2-5 bp higher, with benchmark yields at the high for the year.  The dollar is mostly firmer, but the yen and Swiss franc are posting minor gains.  The euro steadied in Asia Pacific turnover but found sellers in the European morning.  Emerging market currencies have a clear downside bias today. The JP Morgan Emerging Market Currency Index is lower for the fourth consecutive session, which would be the longest losing streak in a couple of months. After four days of approached but unable to push above $1850, rising yields sapped gold, which fell to nearly $1810 in Europe.  News that the US pipeline will re-open took the bid from crude oil.  The June WTI contract reached nearly $66.65 yesterday and is now below $64.50 and poised to test the 20-day moving average around $63.90.  It has not closed below that moving average in a month.  

Asia Pacific

China continues to appear clumsy on the international stage and is alienating regimes that seem somewhat friendly.  Beijing's foreign policy is counter-productive.  It has been harassing Taiwan and has been encroaching on waters of the disputed islands that Japan also claims.  However, reports suggest over 300 vessels have gathered around islands claimed by the Philippines.  Philippine President Durterte has been perhaps the closest friend of China's in the region.  He recently called China a "benefactor" and sought to end the Visiting Forces Agreement with the US.  In March, when the Philippines first protested the Chinese incursions, Beijing said they were "taking shelter from the wind." Since then, the number of vessels has risen by a half.  Some suspect China is probing and seeking to test the US resolve.  

There are two developments to note in Japan.  The first is what did not happen.  Although Japan's Topix has experienced its sharpest three-day decline since last June, the BOJ has not stepped into the market to buy ETFs.  Recall that the BOJ ended its JPY6 trillion (~$55 bln) annual target and opted to act only in times of "heightened market instability."  It has only bought stocks once (April 21) since the new rules came into effect on April 1.   Second, Japan reported a smaller than expected March current account surplus (JPY2.65 trillion vs. JPY2.76 median forecast in Bloomberg's survey and JPY2.92 in February).  However, the trade surplus itself was larger than projected (JPY983 bln vs. JPY788 bln forecasts and JPY524 bln in February).  The primary income surplus, which tracks the flow of profits, interest, dividends, and worker remittances, fell by JPY835 bln to JPY1.44 trillion.  

The dollar reached its best level in a month in Tokyo near JPY109.80 today but is trading broadly sideways and is holding above JPY109.40.  Although resistance around JPY109.65 was frayed, a convincing move above it is needed to signal another try at the year's high set at the end of March near JPY111.00.  The Australian dollar peaked near $0.7890 on Monday before reversing lower.  It found support yesterday near $0.7720, and today, it slipped below $0.7700 briefly. The low from earlier this month was closer to $0.7675.  Initial resistance is now seen in the $0.7720-$0.7740 band.  Note that there is a A$980 mln option at $0.7750 that expires tomorrow.  The greenback traded in a particularly tight range against the Chinese yuan, consolidating yesterday's gain.  It briefly traded at new highs for the week (~CNY6.4580) and steading straddling little changed levels.  After some deviations from expectations, the PBOC set the dollar's reference rate at CNY6.4612, tight to what the bank models projected in Bloomberg's survey.  


The rise in European bond yields is challenging ideas that the ECB would slow its bond-buying next month.  Recall that the surge in US yields helped pull European yields higher earlier this year. The ECB responded in March by stepping up its purchases under the Pandemic Emergency Purchase Program. However, the hawks at the central bank have been arguing that it was not needed anymore, and a decision is expected next month to reduce the buying.  The new staff forecasts were expected to give them cover.  Yesterday, the EU raised its GDP forecasts for the eurozone to 4.3% and 4.4% for this year and next, respectively, from 3.8% in both years.  The ECB is likely to follow suit next month.  It had projected growth of 4.0% this year and 4.1% next.  

The Bank of England's chief economist Haldane, who is stepping down next month, continues to have among the hawkish rhetoric of any major central banker presently.  A week after the Bank of England agreed to reduce its weekly bond-buying, Haldane argued with inflation likely above the 2% target (medium-term) by the end of the year, "tightening the tap" may be necessary to "avoid a future inflation flood." However, he does not appear to have persuaded any of his colleagues.  The December short-sterling futures contract (three-month interest rate futures) remains in its trough where it has been stuck since the end of February, implying a yield of about 14 bp. The December 2022 contract implies 42 bp, matching the highest level since last April.

The euro extended yesterday's slump to nearly $1.2050 trendline support.  A break signals a test on the $1.2000 level, the (38.2%) retracement of the rally from the March 31 low (~$1.1705).  The next retracement is around $1.1950, by where the 200-day moving average is found.  There is an option at $1.21 that expires today for 1.36 bln euros and a smaller option (~715 mln euros) that expires tomorrow at $1.20.  Sterling's losses have also been extended today to test the (38.2%) retracement of this month's gain seen near $1.4025.  The next retracement (50%) is found near $1.3985.  There options for GBP320-GBP360 mln at $1.40, expiring today and tomorrow.  


Yesterday's US CPI shock is followed by today's PPI report.  Economists had projected a 0.3% increase on the headline rate and 0.4% on the core rate in Bloomberg's survey, but there is much talk about an upside surprise.  Yet, if such a surprise does materialize it cannot be, well, as unexpected.  Yesterday's CPI, which the Fed's Vice Chair Clarida admitted was surprising, seems to be the third such surprise for the central bank in a short period.  The surge in US yields in March was said to have caught officials' attention, and last week's hugely disappointing employment report surely surprised officials as much as it did the market.  The annualized rate of CPI this year is so far running a little north of 6%.  This is not about the base effect but about the re-openings and supply chain, and shortage issues.  Vehicle prices rose, and the 10% surge in US used car prices accounted for a third of the headline increase in CPI.  Hotel accommodation and airfares were set low during the pandemic and registered what appears to be record gains last month.   

In addition to the PPI today, the US reports weekly initial jobless claims.  Recall that last week's report showed the first drop below 500k since the pandemic struck.  The median forecast looks for a small decline, though there is some talk of a reading closer to 450k (from 498k).  The jump in US yields yesterday gave the 10-year note auction a concession, and the sale was solid with a higher bid-cover than the previous auction though the yield was nearly identical (~1.68%). Fed Presidents Barkin and Bullard speak today, as does Governor Waller.  While Canada has a light economic diary, the central banks of Mexico and Peru meet.  Although Banxico would like to cut rates, its hands are tied by the strong gains in inflation, which remain well above target.  Peru's reference rate is at 25 bp, and its inflation is above 2%.  The sol has fallen by about 2.7% this year, and the lion's share has taken place over the last several weeks.  

The US dollar posted a potential key reversal against the Canadian dollar yesterday by falling to new multi-year lows (~CAD1.2045) before rebounding and settling above Tuesday's high.  Follow-through dollar buying saw it approach CAD1.2160.  A move above there targets CAD1.2200-CAD1.2235.  An option for $605 mln at CAD1.2110 expires today.  The greenback had traded a little below MXN19.83 on Tuesday and jumped to MXN20.1850 yesterday.  No follow-through dollar buying has emerged yet today, but the intraday technical indicators seem to favor it.  Last week's highs were set near MXN20.3450 and are the next targets.  


The Dollar Stabilizes but Stocks, Not So Much
Wed, 12 May 2021 03:28:10 PDT

Overview: The markets remain on edge.  Asia Pacific and US equities have yet to find stable footing, and inflation fears are elevated.  The foreign exchange market has turned quiet as the dollar consolidates its recent losses. China and Hong Kong escaped the sell-off equities that saw Tokyo and Seoul fall over 1%, but Taipei was the highlight with a stunning 8.6% intrasession plunge before recouping a little more than half.  A combination of more Covid-related restrictions and the global sell-off of tech took a tool.  TSMC, which is 30% of Taiwan's index, finished nearly 2% lower after a more than 9% slump. The US removed Xiaomi from the blacklist, and shares rallied in Hong Kong.  The less-tech sensitive Dow Jones Stoxx 600 is trading steadily after dropping nearly 2% yesterday.  US futures are still heavy.  Ahead of today's auction, the US 10-year yield is slightly softer, around 1.61%.  European bond yields are also around a basis point or so lower.  On the back of a larger than expected Australian fiscal stimulus, its 10-year yield jumped five basis points to 1.76%.  The Antipodeans are the weakest among the major currencies, off about 0.45%-0.50% near midday in Europe, while the others are 0.05%-0.15% softer.  The Canadian dollar is the only major posting a small gain against the greenback.  Emerging market currencies are mostly lower as well.  The Turkish lira and the South Korean won are off almost 0.5% to bear the brunt.  Gold is consolidating after recovering from $1818 to $1838 yesterday.  Crude oil remains bid, and the June WTI contract is mostly holding above $65 today.  

Asia Pacific

Australia's budget unveiled late yesterday points to a larger than expected deficit as the government prepares for next year's election and supports the monetary effort to spur a strong recovery.  New initiatives for infrastructure and social efforts, such as elderly care and tax cuts, were among the highlights.  S&P warned that the fiscal stance justifies its negative outlook for Australia's AAA rating.  

China reported a larger than expected slowdown in lending last month.  New bank loans slowed to CNY1.47 trillion from CNY2.73 trillion in March.  Non-bank lending slowed from CNY610 billion to CNY380 bln.  That put total aggregate financing at CNY1.85 trillion compared with CNY3.34 trillion March and well below the CNY2.29 trillion anticipated.  Separately, reports suggest that officials are allowing an accelerated rate of failures.  

For the second consecutive session, the dollar has not traded above JPY109.  Yesterday was the first time since April 27.  The greenback has spent the first half of the week trading inside the pre-weekend range (~JPY108.35-JPY109.30).  Initial support is now seen near JPY108.60.  The US yields seem more important than equities for the exchange rate.  The Australian dollar approached $0.7900 on Monday before reversing lower.  After consolidating yesterday, it has been pushed to $0.7785, the (50%) retracement of the leg up that began on May 4 near $0.7675.  The next retracement is about $0.7760.  Initial resistance is in the $0.7720-$0.7740 band.  The Chinese yuan slipped against the dollar for the second consecutive session.  It is the first back-to-back decline in over a month.  In recent days, we have noted that the PBOC's reference rate deviated from bank models by among the most since the new transparent approach was unveiled a few months ago. This was understood as a type of signal seeking to stabilize the yuan. Today's fix was at CNY6.4258 compared to the bank models in Bloomberg's survey that projected CNY6.4249, a more normal deviation.  


The main takeaway from the slew of UK data is not that the economy contracted by 1.5% in Q1; it was that the economy finished the quarter stronger than expected.  The March monthly GDP rose by 2.1% after February's growth was revised to 0.7% from 0.4%.  The weakness in the quarterly GDP figures was a function of the sharp 2.5% contraction in January.  The March data included a 1.8% rise in industrial output, led by a 2.1% jump in manufacturing, which was twice what economists projected. Construction output soared by 5.8%, and the February series was revised to 2.3% from 1.6%.  Perhaps the most impressive element was the much smaller than expected trade deficit.  The overall shortfall stands at GBP1.97 bln, less than half of the median in Bloomberg's survey, and the February deficit was revised to GBP856 mln from GBP7.12 bln initial estimate.  

Meanwhile, the tension over Jersey and fishing rights, which has seen both the UK and France deploy naval vessels earlier this month, continue to deescalate. Jersey postponed new licensing requirements, and the French fishermen are allowing Channel Island fishing boat to unload their catches.  

Elsewhere, the eurozone's aggregate industrial production disappointed in March with a 0.1% gain, rather than the 0.8% increase expected, and the February series was revised to show a 1.2% decline instead of the 1.0% fall initially reported. In addition, Norway reported its mainland economy contracted by 1% in Q1, a bit more than expected. However, overall economic output eased by 0.6%, mitigated in part by the upward revision to 0.8% in Q4 20 from 0.6%.  Unlike the UK economy that expanded in February and March, the Norwegian economy contracted every month in Q1, though the pace moderated.  Nevertheless, the central bank is planning on lifting rates toward the end of the year.  Lastly, Sweden's April CPI rose 0.2% for a 2.2% year-over-year increase, in line with expectations.  The Riksbank targets the underlying inflation measure that used a fixed interest rate, and that is a little higher than the headline at 2.5%.  However, that underlying rate excluding energy is up a milder 1.7% year-over-year.  The Riksbank is unseen as well behind the Norges Bank in adjusting monetary policy. 

After three days stalling in the $1.2170-$1.2180 area, the euro eased to a three-day low near $1.2115. However, the session low does not appear in place.  The $1.2105 area corresponds to a (38.2%) retracement of the rally from last week's low near $1.1985, and the 50%-mark is near $1.2085.  Sterling remains firm but flattish on the day.  It reached $1.4165 yesterday and has held below $1.4150 today. Still, like yesterday, it found support ahead of $1.4100.  The intraday technicals warn of the risk of another test on the lows.  Below $1.4100, chart support is seen near $1.4050.  


The focus is on today's report on US April CPI.  Everyone is well aware of the base effect.  April 2020 CPI fell by 0.7%. It will drop out of the 12-month comparison and be replaced by a positive number, and the headline rate may jump to 3.6% from 2.6% in March. This will prove transitory. Consider that in both June and July last year, the monthly CPI rose by 0.5%.  These too will drop out and be replaced by lower numbers,  and the year-over-year will ease.  However, there is another source of inflation that may prove transitory.  It has to do with bottlenecks and shortages frequently amid relatively low inventories.  The uneven re-opening domestically and internationally is going to create some imbalances.  The resulting higher prices will bring in profit-seekers, where barriers to entry are low, and supply will expand.  One way to get a handle on how consumer prices are doing this year is to annualize the monthly numbers.  For example, assume that CPI rose by 0.2% in April as the median forecast in Bloomberg's survey would have it.  That would mean in the first four months, CPI rose by a cumulative 1.5% or a little more than 4.5% at an annualized rate.  That is separate from the base effect. 

Canada's economic diary is light today, while Mexico reports March industrial production figures. Output slowed to a crawl in December (0.06%) but has gradually picked up this year (0.18% in January and 0.43% in February).  Helped by rising auto output, economists look for a 0.7% rise in March.  Tomorrow the central bank meets.  The board, which now has a majority of AMLO appointments, wants to ease monetary policy, but its hands are tied by the elevated price pressures.  Last week, Mexico reported a year-over-year increase of 6.08% in April's CPI.  The pace accelerated every month this year after a 3.15% rate in December 2020.  Back in the US, four Fed officials speak today, including Vice Chairman Clarida, who discusses the economic outlook. Rosengren speaks on crypto, which may draw attention.  Bostic address the Council on Foreign Relations, and Harker discusses higher education.  

The US dollar continues to find traction against the Canadian dollar, difficult to sustain.  It took out yesterday's high of around CAD1.2125 by a few ticks and stopped shy of Monday's high of about CAD1.2140.  It has been unable to distance itself much from the four-year low seen Monday and yesterday near CAD1.2080.  There seems to be little meaningful support ahead of CAD1.20.  The US dollar recorded an outside up day against the Mexican peso yesterday by trading on both sides of Monday's range and settling above Monday's high. Follow-through buying lifted the dollar to a three-day high just north of MXN20.06, which nearly met the (50%) retracement target of the decline from last week's high (~MXN20.3270). Support is seen near MXN19.9450, and a move above MXN20.08 would target the pre-weekend high around MXN20.1350.  Brazil reported a little firmer than expected CPI yesterday (6.76% for April after 6.10% in March).  It underscored the central bank's signal of a third 75 bp rate hike next month.  The US dollar is testing the BRL5.20 support.  The low for the year was set in early January near BRL5.12.  


Stocks Slide but Little Demand for Safe Havens
Tue, 11 May 2021 04:08:11 PDT

Overview: The sell-off in US shares yesterday has triggered sharp global losses today, and there is no flight into fixed income as benchmark yields are higher across the board.  Nor is the dollar serving as much as a safe haven.  It is mostly softer against the major currencies.  Japan and Taiwan led the Asia Pacific equity markets lower.  Chinese shares stand out with a recovery in late turnover in the region to allow a higher close.  In Europe, the Dow Jones Stoxx 600 is flirting with a 2% drop, which would be the largest this year, and in the US, the sell-off is continuing, and the S&P 500 and NASDAQ are poised to gap lower at the opening.  The US 10-year yield, which settled last week below 1.58%, is at 1.61% today, while European benchmark yields are 3-4 bp higher.  In the foreign exchange market, the Swiss franc, the Japanese yen, and the US dollar often touted as safe havens weak, while the Scandis and euro lead on the upside.  The freely accessible emerging market currencies, like the Russian ruble, South African rand, and Mexican peso, are firm.  Central and Eastern European currencies are generally doing better than Asian currencies.  Gold is little changed around $1836 and continues to face resistance near $1850.  June WTI is about 1% lower and is approaching its 20-day moving average (~$63.65), which it has not closed below since mid-April.  The Colonial pipeline attack is attributed to Russia-based Darkside, and a shortage of gasoline is being seen.  Reports suggest it will take a few more days to fully re-open it.  

Asia Pacific

The PBOC is unlikely to feel any special urgency to normalize monetary policy after today's inflation report.  April's headline CPI rose by 0.9% from a year ago, a touch less than expected after a 0.4% gain in March.  On the month, they fell by 0.3% after a 0.5% decline in March.  A key development behind the subdued reading is that food price inflation has broken.  Food prices are off by 0.7%  year-over-year.  It is the third consecutive decline.  Pork prices are over a fifth lower than a year ago.  Non-food prices are up 1.3%.  The core rate stands 0.7% above year-ago levels.  On the other hand, producer prices rose 6.8% year-over-year, which was slightly faster than expected, accelerating from a 4.4% rate in March.  Iron ore and non-ferrous metal prices were a key driver and do not appear to have peaked.    

Japan's household spending surged by 6.2% in March, more than four times the gain projected by the median forecast in Bloomberg's survey.  However, it is a bit of a fluke. Moreover, the surge appears to have occurred between formal emergencies, which suggests several governors want it to be extended now nationwide. It is also seen as unsustainable because real disposable income fell (0.9%) for the fifth consecutive month.  This points to families going into savings to pay for consumption.  

The US and G7 have called on the World Health Organization to invite Taiwan to its May 24 meeting.  It sounds like it ought to be uncontroversial, but it is anything but.  There are some international organizations that only countries can join. Taiwan is not a member of these organizations.  The US and G7 talk about the international rule of law.  The World Health Organization can invite Taiwan as an observer at the May 24 meeting, but the rules require a vote of the members, and the US and G7 would likely lose the vote.  China is opposed, of course.  It worries that it is the thin edge of wedge or a slippery slope that will lead to Taiwan being recognized as a country.  

Separately, Taiwan is the premier producer of state-of-the-art semiconductors.  The US car companies and other producers want to buy more semiconductor chips from Taiwan's TSMC. The bilateral US trade deficit with Taiwan reached nearly $30 bln last year, roughly doubling since the end of 2018. Since the end of 2018, the Taiwanese dollar has appreciated by 10.4% against the US dollar, making it the strongest currency in Asia, and indeed the strongest emerging market currency.  Yet, despite the extenuating circumstances of 2020, the US needs to buy more semiconductor chips from it. With the Taiwanese dollar being one of the strongest currencies in the world, the US put Taiwan on its watch list for currency manipulation.  The US still refuses to state unambiguously that it will defend Taiwan from attack, not simply to keep Beijing wondering, but to discourage Taiwan from declaring independence. 

The dollar is trading within yesterday's range against the Japanese yen (~JPY108.45-JPY109.05), which itself was in the pre-weekend range (~JPY108.35-JPY109.30).  It is in a 20-tick range below JPY109, where an $830 mln option is set to expire today. After reversing lower yesterday and settling on its lows (~$0.7830), the Australian dollar slipped to around $0.7820 before rebounding to test $0.7850.  Turnover is quiet, and the market seems to lack much conviction now.  The Chinese yuan is slightly softer today, its third loss since April 9.  For the third day, the PBOC set the dollar's reference rate notably stronger than the bank models suggested, which, as we noted before the weekend, looks like a subtle protest. Today's fix was at CNY6.4254, while the average forecast in the Bloomberg survey was CNY6.4222.  Previously, the fix was often within 10 pips of the models.  The dollar is near CNY6.4225 after settling near CNY6.4165 yesterday.   


Germany's May ZEW survey was better than expected. The assessment of the current situation stands at -40.1 compared with -48.8 in April.  It is the best since February 2020 and finished 2019 near -20.  The expectations component rose to 84.4 from 70.7, which also better than expected.  It did not get above 77.5 last year.  It seems broadly consistent with other data suggesting that the accelerated vaccination effort is laying the basis for stronger economic activity after the contraction in Q1.  

The idea that the SNP was seeking an immediate referendum for independence was always a straw man argument.  SNP leader and First Minister Sturgeon's proposal was always clear on this.  Addressing the public health crisis was the top priority. She had advocated a referendum toward the middle of the new five-year local government term.  That would put somewhere in late 2023.  Sterling gains, attributed in some quarters because the referendum is not imminent, seems like a stretch.  Last week, the Bank of England signaled that the UK was going to join the first tier of major countries adjusting monetary policy.  Norway's central bank reaffirmed its intention to hike rates later this year.  The Bank of Canada has taken the first step to slow its bond purchases and brought forward when the economic slack will be absorbed (H2 22), which is understood to suggest the timeframe of the first hike.  The implied yield of the December 2022, short-sterling three-month interest rate futures contract is around 37 bp.  It finished 2020 below five basis points.  The Bank Rate is current at 10 bp, and the June 2021 short-sterling futures contract implied yield is about eight basis points, suggest a 25 bp hike has been discounted by the end of next year.   

Some reports suggest that UK Prime Minister Johnson will use the Queen's Speech that lays out the government's legislative agenda to advocate the scrapping for the fixed five-year parliamentary terms that former Tory Prime Minister Cameron oversaw.  Ostensibly, this would allow Johnson to call a snap election while Labour is in a weakened position, and the government can draw support from the fiscal stimulus and the vaccine rollout.  The only reason to change the rules now is if Johnson wanted to have an election before the end of the current parliamentary session in 2024. 

After reversing lower yesterday, there was an opportunity to pare the euro's nearly two-cent gain seen in the last two sessions last week.  However, the euro found support near $1.2125, where an option for nearly 1.3 bln euro is struck is set to expire today.  Yesterday's high was just shy of the $1.2180 level, and today's high so far is near $1.2170.   The $1.2200 may be psychologically important, but the high from late February (~$1.2245) may be more important technical resistance.  Sterling also remains firm.  It reached almost $1.4160 yesterday, its best level since February 25, and is in about a quarter of a cent range today on either side of $1.4125. The euro dropped through GBP0.8590 yesterday to record a one-month low.  It has steadied today and is straddling the GBP0.8600 level.  A break of GBP0.8565 could send it back to the early April low near GBP0.8470.  


The US sold $111 bln in bills yesterday and comes back today selling $40 bln of a 42-day cash management bill, and kicks off the quarterly refunding with a $58 bln of a three-year note offering.  Investors who bought the three-year note at last month's sale locked in 37.6 bp annual yields.  The generic three-year yield is now below 30 bp.  The 3-year note and tomorrow's 10-year note attract a range of buyers, not so much with the 30-year bond. Lifer insurance companies, mortgage lenders, and some pension funds, but not typically foreign central banks, At the end of 2019, the 30-year yield was a little more than 35 bp on top of the 10-year yield.    It peaked earlier this year near 85 bp and is now rising after slipping below 65 bp in early April.  Separately, note that in addition to the US Treasury and US corporates selling debt today, Canada is expected to bring a five-year US dollar bond to market, its first such offering since January 2020.  It is expected to be priced around eight basis points above the five-year Treasury yield. 

Mexican President AMLO has been determined to unwind the liberalization of the energy market.  He argues liberalization really means the privatization of Mexico's public wealth. He has made some inroads, but yesterday a Mexican court temporarily suspend the new law that gave the government the right to suspend fuel permits if it judged national security was at risk.  It also allows PEMEX to take over the facilities of the companies whose fuel permits were suspended.   Brazil's central bank has raised rates by 75 bp twice this year and has signaled its intent to do so again next month.  It is not economic vigor that is prompting the move, but rising price pressures.  Today's inflation report is expected to show prices continue to accelerate last month.  The IPCA measure is expected to rise to nearly 6.75% in April from 6.1% in March and about 4.5% at the end of last year.  The year-over-year rate has been rising since hitting 1.88% in May 20220.  

The US JOLTS report will be looked upon for clues into labor market dynamics after last week's huge miss on the nonfarm payroll report.  Ahead of tomorrow's April CPI report, where the base effect will peak, a barrage of Fed officials speak today.  That said, no fresh ground is likely to be broken today.  The poor jobs report is seen as reinforcing the consensus at the Fed. 

The US dollar fell to new four-year lows against the Canadian dollar yesterday near CAD1.2080.  It is flat today despite the weakness in stocks and oil.  Initial resistance is seen near CAD1.2140 and then the CAD1.2180-CAD1.2200.  Better technical support for the greenback is not seen until CAD1.20.  The US dollar is trading heavily against the Mexican peso.  It was turned back from an attempt on MXN20.00 and has returned to the recent lows near MXN19.86.  Support from the end of last month was established in the MXN19.78-MXN19.80 area.  A break would target the MXN19.55 low seen in January.  


The Dollar Remains on the Defensive
Mon, 10 May 2021 04:13:39 PDT

Overview:  Last week's cyberattack on the largest US gasoline pipeline continues to lift oil and gasoline prices.  The June gasoline futures gapped higher to extend last week's 2.4% gain but has subsequently moved lower to enter the gap.  June WTI is firm and holding above $65. The supply disruption is key, but iron ore prices soared 10% on strong Chinese demand. More broadly, the CRB Index settled last week at six-year highs.  Led by South Korea, Asia Pacific equities markets moved higher, and Australia's ASX rose to a new record high.  Europe's Dow Jones Stoxx 600 is up fractionally but sufficient to also set a new record high.  US futures are narrowly mixed, with the NASDAQ trailing.  The US 10-year yield recovered smartly after the sharp and quick drop on the back of the weak jobs data.  It is steady today near 1.58%.  European yields are narrowly mixed. The UK Gilt yield is up a couple of basis points, while Australia and New Zealand saw their 10-year yield rose three basis points.  The dollar is mostly softer.  Sterling and the dollar bloc are leading the majors, while the yen is softer.  The South Korean won is leading emerging market currencies higher.  The eastern and central European currencies are laggards, though the Hungarian forint is more resilient. The JP Morgan Emerging Market Currency Index is advancing for the fourth consecutive session.  Last week's 1.7% gain was the most since last November.  Gold is firm but below the pre-weekend high (~$1843.50).  The yellow metal may be pausing ahead other $1850 area, which is where the 200-day moving average is found. 

Asia Pacific

The yen rose to two-week highs at the end of last week but has come back offered today.  The exchange rate remains hyper-sensitive to US rates.  Meanwhile, the formal state of emergency for Tokyo and three other prefectures was extended at the end of last week through the end of the month. The emergency declaration was broadened to the industrial regions in Aichi and the prefecture of Fukuoka.   It now covers around 40% of the economy and most major urban centers.  The latest poll (JNN) found support for Prime Minister Suga fell to its lowest level of his eight-month tenure.  His support was at 40%, down from 44.4% last month.  Nearly 2/3 of the respondents (63%) said there disapproved of the government's handling of the pandemic, a 13 percentage point rise.  A separate poll (Yomiuri) found 60% want the Olympic games canceled.  Suga will face a leadership contest within the LDP in September ahead of the national election, which must be held by the end of October.  

The PBOC set the dollar's reference rate weaker than expected, and the gap between the fix and the market expectations (e.g., median projection in Bloomberg's survey of bank models) was particularly wide.  Bloomberg calculates it was the widest since January (CNY6.4425 vs. forecast for CNY6.4370).  As we detected in the pre-weekend fix as well, Chinese officials appear to be trying to slow the yuan's rise.  The yuan is at a three-year high today, with the greenback approaching CNY6.4100.  

Tomorrow Australia's government will announce its budget.  In many respects,  it will look like the Us approach with strong infrastructure measures, social spending, and extended tax income-tax breaks for low and middle-income households. The faster-than-expected growth and the surge in iron ore prices boost the government's revenues, allowing it to record a smaller than expected budget deficit.  Meanwhile, Australia's vaccine rollout out so far has been slow, and before the weekend, the Trade Minister warned international visitors may remain restricted well into H2.  

The dollar is within the pre-weekend range against the Japanese yen (~JPY108.35-JPY109.30).  The stabilization of the US 10-year yield appears to have helped.  The JPY109 area is the halfway point of last week's range, and the greenback stalled a little above there.  The next retracement target (61.8%) is near JPY109.20.  The dollar looks poised to snap a three-day slide today.  It finished last week near JPY108.60.  The Australian dollar is extending its gains for the fourth consecutive session.  Around $0.7870, it is at its best level since the end of February.  There is an option for roughly A$640 mln at $0.7900 that expires today.  The multi-year high was set on February 25, a little above $0.8005.  Since April 9, the Chinese yuan has only fallen in two sessions. However, the pace of its ascent has quickened.  Since returning from the May Day holidays last Thursday, the dollar has fallen by nearly 1%.  It took almost two and half weeks to fall by the last 1%. The offshore yuan is a bit stronger than the onshore yuan.   Official protests may escalate, and among the measures it has adopted before, it can make it easier to invest abroad.   


The UK government did well in last week's local elections, and it is set to ease social restrictions further in about a week's time.  Last week, the Bank of England announced it will slow its weekly bond purchases and looks to complete them by the end of the year. The opposition Labour is in a bit of disarray after losing some traditional strongholds, and party leader Starmer's initial reaction to downgrade his deputy did not boost confidence and was ridiculed by other Labour leaders.  The SNP did not secure an outright majority in Scotland, but with the Greens, a clear majority favor independence.  Still, the public health crisis is the first order of business, and the SNP does not envision a referendum until toward the middle of the five-year term. 

Support for Germany's CDU/CSU slipped to 23% from 24% in the latest polls.  Support for the Greens eased a percentage point as well to 26%.  The SPD lag behind in third place.  It formally endorsed Scholz, the current Finance Minister as its candidate over the weekend. However, he tacked left with a call for more progressive taxes to pay for expanded social programs in his acceptance speech.  The SPD challenge is to distinguish itself after being the junior coalition partner to the CDU/CSU since 2013.  

The euro rose by nearly 0.85% ahead of the weekend to reach about $1.2170, its highest level since the end of February.  It was the largest gain of the year.  It made a marginal new high today but is really consolidating after a strong advance. Recall that in the middle of last week, it briefly traded at two-and-a-half week lows near $1.1985. Resistance is seen near $1.22 now, and the late February high was near $1.2245. Initial support is pegged near $1.2130 and then $1.2100.  Sterling rose to almost $1.41 today after testing $1.38 at the start of last week. It peaked a little above $1.4235 on February 24. The $1.4100 area offers nearby resistance, and the intraday technical readings are stretched.  Support is seen by $1.4050.  The euro stalled near GBP0.8700 last week, the upper end of its recent range, and appears poised to test support in the GBP0.8590-GBP0.8600 area. 


The disappointing April employment data spurred a debate about the nature of the problem.  Tomorrow's Job Opening and Labor Turnover Survey (JOLTS) will be looked up to shed some fresh light on the issue, but the issue has been terribly partisan.  Some, including the Chamber of Commerce, see the main culprit being the government's income support and the federal unemployment insurance supplement. Others, including the Biden administration, argue that the main challenge is the partial re-opening of the economy and that many have not been able to return to work because they are taking care of family members (children and seniors).  

There is a secondary argument the suggests if the modest bump in unemployment insurance coverage is sufficient to deter the return of employees, it says something about the low pay, below what is called a "living wage."  In the public health crisis, poverty itself was seen as a comorbidity.  Initial industry-level analysis suggests that there does not seem to be an obvious relationship between the slow job gain and the relative wage. Hiring in some high and mid-wage sectors slowed while others quickened. Leisure and hospitality reported a 331k increase in employment, mostly associated with lower-wage positions. Personal and laundry services grew 14k positions.  On the other hand, employment by couriers and messengers fell by 77k.

The knee-jerk reaction to the jobs report saw the 10-year yield dropped 10 basis points to 1.46%, but it snapped back completely in less time it took to make a cup of coffee.  Net-net, the 10-year yield closed higher (albeit slightly) ahead of the weekend.  The market concluded after the employment data that the Fed was less likely to raise rates next year and that inflation is likely to result. As a result, the 10-year break-even rate rose to a fresh eight-year high, a little above 2.50%.  

With this backdrop, the US Treasury will sell $126 bln at its quarterly refunding this week, and projections suggest as $40-$45 bln of US investment-grade corporate bonds.  At the same time, the US is expected to report a surge in April CPI as the base effect peaks.  Recall that in April 2020, headline CPI fell by 0.7%. It is expected to be replaced with a 0.2% gain last month.  In May last year, CPI slipped by 0.1%.  Core CPI fell by 0.4% in April 2020. It is expected to have risen by 0.3% last month.  It took fell by 0.1% last May.  The bottom line is that the year-over-year headline rate will soar well above 3% to reach its highest level in a decade, while the core rate will likely approach pre-pandemic levels (2.4% in February 2020).  

The busy week begins off slowly with light economic calendars today in North America.  The Canadian dollar has appreciated for the last five consecutive weeks against the US dollar.  It has extended its gains today.  The greenback slipped below CAD1.2100 today for the first time since September 2017 but has stabilized in the European morning.  There is a $320 mln option struck there that expires today.  There is little chart support until closer to CAD1.20.  The CAD1.2150-level, which holds an expiring option for $425 mln, may offer initial resistance.  The US dollar slumped by 1% against the Mexican peso before the weekend, its largest drop in over a month.  It had begun the week around MXN20.24 and ended it below MXN19.92.  So far today, the dollar is consolidating in a narrow range above the pre-weekend low (~MXN19.86).  Last month's low was set close to MXN19.7850, while the year's low was set in late January by MXN19.55.   The highlight for the week is Thursday's central bank meeting.   With inflation above 6%, Banxico cannot afford to resume the easing cycle that looks to have ended in February before price pressures accelerated.  


Dollar Breaks Down
Sun, 09 May 2021 04:24:15 PDT

The dollar was struggling to sustain upticks when the market anticipated a million new jobs were created in April.  It was sold off in disappointment that only a quarter of the expected jobs materialized.   Despite the inexplicable miss, there is little doubt that the US economy is, in fact, booming.  A large dose of fiscal stimulus, ongoing monetary stimulus, a relatively successful vaccine rollout, the re-opening of the economy, pent-up demand, the wealth effect of rising equities and home prices (and crypto) make for powerful fuel for the world's largest economy.  

We suggest that is the signal, and the disappointing job report is noise that is truly only worrisome if it is repeated. Nor should the dollar's weakness be understood to portend a weak economy.  On the contrary, the record trade deficit and the 18.51 vehicles sold (seasonally adjusted pace), which was the fifth-best in history, speaks to the relative and absolute strength of the US economy. Of course, no one thinks this kind of economic strength is sustainable, but the employment report does not mark its death knell.  

Here is how we see the technical condition of the different currency pairs.  

Dollar Index:  The Dollar Index was stalling near 91.40 at the end of April and the start of May.  It had been pushed to around 90.85 before the employment report, which saw it drop to around 90.20, below its lower Bollinger Band.  The Dollar Index finished the week below the trendline connecting January (~89.20) and February (~89.70) lows that will start the new week near 90.30.  A convincing break target points to new lows for the year.  The MACD is at the year's lows and still falling.  The Slow Stochastic is moving laterally in its trough in oversold territory. Near mid-week, it had looked like the five-day moving average could cross above the 20-day moving average, but the losses of the last two sessions have seen pulled the shorter average back down.  

Euro:  In the middle of last week, the euro had been fallen to a 2.5-week low near $1.1985, but it rebounded quickly, and before the US employment miss, it was trading around $1.2075, its best level for the week.  The disappointing data saw the euro kick up through the $1.2150- high set in late April.  The $1.22-are may off a soft barrier, but the late February high was set closer to $1.2245.  Initial support is likely to be seen around the old $1.2075 area. The MACD is turning higher again after pulling back in recent days, while the Slow Stochastic has trended lower to the middle of the range but has yet to turn higher.   In the big picture, we suspect that the Q1 decline was a correction to the dramatic rally in the last two months of 2020, and that correction is over.  We had initially thought there could be one more push lower. The implication is that businesses and investors should be prepared for the euro to rechallenge the year's high (~$1.2350).   

Japanese Yen:  The softer US rates stalled the greenback's advance near JPY109.70, while Japanese markets were closed at the start of last week, but even when the holiday ended, the appetites for the dollar did not return. The drop in yields that accompanied the disappointing employment report saw the dollar fall to almost JPY108.30, the (61.8%) retracement target of the rally off the late April low near JPY107.50.   That rally lifted the MACD but without much enthusiasm, and it may be rolling back over.  The Slow Stochastic had a stronger upswing and but appears to have stalled.  The US 10-year yield recovered to back toward session highs (~1.58%) after initially falling below 1.47%, its lowest level in two months, but the greenback stabilized but did not recover much. 

British Pound:   A Bank of England that announced it would slow its weekly bond purchases, a strong vote for the Tories in local elections, and the poor US job report lifted sterling to the upper end of its recent range ($1.40) ahead of the weekend.  Despite several attempts, it has not closed above $1.40 since late February.   A convincing move above $1.4020, the (61.8%) retracement objective of the decline since the three-year high was recorded on February 24 near $1.4235, suggests another run at the highs. However, the momentum indicators are not generating any robust signal, and in any case, are not near extreme levels. The lower end other recent range is around $1.38, but initial support may be in the $1.3030-$1.3050 area.  

Canadian Dollar:  The US dollar fell for the fifth consecutive week against the Canadian dollar and traded at levels not seen since 2017.   Although Canada was too disappointed with the April jobs report, the greenback made a new low afterward, near CAD1.2125.  The MACD is still falling fast, and the Slow Stochastic continues to go horizontal in over-extended territory.  In the last week of April, the US dollar closed below the lower Bollinger Band consistently.  In the first part of this past week, it was back within it before again flirting with it in the last couple of sessions.  It begins the new week near CAD1.2130.  There seems to be little chart support ahead of CAD1.2000. The US dollar's pre-weekend high was just shy of CAD1.2200.  Above there, old support in the CAD1.2265-CAD1.2275 area should now offer resistance. 

Australian Dollar:  Three days of solid gains, including the 0.80% gain ahead the weekend, allowed the Australian dollar to close above $0.7800 for the first time since late February.  Last week's 1.7% rise was the most since the US election last November.  Rising commodity and industrial metal prices were also widely factors.  The Aussie shrugged off news that the March trade surplus was a third smaller than expected, and there was no signal from the RBA, which many in the market expect to signal the end to its yield curve control in July.  Despite upward revisions to its growth and inflation forecasts, the RBA does not anticipate raising rates before 2024. As a result, the momentum indicators look poised to turn up, and technically, there looks little to prevent a re-test on the $0.8000 area seen briefly at the end of February.  That said, the upper Bollinger Band is found near $0.7840.  

Mexican Peso:  The dollar recorded an outside down day against the peso the day before the employment report.  It has fallen in five of the past six weeks.  Last week's roughly 1.4% decline took place in the last two sessions, which may have been sufficient to turn the MACD down.  The Slow Stochastic is poised to turn lower.   Mexico's firm April CPI reading ahead of the weekend (6.08%) solidifies ideas that the 25 bp rate in February was the last in the cycle.  Banxico meets next week and is now widely expected to remain on hold. Brazil's Selic rate began the year at 2.0%, half of Mexico's target.  By the end of next month, it will 25 bp on top of Mexico.  The dollar fell to about MXN19.86 ahead of the weekend, but the recovery in US yields seemed to have lent the greenback some support.  The MXN20.00 area may offer a nearby cap.  The three-month lows set in April were near MXN19.78, and the low for the year, seen in January, was by MXN19.55.  

Chinese Yuan:  The May Day holiday in China made for a two-session week for the onshore yuan.  The dollar fell against it both days, and nearly 0.5% loss before the weekend was the largest since January.  It was the fifth consecutive week the dollar has fallen against the yuan, which is the longest losing streak since last August-September when it fell for eight weeks.  China reported a larger than expected jump in its April trade surplus and a slightly smaller than expected increase in reserves ahead of the weekend. The vast majority of China's trade is conducted in dollars.  Officials appear to be accepting a stronger yuan, and its slightly less than 1.5% gain year-to-date makes it the fifth-best among emerging market currencies.  Because the yuan is so closely managed, it is difficult to know how patient Beijing will be to a dollar depreciating against it.  If the US is going to get an advantage by doing so, Chinese officials may want to moderate it or share in it versus the rest of the world. The gap between the PBOC fix and market expectations (Bloomberg survey) was wider than usual under the new, more transparent regime, raising questions about whether a subtle protest was issued.  Stay tuned.  


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