Japan Retains Distinction of being the only G7 Country with Sub-50 PMI Composite

Tapering not a rate hike was the focus of discussions. Powell reiterated that price pressures would prove transitory and would ease after the re-opening disruptions settled down. The implied yield on the December 2022 Eurodollar futures fell for the second day, and the cumulative three basis point decline was the most in a month. The 10-year yield was capped near 1.50% and remains below there today.

The stronger than expected EMU preliminary PMI did not prevent European bond yields from slipping either. The dollar is softer against most major currencies, but the Japanese yen and Japan retain the distinction of being the only G7 country with a composite PMI below the 50 boom/bust level. Despite a strong preliminary PMI, the euro is struggling to extend yesterday’s recovery. The freely accessible and liquid emerging market currencies are also higher. The JP Morgan EM FX index is higher for a third day after dropping in the previous six sessions.

The Czech central bank is expected to hike 25 bp later today after Hungary hiked by 30 bp yesterday and announced the start of a new tightening cycle could see monthly adjustments. Asia Pacific equities were mixed. China, Hong Kong, Taiwan, and South Korea advanced, while Japan, Australia, and India slipped. Europe’s Dow Jones Stoxx 600 recovered yesterday after a soft start. It is trading a little heavier in the European morning.

US futures indices are slightly higher. Industrial commodities, including copper, iron ore, and steel rebar, are trading higher. August WTI is at a new high of around $73.50, helped a 7.2 mln barrel drawdown of US inventories, according to reports citing API. It confirmed it would put US inventories are a new 14-month low. Gold is consolidating in a narrow range of around $1780.

Asia Pacific

Japan’s preliminary PMI underscores the toll of the formal state of emergency and the slow vaccine rollout. The manufacturing PMI slipped to 51.5 from 53.0, while the contraction in the services slowed, signaled by the services PMI edging up to 47.2 from 46.5. The composite fell further from the 50 boom/bust level, easing to 47.8 from 48.8.

Australia’s flash PMI softened, but it remains at strong levels. The manufacturing PMI eased to 58.4 from 60.4, and the services PMI dropped to 56.0 from 58.0. This resulted in the composite slipping to 56.1 from 58.0. The strength of last week’s employment data and today’s report gives the central bank reason to adjust policies at the July 6 meeting. The focus is on its bond-buying and three-year yield target. The market does not see a rate hike until at least the middle of next year.

China had indicated that it was prepared to sell some industrial metals from its state inventories to relieve some pressure on prices. It appears the vague signal was more powerful than the actual announcement. Yesterday, it announced it would auction 20k metric tons of copper, 30k metric tons of zinc, and 50k metric tons of aluminum on July 5-6.

The dollar reached nearly JPY111.00, its best level since March 31. The disappointing Japanese preliminary PMI reinforces perceptions that the BOJ will lag behind the other major central banks in normalizing policy. Last year’s dollar highs were recorded near JPY112.25 in February and JPY111.70 in March. Initial support is now seen in the JPY110.60-JPY110.70 area. Note that there is a $1.15 bln option at JPY110.75 that expires tomorrow.

The Australian dollar is trading at four-day highs around $0.7570. It is trying to re-establish a foothold above the 200-day moving average (~$0.7560) and the (38.2%) of the losses suffered since the FOMC meeting, found near $0.7570. The next (50%) retracement is closer to $0.7600. The greenback rose to a two-month high against the Chinese yuan, a little above CNY6.49, before easing back to CNY6.48. We had seen potential toward CNY6.4950. The PBOC set the dollar’s reference rate that was again softer than the models expected (CNY6.4621 vs. CNY6.4634).


The flash EMU composite June PMI reached a 15-year high of 59.2. Not only was the May reading (57.1) surpassed, but so was the median forecast in Bloomberg’s survey (58.8). The manufacturing PMI held steady at 63.1 in the face of expectations for a modest softening, while the service PMI matched expectations by rising to 58.0 from 55.2.

Germany’s PMI accelerated while the French reading was mixed. Germany’s manufacturing PMI rose to 64.9 from 64.4. The median projection was for a pullback. The service sector surged as social restrictions eased (58.1 from 52.8). The composite jumped to 60.4 from 56.2. Fewer companies were reporting longer lead times and rising material costs. France’s results were somewhat less inspiring but still solid. The manufacturing PMI stands at 58.6 (from 59.4 in May), and the service PMI rose to 57.4 (from 56.6). The composite rose to 57.1 (from 57.0).

The UK, which has to delay its re-opening measures into the middle of next month, saw its preliminary PMI slip. The manufacturing PMI eased to 64.2 from 65.6, which is still a strong result and slightly better than expected. The services PMI slipped to 61.7 from 62.9. That is a bit less strong than expected. The composite also stands at 61.7, down from May’s 62.9 and below the median forecast in Bloomberg’s survey. Separately, the UK and EU appear to be edging toward an extension in the border checks in Northern Ireland that will avoid escalating the tensions.

While formally requesting an extension, the UK has threatened unilateral action. The EU wants to ensure it will not be one extension followed by another and another. Both sides have it in their interest to resolve the situation before a recriminating trade war is sparked.

The euro is holding above $1.1910 but has not risen above the high (almost $1.1955) seen in the US yesterday afternoon. There is an option at $1.1975 for about 465 mln euro that expires today. An option that expires tomorrow for 1.2 bln euros at $1.1925 is also notable. The $1.20 area houses the 200-day moving average and the (38.2%) retracement of this month’s decline. It represents an important hurdle. Sterling is approaching $1.40, where a GBP700 mln option expires today, and a GBP540 mln option expires tomorrow. The (38.2%) retracement of this month’s fall is near $1.3965, and the (50%) retracement is a little above $1.4015.


The US flash PMI is expected to soften a little, but the reading is expected to be strong. That said, looking at survey results, many economists expect the pace of US growth to peak around now. Some of the preliminary estimate details involving lead times and prices may be more important than the headline figures. Separately, the US reports the current account deficit for Q1. It may surpass the $200 bln-mark for the first time since 2007.

In Q4 19, it was a little below $105 bln. We have suggested that when coupled with the large budget deficit (already at 4.7% of GDP in 2019), the US typically has to offer higher interest rates or the dollar bears a greater burden in the adjustment process. Also, the market is interested in the different nuanced stances of Fed officials after last week’s FOMC meeting. Today, Bowman, Bostic, and Rosengren speak.

Canada’s April retail sales are expected to have fallen by nearly 5% after surging 3.6% in March and 5.8% in February. We would not read too much into the monthly volatility. The Canadian economy is recovering, and the key to the July 14 central bank meeting may be the July 9 employment report. Mexico also reports April retail sales. A small rise is expected after its retail sales rose by 3.6% in March (and 2.5% in February). The central bank meets tomorrow. Although it is widely expected to keep the overnight rate target at 4.0%, the rhetoric has become steadily less dovish. The market anticipates around 50 bp of tightening in H2.

The dollar peaked on Monday near CAD1.2485 before reversing lower. Follow-through selling has pushed it below CAD1.2300 today. The greenback bottomed (four-year low) near CAD1.20 on June 1. The CAD1.2300 area corresponds to a (38.2%) retracement. The halfway mark is around CAD1.2245 is the next target. Below there, initial potential extends toward CAD1.2200.

The greenback peaked against the Mexican peso at the end of last week near MXN20.75. It has fallen to a five-day low around MXN20.2630 today. The dollar may be capped in the MXN20.40-MXN20.42 area, which holds the 200-day moving average and the initial high from the FOMC meeting conclusion on June 16. The next target is near MXN20.17.

This article was written by Marc Chandler, MarctoMarket.

Turn Around Tuesday or Dollar Rally Resumes?

The Japanese yen and Canadian dollar are among the more resilient, and the Australian dollar and sterling among the heaviest. Emerging market currencies are mostly lower, except the South Korean won and Turkish lira. Even the Hungarian forint, where the central bank is widely expected to be the first EU country to lift rates today, is weaker. The US 10-year yield continues to recover from the drop to almost 1.35% early yesterday and appears capped near 1.50%.

European yields are mostly softer, while Australia and New Zealand saw a seven basis point jump in the yield of their 10-year benchmarks. Asia Pacific equities responded strongly to yesterday’s rally in the US, led by a 3%+ gain in Tokyo and 1.5% in Australia. Japan’s shares gained the most in around 12-month after yesterday’s first purchases by the BOJ in a couple of months. Hong Kong and Singapore failed to participate in the recovery after Monday’s slide.

Europe’s Dow Jones Stoxx 600 and US indices futures are trading lower. Commodities are sporting a weaker profile. Copper is paring yesterday’s gains. Iron ore fell 3.6% in Shanghai to bring this week’s loss to over 8%. Steel rebar has fallen by nearly 5% this week. Gold snapped a six-day drop yesterday with a 1% gain but stalled in front of $1800 and is trading heavier again today. August WTI initially extended yesterday’s 2.6% gain and reached $73.35, its highest level in nearly two years, before slipping back to around $72.50.

Asia Pacific

A leading adviser to the Japanese government called for a JPY1 trillion (~$9 bln) investment in semiconductor chip development this fiscal year and more in the coming years to revive the national industry. The US, China, EU, South Korea, and Taiwan are all trying to strengthen their capacity. It is becoming, as the Japanese adviser said, as important as food and energy security. A new advanced fabrication facility costs more than $10 bln, according to some estimates. The US has earmarked a little more than $50 bln, while Taiwan’s TSMC alone has announced plans to invest $100 bln over the next three years. South Korea’s Samsung and Hynix are talking around $150 bln investment over the next decade.

Since last week’s stronger than expected jobs data, several observers now expect the Reserve Bank of Australia to temper its emergency policy next month. Some attribute this to yesterday’s drop in Australian bank shares, the most in a year, but the logic is elusive, and the beginning of the normalization of monetary policy is understood to be supportive of financial institutions. Indeed financials recovered today, rising 2%.

The dollar is at a three-day high around JPY110.50 near midday in Europe after staging an impressive recovery after falling to almost JPY109.70 yesterday. Last week’s highs in the JPY110.70-JPY110.80 area are the immediate target. It might take a push higher in the US yields to get lift the greenback above the JPY111.00. Initial support is in the JPY110.20-JPY110.30 area. Note that the dollar has fallen only once against the yen in the last eight sessions. The Australian dollar remains confined to the pre-weekend range (~$0.7475-$0.7560). Some link the Aussie’s weakness to the drop in iron ore prices. Still, it is finding support just below $0.7500 in Europe. Initial resistance is seen near $0.7520 and then $0.7550.

The greenback edged higher against the Chinese yuan for the fourth consecutive session and the ninth day in the past 11. It is at its best level since early May (~CNY6.4745). The PBOC set the dollar’s fixing lower for the second consecutive session than the bank models in the Bloomberg survey anticipated (CNY6.4613 vs. CNY6.4626). Heavy bond issuance by local government and quarter-end demand tightened liquidity conditions in China and sent the overnight repo rate six basis points higher to 2.31%, bringing the cumulative increase to 44 bp over the past three sessions to its highest level in four months.


After striking the bilateral trade agreement with Australia earlier this month, the UK will formally apply to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership today. The UK had initially filed the request to join the bloc in February. The CPTPP covers about 15% of the world’s GDP. Reports suggest the UK is looking forward to opportunities to export autos, services, whiskey, and beef and lamb. In addition to Australia, the UK already has struck deals with seven of the bloc members.

Hungary is expected to become the first EU country to lift rates, followed by the Czech Republic tomorrow. Although expect a 30 bp hike to 90 bp, there is the risk of a larger move. The Deputy Governor spoke of “decisive action.” However, like many others, price pressures have risen before the economic strength has fully returned. Also, the central bank anticipates a stimulative budget next year ahead of elections. The one-week repo rate is at 75 bp.

It is adjusted once a week on Thursdays and may be brought into line with the base rate that will be hiked today. The central bank may also phase out other stimulus measures. It appears the market is expecting about two hikes. The Czech Republic is expected to hike its key repo rate by 25 bp tomorrow to 50 bp. The market also has almost 50 bp of tightening discounted for H2.

The eurozone’s preliminary June PMI will be released tomorrow. While manufacturing may stabilize at elevated levels, the service sector is expected to have accelerated as the vaccination program has intensified. The composite is expected to rise to around 58.8 from 57.1. The UK’s flash PMI is expected to moderate slightly as the contagion increased and forced a postponement to the economy-wide re-opening into the middle of next month. The risk may be on the downside of the median forecast in the Bloomberg survey for 62.5 from 62.9 in May.

The euro finished yesterday near its high of around $1.1920 but has come back offered today. Last Friday and yesterday, the euro found bids near $1.1850. We suspect it may not have to return there to catch a bid today. We are looking at the $1.1870 area for a possible base. Similarly, sterling, which mounted an impressive recovery yesterday from below $1.3790 to almost $1.3940 stalled, is testing the $1.3860 near midday in Europe. However, it too may find support near here, and a move back above $1.3900 would help stabilize the tone.


In prepared remarks for his appearance before the House Select Subcommittee on the Covid Crisis, Fed Chair Powell reiterates the view that once the supply imbalance is addressed, price pressures will ease. While Powell is unlikely to break new ground, his comments will help blunt the more hawkish comments of Bullard and Kaplan. Many think that the dot plots showed the fraying of the average inflation target regime, with 11 of the 18 Fed officials seeing two hikes in 2023 and seven anticipating a hike next year. Powell and the Fed’s leadership can be expected to push back and defend the approach.

The bipartisan effort to find a compromise on the infrastructure initiative may be drawing close. A key issue is how to pay for it, and President Biden has rejected the proposal to index the gasoline tax to inflation. Moreover, the compromise is for a $579 bln package, which pales in comparison with what Biden has proposed. One strategy that is being debated is to go do as much as the bipartisan effort will allow and then come back for the remainder using the reconciliation process.

However, that would require the full support of all the Democrats in the Senate, which does not look possible. Separately, there appears to be growing concern that the Senate’s minimum global corporate tax will not be ratified.

The US reports May existing home sales today. They are expected to have fallen for the fourth consecutive month. The overall level remains elevated, but the pace has slowed. Some link it to the lack of supply of new homes as construction is delayed. Tomorrow, the US reports new home sales (a small increase is expected following a nearly 6% decline in April) and the flash PMI (which is expected to soften from strong levels). In addition to Powell’s testimony, regional presidents Mester and Daly will speak today. Canada and Mexico’s economic calendars are light ahead of tomorrow’s April retail sales reports.

The US dollar reversed lower against the Canadian dollar yesterday after reaching almost CAD1.2490. It fell to about CAD1.2355 but stabilized today. So far, it has been confined to a roughly CAD1.2360-CAD1.2395 range. The CAD1.2400-CAD1.2425 offers nearby resistance. A convincing break of CAD1.2350 could spur a test on CAD1.2300. The greenback found support a little below MXN20.50 and appears to be carving out a new range. If the MXN20.40-MXN20.50 is the lower end of the new range, then the MXN20.70-MXN20.75 might be the upper end.

This article was written by Marc Chandler, MarctoMarket.

Fed Pushes on an Open Door, and the Dollar’s Recovery Goes into Overdrive

In this weekly technical note, we have been tracking the improving tone for the dollar prior to the FOMC meeting. The broad sideways movement seemed to have alleviated the extended condition that was a product of the dollar’s slide in April and May after rallying in Q1.

At the same time, we are mindful that interest rates and differentials are not supportive of the dollar. The 10-year rate differentials moved against the US in the past week, while the 2-year interest rate differential widened in the greenback’s favor by a few basis points. Perhaps, the most significant market adjustment is seen in the December 2022 Eurodollar futures contract. The implied yield rose almost 17 bp to 52.5 bp.

The market had priced in a hike by the end of next year, and now, post-FOMC is discounting about a 60% chance of a second hike. The Fed’s macro projections showed seven officials see a hike next year as appropriate, up from four in March. Recall that the implied yield of the December Eurodollar peaked in early April around 58 bp.

The dollar’s advance, except against the yen, was dramatic, and it has stretched the technical readings. The expiration of futures and options before the weekend, and the approaching quarter-end, maybe adding to the short dollar squeeze. Be attuned for reversal patterns or other signs that the greenback’s upside momentum is fading.

Dollar Index

While many observers attribute the stronger dollar to the Federal Reserve, last week was the fourth consecutive week that the Dollar Index advanced and the fifth week in the past six. This suggests, broadly speaking, that the upside correction to its slide from the end of March was well underway before the FOMC meeting. With the pre-weekend advance, the Dollar Index has surpassed the (61.8%) retracement (~91.95) of the erosion seen earlier in Q2.

It is now well beyond the upper Bollinger Band, set two standard deviations above the 20-day moving average, and is closer to a three-standard deviation move ( 92.35). The MACD is rising sharply, while the Slow Stochastic has entered overbought territory. The March high is still some distance off (~93.45), but it is what at least some bulls are targeting. Initial support is seen in the 91.50-91.60 area.


The single currency fell for the third consecutive week, and its 2%+ decline was the largest since April 2020. Ahead of the weekend, it approached three standard deviations from the 20-day moving average near $1.1840. The $1.1780 area may be the next target, but the $1.1700-area is technically more significant. It is where the euro bottomed at the end of March and corresponds to the (38.2%) retracement since March 2020, when the euro recorded a low near $1.0635. The MACD and Slow Stochastic are headed lower, with the latter over-extended. Initial resistance is around $1.1920.

Japanese Yen

The dollar rose slightly more than 0.7% against the Japanese yen in the past week. It was a back-to-back to gain for the first time since the end of March and the first week of April. The greenback stalled on June 17 near JPY110.80. The market looks like it wants to re-try the JPY111.00 area where it peaked at the end of March. Last year, the dollar made two highs against the yen. The first was in March, near JPY111.70. The high in February was near JPY112.25.

British Pound

The combination of the UK postponing the economy-wide re-opening well into July, a retail sales report that showed a decline as large as the advance economists expected, and the dollar’s broad recovery saw sterling’s losses accelerate. It had slipped by around 0.35% in the previous two weeks before getting clocked for more than 2% last week. It was the biggest loss since last September. The sharp move has pushed sterling a little more than three standard deviations below its 20-day moving average. The momentum indicators have entered overextended territory, but the weak close, near session lows warns that a low may not be in place. The next support area is seen in the $1.3670-$1.3720 band.

Canadian Dollar

The US dollar was stuck in a sideways range between CAD1.20 and CAD1.2125 and exploded higher, punching through CAD1.2460 ahead of the weekend. It also traded beyond three standard deviations above its 20-day moving average. Last week was the fourth consecutive weekly appreciation of the greenback after it fell for the seven prior weeks. The CAD1.2530 area is the next target. It corresponds with a (38.2%) retracement objective of the greenback’s decline since the end of last October. Above there, there is little to stand in the way of a move toward the CAD1.27 area, where the (50%) retracement and the 200-day moving average are found. The MACD and Slow Stochastic appear to be the most over-extended among the major currencies.

Australian Dollar

The Aussie peaked in Q2 in early May, a little shy of $0.7900. It has declined in five of the six weeks since the peak. The nearly 3% loss last week was the largest since last September. It pushed through the 200-day moving average (~$0.7555) like a hot knife through butter. Its losses also pushed it beyond three standard deviations from the 20-day moving average. A break of the $0.7500 area brings the next target around $0.7380 into view, the (61.8%) correction for the move that began before the vaccine was announced in early November. A bearish head and shoulders topping pattern is seen on the daily bar charts but is even clearer on the weeklies. It could project toward $0.7050, which corresponds to the (38.2%) retracement since last year’s low in March 2020, around $0.5500.

Mexican Peso

The dollar rose for the sixth consecutive session against the Mexican peso ahead of the weekend. It is the longest advance in four months. The dollar’s 4%+ gain was the largest weekly advance since last September. The greenback recorded a five-month low slightly below MXN19.60 on June 9 and has shot up to nearly MXN20.75 to briefly trade more than three standard deviations above the 20-day moving average. The momentum indicators show no sign of an imminent top.

The next objective is near MXN20.86. In addition to the powerful short-squeeze in the dollar, Mexico’s relative attractiveness has dimmed. Even without a super-majority, AMLO is pushing to tighten up PEMEX’s dominance. In contrast, Brazil is moving to privatize Elctrobras. Brazil has hiked the Selic rate three times by 75 bp each (to 4.25%) and is set to go again in August. Mexico’s target rate began the year twice the Selic target and now is 25 bp below it. The Brazilian real was the only currency to rise against the dollar last week. That said, dollar buying emerged below BRL5.00.

Chinese Yuan

The People’s Bank of China has taken a few steps up an escalation ladder to protest the yuan’s appreciation. It generated modest results of stabilizing the exchange rate, but the market (over) reaction to the Federal Reserve appeared to do more than the PBOC’s own measures were accomplishing. The yuan weakened for the third week and more than the previous two weeks combined (-0.85% vs. -0.50%).

The greenback finished at its best level in a little over a month, near CNY6.4530. The next interesting technical area is between CNY6.47 and CNY6.4950. The dollar gapped higher after the FOMC meeting, and that gap (~CNY6.4055-CNY6.4185) may offer psychological support. Chinese officials took action on three fronts recently: the currency, industrial commodities, and crypto. All three have moved in the desired direction, though the move against crypto was about access, not price.

This article was written by Marc Chandler, MarctoMarket.

Without Yield Support, the Dollar Wilts

The JP Morgan Emerging Market Currency Index is edging higher for the fourth consecutive session. The lower yields are not doing equities much good today. Outside of China, the large equity markets in the region fell, and the MSCI Asia Pacific Index is posting back-to-back losses. The three-day rally in Europe’s Dow Jones Stoxx 600 is at risk as most sectors, but health care and real estate, are losing ground. Financials are the largest drag.

US future indices are a little changed to slightly firmer. Oil and other industrial commodities are firmer, and the CRB Index closed yesterday at new six-year highs. Gold is unable to benefit from the weaker dollar and lower interest rates. The upside momentum that had carried it briefly above $1900 fizzled.

Asia Pacific

China reported a smaller than expected rise in last month’s consumer prices but a larger rise in producer prices. Falling food prices helped temper the rise in consumer prices to 1.3% rather than 1.6% that the median in Bloomberg’s survey projected. The decline in pork prices helped keep food prices in check, while non-food prices rose by 0.9%. Producer price inflation accelerated to 9.0% from 6.8%. The median forecast was 8.5%. Oil, metals, and chemicals were the drivers. Beijing is trying to finesse lower producer prices by cracking down on unauthorized activity, but it does not appear sufficient.

Reports suggest it is considering some sort of cap on thermal coal prices before peak summer demand. One proposal would cap the price to the miners, while another proposal was to limit the price at the port. Still, the discussion shows that Chinese officials are still reluctant to allow supply/demand to adjust prices. If thermal coal prices or other commodities are not allowed to move freely, is Beijing really prepared to allow the yuan to be convertible as some are suggesting could take place with the introduction of a digital yuan?

The Reserve Bank of Australia did not adjust policy last week, but comments today suggest it may join the queue of central banks adjusting their stance as the inoculations are gradually allowing some return to normalcy. Former RBA member Edwards said that the RBA would likely scale back its QE next month, which others, including ourselves, had suggested was possible.

The RBA’s Assistant Governor Kent admitted he has been surprised by the strength of the rebound and is optimistic about growth fueling wage increases and inflation. Currently, the RBA targets the April 2024 bond at 10 bp. It is to decide next month whether to switch it to the November 2024 maturity. Targeting the 3-year yield at the cash rate is a way to underscore the lack of intent to raise rates in the interim.

The dollar is trapped in almost a 20-pip range against the yen today in the upper end of this week’s range. It has not been above JPY109.65 so far this week nor below about JPY109.20. There are about $1.2 bln in options in the JPY109.00-JPY109.10 area that roll-off today. The benchmark three-month implied volatility reached almost 5.53% yesterday, its lowest level since February 2020. The Australian dollar is steady, trading inside yesterday’s range, which was inside Monday’s range (~$0.7725-$0.7765). Like the dollar-yen, the Aussie is also in a 20-tick range so far today.

The Chinese yuan rose today, recouping the losses seen in the past two sessions. The dollar reached CNY6.4120 at the end of last week but has consistently recorded lower highs and lower lows this week. The PBOC’s reference rate for the dollar was set at CNY6.3956, spot on expectations. It is beginning to look as if official intent is more about breaking the one-way market that had appeared to develop and stabilize the yuan rather than reverse it. Whether defending a set line, which some have suggested at CNY6.35 or not, still has to be seen.


The ink G7 finance minister agreement on the minimum corporate tax is hardly even dry, and the first exception is being sought. The UK (and apparently the EU) want to exclude financial services from the new global tax regime. Separately, the US and the EU will have a rapprochement that will resolve the two outstanding disputes: The goal is to resolve the Boeing/Airbus subsidy issue by July 11 and end the steel and aluminum tariffs imposed by the Trump administration on national security grounds by the end of the year. The US has protested but will not escalate the sanctions for the Nord Stream 2 pipeline, and the tax reform would see European countries drop their digital tax initiatives.

Meanwhile, Europe is gradually taking a harder line against China. The EU Parliament is not proceeding with the ratification of the EU-China trade agreement struck at the end of last year. Italy, which was the only G7 country to sign on to the Belt Road Initiative, has blocked Chinese acquisitions under Prime Minister Draghi. Europe has endorsed the US call for new efforts to find the origins of Covid-19, even though the origins are unnecessary to combat virus and protocols to tighten security as labs during such work are necessary regardless of the precise origin.

Germany reported a 15.5 bln euro trade surplus in April, down from 20.2 bln in March. Exports growth slowed to 0.3% after a 1.3% gain previously. Imports fell by 1.7%, more than expected after the March series was revised to show a 7.1% gain (initially 6.5%). The smaller trade surplus translates into a smaller current account surplus (21.3 bln euros vs. 30.0 bln in March).

Unlike what we saw yesterday with the Japanese trade and current account figures, the German current account is driven by the trade balance. In Japan, the current account surplus is driven by foreign earnings, interest, royalties, and licensing fees, not trade in goods and services.

The euro is firm, but it too is trading inside yesterday’s range, which is inside Monday’s range (~$1.2145-$1.2200). There is an option for about 1.14 bln euros at $1.22 that expires today. The market is also circumspect ahead of tomorrow’s ECB meeting, for which a consensus has emerged that it will not return its bond-buying to that which prevailed before March.

We caution that knowing the ECB’s bond-buying plans does not help trade the euro or European rates, both of which have risen since the ECB accelerated its buying. Sterling, too is range-bound with last Friday’s range (~$1.4085-$1.4200). The general consolidative tone looks set to continue.


The Bank of Canada meeting is the highlight of the North American session today. At its last meeting in April, it announced it would slow its bond purchases and brought forward the closing of the output gap into H2 22. Since then, Canada has reported back-to-back job losses. The Canadian dollar has appreciated by almost 3.4% since that April meeting. It is the strongest of the major currencies. A decision on whether to proceed with tapering is expected at next month’s meeting, not today.

Yesterday, Canada reported an unexpected trade surplus for April. Exports and imports fell, with motor vehicle trade disrupted by the line shutdowns due to the shortage of semiconductors. Canada’s energy trade balance was in surplus by about C$6.8 bln, while the non-energy balance was in deficit by about C$6.2 bln. Canada had a C$6.4 bln surplus with the US and a C$2.2 bln deficit with China.

The US reports wholesale inventory data today ahead of tomorrow’s May CPI. The focus, however, is shifting to next week’s FOMC meeting. Yesterday, the US sold $58 bln 3-year notes. Although the high yield slipped fractionally, the bid cover ticked up, as did indirect bids. Today, the Treasury sells $38 bln 10-year notes and tomorrow $24 bln 30-year bonds.

Tomorrow’s four and eight-week bill auctions may draw more attention than usual as the earlier bill auctions showed a little uptick as the market anticipates that the Fed may have to tweak the interest it pays on reserves or the zero rate on the reverse repos (demand reached a new record of almost $500 bln yesterday). Separately, the US Senate passed (68-22) the bill to boost US competitiveness, which has some elements that were in the infrastructure bill. The bill now gets taken up by the House.

Mexico reports May CPI figures today. The year-over-year pace is expected to pull back from the 6.08% pace seen in April but not sufficiently to change anything. Moreover, the core rate is expected to quicken a little. Through April, Mexico’s core rate has risen by almost 5% at an annualized rate. The market appears to lean toward a rate hike by the end of the year and as much as four hikes by the middle of 2022. Brazil reports its IPCA inflation today as well.

The year-over-year pace is expected to have accelerated to nearly 8% from about 6.75% in April. The central bank has already indicated it will raise rates next week by 75 bp, the third such move of the year. It would lift the Selic rate above Mexico’s cash target rate after having begun the year at half of it.

A little position squaring yesterday lifted the US dollar to almost CAD1.2120, but it has come back offered today and traded CAD1.2085 in the European morning. This week’s low so far is about CAD1.2055. Key technical support is seen at CAD1.20, while CAD1.2145 marks the upper end of the recent range.

The Mexican peso is rising for the fourth consecutive session, the longest rally in two months. The greenback finished last week near MXN19.96 and is testing MXN19.62 now, its lowest level in five months. The next area of chart support is seen near MXN19.50. The US dollar is also on its 2021 lows against the Brazilian real. It has not been below BRL5.0 since last June.

This article was written by Marc Chandler, MarctoMarket.

ECB, Bank of Canada, and the Peak in US CPI Base Effect

And for a good reason: at the end of the day, it does not really matter that much.

ECB Bond Plans

Since the ECB stepped up its bond purchases, the euro, yields, and premiums over Germany have risen. But, of course, there are other drivers of the capital markets, and that is the point. Even though the euro is often quoted to the hundredth a cent, the $6.6 trillion-a-day average turnover is not so exacting that what turns out to be a few billion euros of bond-buying a week makes much of a difference. The same general argument applies to the bond market, as well.

The more important issue that has yet to be fully recognized is that the ECB’s Pandemic Emergency Purchase Program is currently set to expire at the end of March 2022. Assuming the Federal Reserve begins to taper in Q4 21, it will probably still buying as PEPP closes. Of course, the ECB could extend the program, but the macro backdrop might make it politically difficult.

First, the EU’s fiscal initiative will most likely have begun distributing funds, providing added stimulus. Second, the OECD’s largest forecasts anticipate eurozone growth to exceed US growth in 2022, 4.4% to 3.6%. Bloomberg’s survey of private-sector economists shows an EMU beat of 4.2% to 4.0%.

The modest rise in European interest rates here in Q2 has been accompanied by macroeconomic data that have mostly surprised on the upside and an acceleration of the vaccination efforts. The 10-year Bund yield and the 10-year breakeven have risen by about eight basis points since the end of Q1. The EU plans on lifting quarantine rules for vaccinated people as of the beginning of next month. The recovery is gaining traction, and confidence in it is rising. Europe’s Dow Jones Stoxx 600 is at record highs, with a nearly 13.5% gain year-to-date, a little more than the S&P 500 (~12.5%).

French elections

As the economic news stream has improved, the political challenges are intensifying. No, this is not about the next April’s French election. Consternation has been expressed in some quarters that Le Pen is running ahead of Macron, but this is more Sturm und Drang. The election is 10 months away, and the vaccination program and economic re-opening can be expected to strengthen Macron’s standing. More importantly, we have seen this before.

Le Pen’s solid base helps it when there are many candidates. In a run-off final round, Le Pen loses. The German election is closer, and we can confidently say that Merkel’s successor will be elected. The latest polls show the CDU is back ahead. The Greens are in a close second. The SPD is likely to be relegated to third place. The bookmakers and political punters on Predict.Org favor CDU’s Laschet over the Green’s Baerbock as the next chancellor.


Brexit was a particularly uniquely British drama, but it also reflected a broader development of economic nationalism on the one hand and the hardening of the EU’s external walls on the other. Switzerland formally withdrew from talks to codify its 120 (more or less) bilateral agreements into one single framework. In Bern, it was a victory for the right-wing populist party SVP. Yet, it is the tip of the proverbial iceberg. Two years ago, Swiss equity markets lost the right to service EU investors. Since the middle of last month, Swiss companies have been stockpiling some goods such as medical equipment and industrial machinery due to the trade disruption that has already begun.

Norway holds national elections in September. The polls suggest a government can be forged where a majority no longer wish to be in the European Economic Area, (EEA) a free-trade agreement (excluding agriculture and fish) that brings the European Free Trade Area (Norway, Iceland, and Lichtenstein) and the EU together. The center-left coalition could replace the current center-right, but the power may ultimately reside with a small party whose support is needed to forge a government, as was the case in Switzerland.

And, lest we forget, Brexit is not completely over either. EU officials are increasingly frustrated with the UK’s refusal to fully implement Northern Ireland Protocol. The British negotiators had sufficient rope and hung themselves, some might say. A customs border in the middle of the Irish Sea was ridiculed by leading Tories, including former Prime Minister May. It is to Brexit what Dogecoin is to crypto. What began out as a joke turned into something serious. The joint committee on Brexit (EU and UK) will meet in the days ahead. Brussel’s goal is modest: set a joint approach for settling differences.

Bank of Canada

The day before the ECB meets on June 10, the Bank of Canada holds its policymaking meeting. At the previous meeting on April 21, the BoC was unexpectedly hawkish. It announced a slowing of its bond purchases and projected that the economic slack will be absorbed in H2 22, which opens the door to a rate move. Since the last meeting, the Canadian dollar has led the major currencies higher with a gain of about 3.4%. The market has discounted almost 60 bp in tightening by the end of next year. This seems too aggressive.

Canada’s jobs report disappointed for the second month in a row. Ahead of the weekend, Canada announced it shed some 68k jobs in May, which was more than twice as many as the median forecast in Bloomberg’s survey anticipated. It lost 207k positions in April. Canada has lost nearly 145k full-time jobs in April-May. Overall this year, Canada has grown less than 75k jobs. While not backtracking on its April assessment, the Bank of Canada can emphasize the uncertainty and variability of the re-opening of the economy and that patience is needed, which could help extend the consolidation/correction phase.

Emerging market central banks

A few emerging market central banks meet (Poland, Russia, Chile, and Peru). Aside from Russia, they are wrestling with the same vexing issue. Price pressures are rising and are well above the policy rates, but the economies still need support. Peru’s presidential run-off is on June 6. Since the end of April, the Peru sol has fallen by about 1.8%, making it the weakest of the emerging market currencies after the Turkish lira’s 4.3% decline.

Incidentally, Chile holds elections in November. The Chilean peso has performed only slightly better sol since the end of April and is the third weakest of the emerging market currencies. New measures that allow drawdown on pension funds (fourth time) amid concerns about returns and nationalization have disrupted the equity market. Intervention to support the peso limited the reaction in the foreign exchange market.

Poland’s inflation is rising like Hungary and the Czech Republic (4.8% year-over-year, twice the rate seen as recently as February), while the policy rate is a lowly 10 bp. A move at the June 9 meeting seems unlikely as bond purchases continue. Still, the market appears to be aggressive in pricing in a policy rate of nearly 40 bp by the end of the year.

Russia’s central meets on June 11. It has hiked rates by a total of over 75 bp at the past two meetings to bring its key rate to 5.00%. Inflation is rising. It stood at 5.5% in April and is expected to have moved closer to 6% in May. A 25 bp hike is expected, and the risk of a 50 bp move is greater than the risk of its standing pat. Despite oil prices rising more than a third this year, the rouble has risen a modest 2.25% against the dollar. The correlation (rolling 60-day) of the change in the ruble and the change in Brent oil price peaked a year ago near 0.66. It is near 0.20 for the past 60 days.

CPI figures

Last but not least, in the week ahead, both the US and China report May CPI figures. US CPI is still accelerating, but the good news is the base effect peaked last month. In May 2020, the headline and core measures of US CPI fell by 0.1%. They are expected to be replaced in the 12-month measures by a 0.4% increase in both. This will lift the year-over-year rate to around 4.7% and 3.5% for the headline and core rate. In 2020, the headline CPI rose by 0.5% in both June and July. As these drop from the year-over-year pace will likely stabilize and maybe even slip a bit. The core rate rose by 0.2% last June and 0.5% last July.

We quickly add two caveats. First, the Fed does not target CPI but the PCE deflator. Although officials talk about the core rate, the target applies to the headline rate. Second, Fed officials recognize that temporary and technical factors are behind the price pressures and will look past the near-term rise. Words like temporary and even the Fed’s use of average as in target of the average inflation rate are very slippery and have not been defined. While this allows the Fed maximum flexibility, it is not entirely satisfactory to investors and businesses.

China’s consumer inflation bottomed at the end of the last year, but deflationary pressures were still evident in January and February when CPI was still below zero year-over-year. Even though on a month-over-month basis, China’s CPI fell by 0.5% and 0.3% in March and April, respectively, the year-over-year pace accelerated from -0.2% in February to 0.9% in April. Prices are expected to have accelerated to a 1.6% year-over-year pace in May. That would be the highest since last September.

One eye-catching development is that food price inflation has calmed. Last August, food prices had risen by 11.2% on a year-over-year basis. Non-food prices rose by 0.1%. Fast-forward to April, and food prices were off 0.7% year-over-year while non-food prices had risen by 1.3%. The inflationary threat does not come from China’s consumer prices but its producer prices.

With the single exception of January 2020, Chinese producer prices fell on a year-over-year basis from mid-2019 through the end of 2020. On the other hand, US producer prices rose by 1.0%-2.0% year-over-year in H2 19. The deflation in producer prices was experienced in April through August last year. Still, the driver was not so much in China per se as the economic consequence of the disruption and shutdowns related to Covid.

Some observers are concerned that the rise in China’s PPI will fuel higher US CPI. It is possible but doubtful. First, Americans, like others from high-income countries, spend more on services than goods. Services typically are not commodity-intensive. Second, the biggest components of CPI are health/medical related and shelter, which also do not appear to be driven by the commodities. Third, even many of the goods consumers purchase tend not to be raw material intensive. Surely this is true of most electronic products (e.g., computers, cell phones). What about an auto, you ask. The direct raw material costs are estimated at around $3k.

Indeed, Peter Drucker identified the decoupling of the commodity economy from the industrial economy as a key feature of the modern economy back in Foreign Affairs in 1987. He would not be surprised, nor should we, that while Chinese producer prices were falling from mid-2019, US consumer prices were rising at a 1.7%-2.5% year-over-year rate until the pandemic struck. The yawning gap in China between consumer and producer prices may say something about the profit margins of some Chinese companies or the risk of stronger consumer inflation. Still, it does not appear to say very much about consumer prices in the US.

This article was written by Marc Chandler, MarctoMarket.

China Raises Reserve Requirement for FX, Stemming the Yuan’s Rise

Japan, Australia, and Singapore, for notable exceptions. Europe’s Dow Jones Stoxx 600 took a seven-day advance into today’s action and is struggling to extend it. US futures have edged slightly higher. European bond yields have edged higher. The dollar is little changed against the major currencies. Outside of the Australian dollar, which is about 0.3% higher, around $0.7735, the other major currencies are +/- 0.15%. Emerging market currencies are mostly firmer, led by the Turkish lira, which was helped by a stronger than expected Q1 GDP (1.7% quarter-over-year and 7% year-over-year).

The JP Morgan Emerging Market Currency Index is extending its advance for the fourth consecutive session. Gold is holding above $1900, while oil is firm, and July WTI is extending last week’s 4.3% rally as it tries to solidify a foothold above $67 ahead of tomorrow’s OPEC+ meeting. Industrial commodities, such as copper, iron ore, and steel rebar have moved higher to build on the recovery seen at the end of last week.

Asia Pacific

China’s composite May CPI crept up to 54.2 from 53.8. It was the result of a slightly disappointing manufacturing reading that slipped from April’s 51.1 to 51.0. The non-manufacturing PMI, however, was stronger than expected, rising from 54.9 to 55.2. The recovery appears to be morphing into a steady pace expansion. Caixin PMI is next (manufacturing PMI tomorrow) with May trade figures and reserves possibly before the end of the week.

Japan has extended the formal emergency to June 20, with Opening Ceremonies for the Olympics scheduled for July 23. The emergency threatens to delay the economic recovery. April industrial output, retail sales, and housing starts were reported earlier today. Industrial production is aided by exports and rose 2.5%. While better than March’s 1.7%, it still fell shy of projections for a nearly 4% gain. Retail sales, however, sorely missed forecasts and illustrates, at least in part, the impact of the social restrictions on consumption.

The 4.5% month-over-month fall was more than twice the decline expected and was the biggest slump since last April. The broader measure of household spending is due out later this week. Housing starts were a bright spot. The 7.1% year-over-year advance bested expectations and was the first back-to-back gain in two years. Next up, the final manufacturing PMI reading. The preliminary report showed a slower pace of expansion (52.5 from 53.6).

The Reserve Bank of Australia meets first thing tomorrow. No change is expected, but the statement will be scrutinized for clues for what officials will decide next month when it reviews its asset purchases and three-year interest rate target. Shortly after the central bank meeting, Q1 21 GDP will be reported. A 1.1% quarterly advance is expected after a 3.1% expansion in Q4 20.

A series of comments by Chinese officials appeared to talk the yuan lower, emphasizing that the recent gains were unlikely to last due to speculation, potential Fed tightening, and or rate adjustments in the emerging markets. It was having a little impact until the PBOC announced a two percentage point increase in reserve requirements for foreign exchange positions. The new requirement starts June 15, and the reserve requirement will stand at 7%.

The PBOC’s reference rate for the dollar, set at CNY6.3682 (compared with expectations for CNY6.3656, the median in Bloomberg’s survey, also seemed to be a protest. The offshore yuan recovered on the announcement. The US dollar was rebuffed ahead of the weekend after a brief foray above JPY110 for the first time since early April. The greenback was sold in the European morning to around JPY109.65. Support is seen in the JPY109.40-JPY109.60 area. The Australian dollar is firm in the upper end of the pre-weekend range when it approached $0.7750. Recall that it had tested the month’s low (~$0.7675) and rebounded back above $0.7700, where it has remained today. The $0.7800 is the real nemesis for the Aussie bulls.


The eurozone’s May inflation is front and center. French data before the weekend showed a 0.4% rise for a 1.8% year-over-year gain. It was up from 1.6% in April. Italy reported a flat month-over-month rate today, which lifts the year-over-year rate to 1.3%, both slightly softer than expected. Spain’s 0.5% increase matched expectations and lift the year-over-year rate to 2.4% from 2.0%. German states have reported, and the domestic measures were mostly 2.5-2.6% higher year-over-year.

This warns of the possible upside risk to the national harmonized measure that rose 0.5% for a 2.1% year-over-year advance in April. The aggregate figure is out tomorrow. The risk is that the headline rises a little more than the 0.2% gain expected, which could see the year-over-year rate test 2%.

The fifth round of Europe-led talks to revised the 2015 pact that limits Iran’s nuclear developments began yesterday. This round of talks could be the last given the proximity of the June 18 Iranian elections. Separately, the possibility that a deal is struck and some Iranian oil can return to the market is part of the constellation of considerations for OPEC+ when it meets tomorrow to sort out its plans to boost output.

It is generally expected to maintain current output quotas, with a rise expected (~840k barrels a day) in July. Meanwhile, it appears that after four inconclusive elections in four years, Israel may be on the verge of a new government that will not include Netanyahu after one of the Prime Minister’s key allies defected to the coalition being forged by former Finance Minister Lapid. Of note, that coalition may rely on an Arab party to secure a majority. The Israeli central bank meets today and is widely expected to maintain the 10 bp base rate.

The euro fell to a two-week low below $1.2135 before the weekend and rebounded to poke above $1.22 before the end of the session. According to Bloomberg data, the euro has settled between $1.2192 and $1.2195 for the past three sessions. It is confined to around a fifth of a cent range today, hovering around 10 ticks on either side of those settlements. The pre-weekend high was $1.2205, and the euro has been stopped just in front of it so far today.

If it holds, it would be the fourth consecutive session of lower highs. Sterling also appears to be going nowhere quickly. It closed above $1.42 last Thursday for the first time in years, but there has been no follow-through buying. It met sellers today as it tried to push back above $1.4200. Initial support is seen around $1.4150, but better support is closer to $1.41.


The disappointing US April employment report underscores the importance of this week’s May estimate. Moreover, a strong upward revision to the April series would seem to be consistent with other data inputs. Auto sales on Wednesday may also be important. After the surge in April (18.5 mln vehicles as a seasonally-adjusted rate), the chip shortage may take a toll. The median forecast in Bloomberg’s survey is for a 17.5 mln pace.

Note that the chip shortage is seeing new car buyers opt for 2020 models and dealers buying cars with expiring leases as less than expected miles were driven last year, boosting the resale value. Fed president and governors have numerous speaking opportunities this week, and the general message has confirmed what the market already thought it knew, namely that a formal discussion on tapering is possible in the coming months.

As we have noted, many are talking about the Jackson Hole Fed conference at the end of August and/or the September FOMC meeting as likely venues. Despite the talk, the 10-year yield settled just below 1.60% before the weekend. Chair Powell speaks on Friday at a Bank of International Settlements function.

Canada reports Q1 GDP figures tomorrow (expected 6.8% at an annualized pace after 9.6% in Q4 20), but the jobs data at the end of the week is more important. Like the US, Canada’s April report disappointed. It lost 129.4k full-time positions and 207k jobs overall. However, while the US job creation is expected to have accelerated, the median forecast in Bloomberg’s survey anticipates another loss of jobs (~25k).

Mexico’s data highlights include worker remittances (which continue to exceed the trade surplus) and the PMI. However, the central bank’s inflation report on Wednesday is expected to solidify the cautious stance in light of the recent rise in price pressures. The market appears to be pricing in as much as 75 bp of tightening over the next year. In addition to April industrial production and May trade figures and PMI, Brazil reported Q1 GDP. It is expected to have grown by 0.8% after a 3.2% expansion in Q4 20. The year-over-year rate is expected to turn positive. Before the weekend, Fitch affirmed Brazil’s BB- rating and retained the negative outlook due to the risks that fiscal consolidation is not delivered.

The US dollar remains in its trough against the Canadian dollar. The CAD1.20 offers critical technical support, while the upside is blocked by the 20-day moving average (~CAD1.2115). The greenback briefly rose above the moving average last Thursday for the first time in a month, and those gains were quickly sold into, and the sideways churn continues.

The greenback was bid to two-week highs against the Mexican peso (~MXN20.0770) ahead of the weekend but also retreated to settle a little below MXN19.94. The MXN19.90 area offers initial support. The market may be reluctant to take the greenback above MXN20.00 in today’s thin activity. The dollar is testing support near BRL5.20. It has not traded below there since January. A break would target BRL5.0. The central bank meets on June 16 and already appears to have committed to the third 75 bp hike this year.

This article was written by Marc Chandler, MarctoMarket.

For a look at all of today’s economic events, check out our economic calendar.

Dollar Correction at Hand or Just End-of-Month Adjustment?

As we have noted before, short-term trend changes are common around the end of months and the US employment report, typically the first Friday of the new month.

Our review of several dollar pairs’ technical condition suggests a good chance that the greenback’s recovery carries into early June activity even though its initial gains ahead of the weekend were quickly pared. Without stronger interest rate support, it is difficult to see a significant near-term recovery. Here we put more weight on the December 2022 Eurodollar futures for Fed expectations than the 10-year yield, where the 20- and 50-day moving averages of the implied rate have converged around a little above 1.60% compared with a peak of around 1.77% at the end of March. The Eurodollar futures appear to be discounting a rate hike at the end of next year.

Dollar Index

A small bottoming pattern appeared to have been carved out, but the Dollar Index was greeted by a wall of sellers after it popped above the 20-day moving average (~90.30) for the first time in a couple of weeks. If a correction has begun, the measuring objective of the bottoming formation and the (38.2%) retracement objective of the slide since the end of March (from almost 93.50) comes in near 91.00. Additional gains meet stronger resistance in the 91.50-91.70 area that holds the 200-day moving average and the next retracement objective (50%). The MACD and Slow Stochastic have turned up from over-extended territory.


The euro’s advance, which began from almost $1.1700 at the end of March, stalled in the $1.2245-$1.2265 band. ECB doves push against arguments in favor of reducing bond purchases. Month-end adjustments saw the euro retreat to around $1.2135 before the weekend before quickly snapping back to the $1.22 area. The first important technical test is seen at around $1.2050, the low from mid-May and the (38.2%) retracement objective of the rally from that March low.

A convincing break could spark a test on the $1.1975-$1.2000 area, where the (50%) retracement and 200-day moving averages are found. The MACD is turning down from the highs for the year. However, the Slow Stochastic did not confirm the new high in prices and is curled lower, leaving a bearish divergence in its wake.

Japanese Yen

The dollar pushed above JPY110 ahead of the weekend for the first time since April 6 but quickly sold off as the US 10-year yield fell back below 1.60% again. A bearish shooting star candlestick was formed. The JPY109.40-JPY109.60 offers initial support. The momentum indicators had turned higher for the dollar, and it did finish the week in the upper-end of the trading range since early April. Japan lags behind other high-income countries in its inoculation efforts and economic recovery, but US rates appear to be a more important driver of the exchange rate. A move above the pre-weekend high near JPY110.20 targets the JPY111 area.

British Pound

For the first time in three years, sterling closed above $1.42 after a BOE official talked about higher rates next year. However, it held below the multi-year high set in late February, just above $1.4235. The lack of follow-through sterling buying after the outside up day on May 27 is consistent with a consolidative/corrective phase.

Perhaps, also encouraging the profit-taking are concerns that the economy-wide re-opening planned for June 21 may be delayed as the contagion and hospitalizations are seeing renewed increases. Initial support is seen in around 1.4080-$1.4100. However, the momentum indicators are turning lower. Stronger support is seen near $1.40.

Canadian Dollar

The Canadian dollar snapped a seven-week advance last week with a small loss (less than 0.15%). Important chart support for the US dollar around CAD1.2000 held after repeated testing. Bottom pickers and profit-takers helped lift the greenback toward its 20-day moving average (~CAD1.2130) for the first time in a little over a month. Still, it held below the recent high (~CAD1.2145). Above there, the CAD1.2200 area offers resistance. The Slow Stochastic and MACD favor the greenback’s upside. For the past three sessions, higher lows have been recorded.

Australian Dollar

The Aussie’s price action appears to be among the most bearish of the currencies we review here. It reversed lower after failing to resurface above $0.7800 in the middle of last week (on the back of the RBNZ hawkish surprise) and finished the week a little above $0.7700 after retesting the lows for the month (~$0.7675).

A head and shoulders topping pattern appears to have been forged that projects toward $0.7500. That seems rather deep and requires the failure of the congestion support around $0.7600. The MACD and Slow Stochastic’s pullback is well advanced. The MACD peaked on May 11. The Slow Stochastic has been trending lower since April 21.

Mexican Peso

The US dollar saw two-week highs against the peso ahead of the weekend near MXN20.0770 and briefly frayed the downtrend line drawn off the month’s highs. However, the dollar reversed in North America and briefly traded below MXN19.90. The momentum indicators are mixed. The MACD has essentially moved sideways this entire month, while the Slow Stochastic turned higher a week ago.

The dollar appears range-bound. According to press reports, the campaigns for the June 6 legislative and local elections have been marred with the most violence in several years. AMLO’s party is expected to do well at the polls, but global investors might react less favorably due to the unfriendly investment environment.

Chinese Yuan

The dollar’s bounce in Europe and North America ahead of the weekend may halt the yuan’s advance after a seven-day advance. Chinese officials will welcome the price action after warning against a one-way market. Some talk about the CNY6.35 as the possible pain threshold, but in our experience, PBOC officials are more sophisticated than that.

The official discomfort with the rising yuan may have been checked by the broader dollar weakness, but when the greenback bounces, they may have a freer hand to encourage a softer yuan. Initially, the dollar may have potential to recover toward CNY6.40, but there is a small gap from May 24-25 that extends from about CBY6.4150 to CNY6.4180 that may attract prices.

This article was written by Marc Chandler, MarctoMarket.

For a look at all of today’s economic events, check out our economic calendar.

The Dollar Remains on the Defensive

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.

This article was written by Marc Chandler, MarctoMarket.

For a look at all of today’s economic events, check out our economic calendar.

The Dollar and the Fed

This was also true in dealing with the Great Financial Crisis. The divergence then and now had shaped the investment climate.

On a per-capita basis, the pandemic struck the US harder than in most other high-income countries, and some see the wide disparity of income and wealth as a contributing factor. In any event, the vaccine rollout has been quite good by international standards. This, coupled with vigorous policy support, economic activity has exploded.

A growing chorus of economists has argued that the Fed ought to target nominal GDP. Two percent inflation, which the Fed targets at 2% (now on an average basis, but no term for the average has been declared) and three percent real growth, has been an elusive but desired goal. In nominal terms, the US economy grew by more than 10% annualized in Q1, and it appears well above that here in Q2. In fact, after the disappointing employment report, the Atlanta Fed’s GDP tracker sees Q2 real GDP at 11% annualized, down from 13.6% prior to the employment report. The NY Fed’s tracker slipped to 5.1% last week from 5.3%.

Many high-income countries contracted in Q1 but are recovering, and positive growth is likely going forward. The acceleration of the US economy is still quicker, meaning that the divergence may extend a bit longer. However, the real takeaway from recent news and developments is that the divergence meme is ending. In fact, models of data surprises show the US faltering and Europe improving and can only be underscored by the nonfarm payroll report. In addition, the vaccine rollout in other high-income countries is accelerating, and Europe’s seven-day average has surpassed the US. Partly, this is a function of catching up after a slow start. However, there is another issue that is unfolding. A significant minority appear reluctant to take the vaccine.

As we have come to appreciate, herd immunity does not require everyone is vaccinated. The greater the contagion, the greater the percentage of people needed to have immunity. It is possible that some areas, and even states, may fall shy of the coverage that doctors and scientists say is required to achieve herd immunity. In the US, the vaccines are still regarded as for emergency purposes only, making it difficult for public authorities to force the issue. Making the vaccines not just for emergencies could make it easier to impose greater social ostracization on those who refuse a vaccine. While the modern libertarian spirit may be the force behind attempts to decentralize finance, the public health crisis seems to push in the opposite direction.

We have anticipated that the divergence meme morphs into its opposite, namely convergence. However, another divergence is opening and one in which the US is the laggard. The Federal Reserve’s leadership says it too soon to even talk about talking about adjusting the open spigot of monetary policy by slowing the pace of bond purchases from the current $120 bln a month pace. Canada has also begun the process of tapering. Last week, Norway’s central bank reaffirmed its intention to raise rates before the end of this year. The Bank of England said it would slow its weekly bond purchases and look to complete them this year.

There will be a vigorous debate next month at the ECB about the pace of its bond purchases. Several of the more hawkish members apparently want to slow from the stepped-up pace agreed to in March. New staff forecasts at the meeting will likely revise up their growth forecasts and take into account the spillover of the significant US fiscal stimulus. The Reserve Bank of Australia may also be in line ahead of the US to adjust its policies. In July, it will decide whether to extend its yield-curve control to the November 2024 bond and about a new bond-buying program.

With the strong fiscal support, the pent-up demand, the vaccine, the re-opening, the Fed’s stance seems to stretch credulity. While April’s employment data were terribly disappointing, and the 146k downward revision in March’s estimate shows recovery in the labor market is not a powerful as it had appeared. Cleaning the weekly initial jobless claims from fraudulent filings may have exaggerated the decline in filings, but it also exaggerated the increase. Weekly initial jobless claims fell below 500k at the end of April for the first time since March 2020. The four-week was 866k at the end of January.

Unlike the downside of a business cycle, the problem might not be on the demand side of the labor market but the supply side. Without schools and daycare fully open, many who might be taking new positions or returning to old positions cannot. Others may still be reluctant due to the virus and availability and confidence in public transportation. Like the Chamber of Commerce, some called for the end of the federal government’s $300 weekly supplement unemployment compensation to address what anecdotal reports suggest is a labor shortage.

After the Great Financial Crisis, it took five years for the unemployment rate to fall below 6%. It stood at 6.1% last month after falling to 6% in March. It has more than halved from last year’s peak. After the Great Financial Crisis, it took six years from the peak in unemployment to be reduced by half. The underemployment rate fell to 10.4% from 10.7% in March. In the GFC, it peaked in 2009 and was not under 10% until late 2015.

The April retail sales and industrial production reports will shed light on the meaning of the disappointing employment data. Does it signal a slowing of the US economy? Did the fiscal buzz wear off, as some are suggesting? The strong, strong auto sales hint at a healthy retail sales report, but the employment data seemed to have spooked some economists who reduced their forecasts. March’s record US trade deficit showed businesses anticipating strong consumer demand. Manufacturing employment fell by 18k instead of rising by 54k as the median forecast in Bloomberg’s survey had it, and some revised down their forecasts for manufacturing output/industrial production.

The other target is inflation. Next week the April CPI and PPI will be released. Whether price pressures prove temporary, reasonable people may differ, but what seems to be clear is that threat of deflation has all but disappeared. The year-over-year CPI rate stood at 2.6% in March and is expected to have jumped to 3.6% in April. This is partly the base effect, as the last April’s decline drops out of the 12-month comparison.

The average monthly increase of CPI in Q1 was a little more than 0.4%. This is picking up the impact of the supply chain issues and shortages. The median forecast in Bloomberg’s survey was for a 0.2% increase in April. Over the last 10 years (120 months), US CPI has averaged a 1.7% increase and 2.3% over the past 30 years (360 months). The similar core rate averages are 1.9% and 2.3%. The averages capture the broad trend of lessening price pressures and how closely they track each other on a medium and long-term basis.

Producer prices jumped 1% in March for a 4.2% year-over-year rate. Bloomberg’s survey’s median forecast is for the monthly rate to slow to 0.2%, but the year-over-year rate to accelerate to 5.8%. A little more than a third of the year-over-year increase stems from food and energy, which, if stripped out, should around a 3.7% year-over-year pace in April. This means that the cost of inputs, including packaging and transportation costs, are rising. As a result, one of three things, or more frequently it seems, a combination takes place, costs passed on to the consumer, narrow profit margins are accepted, perhaps to maintain market share or productivity increases.

The point, again, is that the threat of deflation has been exorcised. The first debate is not about removing monetary stimulus. It is about slowing the amount of new accommodation by reducing the bond purchases. In Japan, quantitative easing via Rinban operations before the Great Financial Crisis was the norm, but in the US, the purchase of long-term assets is about triage, but now the patient has had a large fiscal and medical vaccine, and some extra monetary vitamins, and is beginning to run. Therapy is still needed, but triage, less so.

While the Fed’s leadership is reluctant to signal that it may begin considering reducing the pace of its bond purchases, the Treasury will auction $126 bln of coupons in next week’s quarterly refunding. The primary dealer system obligates the necessary buying. However, the auctions can be sloppy–low bid cover, a large tail, an immediate post-auction decline in yield, as we have experienced with the sale of the seven-year note earlier this year.

Given the size of the budget and current account deficits, the US has to offer a combination of higher interest rates or a weaker dollar. The Federal Reserve is blocking the former and is willing to accept the latter. Among the high-income countries, the US 10-year note has performed best over the past month. The yield has fallen by almost 10 bp, while European yields have risen 10-27 bp.

In addition to the signals from the 10-year, look at what has happened to the December 2022 Eurodollar futures contract. The implied yield trended higher in Q1 and peaked in early April around 53 bp (cash is around 16 bp), almost 35 bp higher than it had begun the year. The dollar generally trended higher in Q1. Since early April, the yield has trended lower and took another big step down after the employment disappointment. The implied yield traded near 37 bp before the weekend, essentially unwinding this year’s increase. The dollar has been tracking the yield lower.

Tapering is not tightening, but the market knows, and the Fed knows that the market knows that tapering is the first step toward tightening. The Fed may not want to signal tapering because it does not want markets to run with it and tighten financial conditions prematurely. Fed officials appreciate arguably, if not better than Wall Street, that there is no free lunch; there are trade-offs. The disequilibrium will be addressed by either higher interest rates or a lower dollar, or a combination.

This article was written by Marc Chandler, MarctoMarket.

For a look at all of today’s economic events, check out our economic calendar.

The Dollar Consolidates Pre-Weekend Advance

The UK holds local elections, and the US and Canada report employment data at the end of the week. In addition, the earnings season continues, while the US will also announce details of its quarterly refunding plans. Several markets are closed for holidays, including China and Japan (through Wednesday). UK markets are closed for a bank holiday.

After falling 1.15% last week, the MSCI Asia Pacific Index traded heavily today, with only Australia and New Zealand bucking move. Europe’s Dow Jones Stoxx 600 fell for the second consecutive week to the end of April and is struggling to sustain early upticks today. US S&P and Dow futures are trading higher, but the NASDAQ was nearly flat after a mixed performance last week. European benchmark 10-year yields are 1-2 bp firmer.

The US 10-year yield begins the new week around 1.63%. The dollar, which rose sharply ahead of the weekend is narrowly mixed today. Sterling and the Swedish krona are leading European currencies higher, while the yen, and to a lesser extent, the Canadian dollar, are nursing losses. Similarly, among emerging market currencies, eastern and central European currencies are mostly firmer, while Asian currencies are mostly lower, led by a 1% loss of the South Korean won.

The JP Morgan Emerging Market Currency Index is little changed after losing 1% in the last two sessions. Gold is consolidating in last Thursday’s range (~$1756-$1790) and is slightly firmer. Oil prices have slipped lower. Last week, June, WTI tested $65.50 and found support in the $62.90-$63.00 area.

Asia Pacific

Australia reported a small upward revision in April’s manufacturing PMI and a further gain in house prices. The PMI edged up to 59.7 from the preliminary estimate of 59.6 and 56.8 in March. The average in Q1 was 57.0. The rise in house prices is becoming a greater concern to policymakers (in New Zealand and Canada). Prices rose by 1.8% in April after a 2.8% rise in March. Prices have risen steadily since the middle of last year. The average monthly gain over the past six months is 1.5%, while over the past three months, the average has accelerated to 2.2% a month. Tomorrow it reports March trade figures ahead of the central bank meeting.

South Korea is integrated into global supply chains, making its trade figures reported ahead of most other countries a lead indicator. Its April trade figures were released over the weekend, and the 41.1% jump in exports from a year ago exaggerates the strong recovery that is, in fact, taking place. There were two additional working days, which, if adjusted for, still lifted South Korean exports by almost 29.5%.

The second distortion comes from the base effect. The 25.6% year-over-year decline in April 2020 made for a low base. Nevertheless, the takeaway is that the South Korean economy, which returned to its pre-pandemic peak in Q1, is continuing to expand. Exports are averaging about $2.2 bln a day this year. Shipments of semiconductor chips rose by a little more than 30%, and auto exports rose by almost 73.5% from year-ago levels.

Rising South Korean exports to its major trading partners, including China, the US, EU, ASEAN, and Japan, underscore that the global recovery is accelerating. South Korean imports also surged. The nearly 34% year-over-year increase is exaggerated for the same reason imports were flattered. Three forces appear evident. First, South Korea is embarking on a capex cycle for semiconductor chips. Fabrication equipment imports soared by nearly 135%.

Second, importing intermediate goods and components, like display panels, will be used as inputs for exports. Third, the 25% increase in consumer goods imports speaks to the strength of the domestic economy.

The dollar is rising against the yen for the fifth session in the past six again. It reached JPY109.70, its highest levels since April 13, and has met the (61.8%) retracement objective of the decline since peaking near JPY111.00 at the end of March. The JPY110.00-JPY110.10 is the next hurdle. Support is building near JPY109.20.

The Australian dollar retreated from $0.7800 and dipped below $0.7700 at the end of last week. It consolidating in quiet turnover at the lower end of the pre-weekend range. The nearby cap is seen around $0.7740. With Chinese markets closed, the offshore yuan (CNH) weakened for the second consecutive session. It is the first back-to-back decline in three weeks and appears to simply reflect the better tone of the US dollar. The dollar closed at about CNY6.4750 and is trading around CNH6.4760.


While the final manufacturing PMI was a bit disappointing, the real takeaway is that the eurozone economy is recovering from the Q1 contraction. Moreover, claims about a double-dip recession that the Financial Times called out in a headline are misleading. It is hard to say that it truly recovered from the “first” one. And recall, there is no fixed definition of a recession. Europe’s seven-day vaccination average has surpassed the US and is still accelerating. In the US, nearly all adults who want a vaccine have gotten at least one jab.

EMU’s April manufacturing PMI stands at 62.9 rather than 63.3 of the preliminary estimate and 62.5 in March. It was at 55.2 at the end of last year—slower supply deliveries, which are how the supply chain bottlenecks are expressed with rising prices. German and French flash readings were shaved, and although Italy and Spain showed improvement, it was not quite as much as economists anticipated.

Although last week’s release of Q1 GDP figures takes away some of the interest in the high-frequency data from March, German retail sales were stellar. March retail sales soared by 7.7%, more than twice the median forecast in the Bloomberg survey. Moreover, the February series was revised to show a 2.7% gain instead of 1.2%.

European negotiators appear more restrained than Iranians about the prospect of a deal on the nuclear accord. Separately, Iran’s state television claimed a deal was struck–prisoner swap with the US and UK and as much as $7 bln in funds, which the US quickly denied. Getting the US and Iran back into compliance with the 2015 agreement has ramifications not just for Iran, which apparently has been hit hard by the pandemic, but also for the oil market.

Already, last month, Iranian output is believed to have risen by 200k barrels per day to around 2.5 mln, which would be the largest increase in OPEC. Iran and several small producers were exempt from the OPEC+ output cuts, which are now being slowly reversed. Iran’s capacity is estimated to be a bit higher than 3.5 mln barrels per day, but it needs around 1.2-1.5 mln bpd for its domestic consumption. Estimates suggest Iran has around 70 mln barrels in floating storage. A deal is thought necessary before the end of this month, ahead of the June 18 Iranian elections.

Russia may be withdrawing its forces that had massed on the Ukraine border, but relations with Central and Eastern Europe are the most strained since the annexation of Crimea in 2014. Whatever goodwill Putin sought through is vaccine diplomacy has been undermined its aggressive behavior. Bulgaria and the Czech Republic believe Moscow was behind explosions in arms depots and the 2016 poisoning of an arms dealer.

They expelled some Russian diplomats, and Moscow retaliated in kind, and Prague kicked out more. Of particular note, Lithuania and Slovakia moved in sympathy and also expelled Russian diplomats. There arguably is a lost opportunity for the UK. Eastern and Central European were natural allies for the British on various issues, including a harder line toward Russia. Meanwhile, the Greens, whose fortunes in Germany are rising as the center (CDU/CSU and the SPD) continues to lose support, seems to also take a harder line against Russia (and China).

The euro initially extended its pre-weekend drop but has subsequently rebounded from a little below $1.2015 to about $1.2055 in the European morning. The intraday technicals are stretched, and the $1.2065-$1.2080 area offers a nearby cap. Similarly, sterling successfully tested $1.3800, where a large option (~GBP845 mln) expires tomorrow. It has recovered to around $1.3860, which stretched the intraday momentum indicators.

Resistance is seen in the $1.3860-$1.3880 area. Separately, we note despite a slightly smaller increase than expected in Turkey’s April CPI (17.14% year-over-year from 16.19% in March, and 17.3% median forecast in Bloomberg’s survey), there is little chance that the central bank will cut rates this week. Last week, it raised this year’s inflation forecast. Yet, the drop in the manufacturing PMI (50.4 from 52.6) illustrates how the high rates and pandemic are weighing on the economy. The dollar has traded on both sides of its pre-weekend range against the lira and is firm in the European morning around TRY8.30.


The US has a packed economic diary this week, with the April employment report at the end of the week, the highlight. Another gain of around a million jobs is expected. Today features the final April manufacturing PMI report and the initial ISM manufacturing index, and the economists in Bloomberg’s survey look for a 60k jump in manufacturing jobs last month.

The preliminary look at Q1 GDP last week gives good reason to expect a sharp recovery in construction spending in March after a 0.8%, weather-induced decline in February. April auto sales will trickle in over the course of the North American session. Recall that in March, they jumped to a 17.75 mln seasonally adjusted annual rate. It was the most since December 2017. It may be difficult to have sustained that level in April.

Canada sees its manufacturing PMI today, but the Canadian dollar does not seem particularly sensitive to this report. The March merchandise trade balance is out tomorrow, but the week’s highlight is the employment report at the end of the week. In March, Canada grew a dramatic 303k jobs. The risk is of a weaker report. Note that the better part of three rate hikes has been discounted over the next two years.

Mexico reports its PMIs today, but the focus may be on March worker remittances after President AMLO tipped a record of $4.128 bln. Last year, worker remittances were a greater source of capital inflows than Mexico’s trade surplus ($40.6 bln vs. $34.5 bln). The highlight of the week, though, maybe the CPI report and another gain will solidify ideas that its rate cycle is over. Brazil has a full economic diary, including what is expected to be a record trade surplus. Still, little will distract the market from Wednesday’s central bank meeting, which is expected to signal another 75 bp rate hike.

The US dollar has carved out a small shelf against the Canadian dollar in the CAD1.2265-CAD1.2275 range. Initial resistance near CAD1.2320 has already been tested. A break of it could see the greenback firm to around CAD1.2400. Meanwhile, the dollar is extended last week’s 2.1% gain against the Mexican peso that halted a four-week slide. Today’s high near MXN21.3150 is the best level of the US dollar since early April. The next technical target is a little above MXN21.37. At the end of last week, the dollar jumped 1.8% against the Brazilian real to around BRL5.4450. A move above there will target the BRL5.49 area.

This article was written by Marc Chandler, MarctoMarket.

For a look at all of today’s economic events, check out our economic calendar.

The Dollar can Build on the Pre-Weekend Gains

The Japanese yen was a notable exception. The rise in US yields helped lift the greenback nearly a percent against the yen. The Fed’s standpat stance in light of the surging economy and signals the Norwegian central bank and the Bank of Canada seemed dovish. The contrast carried the Norwegian krone and Canadian dollar to new three-year highs last week. Even if the greenback’s pre-weekend advance was exaggerated, it looks to be turning after trending lower in April.

The Federal Reserve’s broad trade-weighted nominal dollar index fell by about 7.5% in the last three quarters of 2020 after rising by 4.6% in Q1 as the pandemic struck and the dollar was bought partly as a safe haven. In addition, it was partly a function of unwinding structured positions that used the greenback as a funding currency. It gained 1.3% in Q1 21 but traded with a heavier bias in April and surrendered most of the Q1 gains, falling over 1%. Moreover, the technical indicators for the dollar have been stretched by its persistent decline in recent weeks. Frequently, it seems that the short-term trends in the dollar are reversed or consolidated around the US employment data. The April report is released on May 7, and another strong report is anticipated.

Our broad macro view is that given the large US fiscal and trade deficit (the March goods balance reported last week widened to a new record high deficit of a little more than $90 bln) requires higher yields or a weaker dollar, or some combination thereof. The fact that the US 10-year yield rose nearly 83 bp in Q1 and the dollar strengthened, and the yield fell in April, and so did the dollar is not coincidentally. We do not want to overstate the link between exchange rate and yields. The long-term relationship does not appear linear but cyclical. However, when trying to discern the recent broad trend, the foreign exchange market seems particularly sensitive to US rates.

Dollar Index

The Dollar Index fell by about 2.5% in April, essentially unwinding the March gain. The pre-weekend advance, helped apparently by month-end position adjustments, was the most since early March. Tentative support was found near 90.40. The MACD looks poised to turn higher, but the Slow Stochastic has flatlined in the overextended territory. The close above 91.15 may help stabilize the tone. To signal a correction to April, the 91.55 area may be overcome. Above there, 92.00 comes back into view.


The dovish Fed lifted the euro to $1.2150, its highest level since the end of February. Sellers greeted it and pushed it back to around $1.2015 ahead of the weekend. The move seemed exaggerated by month-end adjustments. Follow-through selling will likely test support is likely in the $1.1980-$1.2000 area. The momentum indicators are stalling. In the near term, we are more inclined to sell into strength than buy dips. Three-month euro volatility (implied) slipped below 5.5% before the weekend, its lowest level since March 2020, but closed near session highs.

Japanese Yen

The dollar bounced smartly against the yen last week. It had finished the previous week below JPY108, but the rise in US yields seemed to fuel the greenback’s recovery. After falling in nine of the past ten sessions, the dollar rose at the beginning of last week and recorded higher highs until consolidating ahead of the weekend and month-end. The MACD and Slow Stochastics have turned up, suggesting the dollar’s recovery will continue.

The dollar rose above JPY109.30 before the weekend to push and closed above the (50%) retracement of April’s decline. The next retracement target (61.8%) is near JPY109.65, and then the JPY110 level beckons. Implied vol trended lower in April alongside the dollar. The dollar’s recovery is likely to see higher implied vol, which at a little below 6%, is also near its 20-day moving average.

British Pound

A five-day advance rally was halted before the weekend as it pulled back and slipped below the 20-day moving average (~$1.3850). Once again, the market was reluctant to push it above $1.40. Sterling has not closed above that threshold since the end of February, though it has flirted with it several times. The pre-weekend drop succeeded in turning sterling lower for the week after threatening to extend its weekly advance to three. The momentum indicators stalled. Many observers see the local elections, and the election in Scotland, in particular, as a risk to sterling.

On the other hand, the Bank of England is expected to be upbeat as the fiscal stimulus and vaccine will spur a recovery sooner and stronger than previously projected. If $1.40 is the upper end of the range, then the $1.3670 area has been the lower end of the range. Initial support is seen around $1.3800. Three-month sterling vol fell below 7% last week to make a marginal new low since last March.

Canadian Dollar

The Canadian dollar was easily the strongest currency last week, gaining 1.5% against its US counterpart. It the fourth consecutive weekly advance, and it was the biggest of the year. The central bank has begun tapering, rising commodity prices is seen as constructive, and its 1.6% expansion in Q1 matches the US. However, a note of caution is generated as the US dollar closed below the lower Bollinger Band every day last week and finished the week on its lows. Another note of caution comes from the market that may be getting ahead of itself as it prices in three rate hikes by the end of 2023.

The momentum indicators are still falling, and the Slow Stochastic is stretched, and the US dollar still made new three-year lows ahead of the weekend. Initial resistance is seen near CAD1.2335 and then CAD1.2400. The low from 2018 is about CAD1.2250, and below there, chart support is sparse until the 2017 low of almost CAD1.2060. Implied volatility has begun rising. It had briefly fallen below 6% near-mid April, its lowest level since last July, but finished above 6.5%.

Australian Dollar

Rising commodity prices, including industrial metals, and a dovish Federal Reserve failed to sustain an Aussie rally above $0.7800. While it flirts and penetrates it on an intraday basis, it has failed to close above it since the end of February. Indeed, it finished the week close at its lowest level in about two and a half weeks, a tad above $0.7700, briefly dipping below it in a thin NY Friday afternoon. The momentum indicators a mixed. The Aussie spent April mostly in the $0.7600-$0.7800 range and largely above $0.7700 since mid-monthly. A break warns of a return to the lower end of the range.

The RBA meets on May 5 in Sydney. It may be a bit early for it to signal that it too wants to pull back from its extraordinary monetary support, but it seems like a good candidate for later Q3. The central bank will publish new economic projections at the end of the week, ahead of the government’s budget announcement the following week. Three-month vol is trading in its trough below 9.0%. It reached 8.75% last week, its lowest level since last March.

Mexican Peso

The peso had its worst week in a couple of months, falling in four of the five sessions. It snapped a four-week advance with a 2,1% decline, making it the second-worst performing emerging market currency after the Colombian peso (~-2.4%). Higher global interest, including a modest rise in US yields and the prospect of another 75 bp hike in Brazil in the week ahead, encouraged some profit-taking.

News of a large and unexpected trade deficit ($3 bln in March) was not helpful, but the surprising expansion in Q1 (0.4% quarter-over-quarter GDP) did not prevent the peso from extending its losses. The US dollar finished the week around MXN20.2460, its best level since April 16. The MACD and Slow Stochastic have turned up. It met the (38.2%) retracement objective of the decline since late March high near MXN20.2350. The halfway mark is about MXN20.3730.

Chinese Yuan

The broad dollar gains ahead of the weekend halted the yuan’s four-day advance. It was only the second session that the greenback gained over the redback in three weeks. Still, the dollar fell for the fourth consecutive week, which followed a six-week advance. Over the four-week streak, the yuan rose by 1.6%, making it the second strongest currency in the region after the Taiwanese dollar (~2.1%).

If the dollar strengthens in the near term, as it looks likely against a range of currencies, it can return to the CNY6.50 area. The yuan and the euro remain highly correlated. On a purely directional basis, the correlation over the past 30 and 60 days is slightly more than 0.85. The onshore market will be closed the first part of next week to celebrate the May Day holiday.

This article was written by Marc Chandler, MarctoMarket.

For a look at all of today’s economic events, check out our economic calendar.

The Dollar is Heavy ahead of What is Expected to be a Dovish Fed

Despite unmistakable signs that the US economy is accelerating, and by more than expected, the US 10-year yield is around 25 bp off the end of March high. This seems to dampen the enthusiasm for holding the greenback.

The Federal Reserve meets next week and there is no compelling reason to expect a change in tone from either the statement or Chair Powell’s remarks. The Fed has anticipated that the pace of activity and prices would pick up and they have. We think as the economy continues to open up, and growth broadens and deepens, it will be increasingly difficult to justify the $120 bln a month in bond purchases. Although it is not fully discounted, the market leans strongly toward a rate hike by the end of next year.

Tactically, we had thought that there was still some life in the divergence meme that saw the dollar recover in Q1 after its losses accelerated in the last two months of 2020. Strategically, we remain bears. We continue to believe that the third large dollar rally since the end of Bretton Woods is over. Also, the divergence meme that had helped the greenback offers only a temporary respite, as the slow vaccine rollout in the EU and Japan delays but does not negate their recoveries. The combination of a large budget and trade deficit seems to require higher interest rate differentials to support the dollar. Over the past month, the 10-year differentials have narrowed rather than widened.

Dollar Index

The third consecutive weekly decline has brought the Dollar Index to the 90.80 area, which corresponds to a (61.8%) retracement of the rally from the early January lows (~89.20). A break of the 90.80 area signals a test on the 90.00-90.20 area before a return to the lows. The MACD is still headed lower while the Slow Stochastic is trying to turn higher. A close above 91.40 would help stabilize the technical tone.


The euro settled last week at its highest closing level since early March, and made a new high ahead of the weekend at $1.2100. The retreat after the ECB meeting that pushed the euro to $1.1995 was snapped up. The trendline connecting the January and February highs comes near $1.2110 at the end of April, which also is around the (61.8%) retracement objective of this year’s decline. Above it, there is little chart resistance until $1.22. The MACD is still picking up this month’s uptrend, while the Slow Stochastic is detecting a loss of momentum and appears to be poised to roll over. A break of the $1.1990 area may be suggestive, it probably requires a break of the $1.1930-$1.1935 area to be of technical significance.

Japanese Yen

The dollar dipped below JPY107.50 for the first time since early March ahead of the weekend and extended its loss for a fifth consecutive session, for the longest losing streak since last November. It was similar to the previous week when falling US rates dragged the dollar lower until it found a bid before the weekend. Still, it managed to close just above JPY017.75, the (38.2%) retracement target of this year’s advance. If it does not hold, the next technical target is near JPY106.80.

It has been two full weeks since the dollar managed to rise above the previous session’s high. The dollar has not closed above the previous session’s high this month. The MACD’s decline has begun slowing and the Slow Stochastic has flatlined in overextended territory. A move above JPY108.20-JPY108.40 would lift the tone.

British Pound

Sterling did not perform well last week even though it is clear that the recovery in the UK is gaining more traction as the economy gradually re-opens. Retail sales jumped 5.4% in March (median expectation in Bloomberg’s survey was 1.5%) and April’s preliminary composite PMI was above last year’s peak. Sterling’s six-day rally ended after a 1.1% rally to start the week. However, it spent the rest of the week dribbling lower to finish the week higher (~ 0.3%), largely owing to a late rally ahead of the weekend.

It was among the laggards (along with the Australian dollar and Canadian dollar). Sterling has spent March and April between $1.3670 and $1.4000. The upper end of range held last week. Initial support is around $1.3800 and a break may be worth a cent. In the two sessions through last Monday, the euro fell by about 1.5% against sterling but proceed to recover for the last four sessions and rose to almost GBP0.8720 ahead of the weekend and recorded its highest close in two months. The next target looks to be near GBP0.8760 and then GBP0.8850.

Canadian Dollar

The Bank of Canada announced it would reduce the amount of government bonds it was purchasing and brought forward to the second half of next year when it imagines the spare economic capacity would be absorbed. Yet, the Canadian dollar was not really rewarded and finished the week almost 0.3% higher against the US dollar, a function of its pre-weekend advance. The US dollar has been finding steady bids in the CAD1.2460-CAD1.2470 area. The combination of lower implied volatility and a smaller skew in the risk-reversal (favoring the US dollar) is consistent with interest in selling greenback calls. For the past five weeks or so, the US dollar has gone virtually sideways as reflected by the convergence of the five and 20-day moving averages (~CAD1.2530-CAD1.2550).

Australian Dollar

For the past six sessions, the Aussie has been alternating between gains and losses and over this span net-net it is virtually flat. In the first half of April, it traded mostly in a $0.7585-$0.7675 range. Now it is in a $0.7690-$0.7800 range. It did spike to about $0.7825 on April 20, which was the (61.8%) retracement objective of the decline since the peak in late February a little above $0.8000. The momentum indicators are mixed. The MACD is gradually rising while the Slow Stochastic has turned lower.

A break of the $0.7670 area, which houses the 20-day moving average and (50%) retracement objective of this month’s advance would weaken the technical tone. Next week Australia reports Q1 CPI early on April 28 in Canberra, and the underlying measures are expected to be stable, but the import/export prices, the following day, are more noteworthy. Australia has a positive terms-of-trade shock. Consider that its index of import prices fell every quarter last year and is expected to have fallen again in Q1. The index of export prices fell in the middle two quarters of 2020 but rose by 5.5% in Q4 20 and is expected to have risen 9% in Q1 21.

Mexican Peso

The dollar is trading at three-month lows against the peso. It has fallen for the last four weeks and six of the past seven. It is not the strength of the Mexican economy or its success in getting ahead of the Covid-curve that underpins the peso. In fact, there is a good chance that Mexico reports on April 30 that the economy contracted in Q1, and if it did grow, it is likely aided by the booming US economy through the trade and worker remittance channels.

Mexico’s one-month T-bills (cetes) pay a little more than 4%. The 4-week bill in the US has no yield. The momentum indicators are stretched and appear poised to turn higher. A move above MXN20.00 would suggest a near-term low is in place. Yet, if the grind lower continues, there appears little on the charts to deter a test on the year’s low set in late January around MXN19.55.

Chinese Yuan

The greenback ended a nine-day slide against the Chinese yuan, rising a meager 0.1% ahead of the weekend. The yuan’s gain reflects the broad dollar weakness we have been tracking. Over these past two weeks, the yuan has appreciated by 0.8%, which, incidentally, is more than most Asian currencies except the Japanese yen and the Taiwanese and Singaporean dollars.

We suspect that in the near term, the PBOC would prefer the yuan to stabilize after its recent bout of appreciation. That said, China’s premium over the US on 10-year rates widened last week to 161 bp, the most in a little more than a month, though its 60 bp off level prevailing at the end of 2020. China’s April PMI is the main economic feature next week and some stabilization (slight lower readings) seems likely after the March surge. If CNY6.48 is the lower end of the range, then the CNY6.53 may be the upper end of a consolidative range for the dollar.

This article was written by Marc Chandler, MarctoMarket.

For a look at all of today’s economic events, check out our economic calendar.

The Dollar May be at an Inflection Point

The dollar’s inability to gain after the much stronger than expected March employment data may have encouraged a bout of profit-taking. Next week offers a test on the hypothesis that the dollar-bullish divergence meme has been fully discounted. After a brief hiatus, US coupon sales will return ($110 bln), and a string of high-frequency data is likely to confirm an acceleration of prices and activity.

On balance, we expect the US dollar and long-term interest rates to rise next week. US rates fell, with the 10-year yield falling to two-week lows near 1.60%. This means that there is no concession to next week’s supply that begins with a $58 bln sale of three-year notes on Monday. The US will be raising $110 bln in coupon sales, while the data will likely show a jump in prices (base effect and more).

There will also be a surge in real sector data, partly reflecting the recovery from February’s weather-induced weakness and the new stimulus. Meanwhile, new restrictions in Japan and Europe mean that divergence with the US may extend deep into Q2. In fact, if the dollar does not trade higher next week, the bears, who seemed to go into hibernation in Q1, will re-emerge on ideas that investors are moving beyond its focus on the stimulus-driven US recovery and yawning divergence.

Dollar Index

Last week’s pullback met the (38.2%) retracement target of the leg up since the late February low (~89.70) found near 92.00. A convincing break could signal a return to the 91.00-91.30 band. A move now above the 92.50 area would lift the tone, with an initial target in the 92.85-93.00 band, and, perhaps, to the five-month high set at the end of last month closer to 93.50. The MACD and Slow Stochastic point lower, while the RSI is turning higher. The 200-day moving average, which the Dollar Index begins the new week a bit above, is found around9 2.35. The recent decline has seen the five-day average slip below the 20-day moving average for the first time in a little more than a month.


The outside up day on April 5, which seemed to complete a small head and shoulders pattern with the close above $1.18. It set the technical tone for the rest of the week, and the euro met the minimum objective of a bit more than $1.19. However, disappointing European industrial production figures and a jump in US rates (before the US PPI jump that was twice the median forecast in Bloomberg’s survey) stalled the euro’s recovery.

A little shelf has emerged near $1.1860. A bit lower is the (38.2%) retracement of the bounce since the end of March and the 20-day moving average (~$1.1840). A break of the $1.1790-$1.1800 area would signal a retest on $1.17. Some think a new range may be emerging, roughly $1.17-$1.20.

Japanese Yen

The 15 bp decline in the US 10-year yields from its March 30 peak above 1.77% seemed to drag the dollar lower against the yen. Speculators in the futures market had jumped with both feet into short yen positions. The gross short yen position by non-commercials jumped from 13.3k contracts, a multi-year low, in the first half of January to 84.7k contracts as of April 6. Last week was only the third (weekly) decline in the dollar since the end of January.

The dollar peaked in the last session of Q1, just shy of JPY111.00. It hit JPY109 on April 8 before jumping back to almost JPY110 ahead of the weekend as higher US (and China) inflation lifted yields. The JPY110.20 area is the next retracement (61.8%) of the dollar’s pullback. It takes more than a pre-weekend dollar bounce to turn the momentum indicators. A break of last week’s low could spur a move toward the JPY108.30-JPY108.40 area.

British Pound

Sterling fell for the fifth week of the past seven. It flirted with the lows from late March, near $1.3670 ahead of the weekend, before recovering back to almost $1.3750. The MACD remains in its trough, while the Slow Stochastic is turning lower from the mid-range. The five-day moving average has held below the 20-day since early March. Cable also appeared influenced by the dramatic recovery of the euro against sterling. The euro fell to its lows level since March 2020 against sterling at the start of last week (~GBP0.8470).

It recovered smartly to almost GBP0.8700 before the weekend, which corresponds to the (38.2%) retracement of the leg lower that began on January 6 near GBP0.9085, where it met strong selling pressure. It was the biggest euro advance against sterling in about seven months. While we cast a jaundiced eye over many seasonality claims in the foreign exchange market, we note April tends to be a good month for sterling. In the past 20 years, sterling has risen in 17 Aprils. However, May is cruel and sterling has fallen in 16 of the past 20 years in May.

Canadian Dollar

The US snapped a three-week advance against the Canadian dollar that lifted it from a three-year low (~CAD1.2365) to around CAD1.2650 at the end of March. That late March high was retested last week. A robust Canadian jobs report blew away expectations and gave the Loonie a bid. The greenback settled on its lows, and a break of CAD1.25 will open up the downside.

The MACD is trying to turn lower, while the Slow Stochastic already has rolled over. The Bank of Canada meets on April 21. Even though Ontario has reintroduced social restrictions, and the excess fatalities in Canada may rival the US on a per capita basis, the central bank will likely be increasingly confident of a strong economic rebound.

Australian Dollar

The Aussie peaked in late February at a little over $0.8000. It fell to around $0.7600 and has spent most of the past three weeks confined to around a half of a cent range around it. While there appears to be little momentum, the MACD is trying to turn up from overextended territory, and the Slow Stochastic is already trending higher.

Upticks last week were capped by the 20-day moving average, which begins the new week near $0.7660. Australia lost around 350k full-time positions from March through June last year. In the eight months since, it has recouped them all, plus. On the other hand, the unemployment rate was at 5.8% in February, up from 5.1% at the end of 2019. The March figures are the highlight of next week’s data.

Mexican Peso

The dollar eased by around 0.7% against the peso last week. It was the second consecutive weekly decline and the fourth in the past five weeks. This largely mirrors the performance of the JP Morgan Emerging Market Currency Index. Mexico reported a jump in inflation (CPI 4.67%, up from 3.76% in February, and the bi-weekly readings warn it may not have peaked. Mexico also reported a 0.4% rise in industrial output (economists had projected a decline).

A recovery in auto production and sales seems to be critical and linked to the strengthening US economy. The greenback peaked in early March near MXN21.6350 and last week recorded a low around MXN20.0650, its lowest level in almost two months. The move is stretched. The MACD is at its lows for the year, while the Slow Stochastic is poised to turn higher from oversold terrain. The MXN20.40-MXN20.50 area offers the first hurdle for a dollar bounce.

Chinese Yuan

The yuan rose for the first time against the dollar in seven weeks. It has completely unwound its earlier gains and is now off about 0.4% for the year. More trackers of flows into different funds are seeing outflows from Chinese bonds. The yuan’s weakness seems to be fundamentally driven, and the PBOC is not leaning hard against it. Last week, the dollar traded inside the previous week’s range (~CNY6.54-CNY6.58).

The offshore yuan is a little softer than the onshore yuan, which is understood as offering insight into the direction of the underlying pressures. Beijing is expected to report lending figures, trade, investment, retail sales, and industrial production figures for March, culminating in the first look at Q1 GDP. The economy has lost some of its mojo, and the median forecast in Bloomberg’s survey projects that growth nearly halved from the Q4 20 pace (2.6%) to around 1.4%.

This article was written by Marc Chandler, MarctoMarket.

Market Pushes First Rate Hike into 2022

US futures are pointing higher, led by the Dow, while the NASDAQ lags. The US 10-year yield is little changed after surging before the weekend on the back of the stronger than expected employment report. It is hovering around 1.71%. The dollar is narrowly mixed. Sterling is the strongest, rising above last week’s high and knocking on resistance near $1.3880, the top of a two-week range. The dollar-bloc currencies are also firm.

European currencies, including the Scandis, euro, and Swiss franc, are the laggards. Emerging market currencies are also mixed, leaving the JP Morgan Emerging Market Currency Index a little changed after rising by about 0.35% last week. Gold is softer, holding below $1730 in quiet turnover. OPEC+ decision to boost output is weighing on oil prices today. May crude that closed at $61.45 is now more than a dollar lower. The low for the second half of last week was closer to $58.85.

Asia Pacific

When the IMF announces its updated forecasts tomorrow, there will likely be two drivers. The US fiscal stimulus is significant, and so is the recovery of China’s economy. The weakness seen in China’s service PMI readings was attributed to uneven recovery that favored supply over demand. That was partly a reflection of asynchronous activity. The service PMI has picked up, and this could signal that the world’s second-largest economy is seeing a broadening of economic activity.

Separately, the State Administration of Foreign Exchange report last year’s capital inflows. They were nearly evenly divided between direct (~$265 bln) and portfolio ($255 bln). That said, note that direct investment may include retained earnings, not just acquisitions or greenfield investment. While direct investment rose by 14%, portfolio flow surged by 73%, as global benchmarks including China’s asset market. Flows into the bond market dominated portfolio flows, rising 86% to $190.5 bln.

Foreign investors bought more than $64 bln of Chinese shares. However, China is also a larger exporter of savings too, and SAFE reported that China’s financial accounts were in deficit for the first time since 2016. There are three channels. First, Chinese investors are diversifying savings offshore, buying foreign bonds and stocks. Second, there is outbound foreign direct investment, and third, banks have expanded their foreign loans and deposits.

Saudi Arabia feels sufficiently confident in the outlook for Asia’s recovery that it announced it will boost prices next month. Aramco will raise the premium over the benchmark for Arab light by 40 cents to $1.80. The increase is a little more than expected. On the other hand, Aramco announced it was cutting the premium to Europe by 20 cents. The 10-cent cut in the premium on most oil grades sent to the US may say something about the competitive environment.

The dollar is in a narrow range against the yen (~JPY110.50-JPY110.75) as the market consolidates recent gains. There is an option at JPY111.00 for $460 mln that expires today. The pre-weekend low was a little below JPY110.40. The Australian dollar has fallen in five of the past six weeks but is flattish today, near $0.7620. Resistance is seen around $0.7640, and initial support near $0.7600 has been tested. The offshore yuan is quiet, with mainland markets closed but a touch lower for the third consecutive session. It has fallen for the past two weeks.


While France’s survey data is holding up better than expected, the government chopped this year’s growth forecast to 5% from 6% due to the tighter social restrictions. Macron, well aware of his slump in the opinion polls, wanted to avoid a new nationwide lockdown. The mutations and spreading contagion have proved too much. The French economy contracted by a little more than 8% last year. Maron may have also been assuming funds from the EU. At the end of March, the German constitutional court stepped in to hear a challenge after the EU plan was widely supported in both chambers of parliament. The process is paralyzed for at least the time being, and this means that countries, including France, cannot count on the assistance.

The UK is about to enter a new phase in combatting the virus. In a speech later today, Prime Minister Johnson will launch a program to encourage everyone in England to take a coronavirus test every two weeks. Free kits will be widely available. Nearly all adults have had at least one jab (31.5 mln). The next phase in lifting social restrictions is set for a week from today. A covid-status certification (“passport) will be developed and could help expedite the re-opening of sporting events, theater, and clubs.

Turkey reported inflation accelerated last month. The 1.08% increase in March follows the 0.91% increase in February. The year-over-year rate stands at 16.19%, up for the sixth consecutive month and the highest level July 2019. The core rate is even higher at 16.88% and more than 0.5% above expectations. Producer prices also soared. The 4.13% monthly gain was near twice expectations and lifts the year-over-year rate to 31.2%. Rising energy prices and the weak lira appear to be the main culprits. Separately, military officers reported pushed back against President Erodgen’s Black Sea policy.

After pulling out of the international convention to protect women last month, there is suspicion that Erdogan is considering withdrawing from a 1936 treaty that regulates passage from the Mediterranean to the Black Sea. At least ten former admirals were detained. The lira is a little firmer today. It fell by 10% last month following the former governor of the central bank’s dismissal after a 200 bp rate hike. Today’s inflation report will make it harder to reduce rates at the April 15 CBRT meeting.

The euro approached $1.17 at the end of March and traded to about $1.1785 ahead of the weekend. Unable to resurface above $1.18, it is under a bit of pressure following the strong US jobs report and the new lockdowns in Europe. There is a 210 mln euro option at $1.18 that expires today and one ten-times bigger that expires tomorrow. The market is poised to rechallenge the lows. Sterling is firm and rose above last week’s high (~$1.3855) to its best level in two weeks ($1.3870). However, sellers emerged ahead of the $1.3880 resistance, and a return into the $1.3820-$1.3840 comfort zone is likely.


The March US employment data quantified what we have all known, and that is that the world’s largest economy is accelerating. The 916k increase in non-farm payrolls was well above most expectations, and the January and February job growth was revised higher (+156k). The report, coupled with the surge in auto sales (17.75 mln, two million more than in February and more than million above the median expectation in Bloomberg’s survey), likely sets the tone for the upcoming high-frequency data. Moreover, the early projections call for job growth to possibly continue to accelerate this month as the vaccine rollout broadens and more people return to their jobs. The US lost about 22.4 million jobs last spring, and roughly 14 mln people have returned to work. That leaves employment around 8.4 mln lower than in February 2020.

Interest rate futures appeared more volatile than usual after the employment report, which when the equity market is closed may not be surprising. Of note, the December 2022 Eurodollar futures contract was sold aggressively, and the implied yield settled at 56 bp, the highest in a year. The June 2021 contract implies a 17.5 bp yield. This would seem to be consistent with a rate hike, which the median Fed forecast does not expect until after 2023, by the end of next year. The December 2022 Fed funds futures contract implied a 31.5 bp yield, up from 12.5 bp implied in this month’s contract.

Today, the US economic calendar is busy with the final Markit services and composite PMI, the ISM services, and factory and durable goods orders. Only the ISM represents new news, as the flash PMI and preliminary durable goods orders steal most of the thunder. The conviction that the US economy is accelerating will not be challenged by high-frequency data given the strength of the employment data, auto sales, and fiscal stimulus in the pipeline. Canada has a light week of data, but what it does report is important.

In addition to trade and IVEY’s PMI, it reports March jobs data. Another robust report could fuel speculation that the Bank of Canada could change its forward guidance regarding its asset purchases (at the April 21 meeting). Mexico reports worker remittances (larger than its trade surplus) and the manufacturing PMI (remains below 50 boom/bust level). The week’s highlight is the monthly CPI report on April 8. It is likely to confirm the bi-weekly readings that put inflation above the central bank’s 2%-4% and encouraging investors to give up ideas of another rate cut.

The Canadian dollar is edging higher today after slipping ahead of the weekend. The US dollar recorded its low for last week just before strong US employment figures near CAD1.2530. Resistance was encountered ahead of CAD1.2600 before the weekend and earlier today. A retest on the CAD1.2530 area, and possibly CAD1.2500, is likely in the next day or two. Meanwhile, the greenback took out March’s lows against the Mexican peso last week, but the downside momentum is stalling near MXN20.26-MXN20.27. A move above MXN20.35 could signal a move toward MXN20.50. The US dollar fell by about 1.3% against the peso last week.

For a look at all of today’s economic events, check out our economic calendar.

This article was written by Marc Chandler, MarctoMarket.

Big Week Begins Quietly

Europe’s Dow Jones Stoxx 600 ended a four-day advance ahead of the weekend but has come back bid today, led by consumer sectors and info technology. Utilities are the only sector lower in the European morning. US futures are slightly higher. The US 10-year benchmark yield is little changed near 1.61%, while European yields are mostly 1-2 bp lower. Australian and New Zealand bond yields rose (nine and 11 basis points, respectively) after the jump in Treasuries before the weekend.

The US dollar is mixed against the majors, with the New Zealand and Canadian dollars, and sterling a bit firm, and the Swedish krona, euro, Australian dollar, and yen trading heavier. Emerging markets currency are mixed, and the JP Morgan Emerging Markets Currency Index is little changed after slipping by around 0.4% at the end of last week. Gold is slightly firmer, near $1730. Last week’s low was near $1677, and the high was almost $1740. Light sweet crude for May delivery is trading around a 45-cent range on either side of $66 a barrel. Last week’s high was around $67.80.

Asia Pacific

China reported January and February data combined, and an uneven recovery remains evident. On the surface, it looks as if industrial production and retail sales were stronger than expected, rising 35.1% and 33.8% above year-ago periods, respectively. Fixed asset investment was a bit softer than anticipated at 35.0% (instead of nearly 41%), and the surveyed unemployment rate of 5.5% was higher than projected. It appears that retail sales in February were particularly soft (~0.6%), underscoring the weakness of the holiday period. Strong metal output (e.g., aluminum and steel) and coal and gas boosted industrial output.

Japan reported that January core machine orders fell 4.5%, ending a three-month increase. The series is seen as a lead indicator for capital expenditures, and the weakness is consistent with a sluggish start to the new year. Separately, Japan reported its tertiary index fell by 1.7% in January, much weaker than the 0.6% decline anticipated. Tokyo itself remains in a state of emergency until the end of the week, and the criteria for lifting restrictions have been tightened. Tomorrow, Japan reports January industrial output figures and February trade figures on Wednesday. The February CPI and BOJ meetings are the week’s highlights.

While the US was tightening the restrictions on sales to Huawei at the end of last week, a federal judge blocked efforts to prohibit Americans from investing in Xiaomi because of claims it has links to the Chinese military. The prohibition was to come into effect now, but the temporary stay was granted to the company for what it claimed was “arbitrary and capricious” that denied its due process. The threat was real and substantial as Xiaomi could have been de-listed from US exchanges and dropped from global benchmarks.

The presiding judge seemed skeptical that national security was at stake, though traditionally, the executive branch is given a wide berth here. Recall that latitude granted allowed steel and aluminum tariffs to be levied on long-time allies, including Canada, Europe, and Japan. Xiaomi is the world’s third-largest smartphone producer, and its Q3 20 sales surpassed Apple’s iPhone sales (according to International Data Corporation estimates).

The dollar rose about JPY109.35, its best level since last June in late Asian turnover before pulling back. It found fresh bids in early European turnover ahead of JPY109.00. Support is seen around JPY108.80, though last week, the greenback carved out a shelf near JPY108.35. The Australian dollar is consolidating and is little changed, around $0.7755.

A move above $0.7800, where it stalled at the end of last week, would lift the tone and signal a re-test on the $0.8000 area seen at the end of February. The PBOC fixed the dollar at CNY6.5010, slightly firmer than expected. The central bank’s injection of CNY100 bln via the medium-term lending facility matched the amount coming due tomorrow. It did the same with the CNY10 bln injection through the seven-day repo facility. The PBOC continues to with neutral policy.


Between the slow rollout of the vaccine, the extended lockdowns, the scandals, with the latest involving the CDU/CSU over a deal for facemasks, voters German voters are frustrated. Support for the CDU slipped by 2.9 percentage points compared with the last election in 2016 in Baden-Wuerttemberg to 24.1%. It managed to come in second behind the Greens (again). The Green’s support edged higher (+2.3 points to 32.6%), while the SPD, FDP, and AFD fought for third place. Still, the outcome may be good enough to keep the CDU in the state coalition lead by the Greens, but it seems more fluid.

In Rhineland-Palatinate, support for the CDU fell by 4.1 percentage points to 27.7%. The SPD’s slipped by around 0.5 percentage points to 35.7% in its stronghold and will likely continue to lead the governing coalition with the Greens and FDP. On the national-level, Bavarian Premier Soder and CSU leader appear to have a slight lead over the new CDU head, Laschet. The situation is fluid, and a decision on who will be the candidate for Chancellor in the September general election is expected to be made next month.

Sweden’s February CPI was softer than expected, and this kept the pressure on the krona. The 0.3% headline rise was half what economists projected, and the year-over-year rate was unchanged at 1.4% instead of increasing. The underlying rates, which use a fixed interest rate, and one that excludes energy, were softer than expected at 1.5% and 1.2%, respectively.

This contrasts with Norway, where the central bank meets later this week and is expected to reaffirm that it is likely to raise rates next year. Separately, Russia and Turkey’s central banks meet this week, as well. Russia may ratchet up its rhetoric and signal plans to adjust policy after higher than expected inflation readings. Many now look for a hike in Q2. Turkey’s central bank is expected to hike the one-week repo rate 100 bp to 18% when it meets on March 18.

Early last week, the euro bounced off the $1.1835-area but stalled at the end of the week, just shy of the $1.2000-level. It is trading heavily today but inside the pre-weekend range that extended to $1.1910. In early European turnover, the euro met sellers near $1.1940. This area will offer resistance in North American dealings. There is an option for 1.4 bln euros at $1.19 that expires Wednesday and another for 1.2 bln euros at $1.20 that expires the same day.

Sterling is also trading inside the range seen at the end of last week (~$1.3865-$1.4005). Today’s session high (~$1.3950) was seen in Asia and early Europe, and both times sellers lurked. The downside may be explored in early North American turnover. The Bank of England meeting is the UK highlight of the week. It is not expected to do anything, but Governor Bailey is expected to push against an early rate hike.


The busy week begins slowly with the March Empire State manufacturing survey (a slight rise is projected) and the Treasury’s International Capital (TIC) report. The data highlights are expected to include somewhat slower retail sales and industrial production in February from the surge (5.3% and 0.9%, respectively) in January. However, the focus is squarely on the midweek conclusion of the FOMC meeting. It is not so much what the Fed will do as what it will say. Treasury Secretary Yellen reiterated that the US may return to full employment with the new fiscal stimulus measures next year.

In the Fed’s December economic projections, only one official anticipated that a hike would be appropriate in 2022, and only five thought a rate would be appropriate by the end of 2023. Given the fiscal stimulus in the pipeline and the upward revisions to growth, the Fed’s view seems dated. Looking at the implied interest rate of three-month Eurodollar futures, the market appears to be pricing in the first hike in the second half of next year. The March 21 contract that expires this week implies a 19 bp yield, while the June 22 contract implies 25.5 bp, and the December contract is almost at 45 bp.

Canada’s February employment report released before the weekend was better than hoped. The pace of full-time growth accelerated (88.2k vs. 12.6k), and the lion’s share of part-time workers who could not work in January returned in February (171k vs. -225k). The participation rate was steady at 64.7%, while the unemployment rate dropped to 8.2% from 9.4%.

This week’s highlights will include firm February CPI and a soft January retail sales report. January’s underlying inflation rates (trimmed and median core) have already been revised to 2%. It is a helpful reminder that countries can experience price pressures at different stages of recovery. Although we waivered when Governor Macklem suggested that the zero bound was above zero, but below the current target of 25 bp, the Bank of Canada is likely to be among the first major central banks to taper its bond-buying this year.

The Canadian dollar is trading at new three-year highs against the US dollar as it extends last week’s 1.5% gain, the strongest among the majors. The strong employment data reinforced ideas that the Bank of Canada will provide new guidance next month. The US dollar closed below CAD1.25 last week, and there appears to be little chart support ahead of CAD1.2350, though CAD1.2400 may slow the move. The greenback is trading softer against the Mexican peso but above the MXN20.5850-MXN20.5900 lows seen at the end of last week.

Those lows correspond to roughly the (61.8%) retracement objective of the dollar’s rally since mid-February. A break could see MXN20.30 quickly. While many are debating whether Banxico can cut rates at the March 25 meeting, there is more agreement that Brazil’s central bank will hike the Selic Rate by 50 bp to 2.50% in the middle of the week.

This article was written by Marc Chandler, MarctoMarket.

For a look at all of today’s economic events, check out our economic calendar.

FX Price Action: Beginning or End of the Punch?

Although the price action has felt choppy, a few trend moves have been underway. Consider that US Treasury yields (3yr through 30yr) have moved higher for the sixth consecutive week. The CRB Index rose for the seventh consecutive week and has only fallen one week this year. It is up over15.5% so far this year. Crude oil consolidated in recent days after rising dramatically since the bottoming on November 2 (The outcome of Georgia’s special election that gave the Democratic Party its parity in the Senate is not even identifiable on the chart of oil or bonds).

The dollar finished the week on a firm note. Divergence has been underlined. The ECB’s intention to (significantly) step-up bond purchases, while the US goes from a $1.9 trillion fiscal stimulus measures to initiating infrastructure negotiations that could be as large as the stimulus. On top of that, an executive order forces states to ensure that all willing adults can be vaccinated in early May. Still, the dollar’s advance seems mature. Against many currencies, the nadir was reached in the first week of January.

Dollar Index:

On last week’s pullback, the Dollar Index largely held the (38.2%) retracement objective of this month’s rally, which came in near 91.40 (actual low ~91.36) and bounced. It stalled in front of 92.00. A move above there signals a retest on the 92.50 area seen earlier in March. We had suggested a 92.75 measuring target from a bottoming pattern and note that the 200-day moving average is near 92.85 now. The momentum indicators are elevated and may be rolling over but do not stand in the way of a marginal new high.


The single-currency extended its post-US job report losses in the first part of last week, falling to almost $1.1835. It rebounded to about $1.1990, which corresponds with the (38.2%) retracement objective of the downtrend since the February 25 high near $1.2245. Ahead of the weekend, it tested the upper end of a band of support that is seen been $1.1895 and $1.1915. A break signal a test on the recent low near $1.1835 and the 200-day moving average (~$1.1840). Recall that around last November election was $1.16. The MACD and Slow Stochastic appear to be turning up from over-extended territory. It seems to be closer to the end of the boxer’s punch than the start of it.

Japanese Yen:

The dollar pushed to almost JPY109.25 early last week, backed off to around JPY1080.35, and made another attempt to establish a foothold about JPY109. However, for the second time last week, it failed to close above it. The MACD continues to trend higher, but the Slow Stochastic is rolling over. The 50-day moving average is poised to cross above the 200-day moving average (deadman’s cross or golden cross) around the middle of next week. The JPY110 area offers psychological resistance for the dollar.

It has not finished a month above it since April 2019. Rising oil prices impact Japan through the trade channel (boosting imports) and the exchange rate that appears sensitive to rising US rates. A break below the JPY108.30 area could signal a near-term top is in place and project initially toward JPY107.60. The BOJ may confirm a change in tactics in its ETF purchases, but the exchange rate seems to be more a function of international developments rather than domestic.

British Pound:

Sterling peaked around $1.4235 on February 24, solidified a shelf in the $1.3780-$13800 area at the start of last week. The subsequent buying lifted sterling briefly and marginally above $1.40. However, as part of the broad dollar recovery, sterling tumbled to around $1.3860 ahead of the weekend. The trendline drawn off the December lows and early February low begins the new week near $1.3850, and a convincing break could signal a 1.5-2.0-cent decline. The technical indicators are mixed.

The MACD has returned to neutrality and has gone mostly sideways in recent days. The Slow Stochastic, on the other hand, is curling up from oversold territory. The close before the weekend was near the middle of the session’s range. A convincing move above $1.40 would target the recent high. The Bank of England, like the other major central banks that have met since bond yields have risen, is expected to highlight the weakness of the labor market and the transitory and technical nature of the anticipated increase in prices.

Canadian Dollar:

The US dollar fell by about 1.5% against the Canadian dollar last week, the most among the major currencies and the largest weekly loss of the year. The jobs reports showed employment surged by nearly 260k last month, which was more than three times greater than the median forecast in Bloomberg’s survey. Unemployment fell to 8.2% from 9.4% even while the participation rate was steady. The greenback fell to a margin new three-year low, around CAD1.2460.

The snapback in the labor market, coupled with the spillover of the US fiscal stimulus, and progress with the vaccine, should allow the Bank of Canada at its April meeting to signal its intentions to taper its C$4 bln weekly bond purchases perhaps by the end of Q2. The momentum indicators favor further US dollar weakness. The next important band of support is CAD1.2250-CAD1.2350, and I suspect the CAD1.2400 area may be sticky. However, the immediate note of caution is that the US dollar finished the week below its lower Bollinger Band (~CAD1.2500).

Australian Dollar:

Ahead of the weekend, the Australian dollar tested the $0.7800 level and found sellers waiting that took it back down nearly 1% before bids were found just in front of the previous session’s low. The MACD and Slow Stochastic are turning up as the correction since the February 25 high above $0.8000 appears to have run its course (bottoming near $0.7625). A move above $0.7820 is needed to reanimate the uptrend. The pre-weekend activity may have been consolidative in nature. The Aussie rose a little less than 1% (more than all but the Canadian dollar and Norwegian krone, among the majors) to post its first increase in three weeks. Next week, Australia is expected to report a pick-up in job growth and retail sales in February.

Mexican Peso:

The US dollar began last week, extending its advance to almost MXN21.6360, its highest level since spike as US polls closed last November. The dollar’s four-day rally was followed by a three-day slide that saw it shed about 4.2% and saw it approach the previous week’s low near MXN20.55. Although the dollar consolidated ahead of the weekend against the peso, the momentum indicators suggest the path of least resistance is lower for the greenback. The next area of chart support is close to MXN20.35. For the first time in a year, the 60-day rolling correlation of the dollar-peso exchange rates and the 10-year yield has turned positive, and that correlation is the highest since early 2017 (0.83).

Chinese Yuan:

Chinese stocks are underperforming this year. Among the large markets, it is the only one that is down. An attempt to lend official support to stocks during the National People’s Congress was not successful, as reported in the press. The PBOC’s ability to manage the currency has been a bit more successful. The US dollar set new highs for Q1 last week (~CNY6.5440) and then pulled back to around CNY6.4775, just above the 20-day moving average (~CNY6.4760) which may mark the near-term range. A week before top Biden administration officials will meet with senior Chinese officials for the first time, the US deemed it necessary to tighten up the sanctions on Huawei.

It would seem to deter a goodwill gesture by Chinese officials of allowing the yuan to rise, even if the greenback is otherwise bid, for example. Meanwhile, while the interest rate premium offered by Chinese government bonds over Treasuries (10-year) has narrowed by more than 60 bp to about 160 bp this year, the low volatility contributes to portfolio construction decisions. The 3-month implied volatility for the yuan is about 5.5%, which is nearly a percentage point below the least volatile of the majors (euro).

For a look at all of today’s economic events, check out our economic calendar.

This article was written by Marc Chandler, MarctoMarket.

German and Dutch Elections, and FOMC, BOE, and BOJ Meetings

The central bank meetings (FOMC, BOE, and BOJ) will command the most attention, but the elections come first chronologically. Two German states (Rhineland-Palatinate and Baden-Wurttemberg) will be held on March 14. They are important to global investors and businesses because of what they may portend for the national elections in late September. Rhineland-Palatinate is currently a center-left coalition by the Social Democrats, Free Democrats, and Greens. Baden-Wurttemberg is the only state the Greens lead, but they are in a coalition with the Christian Democrats.

Some suggest this “green-black” coalition could be replicated on the federal level. Indeed, as the presence of the Greens hints, they could become Germany’s second party in September by overtaking the SPD, which has been cohabiting with the CDU for so long that some think the distinction has blurred. On PredictIt.Org, the new head of the CDU, Laschet, formerly the head of North Rhine-Westphalia’s government, is trailing behind Soder, the head of the CDU’s sister party in Bavaria for Chancellor. The CSU has been critical of Merkel from the right, while Laschet represents greater continuity. The Green’s Baerbock is slightly ahead of the SPD’s Scholz but far behind the CDU/CSU.

The Dutch election will be held on March 17. While the two-party system has its critics, Dutch politics are so fragmented that after the last general election in 2017, it took 225 days to forge a new government. There are nearly 90 registered political parties, and more than a dozen have seats in the lower chamber (House of Representatives). For international investors and businesses, the election may be a test of the support for the nationalistic anti-immigration, populist message of the People’s Party for Freedom, the country’s second-largest party.

Even if monetary policy is exhausted, as some claim, next week’s central bank meetings are center stage. The FOMC meeting concludes on March 17, followed by the now customary press conference. It is possible that to distinguish monetary policy proper from the regulatory function, the Fed may choose to address the March 31 expiry of the exemption of Treasury holdings and excess reserves from the calculation of supplementary leverage ratio separately from the meeting. That exemption allows the banks’ balance sheets to be around $600 bln larger than otherwise, according to estimates. With record government deficits and large-scale asset purchases ($120 bln a month) by the Federal Reserve, bank capacity is a key part of the plumbing.

The other plumbing issue is the continued drawdown of the Treasury’s cash position with the Federal Reserve. As a result, fewer bills are issued, and funds with flexibility can shift and put downward pressure on other money market rates. The general collateral repo rate, for example, is so distorted (negative) that a bank is paid for lending Treasuries and taking cash. Those who must invest in government bills are pressing yields lower and already yield less than 10 bp annualized out a year. There is a risk that the Fed responds by tweaking the interest on reserves (Note: the Fed pays interest on all reserves, not just excess reserves) or the reverse repo rate.

The Fed’s stance on monetary policy proper has been well articulated and will most likely the statement will be unanimously approved. The economy is far from reaching the Fed’s targets; around 9.5 mln jobs have been lost during the pandemic, and more people are filing weekly initial jobless claims than at the peak of the Great Financial Crisis. The current settings, the Fed submits, are appropriate, and that includes the balance sheet expansion. The rise in yields is mostly a reflection of optimism about the future and that the resulting price pressures will likely be transitory.

The pace of the move did receive attention. The 10-year yield has risen by around 72 bp so far this quarter. It is the fifth-largest quarter since 1995. From the end of January through March 12, the 10-year yield rose six consecutive weeks from around 1.06% to 1.64% at the end of last week. With headline CPI at 1.7% in February, ad real growth anticipated to be more than three-times stronger, a 10-year yield of 1.6% cannot be considered high. In the last quarter before the pandemic, the 10-year yield averaged almost 1.80%.

Fed officials could be protesting the rise in rates more it wanted. The fact that it hasn’t seemed to reduce the risks that it will introduce yield curve control or some version of “Operation Twist.” The Fed might have preferred a more gradual pace, but it is likely not disturbed by the move’s magnitude. On the one hand, with the economy set to boom with the fiscal stimulus and vaccine, some argue that Fed ought to be tapering. On the other hand, some critics want it to take stronger action to “quell investor nerves,” as one journalist put it. Powell’s answer was clear and unequivocal. The bond purchases do not target an interest rate but financial conditions more broadly, which is the same essential point ECB President Lagarde made at the press conference.

The Bank of England meets on March 18, the day after the FOMC meeting concludes. Former BOE Governor King was outvoted at least a couple of times, but it seems clear that the current governor speaks for the majority when he underscores the downside economic risks and the considerable slack in the economy. The furlough program may be hiding some unemployment that may become more evident later.

At the start of the year, the short-sterling market was pricing at negative rates. This was true of the December 2022 contract through January. Since early February, the rate has been positive and rose to 40 bp by the end of last month and is now near 35 bp. Perhaps some participants were inspired by comments from Haldane, the central bank’s chief economist. He does not appear to be singing from the same songbook as the other members of the monetary policy committee and has suggested the central bank may be complacent about the looming inflation risks. Even after Bailey’s efforts to counter such expectations, the contract was still implying a rate hike next year.

The Bank of Japan’s meeting concludes on March 19. It will have completed its formal review of the three elements of monetary policy: asset purchases, negative rates, and yield curve control. While the BOJ won’t back away from negative rates, there is speculation about the other two levers. After buying equity ETFs for more than a decade, the BOJ is sitting on more than $100 bln of profits and owns an estimated 7% of the stock in the Tokyo Stock Exchange first section. The BOJ limits itself to JPY6 trillion a year (~$56 bln) but during the chaos of last year, lifted it (temporarily) to JPY12 trillion.

With both of Japan’s main benchmarks, the Nikkei and the Topix, trading near the best levels since the 1990s, the BOJ is likely rethinking its equity purchase strategy. Some market observers suggest that officials may have already changed their tactics. The BOJ could jettison the annual target will preserve the ability to intervene in disorderly markets.

Under its yield curve control, the 10-year yield is allowed to move in a 20 bp range on either side of zero. The rise in global long-term rates has served to drag Japanese rates higher too. In late February, the 10-year JGB yield rose to a five-year of 18 bp. There was some speculation that the BOJ would widen the range. However, BOJ Governor Kuroda seemed to try to dampen such expectations. Instead, under the policy review, the goal is to make the policy framework more effective.

This suggests minor tweaks, like not preannouncing purchases, for example. However, comments early last week by Deputy Governor Amamiya seemed to keep the door ajar. Amamiya suggested that yields could fluctuate more provided that they did not disrupt the transmission mechanism of monetary policy.

In summary, of the three G7 central banks that meet next week, the Bank of Japan is the most likely to adjust policy. The Fed and BOE are unlikely to take fresh measures or alter forward guidance, and that itself is an important message. While both countries’ governments are boosting fiscal stimulus, the central bankers expect the inflationary bump to be modest and transitory. The high-frequency economic data poses headline risk but is unlikely to alter underlying views that the huge amount of stimulus the US is providing will create diverging economic outcomes. America’s sixth fiscal package during the pandemic is larger than the GDP of all but the nine large economies after the US. The Federal Reserve shows no intention to deviate from its long-term asset purchase program of $1.44 trillion annual rates.

Peak divergence is likely to be this quarter or next. By midyear, the vaccine rollout is likely to accelerate in Europe and Japan. The European Union Recovery Fund is expected to begin distributions. The base effect that bolsters the appearance of US price pressures in the March through May period is revered in June, July, and August, when the headline rate jumped by 0.4%-0.5% each month.

The US debt ceiling suspension ends in July, though Treasury Secretary Yellen, like several of her predecessors, can buy a few months through savvy cash management techniques. Before then, the US Treasury will have brought its cash balances down, which has been a critical factor driving some short-term rates below zero. The latest extension of federal unemployment compensation is also extended to early September and will begin the chins wagging about a fiscal cliff. The point is that this is not the time for linear projections for either inflation or the widening divergence in the US favor. The debt-driven growth will cause the current account deficit to yawn and fuel concern about the twin-deficits. As attention shifts from the stimulus bill to the infra+structure, a sense of a boundless America may both excite and scare investors.

For a look at all of today’s economic events, check out our economic calendar.

This article was written by Marc Chandler, MarctoMarket.

Risk Extends Gains Ahead of the ECB

The Shanghai Composite’s 2.35% gain not only snaps a five-session slide but is the largest rally since last October. Europe’s Dow Jones Stoxx 600 is stretching its advance into a fourth session and is up around 3.5% this week. US futures are pointing to a gap higher opening. Meanwhile, benchmark yields are softer, and the US 10-year note yield is below 1.50% for the first time since the middle of last week. European yields are 1-3 basis points lower ahead of the ECB meeting. Australian and New Zealand bond yields, which had risen the most, are now leading on the downside with another 6-8 bp pullback today.

The US dollar is trading lower against nearly all the majors but the Japanese yen. Emerging market currencies are also mostly higher, and the JP Morgan index is extending its gains after yesterday’s advance of a little more than 1%, which was the largest since early November. Gold rose $10.6 yesterday and tested the $1740 level today, its highest level since the middle of last week. It bottomed on Monday near $1677. Oil prices are higher. April WTI bottomed yesterday near $63.15 and is testing the $65.50 area in Europe.

Asia Pacific

The dollar has risen by about 6.5% against the yen since the bottom on January 6, near JPY102.60. It has moved up alongside the US 10-year yield. The rolling 60-day correlation between the yield and the exchange rate reached a high since June 2019 (~0.92). This should not be dismissed as a dog-bites-man observation. The correlation was negative from October 20 through early last month.

In some ways, if the co-movement is so robust, it shifts the question about the yen to what is driving yields. Grand narratives are told about the vast fiscal stimulus ($5.4 trillion in the past 12-months) and the Fed’s balance sheet’s discovery and dramatic expansion. However, if there is a single quantifiable variable, at the risk of being reductionistic is the price of oil. The rolling 60-correlation of the US 10-year yield and the price of the front-month WTI futures contract is at its highest level since the Great Financial Crisis (~0.96). The correlation was negative from mid-July 2020 through mid-November.

Japanese investors sold a record amount of foreign bonds in the last two weeks of February (~JPY3.6 trillion or about $31 bln) but returned to the buy-side in the week ending March 5 (small at JPY99 bln), according to the weekly MOF data. In the first eight weeks of the year, Japanese investors bought an average of JPY49.5 bln a week. In the same period in 2019, they purchased an average of JPY631 bln of foreign bonds, and in 2018, JPY815 bln.

Foreign investors also bought Japanese after having sold in two of the past three weeks. In the first eight weeks of the year, foreign investors sold an average of JPY79 bln of Japanese bonds a week. In both 2019 and 2020, their purchases were averaging over JPY500 bln a week.

The yen is on the sideline. The dollar is consolidating in this week’s range (~JPY108.25-JPY109.25). It is in a tighter range still (~JPY108.35-JPY108.80). The Australian dollar is rising for a third consecutive session. It has met the initial retracement objective of the pullback since poking above $0.8000 on February 25 that came in around $0.7765.

The next retracement target (50%) is near $0.7815. The $0.7740-$0.7760 area offers initial support. The greenback is also lower against the Chinese yuan for the third consecutive session, the longest pullback in a month. The PBOC set the dollar’s reference rate at CNY6.4970, a bit weaker than the Bloomberg bank survey’s median (CNY6.4988). With today’s move, the US dollar is back within the range that has dominated since the start of the year.


When officials talk to the press off the record, it always makes sense to ask why or who benefits. Less than 24 hours before the ECB announces its new staff forecasts, one or more people told the press that the estimates will justify the stimulus efforts and does not see a sustained rise in price pressures. This is not surprising and could have been surmised by careful observers of the public record.

The near-term GDP forecast is expected to be shaved, reflecting the vaccine’s slow rollout, and this year’s inflation forecast may be increased a little, mostly reflecting the rise in energy prices. If there is a consensus among major central banks, it is precisely that base-effect, and some supply bottlenecks as the economies begin re-opening will lift measured inflation. There is nearly mathematical certitude that CPI will rise.

The judgment made by officials is that inflation will not run very high and will not be sustained. There will be much discussion of financial conditions and how they are best measured. Ensuring accommodative financial conditions is the key to transmitting the central bank’s policy stance.

That is the purpose of bond purchases, not targeting an interest rate per se (which is also essentially what Powell said last week about the Fed’s purchases). The Pandemic Emergency Purchase Program was designed purposely to maximize operational flexibility. It seems unreasonable to expect the ECB to now voluntarily move to limit this flexibility in any meaningful way. It appears that about half of the PEPP’s 1.85 trillion (~$2.2 trillion) line (“envelope”) has been used. The facility has been extended through March of next year, and there is talk that it may be extended, though it seems premature for such a decision today.

The euro tested the 200-day moving average (~$1.1835) on Tuesday and pushed to almost $1.1970 in last Asia. The $1.1975-$1.2000 holds retracement objectives and chart resistance. Initial support is seen in the $1.1920-$1.1940 area. We have noted that despite the general dovishness of the ECB, the euro has advanced on days of its meeting four of the past six times. It is not much better than 50/50, but one might have expected a downside bias. Sterling is also rising for its third session in a row that ends a four-session slide. It has moved above the 20-day moving average (~$1.3950) for the first time since reversing lower (outside down day) a week ago. Retracement targets are found near $1.3980 and $1.4030.


US February headline CPI was in line with expectations rising to 1.7% year-over-year. A little more than half of the increase was to gasoline prices, which seem to have little to do with monetary or fiscal policy. The core rate increase was less than expected, rising 0.1% for a 1.3% year-over-year rate. The cost of medical care increased, but the cost of pharmaceuticals fell. Ower-occupied costs rose sharply, while rents rose at a sub-2% pace for the first time since 2011. The deflation that hit with the pandemic’s onset last year means that the next three CPI reports may pose some “sticker shock” headlines.

Today, attention turns to the weekly jobless claims and the Q4 household net worth report. Weekly initial jobless claims are expected to continue to trend lower, helped, and a number in line with the median in the Bloomberg survey (725k) would be the lowest since early November. The early call is for another strong non-farm payroll report for this month.

American household net worth plunged by $6.9 trillion in Q1 20, which is roughly equivalent to a year’s output of Germany and France together. It was completely recouped in Q2 20 when household net worth rose by $8.3 trillion. It rose by another $3.8 trillion in Q3. In addition to personal income, the wealth may be driven by the equity market (the S&P 500 rose by 11.7% in Q4 20) and house prices (Case-Shiller house price index rose by about 4.2%. in Q4 20).

The most important takeaway from the Bank of Canada meeting is that the forward guidance is in transition, and the next meeting on April 21 will offer greater clarification. Its statement cited the January projections, and these are increasingly dated. The economy is proving more resilient than expected, and rather than contract, the central bank now anticipates expansion. A full recovery in the labor market will take a long time.

The critical change is taking place in confidence about the recovery. With its biggest trading partner stepping on the fiscal accelerator in a big way, Governor Macklem and the central bank will feel more confident about the Canadian economic outlook. A slowing of the Bank of Canada’s C$4 bln a week of bond purchases would be the first move in recognition of that confidence.

Meanwhile, speculation that Prime Minister Trudeau, who heads up a minority government, will take advantage of the stronger economy and vaccine progress to call for an early election. The speculation ebbs and flows and appears to have risen again, with a June timetable suggested.

The US dollar is approaching the month’s low against the Canadian dollar (~CAD1.2575). It is also a retracement objective of the two-day bounce on February 25-26 that saw it recover from the multiyear low near CAD1.2470 to CAD1.2750. The intraday momentum studies are stretched, but rising equities, falling yields, and firm commodity prices could make for only a shallow greenback bounce.

Resistance may be found in the CAD1.2600-CAD1.2620 area. Meanwhile, the US dollar continued to unwind its gains against the Mexican peso. It is the third day the dollar is falling, and near MXN20.75, it has shed around 3.4%. Yesterday’s pullback almost met the (38.2%) retracement of the gains since the MXN19.55 low was recorded on January 21. That retracement was near MXN20.84. The 50% retracement is closer to MXN20.53.

For a look at all of today’s economic events, check out our economic calendar.

This article was written by Marc Chandler, MarctoMarket.

Markets are not Yet Convinced that Yesterday’s Move Signaled a Trend Change

China’s stocks tumbled yesterday, despite reports of official assistance, were mixed with the Shanghai Composite posting small gain and Shenzhen a small loss. South Korea and Australia’s benchmarks slipped lower. Europe’s Dow Jones Stoxx 600 is extending its gains for a third session, while US futures indices are narrowly mixed. The US 10-year yield is a few basis points higher at 1.55%, and most European benchmark yields are slightly firmer. Australian and New Zealand bonds rallied, and yields fell around seven basis points. The US dollar is mostly a little higher against the majors and mixed against the emerging market currencies.

The yen and Swiss franc are the laggards, nursing around a 0.2% loss near midday in Europe. The JP Morgan Emerging Market Currency Index rose by 0.7% yesterday, the most in two months, and has edged a little higher so far today. After rallying almost 2% yesterday, gold is consolidating in a narrow range, mostly between $1710 and $1720. April WTI initially slipped to a four-day low near $63.15 and recovered, rising to $64.35 in the European morning before the buying appears to dry-up.

Asia Pacific

China reported February inflation gauges and lending figures. Consumer price inflation remains below zero. The CPI rose to -0.2% from -0.3% and on a year-over-year basis. The 0.6% rise on the most is the least in three months. Consumer goods prices are off by 0.3% year-over-year, showing continued deterioration. However, prices of consumer services fell 0.1% after a 0.7% year-over-year plunge in January.

The decline in pork prices accelerated. The fading base effect will likely allow CPI to turn positive shortly. Producers prices jumped 1.7% year-over-year after a 0.3% rise in January. Rising commodity prices and the favorable base effect were the key drivers.

China’s lending figures slowed from the hectic pace in January but were stronger than expected. New yuan loans rose by CNY1.36 trillion after a CNY3.58 trillion surge in January when new lending quotas were available. Aggregate financing, which adds the shadow banking activity to traditional lending, rose by CNY1.71 trillion, nearly twice what was expected, but still a dramatic slowdown from the CNY5.17 trillion.

RBA Governor Lowe pushed against market expectations and appeared successful as the yield on the three-year note (targeted at 10 bp) slipped for the second day. It is the first back-to-back yield decline in more than a month, and the three-year benchmark yield eased below the target for the first time this year. Lowe warned the market was getting ahead of itself in pricing in a rate hike. He continued to signal that rates were unlikely to rise until at least 2024.

Lowe dismissed the increase in inflation expectations priced in as not exceptionally high or above the central bank’s target. He reiterated the evolution of its forward guidance, which emphasizes actual inflation over inflation forecasts, and continued to pin the outlook on wage growth. Wage growth, he says, needs to be above 3% or more than double the current record low of 1.4%.

The dollar is consolidating within yesterday’s range against the Japanese yen and has been mostly confined to a JPY108.50-JPY18.90 range. Yesterday’s high was almost JPY109.25. The greenback had finished the North American session near its lows against the yen but was bought in early Asia. With firm US yields, it would not be surprising to see the dollar probe higher in the North American morning./European afternoon. The Australian dollar is moving sideways in the roughly one-cent range established at the end of last week (~$0.7620-$0.7730).

The upper end was rejected in North America yesterday. After pulling back in early Asia Pacific turnover, it recovered, only to find more sellers in Europe above $0.7715. After falling by about 0.3% against the Chinese yuan yesterday, the dollar edged slightly higher today. The greenback has risen in four of the past five sessions and remained above CNY6.50 today. The PBOC set the dollar’s reference rate at CNY6.5106, which was a bit more than usual away from the Bloomberg bank survey that found a median of CNY6.5127.


French industrial output surged in January. The 3.3% jumped compared contrasted with a median forecast in the Bloomberg survey for a 0.5% gain. It was driven by coke and refinery and mining sector. Auto output and transportation material fell. France is the last of the big four EMU economies to report. Recall Germany’s industrial output unexpectedly fell by 2.5%, but the December gain was revised to 1.9% from zero.

Italy’s 1.0% gain was a surprise in the opposite direction, and the December series was revised to show a 0.2% gain (initially a 0.2% decline). Spain’s was a little weaker than expected at -0.7%, and adding insult to injury, December’s 1.1% gain was shaved to 0.8%. The aggregate figure for the eurozone is set for release on Friday.

The ECB begins its two-day meeting, and tomorrow’s announcement will be followed by the press conference. The ECB will be updating its forecasts, and near-term growth projections will likely be shaved while this year’s inflation forecast may edge higher.

The focus is not on exchange rates but yields. Officials seem to have signaled a desire to look past the near-term volatility. There is much expectation that it could increase its bond purchases, but to commit it would seem to remove an important element of flexibility. The Fed commits to buying $120 bln of long-term assets a month. The ECB does not commit to any size, and it will likely keep it this way.

The euro approached its 200-day moving average yesterday (~$1.1830) and rebounded smartly to about $1.1915. Although it finished the North American session near its highs, there has been no follow-through buying today, and the euro had found new sellers when it poked above $1.1900 in early European turnover. Initial support may be seen in the $1.1870-$1.1880 area.

The market appears to see asymmetrical risk from the ECB, and short-term participants may be reluctant to be long euros ahead of Lagarde’s press conference tomorrow. Sterling is also trading within yesterday’s range and is a little changed a little below $1.3900.

Initial support is found around $1.3880 and then $1.3845. The market seems content to consolidate and await fresh directional cues ahead of tomorrow’s data dump that includes January’s monthly GDP figures, where a large contraction is expected.


There are two highlights for the US markets today aside from the formality of the House of Representatives approving the new stimulus package. First, the US reports February CPI. It is the last before the base effect surge that will extend through most of the spring. Last month, food and energy prices rose, which will lift the headline pace to around 1.7% from 1.4%.

The core rate was flat in January, and a 0.2% rise in February may keep the year-over-year rate steady around 1.4%. Barring a surprise, the market impact may be minimal, pending the second important event’s outcome. The US Treasury will sell $38 bln 10-year notes. Yesterday’s 3-year note sales was well received, with the highest bid-cover (2.69x) since mid-2018. However, the real test is with the longer-dated paper, including tomorrow’s $24 bln 30-year bonds sale.

Expectations for today’s Bank of Canada meeting are low. No policy change is expected, and the rhetoric has been rehearsed. The central bank is committed to maintaining the monetary stimulus for some time and well-beyond the immediate economic pick-up. Governor Macklem sees a role for monetary policy in helping to facilitate structural economic changes, like digitalization, which seem to be accelerated by the pandemic. The large fiscal stimulus in the US, which the OECD estimates will add three percentage points to its growth, will have a spill-over effect and likely help Canada as well.

That is to say that the US stimulus should make BoC officials more confident in the economic outlook. The Bank of Canada will provide a broader assessment in April, but some expect a hint that more tapering of its bond-buying is likely in the coming months. Canada’s 10-year bond yield has more doubled since the US election and vaccine announcement to almost 1.55% before pulling back. Yet, given that underlying core inflation was at 2% in January (February’s figures will be reported on March 17), rates are not high. The 10-year yield finished 2019 closer to 1.70%.

As North American markets are set to re-open, the US dollar is trading in the middle in the session’s range against the Canadian dollar (~CAD1.2630-CAD1.2685). It is within yesterday’s range. Indeed, the greenback has hardly traded outside of the range set during the last session of February (~CAD1.2585-CAD1.2750). The intraday technical readings may favor the greenback’s upside. The Mexican peso is holding yesterday’s gains but has been unable to extend them. The US dollar fell from above MXN21.50 yesterday to flirt with the 200-day moving average around MXN21.1560. A break of yesterday’s lows signals a test on the MXN21.00 area. Initial resistance may be near MXN21.30.

This article was written by Marc Chandler, MarctoMarket.

For a look at all of today’s economic events, check out our economic calendar.

Markets Chill

However, the Shanghai Composite rose by about 0.5%, and a smaller increase was recorded in Taiwan and an even small gain in Australia. Europe’s Dow Jones Stoxx 600 is trading lower for the third consecutive session and closed the gap created by Monday’s sharply higher.

US shares are trading lower. Benchmark 10-year yields are edging up in Europe, though Italian bonds are resilient. The US 10-year Treasury yield is around 1.28%, off the 1.33% high seen yesterday, amid reports that several banks are recommending unwinding curve steepening trade.

The dollar is seeing yesterday’s gains pared against both major and emerging market currencies. Sterling is leading the way and is approaching the $1.3950 area seen two days ago, which was the highest since April 2018. Indonesia’s central bank cut its key seven-day reverse repo rate by 25 bp top 3.50% as widely expected, and in Turkey, the central bank kept the one-week repo rate at 17.00%, which was also anticipated.

Gold is trying to snap a five-day slide, but rising yields seem to be sapping it. Initial resistance is seen near $1790. April WTI rose to nearly $62.30 earlier today, a new high, but has pulled back within yesterday’s range when it recorded a high near $61.75. The price of WTI has fallen once so far this month (last Thursday). It settled last month a little above $52.

Asia Pacific

China returned from its extended holiday with little fanfare. The PBOC offered CNY200 bln (~$31 bln) of liquidity via its medium-term lending facility at an unchanged rate of 2.95%. That will help offset loans that are maturing this month. The move does little to ease concerns about the tightness of the PBOC’s stance. The PBOC offered CNY20 bln of sever-day repo funds, while CNY280 bln is coming due. The overnight repo rate rose by about 50 bp to around 2.35%, and the seven-day repo rose two basis points to 2.23%.

Australia’s employment report was mostly in line with expectations. It created 29.1k jobs, nearly the 30k that the Bloomberg survey (median ) forecast. The social restrictions may be behind the slippage in the participation rate (66.1% vs. 66.2%), helping the unemployment rate fall to 6.4% from 6.6%. The breakdown of jobs showed 59k full-time posts (35.7k in December), while part-time positions fell by nearly 30k.

As the pandemic struck last year, Australia lost about 380k full-time jobs, and with the January report, it has gained back a little more than 300k. Separately, Google struck a deal with News Corp and seems to be positioning itself to remain in Australia after threatening to leave. On the other hand, Facebook has moved to restrict news sharing in Australia and is resisting the government efforts to force compensation to news sources.

The US dollar reached the highest level against the yen since last October yesterday, a little above JPY106.20. It settled near its lows and tested support near JPY105.70 in local trading and again in the European morning. Many participants see the scope for higher US yields and see the yen as vulnerable in such an environment. The yen can also be used as a funding currency, and there is much interest in short yen long Chinese yuan positions.

The Australian dollar poked above $0.7800 on Tuesday and backed off to $0.7725 yesterday and bounced back today. It reached rose to almost $0.7785, where it has met sellers in Europe. Initial support is seen in the $0.7750-$0.7760 area. The PBOC set the dollar’s reference rate at CNY6.4536, a little higher than the bank models suggested. Before the holiday, the dollar settled near CNY6.4585 and is now near CNY6.4690.


Here is a shocking divergence. Europe reported the collapse of new car registrations in January, a useful proxy for auto sales. A 24% year-over-year decline was reported. Seasonally-adjusted figures showed month-over-month registrations were down by a third in Germany and two-thirds in Ireland. They were off by nearly half in Spain and the Netherlands.

Auto registrations fell by more than 30% in the UK. France and Italy bucked the trend, and registrations increased by 2.2% and 0.4%, respectively. In the US, January vehicle sales were off 1.3% from a year ago and were up 2.2% month-over-month (seasonally adjusted annual rate).

Separately, the semiconductor chip shortage is doing two things. First, the EU and the US are lobbying for industry and the Taiwanese government for help. Each seems to be seeking preference for its needs. One estimate suggested that the shortage may result in a million fewer light vehicle production here in Q1. The winter storm that has hit Texas has also crippled chip production in Austin. Second, it provides more fodder for economic nationalism as the EU and US want to be more self-sufficient in chip fabrication.

The EU Recovery and Resilience Facility, what some called Europe’s Hamiltonian moment, is technically operational today. It consists of more than 310 bln euros in grants and 360 bln euros in loans. The facility is expected to last six-years, but there are calls from numerous officials, including Italy’s new Prime Minister (who faces a confidence vote in the Chamber of Deputies today), to make it a permanent facility. It is not just about the recovery from the pandemic.

More than a third of the funds are to be used for “green” projects and a fifth for digital transformation. Countries will apply for funds (by the end of April), and the money is expected to be distributed beginning near midyear. There is still likely to be a fight about funds for Poland and Hungary given their reluctance to embrace the EU’s rule of law requirements.

The euro reversed lower after hitting a peak of nearly $1.2170 on Tuesday. It fell to almost $1.2020 yesterday and is consolidating within yesterday’s range today. Initial resistance near $1.2080 has been approached. There is an option for 1.3 bln euros at $1.21 that will be cut today. We see the North American market as more dollar-bullish than Europe and look for the euro to return to the $1.2030-$1.2040 area.

Sterling continues to march to the tune of a different drummer. Sterling is making new session highs in late morning turnover in London. It is approaching the high set earlier this week, near $1.3950. There is little chart resistance ahead of $1.40. The euro is trading near GBP0.8660. It peaked above GBP0.9200 in December. It trading at its lowest level since last March. Chart support is seen near GBP0.8600.


Could there have been a better mix of US data? Retail sales ended their three-month drought with a bang, jumping 5.3% compared with the Bloomberg survey’s median forecast for a still-respectable 1.1% gain. The downward revision in the December series to -1.0% from -0.7% simply underscores the rebound.

The components used for GDP calculation, which exclude autos, gasoline, building materials, and foodservice, surged 6.0% (median forecast was for 1.0%) and is more than the cumulative increase in H2 20. Stong consumption was complemented with robust output.

Last month, industrial production rose by 0.9%, more than twice what economists projected, and manufacturing output increased by 1%. Capacity utilization increased to almost 75.6%, the highest since the eve of the pandemic. Producer prices jumped 1.3% last month, lifting the year-over-year rate to 1.7% from 0.8%. Rising industrial goods prices may also reflect the actual demand from China and East Asia more broadly.

Today’s data does not have the same heft. January housing starts and permits are expected to have begun the New Year on a soft note. However, don’t confuse what may be a mild pullback with weakness in the sector. The housing market and residential investment, in general, is a bright spot. Weekly initial jobless claims are expected to have slipped a little, but the takeaway is that more people are claiming unemployment benefits for the first time than at the Great Financial Crisis’s peak.

Import prices are surging. After a 0.9% increase in December, a 1% rise is expected in January. Most of this is oil and excluding it, import prices likely matched the 0.4% increase at the end of last year. The February Philadelphia Fed survey is also on tap. Here the price component may overshadow the headline, which is expected to have softened to 20.0 from 26.5. Fed Governor Brainard speaks before the equity market opens, and Atlanta Fed’s Bostic addresses educational inequality shortly after the open.

The US dollar reversed higher from almost CAD1.26 on Tuesday and reached CAD1.2745 yesterday. It is consolidating in about a 20-pip range on either side of CAD1.2700 today. Support is seen near CAD1.2660. It has to get back above the CAD1.2740 area to be noteworthy. The greenback began the week near MXM19.90 and yesterday poked briefly above MXN20.38. A consolidative tone is emerging, and the MXN20.14 area is the middle of this week’s range. A break could signal a move toward MXN20.08.

This article was written by Marc Chandler, MarctoMarket.

For a look at all of today’s economic events, check out our economic calendar.