Chinese Officials Calm Markets

Led by a 3% recovery in the Hang Seng, the large equity markets in the Asia Pacific region advanced after the MSCI benchmark recorded the lows for the year yesterday. Europe’s Dow Jones Stoxx 600 is posting modest gains that were sufficient to lift the benchmark to new record highs. US equity futures are firm. US and European 10-year yields are little changed. The US is firm around 1.26%. European yields are also 1-2 bp higher. The biggest reaction in the capital markets is the setback in the dollar, which is softer against nearly all currencies through the European morning.

Among the majors, the New Zealand and Canadian dollars and the Norwegian krone are the strongest. The yen and Swiss franc are the laggards. Among emerging market currencies, the South African rand and Hungarian forint are the strongest. The JP Morgan Emerging Market Currency Index extended yesterday’s gains and is poised for its best two days this month.

Meanwhile, the decline in real yields and a weaker dollar appear to be helping lift gold above its 200-day moving average near $1821. Falling oil inventories in the US are helping lift crude prices. The September WTI contract is up by more than 1% for the second day as prices push above $73 a barrel. After falling on Tuesday, the CRB rose yesterday, its sixth gain in the past seven sessions.

Asia Pacific

Chinese officials moved to calm markets. They did so by the regulators meeting with banks and trying to isolate the crackdown on private education while signaling that IPOs in the US are not banned. State funds may have been deployed to support equities. The PBOC provided additional liquidity. The CNY30 bln (~$4.6 bln) via seven-day repo was the largest such operation this month. Even if Chinese officials succeed in stabilizing the market, the damage to sentiment and confidence among foreign investors will take some time to heal.

First, outside of some general narrative, it is not clear Beijing’s end game. Second, what appears to be capriciousness and clumsiness did not just begin in recent days but is part of a sequence of events that goes back to the intended Ant IPO last year. Third, the opaqueness and activist state approach does not attract foreign investment. Fourth, these recent events show why integrating China into the world’s capital markets is a gradual process that is not simply moving in one direction. The main challenge is not technology, which means that a digital yuan may not be the game-changer that some have suggested.

After buying a record among Japanese bonds in the week through July 16 (JPY2.57 trillion), foreign investors pared their holdings last week by JPY223 bln. The most interesting development last week with Japanese portfolio flows was the continued divestment of foreign bonds. Japanese investors sold JPY1.09 trillion of foreign bonds. It was the fourth liquidation in the past five weeks. Indeed, the average weekly sales over this run have been JPY544 bln, the most in a five-week period since March as the fiscal year was drawing to a close.

The dollar is hovering near this week’s lows against the yen set on Tuesday near JPY109.60. There is little support below there until last week’s low closer to JPY109. There is an option for about $380 mln at JPY109.30 that expires today. On the upside, the greenback has not been able to poke above JPY110.00 today. The Australian dollar is bid, and it is straddling the $0.7400 are near midday in Europe. It has not closed above $0.7400 since July 15.

It appears to be absorbing offers that may be related to the A$1.1 bln in options expiring today between $0.7385 and $0.7400. The $0.7425 area holds the 20-day moving average, and the Aussie has not closed above it since mid-June. The dollar had broken out of the recent range against the Chinese yuan and reached its best level in three months on Tuesday (~CNY6.5125). It has since surrendered the gains and move back to the lower end of the previous trading range (~CNY6.45). It is on track for its biggest two-day drop against the yuan in six months. The dollar’s reference rate was set at CNY6.4942, nearly spot-on the median projection (CNY6.4944) in the Bloomberg survey.

Europe

Germany reported a larger than expected decline in unemployment and what appears to be an upside surprise on inflation. The unemployment queues fell by an impressive 91k in July after a 39k decline in June. It was the largest drop since late 2006. The median forecast called for a 29k decline. The unemployment rate fell to 5.7% from 5.9%. It was at 5% before the pandemic struck.

The German states have reported their CPI figures, and the national figures will be out shortly. The states reported a monthly rise of 0.8%-1.0%, which poses an upside risk to the median forecast expected a 0.6% rise in the national calculation, which would lift the year-over-year rate to 3.2% from 2.3%. The EU harmonized measure was expected to rise by 0.4% for a 2.9% year-over-year pace (up from 2.1% in June).

Spain, the other large EMU country reporting unemployment and inflation figures today. The Q2 unemployment rate eased even if not as much as expected, falling to 15.26% from nearly 16% in Q1. The EU harmonized inflation measure fell 1.2% on the month, which due to the base effect saw the year-over-year rate rose to 2.9% from 2.5%.

Tomorrow is a big day of releases for the eurozone. It reports the June unemployment rate (seen steady at 7.9%, though the risk is on the downside), CPI (seen at 2% but the risk is on the upside), and the first estimate for Q2 GDP ( a 1.5% quarterly gain, which would be the first expansion in three quarters and only the second quarterly expansion since Q3 19 (it was stagnant in Q4 19).

The euro is extending its rally for the fourth consecutive session. It has forged a base around the $1.1750-$1.1760 area and tested it at the start of the week. Today it is pushing against $1.1880, a three-week high. It closed above the 20-day moving average yesterday for the first time since June 7, and the five-day moving average is crossing above the 20-day moving average for the first time since then as well. It has not traded above $1.19 this month, and there is an 800 mln euro option struck there that expires today. Sterling is also advancing for the fourth consecutive session.

It settled last week slightly below $1.3750 and reached $1.3970 today, its highest level since June 23. Recall that sterling peaking on June 1 is near $1.4250. It is moving above the (50%) retracement level (~$1.3910) today, and the next retracement (61.8%) is just shy of $1.40.

America

There are two main takeaways from yesterday’s FOMC statement and press conference. First, the Fed is still on track to make a formal tapering announcement in a couple of months. The actual tapering could begin before year-end, depending on the economy. Powell seemed relatively calm about the prospects that the new Delta variant will cause a major economic disruption. The Jackson Hole-September FOMC meeting timeframe still seems reasonable, especially if the upcoming employment data is as strong as anticipated, and there are several forecasts for non-farm payrolls to rise by a million when announced at the end of next week. Second, the Fed continues to argue that elevated price pressure is temporary.

Powell has argued that a relatively small basket of goods in the CPI basket accounts for the prices. We have noted that only about a third of the components are rising faster than 2%. Powell pointed to cars (new, used, and rental), airfare, and hospitality as significant contributors. The Fed Chair continued to push back against linking house price increases to its MBS purchases and seemed to suggest early tapering off those purchases did not have wide support. The minutes will shed light on this debate.

More than a month after President Biden said a deal was struck, the Senate appears to be on the verge of approving a bipartisan physical infrastructure bill. It will be around $550 bln in new spending, and almost another $500 bln is anticipated in federal money for highways that are part of the regular cycle. It will be partly paid for by reallocated unspent covid relief funds and tapping the Strategic Oil Reserves and a few other more gimmicky measures like counting revenue for future growth and boosting the reporting for crypto trades to capture more tax revenues.

The US reports its preliminary estimate for Q2 GDP. The median forecast in Bloomberg’s survey calls for an 8.5% annualized pace after 6.4% in Q1. Personal consumption is expected to have risen by double digits for the second consecutive quarter. The GDP deflator is projected to rise to 5.4% from 4.3%. We suspect the US economic growth is peaking, and the slowing will be gradual, but by H2 22, the sub-3% pace will return. Separately, the US reported weekly jobless claims. They unexpectedly rose by 50k in the previous week, which was the second increase in three weeks and the first back above the 400k-mark since mid-June. Unperturbed, economists in the Bloomberg survey are looking for 385k claims last week.

The US dollar is breaking down against the Canadian dollar. It is convincingly falling through the 20-day moving average (~CAD1.2525) for the first time since mid-June. The greenback is trading near two and a half week lows against the Canadian dollar to test CAD1.2450. Recall it peaked near CAD1.28 on July 19. The next target is near CAD1.24, the halfway mark of the US dollar’s recovery from the five-year low set on June 1 near CAD1.20.

The Mexican peso shrugged off Moody’s downgrade of Pemex deeper below investment grade (Ba3 and retained a negative outlook). Of the main rating agencies, only S&P sees Pemex as an investment-grade risk. The dollar has approached MXN19.85 to take out last week’s low. The next area of support is seen near MXN19.80. It should be capped in front of MXN19.97.

This article was written by Marc Chandler, MarctoMarket.

Fed Day

The China-inspired losses saw the MSCI Asia Pacific Index fall to new lows for the year today, though Hong Kong’s Hang Seng posted a 1.3% gain. Europe’s Dow Jones Stoxx 600 is posting the first gain of the week, led by information technology, real estate, and consumer discretionary. Despite strong bank earnings, financials are matching the market, not outperforming it. US futures are oscillating around little changed levels.

The US 10-year benchmark yield is firm at 1.25%, while European yields are mostly slightly softer but sufficient to take German, French, Dutch, and Greek yields to new 3-4 month lows. The Antipodean currencies and yen are the heaviest against the US dollar, with the Canadian dollar the only major currency gaining on the greenback through the European morning. Emerging market currencies are mixed, leaving the JP Morgan EM FX index little changed.

The Chinese yuan gained for the first time in five sessions. API estimated a 4.7 mln barrel drop in US oil stocks and a large (6.2 mln barrel) drawdown in gasoline inventories, which, if confirmed, would be the largest since March. September WTI is around 1% higher today. Gold continues to move broadly sideways and is straddling the $1800-level today.

Iron ore and steel rebar futures fell in Shanghai, while copper is recovering from yesterday’s decline, which snapped a five-day advance. September lumber dropped 6.7% yesterday to bring this week’s decline to about 8.3% after jumping 18% last week on Canada’s wildfires. The CRB Index fell 0.6% yesterday to end is five-day, 6.8% advance.

Asia Pacific

Investors are continuing to try to make sense of Beijing’s aggressive moves that appear to be a broad offensive that can only result in a slowing if not reversing of past efforts to integrate into global capital markets. The ultimate goal is not clear. Beijing had appeared to be willing to use the capital inflows to ease restrictions on capital outflows. Some even speculated that this would gradually allow the yuan to be convertible.

Although we disagreed, many observers see that introducing the digital yuan as early as next year’s Olympics would challenge the US dollar’s role. The recent actions appear to deal a blow to such speculation. Lastly, there is some thought that the PBOC could ease policy again (following the recent cut in reserve requirements) to lend support to the stock market, if needed.

Australia’s Q2 CPI came in slightly above forecasts with a 0.8% rise after 0.6% in Q1. The year-over-year pace jumped to 3.8% from 1.1%. The underlying measures were as expected, with a 1.6% year rise (from 1.1%) for the trimmed mean and a 1.7% (from 1.3%) weighted median. Still, the data is unlikely to stand in the way of the RBA announcing increased bond purchases at next week’s meeting (August 3). The lockdown in Sydney and social restrictions elsewhere are threatening the economy.

Keep an eye on Japanese weekly portfolio flows that are released first thing tomorrow in Tokyo. In the previous week, ending July 9, foreigners appear to have bought a recorded amount of Japanese bonds (JPY2.57 trillion or ~$23.3 bln). To put the figure in perspective, the previous four-week average was around JPY546 bln. For their part, Japanese investors have sold foreign bonds for the past three weeks, and the average weekly sale of JPY804 bln is the most since early March. On the other hand, equity portfolio flows have been minor.

The dollar is consolidating in about a quarter of a yen below JPY110.00 so far today. The greenback has been recovering since dipping briefly below JPY109.60 near midday in NY yesterday. A move above JPY110.00 could see JPY110.20, but the subdued session will likely continue until the FOMC statement. The Australian dollar is stagnant. It remains within the range set on Monday (`$0.7330-$0.7390). There is an option for A$710 mln at $0.7390 that expires today and another for about A$515 mln at $0.7400 that expires tomorrow.

The dollar spiked to CNY6.5125 yesterday, its highest level in three months, and broke out of the CNY6.45-CNY6.50 month-old range. However, it was pushed back into the range today as the yuan rose for the first time in five sessions. The PBOC set the dollar’s reference rate at CNY6.4929, slightly lower than the median expectation picked up in Bloomberg’s forecast (CNY6.4935).

Europe

The UK and the EU are still at odds over the Northern Ireland Protocol. However, the EC moved to de-escalate the situation. Rather than push forward with its threat of imminent legal action as the end of the month should mark a new phase of enforcement, it appears to have granted a grace period of the summer to find an amicable solution.

Germany’s August GfK consumer confidence survey was unexpectedly weak. Rather than rising to 1.0 as economists projected, it remained at -0.3. The disastrous floods seem to be the main culprit. Tomorrow, Germany reports July CPI figures and employment data. The EU harmonized measure of CPI is expected to rise to 2.9% from 2.1% in June. Unemployment may have ticked down to 5.8% from 5.9%. It was at 5.0% steadily in H2 19.

The week’s highlight for the eurozone comes on Friday with the aggregate CPI (there seems to be upside risks to the 2.0% median forecast in Bloomberg’s survey) and the first look at Q2 GDP.

In the UK, Nationwide reported its house price index fell 0.5% in July. It is the first decline since March and the largest fall since last June. The year-over-year rate moderated to 10.5% from 13.4% in June. A tax break is winding down. On July 1, the stamp-duty threshold on new purchases was halved to GBP250k, adding GBP12.5k to the average home bought in London. Starting October 1, the threshold will return to GBP125k.

The euro is trading quietly in the upper end of yesterday’s range that saw it reach $1.1840, its highest level since mid-July. It has held above $1.18 so far today, and if sustained, will be the first session since July 12 that it has not traded with a $1.17-handle. There is a billion-euro option at $1.18 that expires today and another at $1.1820, and a third at $1.1850.

Tomorrow, there is a 1.36 bln euro option struck at $1.1850 that will also expire. It suggests that the area will likely be sticky. Sterling is firm but holding below $1.39 that it approached yesterday. An option for almost GBP400 mln is struck at $1.3925 that expires today. Tomorrow there is an option for almost GBP410 mln at $1.3900 that also will be cut. Initial support is seen near $1.3860 and then $1.3820.

America

Following Monday’s unexpected decline in June’s new home sales (-6.6%) and a downward revision to the May series (-7.8% rather than -5.9%), the US reported weaker than expected June durable goods orders, mitigated in part by the upward revisions to the May data. Separately, house price increases accelerated in May.

Today’s reports of the advance goods trade balance and retail and wholesale inventories will give economists the last opportunity to adjust the Q2 GDP forecasts ahead of tomorrow’s report. The median forecast in Bloomberg’s survey sees 8.5% annualized growth in Q2 after a 6.4% pace in Q1. The price deflator is expected to accelerate to 5.4% from 4.3%.

The outcome of the FOMC meeting is center stage today. No change in policy is expected, though some members seem to want to adjust the asset purchases immediately with special attention to the mortgage-backed securities. This seems unlikely. However, Powell is unlikely to push against expectations that an announcement could be made at the next FOMC meeting in September.

By pledging to give the market a clear advance warning, it would seem to need to say something relatively soon to keep its options open for an adjustment in the pace and possibly the composition of its purchase by the end of the year. Powell could deter dissents by striking a compromise by replacing the agency bonds purchases with more Treasuries, but this too seems unlikely. The FOMC statement is unlikely to deviate much from the last one, and the Fed is unlikely to see the rising Delta covid cases as substantially impacting its economic outlook.

Canada reports June CPI figures. The year-over-year rate is expected to ease (3.2% from 3.6%) for the first time this year. Canada has three core measures, two of which may have also softened (median and trim iterations). At the end of the week, Canada will report May’s monthly GDP. It is expected to have matched April’s 0.3% contraction, but the data seems dated.

Mexico’s June trade surplus was much smaller than expected ($762 mln vs. median Bloomberg survey forecast for $2 bln). Partly, it appears that domestic demand is improving, and this will likely be seen in the Q2 GDP report due at the end of the week. The median forecast anticipated a 1.8% expansion in the quarter after a 0.8% pace in Q1.

The US dollar is encountering selling pressure near CAD1.26 for the fifth consecutive session. Key support is seen near CAD1.2525, though there is an option for almost $390 mln at CAD1.2550 that expires today. Momentum indicators like the MACD and Slow Stochastic are trending lower, and the greenback’s recovery from the multi-year low set on June 1 near CAD1.20 looks over or nearly so.

The US dollar is trading near seven-day lows against the Mexican peso (~MXN19.9330). Chart support is seen in the MXN19.80-MXN19.82 band. Nearby resistance is pegged near MXN20.03.

This article was written by Marc Chandler, MarctoMarket.

China Sends Ripples Across the Markets

Hong Kong shares are bearing the brunt. The Hang Seng has fallen by 10% in the three sessions, including today. The Shanghai Composite is off nearly 5.5% in the same period. A few of the other larger markets in the region, including Japan, South Korea, and Australia, posted small gains. Moody’s affirmation of a stable credit outlook helped lift Philippines’ stocks by 2.4%, the most in a couple of months and recouped most of Monday’s slide.

Europe’s Dow Jones Stoxx 600 is off around 0.5%, led by financials and energy. US futures are trading with a heavier bias. Benchmark bond yields are lower. The 10-year Treasury yield is hovering near 1.25%, off more than three basis points. European yields are 1-2 bp lower. The dollar is bid. The yen continues to be resilient. Emerging market currencies are retreating as an expression of the risk-off mood. The JP Morgan Emerging Market Currency Index is off 02%.

Industrial metals have been knocked back by reports suggesting China is considering new export tariffs on steel. Oil is sidelined, and the September WTI contract is little changed, around $72 a barrel. Gold is not drawing much of a bid. A stronger dollar may offset the lower yields as a consideration. If the yellow metal does not recover, it may close below $1800 for the first time in three weeks.

Asia Pacific

Beijing is fighting a two-front battle. Domestically, the new drive that began last year with the Ant IPO and crackdown on Alibaba has broadened. Stronger regulatory efforts, anti-trust, and IPOs in foreign markets, and now private education companies are killing the proverbial goose that lays the golden egg by underscoring international investors’ concerns about investing in China.

The capital inflows were to create conditions under which Beijing could ease capital outflow restrictions. The other front of the battle is in foreign policy. Yesterday’s high-level meetings with the US appeared to have failed to break new ground. While reports suggest that there is still scope for Biden and Xi to meet in October, with the March and July contentious meetings, the chances of an agreement seem remote.

Reports today suggest China is considering a 10-25% tariff on steel exports starting in Q3 to rein in the sector. This is separate from its regulatory initiatives. This seems more in the containing commodity prices and rationalizing the steel sector. It appeared to have an immediate effect of sending iron ore and steel rebar prices lower. However, nickel, which is needed in the new batteries, proved resilient and is at new multi-year highs. Separately, China reported industrial profits moderated to 20% year-over-year from more than 36% in May.

South Korea reported slightly softer than expected growth in Q2. GDP rose by 0.7% on the quarter after a 1.7% pace in Q1. This is broadly consistent with what had been perceived as a maturing of the Asia economic recovery. The government was quick to reaffirm its expectation for 4% growth this year, indicating that today’s report will have no impact on monetary policy. The central bank meets in late August. The market has fully discounted a 25 hike in the next three months. Separately, South Korea and North Korea agreed to re-establish formal relations, including the hotline.

A record number of covid cases in Tokyo has not offset the flow into the yen today. For the first time in four sessions, the dollar slipped below JPY110.00. Initial support is seen in the JPY109.80 area, but recall last week’s low was slightly above JPY109.00. It appears that the same considerations that weigh on US Treasury yields boost the demand for the yen. Covid cases in Sydney are still rising, and the risk-off is pushing the Australian dollar lower.

It has meet resistance in the last three sessions in front of $0.7400, and expiring options are set at $0.7380 today and $0.7390 tomorrow. On the downside, yesterday’s low near $0.7330 is holding, and a break could see a test last week’s lows (~$0.7290-$0.7300). The nearly 0.25% rise in the dollar against the Chinese yuan is the largest in almost a week and a half.

The greenback spiked to CNY6.5125 earlier, which is the highest level since April. The 200-day moving average is found by CNY6.5170. The greenback has not traded above this moving average since last July. The PBOC set the dollar’s reference rate at CNY6.4734, a bit softer than the median projection in Bloomberg’s survey for CNY6.4741.

Europe

Interest in the eurozone’s money supply figures has waned, perhaps as a result of the ECB’s asset purchases and negative interest loans. June M3 rose 8.3% year-over-year, largely in line with estimates. However, it is the underlying lending figures that draw more interest. Loans to households rose 4% after a 3.9% pace in May, while loans to companies rose 1.9%, matching the previous month’s rise. The economic highlights of the week still lie ahead. At the end of the week, the preliminary July CPI and Q2 GDP will be reported.

We see upside risk to the Bloomberg median forecast for 2.0% CPI. The median forecast calls for a 1.5% increase in the GDP quarter-over-quarter.

Hungary hiked its key rate by 30 bp in June to 0.90%. It is expected to follow up with another 20 bp hike today. The overnight deposit rate has stood at minus 5 bp since March 2019, when it was lifted from -15 bp, where it had been since August 2017. Inflation runs above 5%, the highest in nine years, and the core measure is at 16-year highs. As a result, Hungary may lift the deposit rate out of negative territory today to 10 bp.

The euro is trading inside yesterday’s range (~$1.1765-$1.1815). The 20-day moving average is slightly below $1.1820, and the euro has not traded above it since June 11 and has not closed above it since June 7. Although a base has been carved out in the $1.1750-$1.1760 area, the single currency has not been able to distance itself from it.

A break target the year’s low set at the end of March near $1.1700. Reports of falling covid cases in the UK may have helped spur sterling’s gains yesterday to a six-day high near $1.3835. Recall last week’s low was close to $1.3570. However, the recovery stalled, and sterling is consolidating today, straddling the $1.38 level. A break of the $1.3765 area could signal a move into a support band in the $1.3700-$1.3730 area.

America

The US 10-year TIP yield is at a record low today, near minus 1.14%, which seems incredible given that the US is expected to report Q2 GDP around 8.5% at an annualized clip and a deflator of almost 5.5%. The decline in the real yield yesterday was cited as a key force behind the greenback’s heavier today. Meanwhile, states that have had low vaccination rates are seeing strong spikes in the virus. The latest figures show about 60% of the 18+ cohort have been fully vaccinated, and 69% have been given one of two shots.

That means a little more than 49% of the population is fully vaccinated, which has been fairly stable. Ironically, even as the US secures more vaccines, a sizeable minority does not want it. Meanwhile, efforts to reach a bipartisan deal on infrastructure are still being stymied.

The US reports June durable goods orders today. The headline (~2.1%) will be lifted by aircraft, without which a modest gain (~0.8%) is expected. Shipments of non-defense and non-aircraft goods may have slowed to 0.8% from 1.1%. However, more attention may be on house price reports today. The FHFA reports its monthly house price index. It has been rising by more than 1% a month since last June without exception.

In April, it rose the fastest over this period, posted a 1.8% month-over-month increase. S&P CoreLogic Case Shiller index of house prices in the largest 20-cities and nationwide are expected to have accelerated in May. This comes as the FOMC’s two-day meeting begins, and several officials share our concerns about the optics, if not the impact of the central bank continuing to buy mortgage-backed securities. The Conference Board’s July consumer confidence measure is expected to soften from elevated levels. Lastly, note that Alphabet, Apple, Microsoft, among others, report earnings today.

Canada reports June CPI figures tomorrow, and the year-over-year rate may decline (3.2% from 3.6%) for the first time this year. Mexico reports June’s trade balance. A $2 bln surplus is expected, which would be the largest for Q2. Last year, the monthly trade surplus averaged $2.8 bln a month, up from $446 mln in 2019 and a $1.1 bln deficit in 2018. In the first five months of 2021, the average monthly surplus has fallen to $66.5 mln. Separately, we note that the dispute over measuring domestic content for autos and auto parts under the USMCA has not been resolved.

The US dollar is firm against the Canadian dollar but within the recent range (~CAD1.2525-CAD1.2610). There is an option for $550 mln at CAD1.26 that expires today. The 20-day moving average is near CAD1.2515, and the greenback has not traded below it since mid-June. On the upside, the 200-day moving average is around CAD1.2610. A move above it would target the CAD1.2680 area initially. The greenback is also confined to yesterday’s range against the Mexican peso (`MXN19.99-MXN20.1650). The risk-off mood warns of the risk of a stronger US dollar. Last week’s high was near MXN20.25.

This article was written by Marc Chandler, MarctoMarket.

Greenback Starts Big Week Softer

Last week’s weakness in the MSCI Asia Pacific Index seemed to be partly driven by Beijing’s crackdown on some tech companies and private sector education companies. The benchmark fell by 1.9% last week and continued to be sold today, led by Hong Kong’s 4%+ drop and Shanghai’s 2.3% decline.

Only Japan of the large bourses posted modest gains after coming back from a two week holiday. However, the Dow Jones Stoxx 600 in Europe rallied 1.5% last week, but its four-day advance is meeting profit-taking today, and it is nursing a 0.35% decline near midday in Europe. US futures are also heavy. Benchmark 10-year yields are heavy. The US Treasury yield is off almost three basis points at 1.25%, ahead of this week’s auctions of $183 ln in coupons and a $28 bln two-year floating-rate notes. It had been down to 1.22% earlier in the session.

The US 10-year real yield has fallen to a new record low of almost -1.13%. European yields began off a couple of basis points softer, with most benchmarks falling to fresh 3-5 month lows but have recovered to see minor increases. Rallies in China and South Korean bonds pushed their 10-year benchmarks to new three-month lows too. The dollar is mostly softer against the major currencies, having seen its earlier gains pared or even reversed.

The Australian dollar and Norweigan krone are the laggards. Several emerging market currencies, including the South African rand and Mexican peso, have recovered from earlier losses. The JP Morgan Emerging Market Currency Index is off for the third consecutive session and has a four-week downtrend in tow. Gold is firm but meeting resistance in the $1810-$1812. Last week, it peaked near $1825. Oil prices appear to be being dragged lower by demand concerns and are snapping a four-day advance.

However, September WTI has trimmed its earlier losses, and near $71.70 is off about 0.5%. Copper is rising for a fifth session. The CRB Index gained 1.9% last week, its seventh advance in the past nine weeks.

Asia Pacific

China expressed outrage at a map used by CNBC of China did not include Taiwan. Some observers note that if a map of the US did not contain Alaska and Hawaii, there would be no protest, but a critical difference is that China’s territorial integrity is questioned. Other observers complained that some areas, like Tibet, were included as part of China. Meanwhile, China’s attempt to be more integrated into global finance, attract foreign capital, which would give it scope to ease restrictions on capital outflows, will likely be dealt a blow by the crackdown on online educational companies.

Some of these companies attracted investment flows from hedge funds, pension funds in some provinces in Canada, and some states pension in the US. Lastly, a massive typhoon hit eastern China, and on top of last week’s floods. This will likely have some negative economic impacts, and China’s Politburo that meets this week may address it. Still, given the recent cut in reserve requirements, an easier policy bias had already emerged.

Japan’s preliminary July PMI shows that Q3 is off to a poor start. The manufacturing PMI slipped to 52.2 from 52.4. It is the lowest in five months. Output and new orders fell to six-month lows. The services PMI fell deeper into contraction mode. The 46.4 reading, down from 48.0, is a new five-month low, but note that the services PMI has not been above the 50 boom/bust level since January 2020. Last July it stood at 45.4. The pandemic was frequently cited as the main culprit. About 23% of Japan’s population is fully vaccinated, which is a little less than half of the level in many large European countries and the US and Canada.

Falling US yields and the risk-off sentiment is dragging the dollar lows against the yen. Initial support is seen near JPY110.00, and an expiring option for $350 mln at JPY109.80 may attract interest. Recall that before the weekend, the dollar settled on the week’s highs just shy of JPY110.60. The Australian dollar’s key upside reversal in the middle of last week off the year’s low (~$0.7290) faltered near $0.7400 in the last two sessions and was sold to nearly $0.7330 today.

There is an option for about A$455 mln at $0.7335 that will be cut today. The dollar edged higher against the Chinese yuan for the third consecutive session. It begins this week with an eight-week advance that goes back to the first week in June. The PBOC set the dollar’s reference rate at CNY6.4763, a little lower than the models in Bloomberg’s survey projected of CNY6.4768.

Europe

The July German IFO survey disappointed but remains at elevated levels. The expectations component deteriorated for the first time in three months, falling to 101.2 from 103.7, the highest level since 2010. The current assessment ticked up to 100.4 from 99.7. Although it missed expectations, it was still the strongest since mid-2019. The overall business climate reading stands at 100.8, down from 101.7 in June. It is the first decline since January.

Last week, the UK announced it would station two naval ships in Asia as part of the attempt to preserve free navigation and check China’s aggressiveness. Today, reports suggest it is looking at ways to remove China’s state-owned nuclear energy company (China General Nuclear Corp) from future projects in the UK. This could put at risk the GBP20 bln power station (in a joint effort with France’s Electicite de France) and the planned development in Essex.

CGN also has a 33% stake in the Hinkley Point facility being constructed in Somerset and is among the UK’s largest construction projects. Recall that the UK will permanently shut five of its eight nuclear plants by 2024.

At the end of last week, the ECB confirmed that the cap on dividends and buybacks for banks will be allowed to expire at the end of September. However, it still urged banks under supervision to be cautious. The UK had made similar moves earlier this month. A little more than a third of the banks in the Euro Stoxx 600 Index report earnings this week. Note that eurozone banks typically pay dividends only once a year. Bank shares are off about 0.6% today.

The euro is firm. It appears to be forging a shelf in the $1.1750-$1.1760 area for the sixth session. It is knocking around $1.1800. Last week’s high, set on July 19, was about $1.1825. There is an expiring option for a little more than 620 mln euros at $1.1830 today. Sterling is firm and has risen a little above last week’s high of $1.3790. A move above $1.3820 would lift the tone. Support is seen around $1.3735.

America

This is a big week in the US with the FOMC meeting and the first look at Q2 GDP on tap. However, there are other important events as well. First, there will likely be a test vote in the Senate on the bipartisan infrastructure initiative. Our concern is that even if the Senate strikes a compromise, the House may prove more difficult. Some want immigration to be included, and others may reject the funding compromise that could be reached in the Senate. Second, Treasury Secretary Yellen acknowledged that the statutory debt limit is back on August 1 and that the various maneuvers can buy for a couple of months.

Recall that in 2011, over a similar dispute, S&P downgraded the US. Among the first places to look for investors to respond may be in the T-bill auctions, though it is not exactly clear when Treasury runs out of room. Third, large tech companies, including Apple, Alphabet, Facebook, Microsoft, Qualcomm, and Amazon, report earnings this week. So do Telsa, Ford, Exxon, Chevron.

The US begins the week with June new homes sales, which are expected to bounce back after falling for two months. The limited supply seems to be the major culprit. The July Dallas Fed manufacturing survey is due, and it is expected to have edged higher. It, too, has slipped lower for the previous two months. Canada has a light economic diary until the middle of the week, when the June CPI will be reported. The year-over-year rate (3.6% in May) could soften for time this year, largely as a result of the base effect.

Two of the three core measures are also expected to have eased. At the end of the week, Canada reports May GDP, which is likely to have contracted for the second month. That said, Canada appears to be emerging from the soft patch. Mexico also has a busy week. Today’s unemployment data is followed by the trade balance tomorrow and Q2 GDP at the end of the week. According to the median forecast in Bloomberg’s survey, the economy is expected to have expanded by 1.8% on the quarter, after a 0.8% expansion in Q1.

The US dollar peaked against the Canadian dollar last Monday near CAD1.28. It was sold to around CAD1.2530 before consolidating ahead of the weekend. A break of CAD1.25 would strengthen the conviction that a high is in place. It corresponds to both the 20-day moving average, which the greenback has not closed below since early June, and the (38.2%) retracement objective of the uptrend since then.

A convincing break could signal a test on the CAD 1.24 area. The US dollar flirted with the 200-day moving average against the Mexican peso last week (~MXN20.21) but failed to close above it and tested MXN20.00 before the weekend. It is little changed on the day in Europe, having already tested the MXN20.1650 area. A break of MXN19.97 could spur a decline toward MXN19.82.

This article was written by Marc Chandler, MarctoMarket.

Stretched Dollar Remains Firm

Sterling fell to new six-month lows while the euro recorded its lowest level since late March, and the Australian dollar fell to new lows for the year. Led by a 2% fall in the South African rand, with the bulk of the sell-off coming after the central bank kept policy rates unchanged, which is now lower on the year, most emerging market currencies weakened. The Russian rouble was the strongest in that space, though the lion’s share of the gains came before the central bank hiked its key rate by 100 bp to 6.5% ahead of the weekend.

The dollar had seemed to track short-term US interest rates until recently, and its strength has come in the face of softer rates. The implied yield of the December 2022 Eurodollar futures contract finished the week near 42 bp, down 13 bp over the past few weeks. The 10-year yield fell to about 1.125% before recovering to trade closer to 1.30% at the end of last week.

The dollar and interest rates are behaving as one would expect in a risk-off environment. The contagious Delta variant appears to be dampening activity economic activity in Australia, Japan, and parts of Europe. Several US states are recording multi-month highs in cases, and weekly initial jobless claims unexpectedly rose to their highest level in two months (in the week through July 16).

Floods in Germany, Belgium, and China could also impact economic activity and prices. Droughts in North America may boost food prices and boost natural gas prices as an alternative for a decline in hydroelectric output. A freeze in Brazil sent coffee prices sharply higher, while wildfires in Canada saw lumber prices rise dramatically (almost 22% over the past three sessions) after trending lower in recent weeks.

On the other hand, equities are harder to fit into the risk-off narrative. Most of the large Asia Pacific equity market fell, but Europe’s Dow Jones Stoxx 600 rallied and will take a four-day advance into next week. The benchmark is within striking distance of the record high it set earlier this month. The S&P 500 and NASDAQ advanced and have only fallen in two of the past eight weeks. They are both poised to set fresh recorded highs.

Dollar Index

The Dollar Index recorded a key reversal in the middle of last week. After rising to its best level in three months (~93.20), it reversed lower and settled below the previous day’s low. Follow-through selling the next day took it to 92.50 and the 20-day moving average. It recovered by stalled near 93.00 before the weekend. Neither the MACD nor the Slow Stochastic confirmed the new high, but the underlying tone remains constructive and buying on dips seems stronger than the selling pressure into rallies. Moreover, the five and 20-day moving averages cross-over has caught the major moves this year since February, and the five-day average is still above the 20-day.

The year’s high was set in late March near 93.45. A break above there could target the high from early last November near 94.30, and the 94.50 area corresponds to the (38.2%) retracement of the drop since the panic-driven high in March 2020 near 103.00.

Euro

The downside momentum of the euro seemed to pause in recent days ahead of $1.1750. However, the bounces have been brief and shallow. The momentum indicators have not confirmed the recent lows. The risk is for a test on the year’s low set in late March near $1.1700, and a break of it could signal a return to the low set near $1.16 on the night of the US election last November.

The ECB’s lower for longer forward guidance could attract funds into the asset markets, but the euro itself is unloved, and speculators in the futures market are still scaling out of a net long position. A move above $1.1830, where the 20-day average is found, would lift the tone. The euro has not closed above the 20-day moving average since early June.

Japanese Yen

The dollar began last week testing JPY109.00, its lowest level since late May as the US 10-year note yield slumped below 1.20%. By the end of the week, the yield was back near 1.30%, and the greenback was around JPY110.60. It settled above its 20-day moving average (~JPY110.40) for the first time in a couple of weeks. The MACD and Slow Stochastic have turned up from oversold territory. Overcoming chart resistance near JPY110.65 could see a push above JPY111.00. The year’s high was set earlier this month near JPY111.65.

British Pound

Sterling fell to five-month lows near $1.3570 on July 20, just shy of the (50%) retracement of the rally from last November, found near $1.3550. In the second half of the week, a recovery attempt stalled near $1.3785 in front of the 20-day moving average (~$1.38). This area presents an important technical hurdle, which overcoming would lift the tone. The momentum indicators look constructive as they try to turn higher. A move below $1.3680 warns of a return to the lows.

Canadian Dollar

The greenback reached 5.5-month highs against the Canadian dollar at the start of last week, near CAD1.28. It pulled back to the CAD1.2525 area before buyers re-emerged, and it consolidated mostly below CAD1.26. The MACD has turned down, as has the Slow Stochastic, without confirming the high. Still, a push back above the CAD1.2650 area could warn of another run at the highs. The 20-day moving average is near CAD1.25, and the US dollar has not closed below it since early June. Doing so now would likely confirm that a top is in place.

Australian Dollar

The elevated covid cases in Sydney and the weakest composite PMI (preliminary reading) since May 2020 (45.2) illustrate headwinds for the Australian economy. The minutes from last month’s RBA meeting showed that officials have a flexible stance toward bond purchases. It is likely to use that flexibility at its August 3 meeting to boost its bond purchases. Ahead of that, investors expect a jump in Australia’s Q2 CPI, with the headline rising above 3.5% year-over-year from 1.1% in Q1.

The underlying measures will likely firm toward 1.5%-1.6% from 1.1%-1.13%. The Aussie posted a key reversal in the middle of the week by falling to new lows for the year (~$0.7290) and then recovered to finish above the previous day’s high. Sellers were lurking in front of $0.7400 and drove it back to $0.7350 ahead of the weekend. The pre-weekend price action was poor, and the close was near session lows. The next important support area is near $0.7300.

Mexican Peso

Although the dollar set four-day lows ahead of the weekend, it still managed to close high (0.5%) on the week for the third consecutive week. The JP Morgan Emerging Market Currency Index fell for the fourth consecutive week and the sixth weekly fall in the past seven weeks. The greenback peaked against the peso in the middle of the week, slightly above the 200-moving average (~MXN20.21). Initial support now is seen near MXN19.95 and a stronger shelf in the MXN19.80-MXN19.83 area.

The Slow Stochastic is trending higher and is approaching overbought territory. The MACD has flatlined near the trough. In the slightly bigger picture, the dollar has mostly been confined to a range set on June 24 (~MXN19.7150-MXN20.2150).

Chinese Yuan

The US dollar posted a minor gain of about 0.15% against the yuan ahead of the weekend to secure another weekly advance. The advance covers the last eight weeks without fail. While that is statistically true and no doubt has not been lost on official and private observers, it is also true that the greenback has been mostly in a CNY6.45-CNY6.50 range. Rather than see a depreciation of the yuan, it has gone essentially nowhere.

The dollar has not traded above the high set in late June near CNY6.4910 this month, though it was approached a couple of times. It is also true that the yuan’s 0.7% gain against the dollar this year make it one of the strongest emerging market currency so far this year and stronger than all the major currencies but the Canadian dollar (~1%). Moreover, by focusing on the eight-week decline of the yuan against the dollar, one misses the fact that the yuan is at five-year highs on a trade-weighted basis (CFETS).

This article was written by Marc Chandler, MarctoMarket.

Lower for Longer

While the existing vaccines seem to have lost some of their ability to prevent the illness, they remain a power prophylactic against hospitalization and death. Nevertheless, new social restrictions have been introduced in some high-income countries, even those like Israel, that have been fairly successful in vaccinating a large part of their population.

The virus is once again raising the prospects of slowing the economic recovery that was unevenly unfolding. The preliminary July PMI for Australia, UK, France, and the US disappointed. Expectations for the trajectory of monetary policy are being impacted. Consider that the implied yield of the December 2022 Eurodollar futures fell to 40 bp in the middle of last week from 55 bp on July 1.

A similar futures contract in the UK, the December 2022 short-sterling implied yield fell from 58 bp in mid-July to almost 40 bp on “Freedom Day” as the UK dropped all social restrictions and mask requirements. The implied yield of the December 2022 Bank Acceptances in Canada fell 20 basis points from July 14 to nearly 105 bp ahead of the weekend. In Australia, the December 2022 bill futures contract’s implied yield fell a little over 60 bp on July 6 to 36 bp last week.

The December 2022 Euribor futures contract has been considerably steadier as it is widely accepted that the European Central Bank will not lift rates until after 2023. The implied yield has been confined to a -42 bp to – 50 bp trading range since the end of April. The yield finished last week at -49 bp, falling about five basis points since the ECB meeting. The ECB’s new forward guidance signaled that bond purchases and low rates will prevail until the staff forecasts that the 2% target can be sustained. In June, the staff forecasts projected 2023 CPI at 1.4%.

The signal of lower for longer helped drive European bond yields to new 3-4 month lows. The French 10-year bond yield had been offering a positive yield since the second half of April but recently moved back below zero. One has to pay Greece 50 bp to lend to it for two years, which is a little more than one would pay to Italy for the same maturity.

Greece takes about 15 bp a year from those lending to it for five years, while Italy’s five-year yield has dipped below zero for the first time since early April. The amount of negative-yielding bonds in the world has increased to almost $16 trillion from below $13 trillion in late June, and that does not include Japan’s 10-year bond, where the benchmark yield is less than a basis point.

The ECB’s dovishness likely minimizes the impact of the preliminary July CPI figures. In July 2020, the eurozone saw consumer prices fall by 0.4% on the month and again in August. This speaks to a likely acceleration of the year-over-year pace from 1.9% in June. Also, note that since at least 2000, prices gained less in July than in June (and consistently rose more in August than July).

The monthly increase in June was 0.3%. The Bloomberg survey shows economists anticipate sharp month-over-month declines in Italian and Spanish prices. French CPI is also expected to have fallen slightly in July. German inflation may have ticked up. These considerations suggest the year-over-year rate may have edged above 2%.

The eurozone will provide its first estimate of Q1 GDP at the same time as the CPI figures on July 30. Recall that in Q4 19, before the pandemic struck, the eurozone economy was stagnant. Last year contracted in H1 before recovering in Q3. However, unlike the US experience, the eurozone economy contracted against in Q4 20 and Q1 21. Despite the spread of the Delta mutation and the floods in parts of Europe, including Germany, the recovery now appears to be on more solid footing, and the EU Recovery Funds are at hand. The regional economy likely expanded around 1.4%-1.5% in Q2 and is poised to accelerate further here in Q3.

The highly contagious, though less lethal mutation (if vaccinated), has pushed investors to reconsider the recovery theme that had two drivers last November, the US election and the vaccine announcement. Of course, this does not mean that it is the only development in the market, but it seems to be a relatively new and powerful one. The US dollar rallied as the pandemic first struck, partly as a safe haven as US Treasuries were bought and partly as a function of the unwinding of dollar-funded purchases of risk assets (e.g., emerging markets).

When things began to stabilize at the end of last March 2020, and the NBER now dates the end of the US recession as April 2020, the dollar trended lower and accelerated into the end of the year and began to recover in early January. From the end of March through December last year, the Antipodeans and Scandis led the move against the greenback and appreciated roughly 20%-25% against the US dollar. These currencies are often perceived to be levered to world growth and are often more volatile than the other majors. Over the past three months, they have been the weakest, losing 3.0-6.50%.

The opposite is also true in the sense that the Swiss franc and Japanese yen, other currencies often used for funding, hence the appearance of safe-haven appeal, were the worst performers against the dollar in the last nine months of 2020 (rising about 8.25% and 4.5% respectively). However, over the past three months, they have been among the most resilient in the face of the dollar’s surge. The Swiss franc is off less than three-quarters of a percent, while the yen is off by about 2.4%.

A challenge for investors and policymakers is the evolution of the virus that renders some of the high-frequency data rather dated and arguably less impactful outside of the headline risk posed. The Federal Reserve has succeeded in securing for itself much room to maneuver and is not tied to a particular time series, like the monthly jobs report or data point. The FOMC statement is likely to hardly change from the previous one.

Discussions about the pace and composition of the Fed’s bond-buying will continue. Still, Fed Chair Powell was speaking for the central bank when he told Congress recently that the bar to adjust the purchases (substantial further progress toward the Fed’s targets) has not been met.

The Jackson Hole symposium at the end of August has long been seen as the first realistic window of opportunity for the Fed to signal its intention to slow, possibly alter the composition of its bond purchase, and shape it more formally at the September FOMC meeting. Ahead of Jackson Hole, there is one more jobs report, and the early call is for around a 750k increase.

Reporters may try to draw Powell out but are unlikely to have much more success than the US Senators and Representatives. There is ongoing interest in the size of the reverse repo facility, for which the Fed now pays five basis points at an annualized rate, the same as a six-month bill. In addition, Powell pushed back against suggestions by some officials that the central bank’s MBS purchases are lifting house prices beyond the access of many American families. Will reporters press him on this or the buying of inflation-protected securities that arguably distort the price discovery process and the break-even metric?

Stable coins’ regulatory framework may be questioned. Recall that just before Biden took office, the Comptroller of the Currency allowed federally chartered banks to used distributed ledgers (blockchain) and conduct business with stable coins. There is a push to treat stable coins as securities for regulatory purposes. While the ECB recently announced it was going forward with a research and design phase of its development of a digital euro, the Federal Reserve’s report is expected in September. Powell said what many officials seem to believe that the introduction of a digital dollar would likely dry up demand for stable coins and crypto.

The day after the FOMC meeting concludes, the US reports its first estimate of Q2 GDP. The median forecast in Blomberg’s survey has crept up in recent days to 8.5% at an annualized pace, up from 6.4% in Q1. The NY Fed’s GDPNow model puts growth at 3.2%, while the Atlanta Fed’s model is closer to the market at 7.6%, while the St. Loius Fed Nowcast stands at 9%.

Even before this surge in the virus in the US, where about half of the adult population is fully vaccinated, we suggested there was a reasonable chance that Q2 marks the peak in growth. Fiscal policy will increasingly be a drag, pent-up consumer demand will be satiated. Monetary policy is near a peak. Perhaps the recent increase in the rate paid on deposits at the Fed and on the reverse repo facility and the recent sales of corporate bonds bought in 2020 mark the end of the easing cycle. We have also underscored the restrictive impact of doubling the oil price since the end of last October.

While there does not appear to be an iron law, it would not be surprising to see price pressures peak with a bit of a lag. This dovetails with the timeframe suggested by both Powell and Yellen. Some recent industry data suggests that the US used car market (accounting for around a third of the recent monthly increases in CPI) is normalizing in terms of inventory, and prices have softened in the wholesale markets.

We note that input prices and prices paid components Markit PMI have fallen in June, and the preliminary report suggests a further decline is taking place this month. Airfare and the price of hotel accommodations, and food out of the house, appear to be a one-off adjustment rather than persistent increases.

The US will report June personal income and consumption figures ahead of the weekend, but the data will already be embedded in the GDP estimate. On the other hand, the PCE deflator, which the Fed targets rather than the CPI, may draw attention. It is expected to post a sharp 0.7% increase on the month for around a 4.2% year-over-year. It rose by 0.4% in May and a 3.9% year-over-year rate. The core rate, which the Fed does not target but makes references from time to time, is expected to accelerate to 3.7% from 3.4%.

Lastly, the infrastructure debate in the US Senate looks to come to a head in the days ahead. It could, in turn, shape the political climate until next year’s midterm elections. The latest wrinkle is that what might serve as the basis of a compromise in the Senate may be rejected by a number of Democrats in the House. The failure to find a bipartisan solution for even the physical infrastructure components will not defeat the Biden administration but force it to rely on the reconciliation mechanism, which is confined to fiscal policy.

It would likely hamper the administration on non-budgetary fiscal issues. The debt ceiling looms. The Congressional Budget Office sees the Treasury running out of room to maneuver in October or November. Biden’s spearheading of a 15% minimum corporate tax rate might not need their approval, but the approval of 60 Senators may be needed for the other component of the global tax reform, the agreement to link the sales and taxes for the largest companies.

This article was written by Marc Chandler, MarctoMarket.

Delta Variant Saps Risk Taking Appetites, Sending the Greenback Higher even as Rates Fall

Equities are under pressure. Nearly all the markets in the Asia Pacific region and Europe are lower. The MSCI Asia Pacific is paring last week’s 1.4% advance, while the Dow Jones Stoxx 600 in Europe is off for the fourth consecutive session at six-week lows. Only the consumer staples and health care sectors are posting small gains. The S&P 500 futures are off nearly 0.5%.

The Dow futures are off more, while the NASDAQ futures are down a little less. Bonds are bid, and the US 10-year yield is around three basis points lows near 1.26%. Core European benchmark yields are softer, and most are trading at new three-month lows today. Peripheral bonds have come under pressure as the European morning progressed. The dollar rides high, with the Scandis and dollar-bloc currencies off leading the move with losses of mostly 0.3%-0.7%, with the Canadian dollar being tagged for more than 1%.

The yen is the notable exception, and it is posting modest gains. Emerging market currencies are all lower, led by the Czech koruna and South Korean won. Gold, which had been flirting with $1835 a couple of sessions ago, is testing the $1800 area. The OPEC+ agreement is pushing oil lower. September WTI is trading below $70. The next technical target is seen in the $66.80-$68.60 area. Copper is off for the fifth session in the past six.

Asia Pacific

OPEC+ struck a deal yesterday that had been rumored last week. The output will increase by 400k barrels a day next month. Gradually, the 5.8 mln barrels a day that have been shuttered will come back to the market. The key to the deal was the baseline of not just the protesting UAE, but others will be adjusted higher. The UAE’s baseline from where cuts will be measured was boosted to 3.5 mln barrels a day from 3.17 mln, and not quite what it had initially sought (3.8 mln).

Saudi Arabia and Russia saw their baselines increase by 500k barrels to11.5 mln. September WTI fell 3% last week, the most in three months. It was the second weekly decline after a nine-of-ten-week advance (~21%). While the political compromise resolves the immediate crisis, there are fissures with the bloc and, for many, the baseline may be than a little embellished.

The surge of the Delta virus and reports of a “Delta plus” mutation gaining ground is emerging as a powerful economic and political factor. The Reserve Bank of Australia meets on August 3, and there are already forecasts that it will take back its recent decision to taper (from A$5 bln a week to A$4 bln). The governing coalition is slipping in the polls, and the opposition Labour is now six percentage points ahead. According to Newspoll, satisfaction with the vaccine rollout has fallen to 40% from 53% in April.

Meanwhile, two polls show support for the Japanese cabinet is continuing to decline, and the pre-Olympic build-up is marred with new covid cases among athletes. The Kyodo poll showed support for the cabinet falling more than eight percentage points to 35.9%. A Mainichi Shimbun poll had the support rating falling four points to 30.

The dollar is trading near session lows against the Japanese yen in the European morning but has not taken out last week’s lows near JPY109.70. Below there is this month’s low, slightly above JPY109.50, which stands in the way of a move toward JPY109. The Australian dollar finished last week at new lows for the year, and follow-through selling has pushed it beyond the (61.8%) retracement target of the rally since the end of last October (~$0.7380).

The next important support area is not until closer to the $0.7230-$0.7250 area. The US dollar firmed for the second consecutive session against the Chinese yuan. It is at a six-day high near CNY6.4850. The greenback has been trading in the CNY6.45-CNY6.50 range for the past several weeks. The PBOC’s dollar reference range was the tightest to expectations (CNY6.4700 vs. CNY6.4705) for several sessions.

Europe

A bit of a caricature of”Freedom Day” in the UK has materialized. The health minister Javid, who recently returned to the government, acknowledged he tested positive for covid. Prime Minister Johnson and the Chancellor of the Exchequer have also been ordered into quarantine due to their contact with Javid. “Freedom Day” drops the mandatory mask-wearing and social distancing requirements.

Ironically, Israel, one of the most vaccinated countries, has reimposed some restrictions (e.g., mask-wearing indoors) dubbed “soft suppression” to avoid a fourth national lockdown due to the contagion of the new variant. Separately, there seems to be a dispute in the UK government over a potential GBP10 bln healthcare tax that the Prime Minister and Health Minister Javid are pushing for, but meeting resistance from the Chancellor of the Exchequer Sunak. In Germany, the polls have yet to show the impact of the flooding. The national election is in just over two months. CDU/CSU candidate Laschet’s attempt at jest seemed to go over like a lead balloon. The Green’s maybe in the best position to gain.

The economic highlight of the week is the ECB meeting followed the preliminary PMI. The central bank needs to bring its forward guidance into line with its redefined symmetrical inflation target of 2%. The adjustment is expected to begin preparing the groundwork that lifts the bar to an exit from the extraordinary monetary policy. In fact, it seems likely that what was once regarded as extraordinary–bond purchases, long-term loans at negative rates, and a negative deposit rate–will be part of the standard operating procedure even after the Pandemic Emergency Purchase Program is completed next year.

As we have noted, the ECB has not hiked rates since 2011, and even then, the move was seen as a mistake, and Draghi unwound the two hikes in his first two meetings as ECB President. The Bloomberg survey found a median expectation for the manufacturing PMI to ease a bit, while the service PMI is expected to quicken. The net result is a marginal new high in the composite PMI.

The euro’s 0.6% loss from last week is being extended today, and the single currency looks to be heading toward the low for the year set at the end of March near $1.1700. There may be some chart support around $1.1740. A move above $1.1820 would help stabilize the tone. We note that the latest Commitment of Traders shows that as of July 13, the net long speculative euro position is the smallest since last March at around 59.7k contracts, down from 165k contracts in early January. The fifth loss in six sessions has brought sterling to nearly $1.37, where the 200-day moving average is found. Sterling had not traded below this moving average since last September, when it was closer to $1.27.

The sell-off is pushing sterling through the lower Bollinger Band (~$1.3715). There is some old congestion around $1.3670 that may offer some near-term support. However, the next important chart area is not until closer to $1.3550. The net long speculative sterling position in the futures market fell by nearly 2/3 in the CFTC reporting week through July 13. At below 8k contracts, it is the smallest since early January.

America

A simmering dispute over the terms of the new North American free-trade agreement broke into the open last week. Ironically for many observers, in some important respects, the Biden administration is taking a tougher line on trade than Trump. This applies not only to China, where sanctions have been extended, and as we learned last week, there are no plans for regular high-level meetings on economic matters, as there were under Bush and Obama.

Mexico and Canada argue that the Biden administration is backtracking from the understanding struck with Trump officials about the technical rules for cars and parts shipped across the regional borders. As a result, they are threatening to launch a formal complaint under the terms of the treaty. If the case goes against them, it will be harder for Mexico and Canada to meet the thresholds. Yet rather than necessarily move production capacity to the US, as the US administration and the United Auto Workers seem to assume, producers in Mexico and Canada could forfeit the advantage and pay the WTO tariff schedule of 2.5% on passenger vehicles (and a much stepper 25% on light trucks).

The US economic calendar is dominated by housing markets reports (starts and sales) and the preliminary PMI at the end of the week. In addition to bills, the government auctions 20-year bonds and 10-year TIPS. Fed officials enter the quiet period ahead of July 27-28 FOMC meeting. The highlight for Canada is the May retail sales report on Friday, which is expected to be soft. Mexico also reports May retail sales at the end of the week, but before that, it will report the biweekly CPI measure.

Banxico meets on August 12, and the market appears to have about a 50% chance of a 25 bp hike discounted. Brazil reports July inflation figures, and another rise is expected (8.50% vs. 8.13%), which underscores expectations for another 75 bp when the central bank meets on August 4.

The US dollar has soared against the Canadian dollar, jumping through the 200-day moving average (!CAD1.2625) to reach CAD1.2780, its highest level since early February. The weakness in equities and oil are sources of pressure. The next important chart point is not until closer to CAD1.2850, the (61.8%) retracement objective of the US dollar slump since the end of last October. The greenback is now well beyond the upper Bollinger Band (~CAD1.2680).

The CAD1.28-area corresponds to three standard deviations from the 20-day moving average. The net long speculative position in the futures market was chopped by nearly 15k contracts in the week through last Tuesday, the most since last March. It stands near 26.4k, the smallest since early May. The US dollar is firm against the Mexican peso, but it remains below last week’s high (~MXN20.0820). The greenback continues to trade within last Tuesday’s range (~MXN19.8150-MXN20.8020). Speculators in the futures market have been net short the peso since the end of April.

This article was written by Marc Chandler, MarctoMarket.

Rates and Currencies Act like They are From Different Planets

The 10-year yield slipped four basis points on the week to 1.32%. The yield has risen in three of the past 15 weeks. It is tough to argue that it is a fluke. While it is holding above the 200-day moving average (~1.25%), the 30-year yield has spent the last two sessions below its 200-day moving average (~1.975). The implied yield of the December Eurodollar futures fell five basis points last week and is off near 15 bp over the past five weeks.

The dollar rose against all the major currencies but the Japanese yen, which eked out a negligible gain. The combination of economic data and central bank statement (and an end to asset purchases) spurred the market to price in an RBNZ rate hike as early as next month (August 17). Still, the Kiwi finished slightly lower on the week. Still, it joined the yen and Swiss franc, whose central banks are widely expected to be among the laggards in adjusting monetary policy, to be the only currencies that have risen here in July against the US dollar.

Perversely, the other two high-income countries in the front of the queue to adjust policy, Norway and Canada, have the poorest performing currencies this month (~-2.80% and -1.70%, respectively).

Dollar Index

The Dollar Index rose by about 0.6% last week. Still, it is up less than 0.30% in July after rising 2.9% in June. In recent days, it has held below the three-month high set on July 7, near 92.85. The MACD is slowly declining, while the Slow Stochastic has pulled back from overbought territory but is threatening to cross higher. The year’s high was set at the end of March near 93.45. A break of that March high would have bullish implications and it least signal at test on the 94.40-94.50 area. On the other hand, a move below 91.55 would suggest a high may be in place.

Euro

The euro fell to new three-month lows last week, slightly above $1.1770. The single currency has spent the last three sessions within the range set on July 13 (~$1.1770-$1.1875). Immediate resistance is seen in the $1.1840-$1.1850 area. Ahead of the ECB meeting on July 22, the risk is on the downside as the market prepares for a dovish forward guidance adjustment in light of its new symmetrical 2% inflation target. The MACD has not confirmed last week’s lows. The Slow Stochastic edged out of oversold territory but has moved sideways in the second half of last week. A convincing low does not appear to place, and the next important support area is seen closer to $1.17.

Japanese Yen

After matching a five-day high on July 14 (~JPY110.70), the dollar reversed lower, arguably with the drag of falling yields, and finished below the previous session’s low. The outside down day saw follow-through dollar selling the following day, but good bids were seen around JPY109.70. The greenback recovered a bit ahead of the week, as yields edged higher and settled slightly above JPY110.05.

Although the MACD and Slow Stochastic appear to be poised to turn higher, they haven’t yet. The correlation between US 10-year yield and oil prices over the past 30-day is near the highest since March 2019 (~0.52, rolling 30-day correlation of differences). A move above JPY110.85 could see the dollar rested the month and year high around JPY111.65. Below the JPY109.50 area, support is seen ahead of JPY109.00.

British Pound

Strong inflation and consumption figures spurred hawkish rhetoric from a couple of BOE officials and firmer short-term UK rates, but sterling still fell around 0.95% against the US dollar and lost about 0.35% against the euro. Indeed it posted a weekly close below $1.38 for the first time since April. Sterling closed poorly, and although it held above the recent lows in the $1.3730-$1.3740 area, it looks weak.

The cap near $1.39 looks stronger than support, and the 200-day moving average may beckon (~$1.3695). The Slow Stochastic has cycled to the middle of the range without a strong recovery in prices, and it looks to be poised to level out. The MACD moved gently off its lows but could turn down again.

Canadian Dollar

What a miserable two-week stretch for the Canadian dollar. It has fallen in eight of the ten sessions and has fallen by 2% over this run. The data has been firm, and the Bank of Canada did take another step toward slowing its bond purchases. The greenback covered the week’s range in two days. There were buyers for it on the pullback after the Bank of Canada’s announcement near CAD1.2425, and the following day it was flirting with the upper Bollinger Band (~CAD1.2610) and the 200-day moving average around (~CAD1.2625).

Above there, the CAD1.2700 marks the halfway point of the US dollar’s sell-off since last November’s election, but there appears to be little chart resistance ahead of the CAD1.2740-CAD1.2750 area. The MACD is stretched but continues to move higher. The Slow Stochastic has flatlined below last month’s high.

Australian Dollar

With a little more than a quarter of the population having received a single vaccine and a longer and tighter lockdown in parts of the country, the economic prospects have dimmed. They offer a stark contrast with New Zealand. The Australian dollar was sold to new lows for the year ahead of the weekend, as it slipped below $0.7400. We have recognized the risk of a move to $0.7380, which would complete the retracement (61.8%) of the rally since the US election last year. Below there may not be much support for another half of a cent. The MACD has is nearly a horizontal line in the trough, while the Slow Stochastic is moving sideways a little above the low set earlier this month.

Mexican Peso

The US dollar set the week’s range on July 13 (~MXN19.8150-MXN20.0820). It finished the week near the lower end of the range, but this represented only a small loss for the greenback (<0.15%). Still, it is the third decline in the past four weeks. The JP Morgan Emerging Market currency index eked out a minor gain last week (0.1%) to end a two-week decline. Although the peso is the only LATAM currency to rise so far here in July (0.4%), it was a poor performer last week in the region.

The Brazilian real came back into favor rising 2.8%, the Peruvian sol rose 1.6%, and the Colombian peso rose slightly more than 0.6%. The Chilean peso lost the most in the region (~1.25%) despite the central bank hiking rates and suggesting it may be the first of several. The momentum indicators are mixed. Broad sideways trading seems like the most likely near-term scenario. The MXN19.75 area offers support below MXN19.80.

Chinese Yuan

The yuan was virtually unchanged against the dollar last week, finishing slightly below CNY6.48. It leaves it off by about 0.33% here in July and up by nearly 0.75% year-to-date. Three-month implied volatility settled June a little above 5%. It began last week above 5% and finished at its lowest level since March 2020 (~3.93%).

The lower end of the near-term dollar range appears around CNY6.45, but it looks poised to test the upper-end that comes in around CNY6.49. The greenback has not traded above CNY6.50 for about three months. Although the firmness of June economic data shows the quarter ending on an upbeat, the PBOC does not appear to be in a hurry to ease policy further. The 10-year onshore yield fell to fell to 2.92% on July 13, its lowest in a year.

The low currency volatility and the non-correlation of the bond market to other major bond markets attract foreign asset managers. Year-to-date, the US 10-year yield has risen 40 bp, the German Bund by 22 bp, the British Gilt 43 bp, and the Chinese bond yield is off almost 20 bp.

This article was written by Marc Chandler, MarctoMarket.

The Dollar Reverses Lower: Is this the Real Thing?

The dollar’s rally into early July left the technical indicators stretched, and we note that near-term trend reversals recently have occurred around the end of the month or US jobs report.

Despite the first employment report that beat expectations in three months, US interest rates softened. In fact, the implied yield of the December 2022 Eurodollar futures contract fell four basis points. The contract traced out what appears to be a key reversal by making new lows before rallying and closing above the previous high (in price). The two-year note yield, which doubled in June, slipped lower for the fifth session in the past six. The 10-year yield fell every day last week for a cumulative decline of 10 to approach 1.40%, the lower end of where it has traded over the past four months.

The new week begins off slowly with the US holiday on Monday. Given that the individual forecasts of Federal Reserve officials were not discussed at last month’s FOMC meeting, and Chair Powell played them down, it ought not to be surprising if the minutes were not as hawkish as the dots. Still, while some “buy the rumor sell the fact” type of trading of the dollar was seen after the employment data, the market will want to see follow-through before becoming convinced that the month-long dollar rally is over.

Dollar Index

The Dollar Index rose to a new high since early April ahead of the jobs report, reaching almost 92.75. It sold off and closed near its lows, around 91.20. A potential key reversal was traced out. A break of 92.00 favors a near-term top being in place, and a move below 91.50 would be convincing. The momentum indicators are over-extended but are still pointing higher. As scar tissue shows, even with technical indicators seeming near extremes, prices can continue to rise, but the reversal pattern and weak close is the ideal set-up to mark the end of the month-long rally.

Euro

The common currency bounced off the push below $1.1810 after the employment data but did not take out the previous session’s high (~$1.1885). It snapped a four-day slide. A move above $1.19 would help stabilize the tone. The late June high near $1.1975 needs to be overcome to boost confidence that a meaningful low is in place. The momentum indicators are oversold territory, but if $1.1800 is given, there is little on the charts before $1.1700, which corresponds to the March low and the (38.2%) retracement of the rally since the pandemic low in March 2020 (~$1.0635).

Japanese Yen

The US dollar posted a bullish outside up day in the middle of last week, trading on both sides of the previous session’s range and closing above its high to move back above JPY111.00. However, ahead of the weekend, it posted a bearish outside down day. It made a marginal new high for the year, a tad above JPY111.65, where the upper Bollinger Band was found. The high from March 2020 was slightly higher at JPY111.70. The high from last year was set in February by JPY112.25. The MACD does not appear stretched, but the Slow Stochastic is more so. Both look poised to turn lower. The yen is often a range-trading currency, and the lower end of the range may be represented by the trendline off the Q2 lows, which is near JPY110.00 now.

British Pound

Sterling fell to its lowest level since mid-April (~$1.3735) before the US jobs data. It recovered to almost $1.3850 to record a key upside reversal. It has fallen in four of the past five weeks, and as a consequence, the momentum indicators are stretched. The MACD is poised to turn higher next week. Next week, follow-through cable buying could turn the Slow Stochastic, which has not confirmed the drop to the lowest level since mid-April. The $1.3870-$1.3900 offers the next hurdle. For its part, the euro has been struggling to sustain a foothold above GBP0.8500 and now looks set to pull back and return to the lower end of its range, closer to GBP0.8500.

Canadian Dollar

The Canadian dollar was the most impressive of the majors at the end of last week. After making a marginal new high near CAD1.2450, before the US jobs report, the greenback reversed lower, taking out the previous three sessions’ lows to record key reversal. Indeed, it surpassed the (61.8%) retracement objective of the bounce since the June 23 low near CAD1.2250. The nearly 1% US dollar decline (to about CAD1.2310) ahead of the weekend was the largest in a year. Initial support will likely be found in the CAD1.2300. A break of it could signal a move back toward CAD1.2200. The MACD has curling over, but the Slow Stochastic is, well, slower.

Australian Dollar

The Aussie recovered smartly after falling to a new low for the year (~0.7445) ahead of the weekend and rallied smartly through the high of the previous two sessions to rise to almost $0.7535. It, too, posted a key upside reversal. It also snapped a four-day drop, which followed a five-day rally the previous week. The MACD is headed lower though it is already at the lowest level since April 2020. The Slow Stochastic is headed lower, but follow-through gains next week could see it turn higher, which would leave a bullish divergence in its wake, has not confirmed the new low in price. The $0.7550-$0.7575 band offers nearby resistance and houses the 200-day moving average. However, it may require a move above $0.7600 to boost confidence that a durable low is in place.

Mexican Peso

The dollar peaked against the peso the day before the US employment report around MXN20.08, nearly reaching the (38.2%) retracement of the unexpected Banxico rate hike-induced slide (MXN20.1040). The pre-weekend sell-off saw it briefly trade below MXN19.75 to record a new low for the week. The momentum indicators are not particularly helpful now, but the dollar is likely to remain under pressure. Initial support is likely around MXN19.70 and then the five-month low set on June 9 by MXN19.60. The market has 50 bp of tightening priced into Q3.

Chinese Yuan

The yuan has been recently moving in line with emerging market currencies against the dollar. Consider last week, the yuan fell by about 0.25% and declined by around 1.3% in the month of June. The JP Morgan Emerging Markets Currency Index lost 0.5% last week and 1.2% in June. Still, the dollar rose for the fifth consecutive week against the yuan. Yet, last week’s high near CNY6.4850 was below the previous week’s high (~CNY6.4910)), and the greenback’s pullback after the employment data suggests a stronger yuan to start the new week. Initially, the dollar could ease toward CNY6.45 and maybe CNY6.43 in the coming days.

This article was written by Marc Chandler, MarctoMarket.

Dollar’s Upside Correction Stalls after 3-4 Weeks of Gains

The combination of a seemingly more hawkish Federal Reserve and position squaring around the expiration of futures and options had pushed the greenback dramatically higher and stretched the technical conditions. It had traded three standard deviations away from its 20-day moving average, for example, against several major currencies.

The dollar’s pullback should not be surprising, though several large banks appeared to throw in the towel on their bearish narratives. Nevertheless, our underlying concern remains intact that given the large trade and budget deficits, the US must offer higher interest rates or accept a weaker dollar, and more likely, a combination of both. Moreover, we recognize that the US economy may be reaching its peak pace of expansion here in Q2 and that price pressures should also begin easing.

At the press conference after the FOMC meeting, Chair Powell cited two concrete examples of prices. The first was lumber, which he noted, rallied sharply but had begun coming off. The price of lumber has nearly been halved since peaking in early May. The second example was used vehicle prices. They rose by 10% in April and more than 7% in May and accounted for around a third of the jump in CPI. Early industry reports suggest the wholesale market may have peaked, and retail should follow with a lag.

Dollar Index

After rallying to 92.40 in the aftermath of the FOMC meeting, the Dollar Index fell to almost 91.50, where the 200-day moving average intersects, in the middle of last week. The subsequent upticks stalled in front of 92.00. It finished the week near its lows. Additional near-term losses are likely. There is scope to test the 91.00-91.15 area. The Slow Stochastic has rolled over from overbought territory, and the MACD looks poised to do the same in the coming sessions. A break of the 90.60 area would deliver a blow to the apparently newfound bullish sentiment.

Euro

The euro rose in four of last week’s five sessions for a net gain of about 1%. Although it closed near the week’s highs, the market shied away from testing the $1.2000 area, where the 200-day moving average and (38.2%) of June’s decline is found. A move above there would likely signal a move into the $1.2050-$1.2100 band. The euro settled around $1.2125 on the day before the FOMC meeting concluded (June 16). The momentum indicators are turning up. A soft preliminary EMU June CPI figure followed by a firm US jobs report (estimates appear to be gravitating around 700k increase in nonfarm payrolls) may off a macro challenge to the constructive technical outlook for the single currency.

Japanese Yen

The dollar made a new high for the year against the yen, slightly above JPY111.10. However, it failed to settle above JPY111.00 and spent the entire pre-weekend session below it. Over the past 30 and 60 days, the correlation between the exchange rate and the US 10-year yield is stronger than the correlation with the 2-year yield. The US 10-year Treasury yield is struggling to rise much above 1.50%. Some observers still attribute the lowly yield to the Fed’s purchases but recall that the yield poked above 1.77% at the end of Q1. Since late April, the dollar has been trending higher, and that trend line begins next week near JPY109.75.

British Pound

Although all the major currencies but the yen rose against the dollar last week, sterling was an underperformer, rising a still-impressive 0.75%. In doing so, sterling snapped a three-week 2.7% decline. After finding support slightly below $1.38 at the start of the week, it ran into sellers around $1.40 in the middle of her week and subsequently drifted back to $1.3900.

The Bank of England may have sounded dovish, but the implied yield of the June 2022 short-sterling futures contract (three-month time deposit, like Eurodollar futures) eased by two basis points (~32.5 bp), still above the month’s low (26 bp). This suggests the market is still pricing in a hike over the next year. The Slow Stochastic has turned higher, but the MACD is lagging. A move above $1.4020 could spur a test on the $1.4100-$1.4150 area. On the other hand, a break of $1.3870 signals that the bears have the upper hand.

Canadian Dollar

The US dollar extended its recovery after failing to take out CAD1.20 at the start of the month, reaching almost CAD1.2490 at the start of it the week. It reversed lower and fell to about CAD1.2250 in the middle of the week before consolidating. It still looks vulnerable. A break of the CAD1.2250 area, which corresponds to the (50%) retracement of the June gains, signals a move toward CAD1.2200, the next retracement (61.8%), and the 20-day moving average. The MACD and Slow Stochastic have turned down from overbought levels that followed the four-week 3.2% greenback recovery.

Australian Dollar

The Australian dollar made new highs for the week ahead of the weekend, above $0.7600. The Aussie approached the (50%) retracement objective of the sell-off that began with the key reversal on June 11, when the high for the month was set (~$0.7775), selling off and settling below the previous session’s low. The momentum indicators are turning up, and further gains are likely ahead. A move through $0.7625 could see $0.7660-$0.7700.

A move now below the 200-day moving average (~$0.7560) would be disappointing. The central bank meets on July 14 and will likely adjust policy. The most likely scenario is to cease targeting the three-year yield at its cash target level. It may also reduce the size of its next round of QE.

Mexican Peso

The dollar soared nearly four percent against the Mexican peso in the week of the FOMC meeting. The greenback stalled at the start of the past week and was offered even before Mexico’s central bank surprised the world by raising rates. The dollar slumped by 1.7% on the day Banxico moved the most since last September. In fact, the greenback fell every session last week for the first time since April. The market is pricing in further aggressive tightening, encouraged by the bi-weekly CPI poked above 6%. The momentum indicators are pointing lower.

The five-month dollar low set earlier this month was a little below MXN19.60, and the low for the year was set in January near MXN20.55. A four-year trendline comes in near MXN19.04 at the end of next week, rising by about 0.01 pesos a week. We note that the momentum indicators are have also turned up for the JP Morgan Emerging Market Currency Index. The index bounced smartly off the 200-day moving average last week. It also rose in every session last week.

Chinese Yuan

The adjustment that the PBOC signaled in early June by lifting the reserve requirement for foreign currency forwards appears to have run its course. The dollar poked briefly above CNY6.49. We had anticipated a move into the CNY6.47-CNY6.4950 area. However, the way the PBOC is setting the dollar’s reference rate seemed to suggest that officials were content with the pullback in the yuan. The dollar slipped fell for three consecutive sessions against the yuan, and the loss before the weekend of slightly less than 0.25%, was the longest losing streak and the largest loss of the month.

If the CNY6.50 area is the upper end of a possible new range for the dollar, where is the lower end? That still has to be determined, but we suspect it may be around CNY6.4200. Although the yuan is a closely managed currency, it is notable that the Slow Stochastic and MACD are poised to turn lower for the dollar.

This article was written by Marc Chandler, MarctoMarket.

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).

Europe

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.

America

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.

Europe

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.

America

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.

Euro

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.

Europe

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.

America

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

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.

Europe

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.

America

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.

Euro

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.

Europe

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.

America

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.

Europe

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.

America

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.