China and Hong Kong Pressures are Having Limited Knock-on Effects

The spill-over into today’s activity has been minor. The heightened tensions weighed on China and Hong Kong markets, but Japan, South Korea, Taiwan, and Indian equity markets rose.

Europe’s Dow Jones Stoxx 600 is higher for the third consecutive session, the longest streak this month. US shares are also trading higher, and the S&P 500 looks poised to rechallenge yesterday’s high, leaving yesterday’s opening gap unfilled. Benchmark bond yields are a little lower, and the US 10-year is hovering around 68 bp.

The greenback is bid against most of the major and emerging market currencies. Among the majors, the yen, the Canadian dollar, and New Zealand dollar are steady to higher, while the European complex, led by the Swiss franc, is nursing small losses. Turkey, Hungary, and South Africa led the losers among emerging market currencies.

The Chinese yuan (onshore and offshore) fell to its lowest level of the year. Gold drifted to two-week lows a little above $1700, while July WTI is consolidating in $33.50-$34.30 range as Russia seems to be balking at extending the maximum output cuts beyond next month.

Asia Pacific

President Trump is threatening “very interesting” action against China by the end of the week. Apparently, under consideration are a new set of sanctions against officials, businesses, and financial firms over the effort to crack down on dissent in Hong Kong.

There are actions the US could take, including limiting transactions and freezing assets. The US could suspend Hong Kong’s special trade privileges, but this seems potentially too disruptive for US companies and would punish Hong Kong more than China. Meanwhile, demonstrations and conflict with police have escalated in Hong Kong.

Pressure on the Hong Kong dollar is evident in the forward market. The 12-month forward points increased by almost 60 to 670. A week ago, they stood at 256. The 3-month forward points increased by almost 20 today to about 167. A week ago, they stood at 75.

Separately, the PBOC set the dollar’s reference rate at CNY7.1092, while the bank models implied CNY7.1144. However, the dollar rose to almost CNY7.1630 to approach the CNY7.1850 peak last September. The dollar rose to almost CNH7.1770 against the offshore yuan. It peaked last September near CNH7.1965. Chinese officials do not appear to cause the yuan’s weakness but are not resisting it forcefully.

Separately, China reported a 4.3% decline in April industrial profits, almost a third of the decline that the median forecasts in the Bloomberg survey anticipated and what seems like an improvement after the nearly 35% decline in Q1. However, the performance of the state-owned enterprises suggests a more complicated picture. Profits in this sector fell 46% in the January to April period, a little worse than the 45.5% decline reported in Q1.

Nevertheless, with the latest reserve requirement cuts for large banks, and additional efforts for small and medium businesses, and signs of more fiscal support coming from the National People’s Congress, China is stepping up economic and financial efforts. At the same time, Japan’s cabinet has approved a JPY117 trillion supplemental budget with JPY72.7 trillion of fiscal outlays. South Korea is expected to deliver another 25 bp rate cut tomorrow (bringing the seven-day repo rate to 50 bp).

For the sixth consecutive session, the dollar stuck on the JPY107-handle. It has not traded below JPY107.30 since May 18. It neared JPY108 yesterday but backed off. Today there are $1.7 bln in options in the JPY107.80-JPY107.90 area that expire. If that is not a sufficient cap, there is another billion-dollar option at JPY108.15 that will also be cut. The Australian dollar is in a narrow range below yesterday’s high near $0.6675. There is an option for nearly A$635 mln at $0.6650 that expires today.


The European Commission appears to be combining the German-French proposal with the other proposal by Austria, Sweden, Denmark, and the Netherlands to advance a 750 bln euro fiscal support effort. It would include 500 bln euro in grants and 250 bln euros in loans.

It seems a popular meme to see an EU bond as a step toward the mutualization of debt and a fiscal union. This seems exaggerated. There are already common obligations, such as bonds issued by the European Stabilization Mechanism and the European Investment Bank. The EU itself has issued bonds in the past.

ECB President Lagarde is laying the foundation for an increase in the central bank’s Pandemic Emergency Purchase Program next week. She cautioned today that the more mild scenario that had been considered was out of date and that the more likely scenario is the one that anticipates an 8-12% contraction this year.

The internal debate seems to be over relaxing more of the self-imposed limits. The capital key has already been diluted for PEPP, and the issue limit of 1/3 has also been waved. There does not seem to be much interest in taking rates deeper into negative territory.

There has been much discussion of the Bank of England adopting negative rates. We have understood officials to be keeping that option on the table, which may help lower UK rates, such as last week’s 3-year Gilt auction that resulted in a negative yield.

However, it does not seem to be imminent. More likely, the Bank of England will increase its bond purchases when it meets on June 18. The BOE’s chief economist, Haldane’s comments, were consistent with the idea that other policy options will be explored before negative rates.

The euro initially slipped to almost $1.0930 after stalling in front of $1.10 yesterday. However, with a running start in the European morning, the euro punched above $1.10 and above last week’s high to poke above the 200-day moving average (~$1.1015) for the first time since the end of March.

The $1.1050 area may hold some offers, but there is little chart-based resistance ahead of $1.1160-$1.1200. Sterling, on the other hand, is firm but through late in the London morning, has been unable to surpass yesterday’s high near $1.2365. The next target above there is around $1.2425.


The US reports the May Richmond Fed survey and the Fed’s Beige Book for ahead of next month’s FOMC meeting. Nearly every survey (diffusion indices and sentiment surveys) have shown some moderation in the weakness since in April. The improvement has also mostly been better than expected. And yesterday’s it was reported that April new home sales, which were forecast to have imploded by nearly a quarter, eked out a small (0.6%) gain.

Yes, there is little doubt that the world’s biggest economy has suffered a large hit in this quarter, but the data suggests ideas of a Q3 recovered may not be misplaced. Other data, including traffic patterns, are also pointing to a slight pick up in activity as the lockdowns ease. Canada and Mexico’s calendars are light today. Banxico issues its inflation report today, and coupled with the strength of the peso may spur speculation of another 50 bp rate cut at its next meeting.

Although Fed officials have played down the likelihood of negative rate policy in the US and the fed funds futures curve is not implying negative rates, the central bank may not be done. There is more virtual ink being devoted to the possibility of yield curve control, where the Fed would not target a certain amount of Treasuries to be bought, as it is now ($5 bln a day down from $75 bln a day at the peak) but to target another rate.

The Bank of Japan targets the 10-year yield, and the Reserve Bank of Australia targets the three-year yield. If the Fed adopts such a tool, it would more likely target a short or intermediate coupon such as something between a two- and five-year maturity. It would help steepen the curve and send a signal that rates will remain low for some time.

The Canadian dollar joined the Australian dollar in breaking out of its recent range. The US dollar fell below the lower end of its two-month range against the Canadian dollar near CAD1.3850 yesterday. The losses are being extended today. The break of CAD1.38 is important from a technical perspective as it coincided with the halfway mark of this year’s range.

The next retracement objective is near CAD1.3600. More immediately, a bid in the European morning was found near CAD1.3730. The old support near CAD1.38 now offers resistance. The greenback is also pushing below the halfway mark of this year’s range against the Mexican peso (~MXN22.15). A break of MXN22 would set the sights on the MXN21.00-MXN21.10 area. Mexico is reporting a record increase in virus cases and related fatalities. The peso’s strength largely reflects the broader risk-on mood.

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

Fear is Still on Holiday

Equity markets have rebounded strongly. Nearly all the equity markets in the Asia Pacific region rose (India was a laggard) led by an almost 3% rally in Australia, which was seen as particularly vulnerable to the Sino-American fissure.

The Nikkei is approaching its 200-day moving average as it reached the best level since March 5. Europe’s Dow Jones Stoxx 600 is up around 1% after a 1.5% gain yesterday. It is at its best level since March 10.

The S&P 500 is set to gap sharply higher, above 3000, and its 200-day moving average for the first time since March 5. Benchmark 10-year bond yields are mostly firmer (US ~70 bp), but peripheral yields in Europe are softer, which is also consistent with the risk-on mood. Germany sold a two-year bond today with a yield of minus 66 bp and saw the strongest bid-cover in 13 years.

The dollar is heavy. Among the majors, the Antipodean and Norwegian krone lead the way. The yen is least favored and is struggling to gain in the softer dollar environment. Emerging market currencies are higher, led by more than 1% gains by the Mexican peso, South African rand, and Polish zloty. Gold is consolidating at softer levels (~$1725-$1735), while oil prices continue to recover. July WTI is probing the recent highs around $34 a barrel.

Asia Pacific

The risk-on mood has not been sparked by any sign of a thaw in the US-Chinese tensions. Indeed, the PBOC set the dollar’s reference rate against the yuan a little higher than the bank models suggested (CNY7.1293 vs. CNY7.1277). It was the second successive fix that was the highest since 2008. Still, the yuan snapped a three-day decline and rose less than 0.1%.

Legislation that makes it easier to crack down on dissent pressured Hong Kong, where the stock market fell more than 5.5% before the weekend, and forward points for the Hong Kong dollar exploded. The Hang Seng stabilized yesterday and gained more than 1.8% today. The 3-month and 12-month forward points are more than double what they were a week ago, but have eased from the extreme readings before the weekend. The situation is far from resolved despite the market moves.

The focus in Japan is on the government’s second supplementary budget for nearly JPY1 trillion. It could be approved by the Cabinet as early as tomorrow and would nearly double the government’s efforts. Japan is lifting the national state of emergency.

The dollar is firm against the yen but held just short of JPY108.00 (last week’s high was ~JPY108.10). There is an option for a little more than $400 mln struck at JPY107.90 that expires today. The market looks poised to challenge the highs in North America today. Note that the 200-day moving average is found near JPY108.35, and the greenback has not traded above it since mid-April.

The Australian dollar is punching above $0.6600 and is at its best level since March 9. Its 200-day moving average is found near $0.6660. The dollar peaked against the Chinese yuan at the end of last week near CNY7.1437. It rose against the offshore yuan on the same day near CNH7.1646, just below the high set on March 19.


The EU responded to Germany’s proposal to take at least a 20% equity stake (~9 bln euros) in Lufthansa by requiring it to give up some slots at airports in Frankfurt and Munich. Meanwhile, the larger focus is on the EC’s proposal for a recovery plan now that the German-French proposal has been countered by Austria, Denmark, Sweden, and the Netherlands.

However, the basis for a compromise does appear to exist in the form of some combination of grants, loans, and guarantees and in terms of access. With the European Stabilization Mechanism and the European Investment Bank issuing bonds for which there is a collective responsibility, we are not convinced that an EU bond is a step toward mutualization of existing debt or a fiscal union. In fact, such claims do little more than antagonize the opposition.

The ECB’s Pandemic Emergency Purchase Program (PEPP) has spent a little more than a quarter of its 750 bln euro facility in the first two months. Hints from some officials suggest that this could be expanded as early as next week when the ECB meets. At the current pace, PEPP will be out of funds toward the end of Q3 or early Q4. Talk in the market is that a 250-500 bln euro expansion is possible.

The political controversy of UK’s Cummings violation of the lockdown seems to have little impact for investors. Sterling, the worst performing of the major currencies this month, is bouncing back smartly today, and while the UK stock market was closed yesterday, it is playing a little catch-up today. The benchmark 10-year Gilt yield is a few basis points higher, but faring better than German Bunds and French bonds (where the 10-year yield is now back into positive territory, albeit slightly).

The euro has bounced a full cent from yesterday’s low near $1.0875. The market has its sights on last week’s high just shy of $1.1010 and the 200-day moving average a little above there. The euro has not traded above its 200-day moving average since the end of March. Above there, the $1.1065 area corresponds to about the middle of this year’s range. Sterling is near its best level in a couple of weeks.

After finding support near $1.2160 in the past two sessions, it bounced to about $1.2325 today to toy with the 20-day moving average (~$1.2315). The short-covering rally has stretched the intraday technical readings, and it may be difficult for the North American session to extend the gains very much before some consolidation.


The US reports some April data (Chicago Fed’s National Economic Activity Index) and new home sales. The reports typically are not market-movers even in the best of times. Moreover, it is fully taken on board that the economy was still imploding. May data is more interesting. The Dallas Fed’s manufacturing survey and the Conference Board’s consumer confidence surveys will attract more attention and are expected to be consistent with other survey data suggesting the pace of decline is moderating. This is thought to be setting the stage for a recovery in H2.

Canada’s economic diary is light today, and Mexico is expected to confirm that Q1 GDP contracted by 1.6%. Yesterday Mexico surprised by with a nearly $3.1 bln trade April deficit. The median forecast in the Bloomberg survey was for a $2 bln trade surplus. Apparently, none of the economists surveyed expected a deficit. Exports fell by nearly 41%, and imports tumbled by 30.5%. Many economists are revising forecast for Mexico’s GDP lower toward a double-digit contraction this year.

Nevertheless, the peso is flying. It is the strongest currency here in May. The 1.75% gain today brings the month’s advance to a dramatic 9%+ gain. The US dollar is near MXN22.10, giving back about half of this year’s appreciation. A break of the MXN22.00 area would target the MXN21.30 area.

The intraday momentum indicators are stretched. The US dollar is heavy against the Canadian dollar as well. It is approaching the lower end of its two-month trading range near CAD1.3850. The next important chart point is around CAD1.3800. Here too, the greenback’s slide in Asia and Europe is leaving intraday technicals indicators stretched as North American dealers resume their posts.

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

Markets Pull Back after Flirting with Breakouts

Perhaps it is a bit of “buy the rumor sell the fact” type of activity on the back of upticks in the preliminary PMI reading and hesitancy about pushing for what appeared to be breakouts. The MSCI Asia Pacific Index snapped a four-day advance, although India and Taiwanese shares were bought. Europe has been chopping back and forth since surging 4%+ on Monday. It is off almost 0.65% in late morning turnover in Europe.

US shares are heavy, and the early call sees the S&P 500 giving back a little more than half of yesterday’s nearly 1.7% gain. Benchmark yields are mixed, and the US 10-year is in its well-worn range around 66 bp. The dollar is higher against all the majors, while the emerging market currencies are mixed. South Africa and Turkey, which are expected to deliver 50 bp rate cuts, are seeing their currencies trade with a heavier bias.

Gold is weaker amid some profit-taking after unable to close above $1750 for the past four sessions. Support is seen near $1725. Meanwhile, July WTI is extending its rally for the sixth consecutive session as it pushes above $34 a barrel. It finished last week near $29.50.

Asia Pacific

The Japanese and Australian preliminary PMIs showed a nascent recovery in services while manufacturing remained under pressure. And this seemed to also be picked up by weakness in the latest Japanese and South Korean export figures.

First, the PMIs. In Japan, manufacturing slipped to 38.4 from 41.9, while services rose to 25.3 form 21.5. This translated into a 27.4 composite from 25.8. In Australia, the manufacturing PMI eased to 42.8 from 44.1. Services rose to 25.5 from 19.5. The composite rose to 26.4 from 21.7.

Let’s look at the trade figures next. April exports from Japan fell 21.9% year-over-year. This was in line with expectations after an 11.7% decline in March. Imports fell 7%, which was shallower than expected after a 5% decline in March. Japan recorded a JPY930 bln deficit. It is the fifth deficit in the past six months.

South Korea’s trade figures have begun improving. In the first 20 days of May, exports fell 20.3%, moderating from a 24.3% decline in April. Exports of semiconductor chips from 13.4%, while autos were off 58.6%, mobile devices fell 11.2%, and oil products were down almost 69%. In terms of destinations, exports to the US were off 27.9% and 18.4% to the EU and down 22.4% to Japan. Exports to China were off only 1.7% from a year ago.

This month’s up trendline for the dollar is seen near JPY107.35 today. It has not been below JPY107.50 today. On the upside, although frayed earlier this week, the JPY108 area still offers resistance and the 200-day moving average is near JPY108.30. The dollar has not been above JPY107.85 today, and there is a roughly $465 mln option at JPY107.69 that expires today.

The Australian dollar began the week near $0.6400 and was probing $0.6600 yesterday, the highest since early March. It found initial support today around $0.6550, and there is additional chart support by $0.6525. The PBOC set the dollar’s reference rate a little lower than the bank models suggested, but the greenback edged higher. It continues to trade in a narrow range around CNY7.10, which is the upper end of the broader two-month trading range.


A similar pattern to Australia and Japan was seen in the preliminary European PMI: namely a better showing a stronger pick up in services than manufacturing. German manufacturing PMI rose to 36.8 from 34.5, while the service PMI rose to 31.4 from 16.2. The composite was lifted to 31.4 from 17.4. In France, manufacturing rose to 40.3 from 32.5, while the service PMI rose to 29.4 from 10.2. These translate into a 30.5 composite reading compared with 11.1 in April. For the eurozone as a whole, Markit estimates the manufacturing component rose to 39.5 from 33.4, and the services PMI rose to 28.7 from 12.0. The composite sits at 30, up from 13.6.

The UK’s preliminary figures were also consistent with this broad pattern. Manufacturing PMI rose to 40.6 from 32.6, while the services PMI increased to 27.8 from 13.4. The composite is at 28.9 after a 13.8 reading in April.

The reports lend credence to the idea that worst for the regional economy is likely passed. To be clear, a sub-50 reading on the PMI shows contractions continue, but the turning of the “second derivative” is the first sign of the bottom. Moreover, many areas remained shut down in whole or part when the surveys were conducted between May 12 and May 20. This seems to set the stage for stronger readings in June.

After a couple of Bank of England members explicitly said that negative interest rates were among the policies being considered, the new Governor seemed to soften his stance. Bailey acknowledged his position had modified and that there was no need to rule out anything. Shortly before that, the UK auctioned its first note that had a negative yield.

It sold GBP3.75 bln of a three-year Gilt with an implied yield of -0.003%. The auction was oversubscribed (2.15x) but by the lowest amount in two months. The Bank of England meets again on June 18. The odds still favor an increase in asset purchases before negative rates come into play. Neither the short-sterling futures strip or the rest of the yield curve (outside the 2-3 year Gilt) are implying negative rates. Sterling has stabilized after falling by about 4.5% against the dollar in the month through the start of the week.

Banks took about 850 mln euros from the ECB’s first Pandemic Emergency Long-Term Refinance Operation. These loans were for minus 25 bp. It was disappointingly light and will likely fan speculation of easier terms perhaps as early as the June 4 ECB meeting. In terms of these long-term loans, the one to watch is the June 18 offering, which will be the first that could be at a minus 100 bp yield if specific lending criteria are met. Moreover, other such loans will be rolled into this more attractive option. It could be a trillion euro.

The euro was stopped 1/100 of a penny shy of the $1.10 level yesterday and is consolidating lower today. It spent little time above $1.0980 in Asia and eased to about $1.0950. Support is seen in the $1.0920-$1.0940 band. A break below $1.09 would disappoint the bulls.

Sterling tested a three-day low near $1.2185 today, which is about the middle of this week’s range. The high for the week was set on Tuesday, 4/100 of a cent below $1.23. The price action of both the euro and sterling is a timely reminder of the psychological significance of round numbers, and stops should be placed accordingly. Sterling rebounded toward $1.2240 in the European morning but appears set to run out of steam near there.


The US has stepped up its pressure on China. The rhetoric over the virus, Taiwan, the kidnapping of Panchen Lama (1995), and China’s military and economic policies has escalated in recent days. But it is not all about rhetoric. The US Senate passed a bipartisan bill yesterday that requires Chinese companies listed in the US to affirm that they are not under the control of the government.

This could impact large Chinese companies, like Alibaba and Baidu, both of whom sold off late yesterday in response to the bill. A separate bill that authorizes the President to levy sanctions on individuals for the mistreat of minorities in China is also progressing through the legislative process. Soon, the US Treasury report on the currency market is expected, and more importantly, the US State Department has to affirm that Hong Kong remains autonomous, or the SAR will lose its special trade privileges with the US.

The US reports the weekly jobless claims, which are expected to have remained elevated at over 2 mln. The Philadelphia Fed survey for May (expected rise to around -40 from -56.6) and the preliminary PMI (both manufacturing and services are expected to increase and lift the composite from the 27.0 reading in April) are the highlights. The April index of Leading Economic Indicators and existing home sales are overshadowed by May data. Canada and Mexico have light calendars today, but both report March retail sales tomorrow.

The US sold 20-year bonds for the first time since 1986 yesterday. It paid 1.22% to borrow $20 bln. The bid-cover was 2.53, and indirect bidders, which include foreign central banks and some asset managers, took almost 61%. There is not much available in that duration area, and what there is the Federal Reserve appears to have bought nearly to their 70% individual issue cap.

Separately, the FOMC minutes from last month’s meeting were published, and little new ground was unearthed. There seemed to be an agreement that if things got worse, apparently from their base case for a recovery in H2, more fiscal stimulus was needed, and there was more than the Fed could do. Yield curve control remains a possibility. No official discussion of negative interest rates was recorded. The possibility of tweaking interest on reserves, which some, including myself, played up, seems less likely now. The Fed reported that there was little concern that the fed funds rate would fall below target.

The US dollar is trading within yesterday’s range against the Canadian dollar, which was inside Tuesday’s range. The CAD1.3900-CAD1.3950 range so far today is likely to be extended, and the intraday technical readings suggest higher. The recent price action reinforced the lower end of the six-week range near CAD1.3850. A move above CAD1.4000-CAD1.4020 is needed to lift the greenback’s tone. The US dollar finished last week a little above CAD1.4100.

The greenback fell 1.8% against the Mexican peso yesterday, the third consecutive decline, and the most in roughly three weeks. It found support just above MXN23.00, the dollar’s lowest level since late March. A push above MXN23.30 now would suggest a near-term low is in place with the next resistance near MXN23.50.

This article was written by Marc Chandler, MarctoMarket.

Optimism Burns Eternal

There was strong follow-through in the Asia Pacific region, where most markets advanced by more than 1% today. However, the bloom came off the rose, so to speak, in Europe. After a higher opening, markets reversed lower, and the Dow Jones Stoxx 600 is off about 0.75% in late morning turnover. All the major sectors are lower, led by utilities and industrials.

The US 10-year yield closed yesterday at 72 bp, its highest in a month, and sent Asia Pacific yields higher. However, the German-French proposal and ideas that the ECB will likely increase its bond purchases saw peripheral yields fall more than core rates.

The US 10-year yield is also a little softer. The risk appetites were expressed as a weaker US dollar, yen, and Swiss franc, while high-beta dollar-bloc currencies and Scandis jumped, and this has continued today. The JP Morgan Emerging Market Currency Index rose by nearly 1% and is up another 0.2% today and is at new highs for the month.

Gold reached $1765.4 yesterday before stabilizing, and today it is consolidating around $1726-$1740. Oil is also consolidating after yesterday’s surge. The July WTI contract reached $33 yesterday. It bottomed in late April a little above $17. It is trading today between $31 and $33 a barrel.

Asia Pacific

China is adding pressure on Australia. Even though Beijing has not formally linked its actions against Australian barley and beef as retaliation for its calls for an investigation into Covid-19 and the wet markets, there is little doubt about the subtext.

China is threatening to widen the trade dispute, and reports suggest it could extend to other products, such as wine, seafood, and oatmeal. On the other hand, Australia is the largest producer of iron ore, and Chinese demand has lifted prices to eight-month highs. Brazil, the second-largest producer, is being hobbled by a surge in virus cases and is now the world’s third-largest hotspot. Still, China’s apparent willingness to disrupt trade, as it has with Canada over Huawei, is unsettling.

The Bank of Japan’s next scheduled meeting is on June 18, but officials signaled an emergency meeting at the end of this week. The ostensible purpose is not to adjust monetary policy itself. Instead, it is expected to unveil a new program to support small businesses. The central bank left its bond-program unchanged today and stepping into the market to buy JPY1.2 bln of ETFs and REITs.

The dollar has been confined to about a 30-pip range against the yen below JPY107.60. For the sixth session, it has been limited to the range set on May 11 (~JPY106.40-JPY107.75). There are options for $1.5 bln that expire today between JPY107.65 and JPY107.75 and a $640 mln option at JPY107.35 that will also be cut today.

Just when the Australian dollar looked to be (finally) rolling over, with its first close below the 20-day moving average in a month before the weekend, it jumped up yesterday, and the follow-through buying today is testing recent highs. The late April high was set near $0.6570, and today’s high is just below. The intraday technicals suggest consolidation is likely. The PBOC set the dollar’s reference rate a little higher than the bank models suggested.

The dollar remained above CNY7.10 for the second session, which had been seen as the upper end of the acceptable range. We had thought that ahead of the National’s People Congress later this week, officials would have wanted a more stable yuan exchange rate. Meanwhile, tomorrow, the Loan Prime Rate is set, and more than 75% in a Reuters poll expect the one and five-year rate to be unchanged at 3.85% and 4.65%, respectively.


It has been up to the individual European countries to respond to the virus. The federal or joint effort has been limited largely to the ECB. However, that will change in the coming weeks as the EU prepares to respond. Yet, that is a point in itself, the level is not the monetary union but the larger group of 27. The vehicle is the EU’s budget seven-year financial framework that has been a bone of contention even before the pandemic.

Germany and France jointly proposed a 500 bln joint borrowing as part of the EU budget that will be used to help spur economic recovery. Germany and France envisioned grants, while several countries want loans. The funds would be raised by the EU and available based on need, while the repayment will be according to the share of the EU budget (tied to the size of an economy).

The ultimate EU effort will likely be larger than these funds, which still require agreement among the members. Last month the EC suggested a 2 trillion-euro packaged that included 320 bln euro borrowing. Its proposal included grants, loans, and guarantees. Investors liked what they saw, and Italian bonds rallied strongly.

The 10-year yield fell 19 bp, the most since late March, and the premium over German narrowed to below 215 bp for the first time in a month. The French 10-year yield rose a couple of basis points, less than the (~six basis-point) increase in the German Bund yield, despite Fitch’s cut in the outlook to negative before the weekend.

The UK reported jobless claims surged by 856.5k in April, while the claimant count rate rose to 5.8% from 3.5% in March and 3.4% at the end of 2019. Those working but experiencing an income loss qualify. The average weekly earnings (2.4% vs. 2.8%) and unemployment rate (3.9% vs. 4.0%) are March readings. Separately, while in trade talks with the EU, the US, and Japan, the UK unveiled a new post-Brexit tariff schedule. Some items like dishwashers and freezers will enter the UK duty-free next year. A 10% tariff will remain on cars, and duties will still be levied on agriculture goods.

The German ZEW survey was mixed. The current assessment deteriorated to a new low of -93.5 (from -91.5). However, the expectations component soared to 51.0 from 28.2. This is its highest level in five years. The IFO survey and the PMI, both due later this week, are seen as more important soft economic reports.

The euro is extending yesterday’s rally, which was the largest in a month, and the first push above $1.09 since May 4. The high from May 1, when Europe was on holiday, was near $1.1020, and that area is the next target, and the 200-day moving average is found there as well. The euro has not traded above it since late March. The intraday technical readings, however, are stretched, and initial support is seen near $1.0920. Sterling recovered smartly yesterday.

After falling to almost $1.2075, its lowest level since late March, sterling rebounded to nearly $1.2230 yesterday and reached almost $1.2270 today. The gain is notable too because another MPC member (Tenreyro) weighed on on the negative interest rate debate and claimed it was a powerful transmission mechanism with a positive impact on some EU countries. An option for nearly GBP430 mln is set at $1.23 rolls off today. As is the case with the euro, sterling’s gains through the European morning have stretched the intraday technical readings, cautioning against chasing it immediately higher.


An experimental vaccine by Moderno, the US biotech firm, showed some promise in a small first study to spur an immune system response to the novel coronavirus. The innovation here appears to be stimulating one’s own body to generate the spike protein that, like Covid-19, which ideally triggers the creation of antibodies. This helped lift sentiment. On the other hand, President Trump has given the World Health Organization 30-day for “major substantive improvements,” or America’s temporary funding freeze will become permanent.

NASDAQ reportedly will tighten its rules for IPOs that will make it more difficult for small Chinese companies to list. The listing of many Chinese companies on US exchanges has come under greater scrutiny recently. While the need for reform is clear, in the current setting, it is seen as part of the larger US campaign against China.

The US reports April housing starts and permits. At issue is the magnitude of the decline, and expectations are for a drop of 20-25%. It is the May survey data that, like the Empire State survey and University of Michigan consumer sentiment, that may show the first signs that a bottom was reached. Still ahead this week are the Philly Fed survey and preliminary PMI.

Separately, Treasury Secretary Mnuchin and Fed Chairman Powell will testify remotely before the Senate Banking Committee, and their prepared remarks have already been released. The takeaway is that although more steps may be taken, the economic recovery is expected to begin in Q3.

Canada and Mexico’s economic calendars are light today. The US dollar tested this month’s low near CAD1.3900 earlier day to extend yesterday’s loss that began from a little above CAD1.4100. The downside momentum appears to be stalling, and initial resistance is seen in the CAD1.3970-CAD1.4000 area. The greenback is also consolidating yesterday’s losses against the Mexican peso. Yesterday, it had fallen to its lowest level since mid-April near MXN23.45. The next support area is seen in the MXN23.25-MXN23.35 band.

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

This article was written by Marc Chandler, MarctoMarket.

Yuan Slumps as US-Chinese Tensions Rise

India was an outlier, suffering a 2.4% loss, and Taiwan’s semiconductor sector was hit, and the Taiex fell 0.6%. European markets are off to a strong start with a 2% gain in the Dow Jones Stoxx 600 to cut last week’s loss in half. The benchmark is approaching a two-week downtrend line near 399. US shares are higher, and this could lift the S&P 500 to test the key 2945-2955 area.

The US 10-year yield is little changed near 64 bp, but European bonds are lit with peripheral yields off 4-8 basis points. The dollar is mixed. The dollar-bloc currencies and Scandis are firm, while the European complex and yen are heavier. Risk appetites are also evident among emerging market currencies, where the South African rand, Mexican peso, Turkish lira, and Hungarian forint are higher.

The JP Morgan Emerging Market Currency Index is in a sawtooth pattern of alternating gains and losses for more than a week. It fell before the weekend and is higher now. The Russian rouble has been helped by the continued recovery in oil prices, where the July WTI traded above $31. Gold racing higher after pushing to new multi-year highs at the end of last week. The yellow metal is extending is advance for a fifth session and tested the $1765 area in Europe.

Asia Pacific

Japan reported its GDP contracted by 0.9% in Q1 or 3.4% at an annualized rate. It was a little better than expected though the Q4 19 loss was revised slightly to show a 1.9% quarterly contraction (earthquake and sales tax increase). This quarter understood to be considerably worse with expectations of a quarterly decrease of around 5.0-5.5%. Separately, even if not totally unrelated, the latest Asahi poll shows support for Prime Minister Abe is off about eight percentage points to 33%, the lowest in two years. The two big knocks include the handling of the virus and efforts to secure the power to appoint senior prosecutors.

At the same time that the US was announced a tighter ban on the sales of chips to Huawei, China took steps to dramatically increase its output of 14-nanometer wafers. Taiwan Semiconductor Manufacturing Corporation (TSMC) plans to build a wafer fabrication plant in Arizona needs to also be understood in this context too. The US prohibited without a license the sales of chips to Huawei if designed or made by US-produced technology and hardware. That would apply to TSMC, whose biggest customer is Huawei.

The US export controls were circumvented by servicing Huawei out of foreign fabrication facilities. The new actions seek to close the loophole, and it seems that China had been preparing for this be stockpiling in semiconductor chips.

The dollar is confined to less than a third of a yen range above JPY107.00 and is within the pre-weekend range. So far, it is the first session in four that the dollar held above JPY107.00, though this could be challenged in the North American session today. On the top side, a $2.2 bln option at JPY107.50 expires today. After settling on its lows before the weekend, the Australian dollar bounced back to test the $0.6455 area. Resistance is around the pre-weekend high near $0.6475.

The option for roughly A$635 mln at $0.6495 that expires today looks safe. A closed blow $0.6440 would likely signal that the corrective forces remain in control. Given the heightened tension between the US and China and the greenback’s strength seen late last week, today’s PBOC fix was closely watched. The dollar’s reference rate was set at CNY7.1030, which was a bit stronger than the bank models suggested. The dollar reached its highest level since it peaked on April 2 near CNY7.1280. The highest close was on March 25 near CNY7.1150 and is under threat today.


Bank of England Governor Bailey reportedly denied that zero interest rates were under consideration last week. And the BOE’s chief economist Haldane seemed to suggest that negative interest rates were among the unconventional measures that were being considered. We suspect that the contradictory signals are more apparent than real.

With the base rate at 10 bp, unconventional policy options are being discussed. Haldane was making this more academic point. Bailey was signaling the policy thrust, which is to say that expanding its asset purchase program holds more promise. The UK 2-year yield, which fell below zero last week, is now near minus five basis points.

The economic data highlight of the week is the preliminary PMI reports. The aggregate composite is expected to rise from the record low of 13.6 in April to 27.0 in May, according to the median forecast in the Bloomberg survey, as both the manufacturing and service sectors are forecast to improve. Ahead of the report, the European Commission is slated to announce its policy recommendations for a recovery package for next month’s meetings.

The euro is trading heavily but within the pre-weekend range. It has found a bid at $1.08, where a nearly 530 mln option will expire today. On the topside, the pre-weekend high was near $1.0850, and the 20-day moving average is just below there, likely keeping the $1.0875, expiring option for about 565 mln euros out of play. Sterling gapped lower (below $1.21) on the back of the talk of negative rates, but recovered to $1.2125 in the European morning.

It is struggling to maintain the downside momentum that has seen it fall for five consecutive sessions coming into today. Note that the lower Bollinger Band is found near $1.2115 today. The Turkish lira‘s short-squeeze is extending for its eighth consecutive session. News that Clearstream and Euroclear will not settle lira trades appears to have encouraged further buying back of previously sold lira positions. The US dollar found support near TRY6.81, as domestic demand (for debt servicing?) emerged.


The US calendar is light today. The highlight of the week includes the Philadelphia Fed survey (the Empire State manufacturing survey rose to -48.5 from -78.2) and the preliminary PMI (which is also expected to improve). April housing starts, and existing home sales will also be reported, and no fewer than eight Fed officials speak, including Powell (and Treasury Secretary Mnuchin) before the Senate Banking Committee tomorrow. Canada reports April CPI and retail sales figures this week. Mexico’s data highlight is the April retail sales report.

Conventional wisdom sees the negative yields in the US fed funds futures and concludes that investors are betting that the Fed cuts the target rate again. Some suggest that investors may be trying to push the Fed hand, deliver it a fait accompli, force it to cut, perhaps against its wishes. It is hard to argue against this. It seems to intuitively true.

Yet, the markets are not only about betting and taking on risk, but they are also for hedgers and people trying to layoff risk. The negative yields can be explained, even if no one thought the Fed would adopt negative rates. Imagine businesses that need to protect themselves against the chance.

They buy “insurance” from the seller, who then goes to the market to layoff the risk. Financial intermediaries may also choose to hedge the risk of sub-zero rates. Negative rates in the US appear to be more about swapping from floating to fixed rates and the related hedging then actually reflecting expectations of negative Fed policy rates.

Brazil is being punished. The currency and equity market are among the hardest hit, losing a third of their value. It is not simply a function of macroeconomics. Policy matters. The self-inflicted political crisis adds to the challenge posed by the crippling pandemic. President Bolsonaro has lost the confidence of investors who had been prepared to like him after several tumultuous years. The loss of the second health minister in a month during a pandemic that appears to give Brazil the fourth most cases in the world.

The US dollar is consolidating within the pre-weekend range against the Canadian dollar (~CAD1.4020-CAD1.4120). A six-week downtrend line is found today near CAD1.4160. With stronger risk appetites today, initial support near CAD1.4060 would be pressured in North America. The greenback is also consolidating against the Mexican peso with a heavier bias. Lows from the end of last week around found near MXN23.75. Below there, support is seen around MXN23.50, which also corresponds to the lower Bollinger Band. The dollar posted a key downside reversal on May 14 against the Brazilian real. Still, the follow-through dollar selling ahead of the weekend was reversed in late turnover, and the greenback finished on session highs (~BRL5.8560). The dollar’s record high was set near BRL5.9715.

This article was written by Marc Chandler, MarctoMarket.

What do the Charts say about Risk Appetites?

Decreased appetites for risk, illustrated by losses in the major equity benchmarks, seemed to have played a role. Sterling fell every day last week to reach its lowest level since late March ahead of the weekend.

While there was discussion of the possibility of negative rates in the US, the UK two-year yield has remained below zero for the past three sessions. New Zealand, which explicitly played up the possibility of negative policy rates, while doubling its bond-buying, saw its currency slump the most of the majors, losing about 2.7%. At the same time, UK talks with the EU are not going well, and without an extension, which Prime Minister Johnson rejects, it is difficult to see how significant disruptions will be avoided.

On the one hand, interest rates will remain low for a long time, and, for many investors, there is not much of an alternative to equities, and there appears to be plenty of cash on the sidelines.

On the other hand, the extreme left-hand tail risk that was palpable in March has been reduced by aggressive central bank and government action. Still, a meaningful recovery appears to some time off and more economic pain, in terms of business failures and supply chain disruptions. At the same time, the tensions between the US and China are ratcheting higher, and it has tended to curb risk-appetites in the past.

Dollar Index

A 99.00-101.00 range has contained the Dollar Index since the end of March with a few downside breaks that proved false. It pushed toward the upper end of the range last week, reaching its best level since April 24, roughly 100.55. With the pullback ahead of the weekend, it finished about 0.4% higher on the week. The sideways movement has rendered the momentum indicators moot, and if one assumes the range remains intact until proven otherwise, the risk-reward and the rule of alternation would seem to discourage new longs.


A range of about 1.2-cents prevailed last week (~$1.0775-$1.0895), and the euro finished virtually unchanged. Demand around $1.08 seems to be gradually being absorbed. The euro traded below there five times in April and has matched that in the first half of May. A move and probably a close above $1.09 is needed to take pressure off the downside. Three-month implied volatility had its lowest weekly close (~6.7%) since the end of February. Volatility may increase as the EU and ECB move back into fore next month.

Japanese Yen

The range for the entire week was set on Monday (~JPY106.40-JPY107.75). The rest of the week was consolidation. The price action reinforces the month-old trading range of JPY106.00-JPY108.00. Three-month implied volatility is approaching the 200-day moving average near 7.10%. It peaked around 19% and was trading below 5% in mid-February.

British Pound

Sterling’s five-day slide shaved 2.3% of its value against the dollar and sent it to almost $1.21. It saw its lowest level since March 26 ahead of the weekend. The MACD is rolling over, but the Slow Stochastic is getting stretched. The convincing break of the late April low near $1.2240 and the (38.2%) retracement objective (~$1.2175) are bearish technical developments. Although initial support may be encountered in the $1.2000-$1.2030 area (psychological support and the 50% retracement objective), the risk extends to $1.1850-$1.1880 (61.8% retracement and the measuring objective of the double top at $1.2650, with a neckline at $1.2250). A move back above $1.2250-$1.2300 would help stabilize the tone.

Canadian Dollar

The US dollar rose four of last week’s five sessions. It gained about 1.2%, the largest weekly rise in six weeks. An outside up day on Monday set the stage. The greenback rose from CAD1.3900 to roughly CAD1.4140. Since the explosive moves in March, the exchange rate has found a base around CAD1.3850. On the topside, the greenback has been making lower highs. The downwardly sloping trendline is found near CAD1.4160 to start the new week. The Canadian dollar remains sensitive to the general risk appetite, more so than the Australian dollar (60-day correlation of the percent change of the S&P 500 and the exchange rate 0.51 vs. 0.47, respectively). More inclined to see an eventual upside break for the greenback.

Australian Dollar

We have been looking for the Australian dollar to top out. It tested the late April high near $-0.6560 and reversed to post an outside down day on Monday. It approached $0.6400 in the second of the week and settled on the week’s low. For the first time since April 3, it closed below its 20-day moving average (~$0.6435), and the five-day moving average can move below the 20-day in the coming days. The MACD is rolling over from over-extended territory while the Slow Stochastic is tuned down from a secondary bounce. The next support area is around $0.6370, and a break could confirm a top is in place and warn of losses toward $0.6170, a measuring objective of a double top, and the (38..2%) retracement of the big rally off the March spike low to almost $0.5500.

Mexican Peso

The dollar rose 1.6% against the peso last week to snap a two-week 5.4% slide. After peaking around MXN25.78 in early April, the greenback has been consolidating. It has held below MXN25.00 this month and found support in the MXN23.50-MXN23.75 band. Initial resistance is now seen in the MXN24.50 area, and a three-week downtrend line begins the new week just below there. The MACD continues to drift lower, while the Slow Stochastics are just turning higher. The peso initially strengthened after Banxico delivered the 50 bp rate cut that was widely expected (overnight target is now 5.5%), but the pullback in equities proved too much, allowing the dollar to finish the week above MXN24.00.

Chinese Yuan

The yuan fell by about 0.4% against the dollar last week. Only a handful of currencies rose against the greenback, and the JP Morgan Emerging Market Currency Index fell by nearly 0.7%. It is not so much the magnitude of the dollar-yuan exchange rate movement, but the level that is notable. The dollar traded at a six-week high (~CNY7.11) before the weekend. It is the second close this month above CNY7.10 after not doing it at all last month. Some may link the yuan’s weakness to the escalating US rhetoric. We suspect that ahead of the National People’s Congress, Chinese officials likely prefer a stable yuan.


A four-day rally lifted the yellow metal above $1750 ahead of the weekend, its best level since late 2012. The advance began with an outside up day on May 7 from a low near $1677, as gold fell by about 1% over the next two sessions. However, the recovery and push higher was steady, and closes were near session highs, but only marginal new highs were seen as stops were triggered above the mid-April high near $1747 and more at $1750. Both the MACD and Slow Stochastics are pointing higher. The next big target is $1800. Initial support is likely near $1720.


Light sweet crude oil for July delivery extended its rally for a third successive week. The 13% rally lifted it to almost $30 a barrel ahead of the weekend. A small increase in demand, coupled with cuts in output, has helped prices recover. The US recorded its first decline in oil inventories since January, and there is a push for OPEC+ not to boost output in the next phase of the agreement output restraint agreement. The key technical level is $35, roughly last month’s high and the (38.2%) retracement of this year’s decline. It is also a level that reportedly will bring back some production. The MACD and Slow Stochastic are stretched but have not begun rolling over. This would seem to be consistent with a push closer to $35, but profit-taking is likely ahead of it.

US Rates

After absorbing a record-sized refunding, US coupon yields were lower on the week. In fact, ahead of the weekend, the 10-year yield touched its lowest level here in May, just below 59 bp. The yield bounced back as investors seem comfortable with the 0.60%-0.70% range. The two-year yield, which fell to record lows the week prior to near 10 bp, stabilized and finished the week little changed.

While the Fed continues to taper its Treasury purchases, some of its other facilities are just becoming operational. Purchases of corporate bond ETFs, which may include some high-yielding bonds, are formally launched last week. The Fed’s balance sheet rose by about $213 bln (~3.2%) last week, the most in nearly a month. The March and April 2021 fed funds futures contracts hover around zero, but the May contract has not implied positive rates for seven sessions and counting.

Foreign central banks continue to replenish their Treasury custody account at the Fed that was drawn down in March and the first half of April. Official holdings rose by $21.2 bln in the fifth consecutive week of accumulation.

S&P 500

The 1.5% rally in the last two sessions was not sufficient to offset the earlier losses, and the S&P 500 fell by about 2.25% last week. It reversed higher from three-week lows recorded on May 14 (~2766.6) and saw follow-through gains ahead of the weekend, with a close above the May 14 high (~2852.8) and back above the 20-day moving average (~2856.3). The momentum indicators are mixed with the MACD continuing to flatline near the highs and the Slow Stochastic turning back lower from the middle of the range. Resistance seems clearer than support presently.

The double top from late April and early May is in the 2945-2955 area, and then there is the 200-day moving average and psychological resistance around 3000. A close below 2800, which has not occurred in three weeks, might signal a new phase. The April equity recovery, which lifted the NASDAQ into positive territory for the year, arguably, was fueled by the removal of the far left-hand tail risk by officials that moved to replace part of the income lost during the shutdown. Now, it seems as we anticipate the survey data to begin showing some improvement as economies start opening up, risk appetites may wane as focus shifts toward the long slough back to a new normalcy.

This article was written by Marc Chandler, MarctoMarket.

Risk Appetites Wane

Europe’s Dow Jones Stoxx 600 is off a little more to double this week’s decline and leaves it in a position to be the biggest drop since panicked days in mid-March. US shares are narrowly mixed, but coming into today, the S&P 500 is off 3.7% for the week, which, if sustained, would also be the largest decline in nearly two months.

Bond markets are better bid, and the US 10-year benchmark is off four basis points to 61 bp, the lowest in three and half weeks, despite the deluge of supply. European yields are off 1-3 bp. The dollar is firm against nearly all the world’s currencies. The yen, among the majors, and the Turkish lira and Russian rouble in the emerging market space, are the notable exceptions. Oil and gold are near five-day highs (~$1720 and $27 basis July WTI)

Asia Pacific

Australia reported a massive 594k job loss in April. While it was slightly more than most economists expected, given the magnitude, the median forecast of the Bloomberg survey for a loss of 575k proved fairly accurate. About 220k were full-time positions.

The unemployment rate rose from 5.2% to 6.2%. Economists had projected a jump to 8.2%. Australia’s 10-year yield is dipping below 90 bp for the first time this week. Wednesday saw record demand at the 10-year sale while the central bank has stepped back from its purchase program.

The Bank of Japan has also reduced its buying of equity ETFs and REITs. Its JGB buying had been tapered under its yield curve control initiative. Back in the particularly dark days in March, the BOJ bought a little more than JPY200 bln of the ETFs on four different occasions.

In the first five sessions of May, it purchased a total of JPY126.5 bln. Separately, a BOJ lending initiative in April that pays banks 10 bp on reserves associated with lending under the program is off to a successful start, and BOJ Kuroda hinted at an emergency meeting before the next formal meeting (June 16) to unveil a new facility to lend to small businesses.

Following the Reserve Bank of New Zealand’s move to put negative rates on the table, the government approved an NZD$50 bln (~$30 bln) stimulus package. It projects that the country’s debt will rise over 53% of GDP from less than 20% last year.

The 10-year benchmark bond rose six basis points today from the record low hit yesterday below 60 bp. Year-to-date, the Kiwi is the second worse performing major currency, off a little more than 11% (behind the Norwegian krone that has depreciated by nearly 13.7%).

The dollar rallied from JPY106.40 to almost JPY107.80 on Monday, and that has marked the range, for now, the third session. Narrower still, the greenback is within yesterday’s range (~JPY106.75-JPY107.30). There are two sets of expiring options to note today. There is about $1 bln at JPY106.75-JPY106.82 and another $1.1 bln in options struck at JPY107.00-JPY107.05 This is the fourth consecutive session that the Australian dollar is falling.

It is the longest streak since late March and early April. Watch the 20-day moving average. It is found near $0.6430 today, and although it has been flirted with on an intraday basis, it has not closed below it since April 3. A break of the $0.6375 area may be needed to confirm the top we have been anticipating. The dollar is little changed against the Chinese yuan and is hovering around the CNY7.09-CNY7.10 area, the upper end of its recent trading range.


Bank of England Governor Bailey hinted that the GBP200 bln bond purchase program will likely be extended as early as next month (next MPC meeting is June 18). Recall that at last month’s meeting, the majority wanted to wait while two members dissented in favor of an immediate increase of GBP100 bln in Gilt purchases.

While much attention has been focused on the fact that some derivatives in the US imply negative rates, the UK 2-year Gilt has a negative for the third consecutive session (about minus 3 bp). Since our experience with negative rates is so limited, we relied on induction to derive a hypothesis that countries with negative rates had central banks that led the move and have current account surpluses. That hypothesis is being tested. We suspect that the currency would have to bear more of the burden if this turns out to be the case.

The euro reached a seven-day high yesterday and approached $1.09 before reversing lower and recording new session lows late in the session near $1.0810. It is in about a 15-tick range on either side of that level, with little enthusiasm in either direction. There is a 1.2 bln euro option at $1.08 that expires today. Below there is an option for 1.8 bln euros at $1.0750.

The euro settled last week near $1.0840. Sterling fell to $1.2180 today, its lowest level since April 7, when it recorded the month’s low near $1.2165. It is lower for the fourth consecutive session, which is also its longest losing streak since March. Initial resistance is now seen near previous support in the $1.2250 area.


Powell had no more luck than his colleagues in removing the risk that the Federal Reserve will adopt a negative interest rate target. The implied yield of April 2021 through March 2022 fed funds futures contracts remains negative. The OIS forward curve is slightly negative two and three-years out. The impact on the dollar seems minimal at best.

It is higher against all the major currencies this month, but the Norwegian krone (~0.60%) and yen (~0.30%). Overall, Powell’s economic assessment was very somber. He indicated that a report out today will show that 40% of the households under $40k a year income, who had a job in February, lost it. Powell advised not placing much stock in estimates of full employment. The Chair tends not to put weight on economist’s intangible concepts like r-star (natural interest rate) or full-employment.

Powell called for more fiscal support, a day after the House of Representatives prepared an additional $3 trillion spending bill. When coupled with Dr. Fauci’s comments the previous day, calling for more testing and tracking, and slowing the re-opening process, the message appears squeezed risk appetites.

There are two highlights of the North American session today. First is the release of the US weekly initial jobless claims. Economists expected a decline to 2.5 mln, which is still around ten-times larger than what was prevailing before the crisis. It has been gradually declining since reaching above 6.8 mln in late March. Separately, the continuing claims are likely to push above 25 mln.

Note that the survey for the next monthly jobs report is being conducted this week. Second, the central bank of Mexico meets today, and the consensus forecast is for a 50 bp cut to 5.50%. A week ago, Mexico reported that April CPI fell to 2.15%. Given this and the broad stability of the peso, we suspect that if Banxico is to surprise, it is more likely to deliver a larger rather than a smaller cut.

For the fourth consecutive session, the US dollar has edged above the previous session’s high against the Canadian dollar. However, it is better offered in the European morning. The CAD1.4040-CAD1.4060 may provide support today, but it seems particularly sensitive to the broader risk appetites.

Tuesday’s range in the greenback against the Mexican peso is to be watched (~MXN23.75-MXN24.40). After rallying strongly in March and into early April, the US dollar has been consolidating for over a month and has largely been confined to a MXN23-MXN25 range. Lastly, note the EIA reported the first decline in US oil inventories (-745k barrels) since the middle of January.

Holdings in Cushing fell by 3 mln barrels. This, coupled with the IEA assessment of a marginal improvement in supply (reined in) and demand (a little stronger) dynamics, are helping to underpin prices today.

This article was written by Marc Chandler, Marcto Market.

Will Powell have any more Luck Pushing against Negative Rate Expectations in the US?

India led the way (~2%) after a fiscal stimulus program was announced. European shares, though, are heavier, led by consumer discretionary and financial sectors. US shares are steady to firmer. After a slow start, European bonds have rallied and yields are 2-3 bp lower, with Italy’s benchmark off about 6 bp to 1.82%.

Bond markets are mostly quiet, but the Reserve Bank of New Zealand’s increase in bond purchases and indication that negative rates are possible saw the benchmark yield fall around 12 bp and took the currency about 1% lower. The 10-year US Treasury is a little softer at 66 bp.

Outside of the Kiwi, most of the major currencies are mostly firmer, led by the Norwegian krone and Canadian dollar. Emerging market currencies are mixed, with eastern and central European currencies a little heavier. Gold continues to hover are $1700 and July crude continues its broadly sideways drift.

Asia Pacific

India announced a package of INR20 trillion or 10% of GDP. The details are not yet clear, but it does appear that officials have combined several previous commitments and central bank measures. The fresh initiatives, though, still appear substantial and are estimated around INR8-INR12 trillion (~4%-6% of GDP).

The Reserve Bank of New Zealand doubled its bond-buying efforts to NZD60 bln. It left its cash rate target at 25 bp but suggested that negative rates are possible. Thus far, no country with a current account deficit has adopted negative interest rates. New Zealand’s current account deficit was about 3.3% of GDP in 2019.

The US dollar jumped to a little more than JPY107.75 to start the week after testing the JPY106 area while Japanese markets were closed in the first half of last week for the Golden Week holidays. Yesterday and today, the dollar has pared Monday’s gains and now is testing JPY107.00 where a nearly $900 mln option is set to expire.

The dollar is third of a yen range today, and the upside looks to be blocked with the help of a $1.1 bln expiring option at JPY107.40. The Australian dollar fell nearly 1% over the past two sessions, but it found support near the 20-day moving average (~$0.6425), which it has not closed below in over a month. There is an option for A$1 bln at $0.6500 that expires today. The greenback is firm against the Chinese yuan as it holds in the upper end of the CNY7.05-CNY7.10 range that has largely contained it in recent weeks.


The two main economic reports from Europe were not as dismal as expected. The eurozone reported industrial output in March fell 11.3%. The median forecast in the Bloomberg survey was more than a 12% slump. The UK economy contracted 2% in Q1 with the median estimates looking for a 2.6% decline in output. The monthly GDP estimate showed a 5.8% decline in March alone.

The Bank of England is expected to increase its bond purchases as early as next month. The ECB is also likely to increase is Pandemic Emergency Purchase Program (PEPP) as well, but the timing is less clear.

On the fiscal front, the UK has extended its furlough program until the end of October and will not taper it until at least July. Italy’s cabinet approved the 55 bln euro stimulus package. Nearly 30% is for its employee furlough program. More than 10% is earmarked for what appears to be grants to small businesses. And nearly another 10% is for self-employed and seasonal workers.

The euro traded in a cent-range yesterday (~$1.0785-$1.0885) and today is in a little more than a quarter-cent range above $1.0830. The consolidation looks set to continue. Sterling fell to around $1.2255 yesterday, its lowest level in over a month. A marginal new low was made in Asia, before sterling was bid in Europe to toy with the $1.2300 area. There is potential toward back toward $$1.2340-$1.2350.


There are three events in the US today to note. First, the US reports April producer prices. The deflationary shock is well recognized, and the collapse of oil price will send the headline PPI into negative territory. However, the core rate, which excludes food and energy, is likely to fare considerable better. The median forecast in the Bloomberg survey is for a 0.1% decline on the month for a 0.8% year-over-year gain.

In yesterday’s April CPI, gasoline prices fell by over 20% while food prices rose 1.5%. Second, the EIA will make its weekly energy inventory report. API estimated that oil stocks increased by about 7.6 mln barrels, but at Cushing, they might have fallen by more than two million barrels. This would be the first decline in 10 weeks.

Third, Federal Reserve Chairman Powell speaks at the Peterson Institute (9:00 am ET). He is expected to push back against ideas a negative funds rate. Despite the efforts of several regional presidents to play down this scenario, the fed funds futures strip starting next March imply slightly negative rates. Another common theme of Fed speakers have been that more support may be needed for the economy. This is seen as a balance sheet issue and fiscal policy.

After raising $100 bln in cash management bill sales, the Treasury sold $32 bln 10-year notes at a lower yield than the previous auction (70 bp vs 78 bp), with a higher bid-to-cover (2.69 vs 2.63), and more taken up by indirect bidders that include asset managers, hedge funds, and foreign central banks (66.1% vs 59.2%). More is coming. It is not just today’s $20 bln 30-year bond sale to round out the quarterly refunding and another $75 bln of cash management bills, but another large spending bill has begun its circuitous route to become law.

The initial estimate of the House bill is about $3 trillion and that is on the day that the US reported a record $737.9 bln deficit for the month of April. Around a third of the bill is for states and local governments. There are also funds for another $1200 payment adults, which is means-tested, and money for elections and the postal service.

The deduction for state and local taxes is also brought back. Of course, as the Senate Majority Leader noted it is aspirational. It must be negotiated with the Senate, and especially Trump Administration. However, the House took first-mover advantage and forces the GOP to be less “Rooseveltian” with the election now less than six months away.

The US dollar settled last week near CAD1.3925. It recovered 0.5% on Monday and again on Tuesday but has run out of steam near CAD1.4085. Support is seen in the CAD1.3980-CAD1.4000 area today. Similarly, the greenback finished last week around MXN23.65 and gained 1% on Monday and 2% yesterday to reach MXN24.40.

It is trading softer now around MXN24.10. Dollar losses may be limited in North America today ahead of the Banxico rate decision tomorrow. Although a 50 bp cut is widely expected, there is scope for 75 bp move. More political problems for Brazil’s President Bolsonaro weigh on the real, which fell to new record lows yesterday (the US dollar rose above BRL5.89). Today, Brazil reports March retail sales and its economic activity index. The only question is how fast of a contraction is being experienced.

This article was written by Marc Chandler, MarctoMarket.

Quiet Start to a New Week

Benchmarks off all three regions rallied by 3.4%-3.5% over the past two weeks. Bond markets are also little changed, with the US 10-year benchmark just below 70 bp ahead of this week’s record refunding. Core European yields are slightly higher, while the peripheral premiums have edged in. The dollar begins the new week firmer across the board, with the New Zealand dollar and Japanese yen the weakest, off around 0.5%.

Except for a handful of mostly currencies from smaller Asian countries, most emerging market currencies are also beginning the week with a heavier tone. Gold is a little lower as it tests $1700, and July WTI is heavy near $25.50 after stalling near $28 last week.

Asia Pacific

China’s aggregate financing rose by nearly CNY3.1 trillion last month, a little stronger than most economists expected after a CNY5.1 trillion increase in March. The annual growth rate accelerated to 12% from 11.5% and is the highest in two years.

The main catalyst was bonds issued by and lending to local governments, which is the vehicle of China’s stimulus, not the central government. Separately, the PBOC’s quarterly monetary policy statement promised more powerful policies to promote growth and job.

What it did not say was also important: it did not repeat pledges about avoiding excess liquidity. Many expect new initiatives after the National People’s Congress in about ten days.

South Korea’s reported exports in the first ten days of May slumped 46.3% from a year ago. That followed a 24.3% decline last month. Average daily exports fell by a little more than 30%. Exports to the US were off almost 55%, while shipments to the EU were off 50.6%. Exports to China fell by 29.4%.

In terms of products, the exports of semiconductor chips and wireless devices fell by 17.8% and 35.9%, respectively. Imports were off 37.2%, but the imports of chip fabrication equipment rose by almost 70%.

Since Japanese markets re-opened from the Golden Week holiday on May 7, the dollar has risen in all three sessions. The greenback bottomed last week just below JPY106.00. It climbed steadily in Asia and reached almost JPY107.30 in the European morning, its highest level since May 1.

Initial resistance is seen near JPY107.50 then JPY108.00. Intraday technicals are stretched. A close below JPY107 would be disappointing. The Australian dollar’s gains were extended to $0.6560, just shy of the rebound high (~$0.6570 on April 30) but have reversed lower to test the $0.6500 area in Europe.

A break, and ideally a close below, the pre-weekend low of about $0.6490, would be another opportunity to try picking a top. At the least, it may signal a test of $0.6400. The dollar rose by about 0.2% against the Chinese yuan to about CNY7.09 and remains within the range seen in recent weeks.

Credit Ratings

Moody’s did not change its credit assessment of Italy or Greece’s sovereign ratings at the end of last week. Moody’s gives Italy the lowest investment-grade rating. Recall that the ECB has indicated that it would ignore rating downgrades until September 2021. Moreover, the ECB accepts the highest rating of the top four agencies. DBRS gives Italy a high BBB rating. However, before the weekend, it cut the trend (outlook) to negative from stable, citing the deterioration of the government’s balance sheet.

The fallout from the German Constitutional Court ruling last week continues. Over the weekend, EU President von der Layen threatened to sue Germany over the verdict. The ECB is undeterred. The German court did not rule on the Pandemic Emergency Purchase Program, a 750 bln euro effort that is not bound by the capital key. However, press reports indicate that lawsuits are being prepared. Separately, ECB President Lagarde estimates that EMU members will be issuing 1-1.5 trillion of new bonds. Most seem to expect the ECB to expand its PEPP buying in the upcoming meetings by 250-500 bln euros.

The euro remains pinned near $1.08, where a nearly 900 mln option is set to expire today. There is also an option at $1.0850 for one billion euros that also will be cut today. Between the two, it likely marks the range. Sterling is finding support around $1.2350 in the European morning, and the intraday technicals are stretched, suggesting potential for a bounce in early North American activity. Initial resistance is seen near $1.2400. The dollar is slipping against the Turkish lira following the reversal of last week’s decision to ban three banks (Citi, UBS, and BNP).


The implied yield of the December 2020 Fed funds futures rose by 2.5 bp ahead of the weekend to pop back above zero, despite the simply dreadful jobs data. The yields through May 2021 also moved out of negative territory. Federal Reserve officials have repeatedly rejected such a course. Fed Chairman Powell will discuss “current economic issues” on the internet on Wednesday and is expected to push back against such speculation. Some hedgers may seek protection from the low probability but high impact possibility.

Others might look at it as on a risk-reward basis, without attaching any special value attached to the zero bound. It is just “betting” on the chances of another rate cut. At the same time, the Federal Reserve signals that it recognizes that financial conditions are continuing to improve as it reduces the amount of Treasuries it will purchase this week will be $7 bln a day, down from a peak of $75 bln a day. Meanwhile, after the employment data, the Atlanta and NY Fed GDP trackers were revised sharply lower for Q2 to -34.9% and -31.2%, respectively.

The data highlight this week include the US April CPI retail sales (tomorrow) and retail sales and industrial production figures (Friday). The week, the US Treasury sells more than $90 bln in coupons for its quarterly refunding, which includes a 20-year bond. Canada has a light calendar, while the highlight of Mexico’s is the central bank meeting on May 14. The overnight rate is at 6.0% now, and at least a 50 bp cut is likely to be delivered. Ahead of the meeting, Mexico reports March industrial output (expect around a 4% decline on the month) and April job creation (after a loss of 130.6k jobs in March).

Before the weekend and again today, the US dollar found good bids near CAD1.3900. Initial resistance is seen near CAD1.40, which is about the middle of the recent range. The Canadian dollar is more sensitive to the risk environment (equities) than the price of commodities (oil proxy). Near MXN23.55, the US dollar was at the lower end of its recent range against the peso. After falling for the last two sessions, the greenback is firm. Initial resistance is seen near MXN24.00 and then MXN24.15.

This article was written by Marc Chandler, Marcto Market.

The Euro is Knocked Back Further

European bourses opened higher but made little headway before some profit-taking set in, while US shares are trading higher. Benchmark 10-year yields are firmer, and the US Treasury yield is near 67 bp and is approaching the upper end of its recent range.

The yield has not closed above here since April 14. Despite the German court ruling yesterday, peripheral European bonds are not under pressure, and in fact, the Italian premium has narrowed a little. The dollar remains firm against most of the major currencies. The yen is resilient and Japanese markets re-open tomorrow.

The dollar bloc is little changed, but the euro and sterling are under heavy. The euro slipped below $1.08 in the European morning, and sterling was sold below $1.24.

Among emerging markets, the South Korean won is the strongest, though foreigners were net sellers of its equities today. The South African rand was resisting the dollar’s tug but has since turned weaker. On the other hand, South African bonds continued yesterday’s recovery.

Despite the recent downgrades and being dropped from the FTSE World Government Index, foreign investors have returned to South Africa’s bond market, and its bond sales yesterday were oversubscribed. Gold is hovering a little above $1700. June WTI, which traded near $10 a barrel early last week, briefly poked above $26 today before setting back to $24 and is now near the middle of the session’s range.

Asia Pacific

China’s mainland markets re-opened from the May Day holiday. When the local markets were shut on April 30, the dollar was at about CNY7.0635. The offshore yuan had weakened in the meantime. The US dollar rose from around CNH7.0815 on April 30 to close yesterday near CNH7.1225. The PBOC set the dollar’s reference rate against the yuan at CNY7.0690, which was a bit weaker than the CNY7.0720 that the models projected. The dollar fell to CNH7.10, as three-day low before recovering.

There is little evidence that Chinese officials are seeking to express their frustration with the escalation of US rhetoric over the virus or Taiwan through the exchange rate. On the other hand, the dramatic decline in energy prices is another hurdle to China fulfilling the trade agreement with the US, which seemed to have been a stretch under normal circumstances.

Australia appears to have reported an 8.5% surge in March retail sales, as households stockpiled. However, prices jumped in Q1, and when retail sales are adjusted for price changes, the Q1 performance is not impressive. In real terms, retail sales rose by 0.7% in Q1 after a 0.5% increase in Q4 19. The median forecast in the Bloomberg survey expected a 1.8% increase. Separately, New Zealand reported the jobless rate rose to 4.2% in Q1 from 4.0% in Q4 19. Employment rose 0.7% in the quarter while economists had expected a 0.2% decline. Private wage growth slows.

The dollar is trading heavily against the yen for the fourth consecutive session and has gained only once in 11 sessions. It slipped to almost JPY106.20 today, its weakest level since March 17. It is fraying the band of support that appeared to have been built in the JPY106.40-JPY106.60 area, which now becomes resistance. Some are linking the yen’s persistence to repatriation from US derivatives such as collateralized loan obligations.

However, our understanding was that most of these purchases were funded with dollar borrowings or swaps. The Australian dollar finished last week near $0.6420. It firmed slightly over the past two sessions but has stalled a cent below last week’s highs (~$0.6570). Watch the $0.6400 area, where the 20-day moving average is found. It has not closed below this moving average since April 3.


The flash PMI reports steal most of the thunder from the final estimates. The new information today is the German factory orders for March, which were weaker than expected, falling 15.6%, half again as much as the median forecast in the Bloomberg survey anticipated (-10%). The eurozone retail sales for March were also reported. They fell 11.2% on the month, more than the 10.6% decline expected.

The final PMI eurozone as a whole ticked up from the flash. The service component stands at 12 rather than 11.7, but still off from 26.4 in March. The composite edged up to 13.6 from 13.5, but it means virtually nothing given the 29.7 reading in March. German services and composite PMI were revised higher from the flash while France’s reports were revised slightly lower. Italy came in a little better than expected, and by that, we mean that the drop was a smidgeon smaller than expected, while Spain’s showed a larger decline than expected.

The euro was unable to recover much after falling from around $1.09 to about $1.0825 in response to the German Constitutional Court ruling yesterday, and it has been sold further today. A trap was laid by the court. It is not as simple as complying with a German court’s demand, as many observers seem to think.

If the ECB provides the justifications that its Public Sector Purchase Program is indeed a proportionate response, it concedes that the German court can overrule the European Court of Justice. This would set a dangerous precedent, most immediately for the likes of Hungary and Poland. They are already at odds with the ECJ over the independence of the judiciary, for example.

On the other hand, if the ECB were not to provide the justification, then it would leave the Bundesbank in an awkward position. Could it ignore the German Constitutional Court and continue to buy bonds under the PSPP program? The Germany court claimed that the ECJ had overstepped its authority (ultra vires).

The PSPP program accounts for less than a quarter of the ECB’s current purchases, success here will likely encourage challenges of the Pandemic Emergency Purchase Program, which is not bound by the capital key. Also, troubling was the German Court’s urging of the German government and parliament to challenge the ECB.

Even Bundesbank President Wiedmann, who wanted to ECB to adhere to the German Court’s demand for formal justification of its purchases, tried to defend the ECB’s independence. It begs the question, not of monetary or fiscal union, but the need for a legal union, and perhaps, a reaffirmation of the primacy of EU law over national law.

The euro has been sold below $1.08 in the European morning. It is at its lowest level since April 24 when it reached almost $1.0725. The low from late March was set near $1.0635, and the risk of a retest is growing. Resistance is now seen near $1.0850. Sterling also traded at its lowest level since April 24 when it briefly took out the $1.2360 area. It is slightly heavier than the euro. There is an option for about GBP325 mln at $1.2400 that expires today. Initial resistance is in the $1.2400-$1.2420 area.


Three US reports attract attention today. First is the ADP private-sector jobs estimate. Millions of jobs were lost in April, and the ADP will give some clue as to the magnitude ahead of the national figures on Friday. Something on the magnitude of 21 mln job loss is expected. Second, the US Treasury will announce the details of its quarterly refunding that is expected to boost the size and also re-introduce a 20-year bond. Third, the EIA oil inventory figures will be watched, following the API estimate of an 8.4 mln barrel build, the smallest since late March.

Oil prices are extending their recovery. The five-day rally coming into today is the longest in over a year. Most of the talk is about reductions in supply, and many expect that US inventory growth slowed for the third consecutive week. The EIA estimated that oil stocks rose almost 9 mln barrels in the week to April 24. Near $28.35, the June WTI contract would meet a (38.2%) retracement objective of this year’s decline. Reports suggest some shale producers they could start up again if crude were above $30.

Brazil’s currency and equity markets are among the worst performers so far this year. The currency is off 27%, and the stock market has fallen 30%. The central bank meets later today and is expected to cut the Selic rate again as the economy has deteriorated sharply. Inflation expectations had dropped since the last meeting when the officials had thought they provided enough stimulus. Although most economists expect a 50 bp rate cut, the market appears to in between a 50 and 75 bp cut.

Yesterday, Brazil reported March industrial output. The median forecast in the Bloomberg survey was a sharp 3.7% decline. Instead, it plummeted by 9.1%. The IBGE measure of CPI will be released later in the week. It is expected to fall to around 2.5% from 3.3% in March. Fitch cut its outlook for Brazil’s BB- rating to negative late yesterday. It cited the economic weakness, fiscal efforts, and tensions between President Bolsonaro and Congress. The virus contagion is spreading, and the economic situation is likely to get worse.

The US dollar is trading within yesterday’s range against the Canadian dollar after finding support in front of CAD1.40. Yesterday’s high was just shy of CAD1.4100. Firm equities warn of the risk that the greenback is sold through CAD1.40 today. A low near CAD1.3930 was seen at the end of last week. Meanwhile, the US dollar is also pushing near yesterday’s high against the Mexican peso near MXN24.17 in the European morning. The intraday technicals suggest it may hold, but if it doesn’t, the risk is for MXN24.40. Support is seen in the MXN23.60-MXN23.80 area.

New Month, New Trends?

The Dollar Index fell by 1.3%, the biggest loss since the last week of March, and posted its lowest close in nearly three weeks ahead of the weekend. There seemed to be a change in the market after key equity benchmarks, like the MSCI ACWI Index of both emerging and developed markets put in a recovery high in the middle of last week. The S&P 500 also peaked at mid-week, meeting the (61.8%) retracement objective of the drop from the record high since on February 19.

It is possible that this is a function of month-end considerations and the long-holiday weekend. However, we were concerned that some moves, like the Australian dollar, sterling, and the equity market were approaching highs. We are predisposed to view the price action then as signaling more than a calendar effect.

Dollar Index

The Dollar Index fell in the last five sessions of April before stabilizing on May Day. Last month’s low was just above 98.80, and ahead of the weekend, and before it recovered, the Dollar Index slipped a through it. The lower end of the range may be nearer 98.25, the late March lows, and 98.35, where the 200-day moving average is found. The upper end of the range is around 101.00. Interim resistance is likely in the 99.60-100.00.

Japanese Yen

A six-day dollar decline against the yen ended on April 30, with a (~0.5%) bounce. However, it gave is nearly all back the following session, on May 1. Nevertheless, the damage was done, and the greenback fell for the fourth consecutive week, matching the longest losing streak in eight years. The technical indicators are not generating robust signals. Initial resistance is seen near JPY107.50. Support is seen in the JPY106.00-JPY106.35 band.

British Pound

Sterling appears to have negated the possible head and shoulders pattern by retesting the head near $1.2645. This area also corresponds to the 200-day moving average and the upper Bollinger Band. It was repulsed and finished the week below $1.2500 albeit slightly. The MACD appears to be rolling over from close to its best level of the year, while the Slow Stochastic is trending higher. On balance, we still are still more inclined to see the path of least resistance is lower Support is seen first near $1.2430 and a convincing break could spur a near-term decline of another cent.

Canadian Dollar

It was a week of two halves. In the US dollar fell and set a marginal new low for April (~CAD1.3850) before rebounding smartly on the back of sell-off in stocks. The greenback’s high for the week was set on Monday near CAD1.4120. Ahead of the weekend, it reached CAD1.4110 before settling just below CAD1.4090. The MACD looks like it wants to turn higher, while the Slow Stochastic is still moving lower. Follow-through US dollar buying early next week would target the CAD1.4265, the high from the second half of April. A move above there could be a bullish technical signal that could point to a retreat of the mid-March high near CAD1.4670.

Australian Dollar

The Australian dollar impressive rally peaked on April 30 near $0.6570 as it tried stretching the six-day streak into a seventh session. It posted a minor reversal pattern and sold-off sharply ahead of the weekend and settled just above the session lows of $0.6410. The MACD is set to turn lower. The Slow Stochastic is set to turn lower, without confirming last week’s high. The is a potential bearish divergence. Losses will likely accelerate on a break of the $0.6375-$0.6380 area. The April 21 low near $0.6250 is the first important technical target and then $0.6200 beckons. The 38.2% retracement of Aussie’s recovery from the March 19 spike to almost $0.5500 is found near $0.6165.

Mexican Peso

The dollar’s five-day rally ended with a three-day drop. The sellers pressed their luck for a fourth session, and after making a new low near MXN23.6440, near a month-long trendline, the dollar reversed higher and rose a little above MXN24.87 ahead of the weekend. The upper end of the six-week range is less well-formed but somewhat above MXN25.00. We suspect this large consolidation pattern will ultimately resolve itself with an upside breakout, but the technical indicators are far from clear. The MACD looks poised to turn higher, while the Slow Stochastic is turning lower after the losses in the first part of last week.

Chinese Yuan

Before the May Day holiday, the dollar has weakened to a two-week low below CNY7.0500. The offshore yuan traded at a two-week low a little above CNY7.05. However, before the weekend when the mainland was closed, the dollar jumped to CNH7.14, taking out a month-long downtrend. The 0.75% gain is the biggest rise since March 19. We suspect this was not an official protest of reports that the US was looking to retaliate against China over the novel coronavirus.

Instead, we suspect that speculators see the report and a recent op-ed piece by Mitt Romney as a hardening of the US position toward China and judge the relationship will become more strained, especially in this political cycle. Some asset managers seeing the same thing could choose to hedge in the freer offshore market. The dollar peaked in the offshore market on March 19 around CNH7.1650.


The precious metal is consolidating in a roughly $50-range on either side of $1700 and it finished last week in the dead center. The five and 20-day moving averages converge there too. The MACD and the Slow Stochastic warn of the downside risk. Gold has been alternating on a weekly basis between gains and losses since late March. Last week it fell by 1.7%. On a 30 and 60-day rolling correlation between the percentage change in gold and the percentage change in the S&P 500 remains positive (~0.30 and ~0.20 respectively).


The price of light sweet crude oil (WTI) rose each month in Q4 19 and has fallen in each of the first four months of 2020. The yawning gap between supply and demand has likely peaked. Demand will slowly pick-up as the lockdowns ease. Supply is already being reduced. OPEC+ cuts were formally implemented on May 1, but reports suggest several producers had already begun reducing output in late April. Meanwhile, output has been falling from others not party to the agreement, like the US, Canada, and Brazil.

The June contract tested $10 a barrel early last week and rallied in three sessions to almost $20.50 ahead of the weekend. The (50%) retracement of the decline from the April high ($33.15) is found near $19.80. The next retracement (61.8%) is around $23.30. Ahead of that, resistance may be encountered in the $21.60-$22.00 band. The momentum indicators support continued recovery.

US Rates

The US 10-year yield has stabilized. It finished outside the 0.60%-0.66% range once in the past 12 sessions. The volatility of the bond market, captured by the MOVE index finished last week around 48%, the lowest of the year. It peaked above 160% in March. As the June note traded sideways, the momentum indicators have moved lower. Continued range trading appears to be the most likely scenario. If the denied reports that the possibility of defaulting on Chinese debt was discussed is unable to inject fresh volatility into the market, the horrific jobs data at the end of next week, which is universally expected, might not provide a fresh catalyst. The Eurodollar curve is inverted. The June 2020 contract implies a yield of about 36 bp. The next contract that implies a higher yield is not until December 2022. Even, then the first contract to be above 50 bp is December 2023. This gives a sense of how long investors expect the Fed to sit on the zero-bound.

S&P 500

The benchmark rallied nearly 12.7% in April, its best monthly showing in more than three decades, and nearly recouped March’s decline. The high was recorded in the middle of last week (~2955), surpassing the (61.8%) retracement of the decline since the record high was set in February. However, the S&P 500 was sold in the last two sessions. Unless the gap created by the sharply lower opening on May 1 is filled early next week, the bearish implications will dominate. The gap is found between roughly 2869 and 2892.50. The gap is also technically important because it was through a near-term trend line The momentum indicators lend more credence to this bearish view. The MACD appears to set to turn lower and the Slow Stochastic did not confirm last week’s high. Initial support is seen near 2815 and then 2790, but a conservative corrective target is near 2660.

ECB Takes Center Stage

Hong Kong and South Korea were closed, but the rest of the Asia Pacific bourses rallied strongly with several, including Australia and India, rising more than 2%. European shares opened higher before stalling, and US shares are firm after the S&P rose nearly 2.7% yesterday. Benchmark bond yields are mostly lower, though Italian bonds are underperforming.

The 10-year US Treasury yield is softer at 61 bp. The US dollar is mostly softer, though the Antipodean currencies are paring recent gains. Emerging market currencies are mostly higher, and the JP Morgan Emerging Market Currency Index is pushing higher after gaining more than 1% in each of the past two sessions.

Even the South African rand has rallied after having been downgraded by S&P late yesterday to BB- (three notches below investment grade). Gold is consolidating above $1700, while oil is extending its recovery. June WTI hit almost $10 two days ago and is now above $17 as Norway joins the output cuts (-250k barrels a day in June and -134k barrels a day in H2) amid a smaller than expected US build.

Asia Pacific

Japan reported March industrial output fell 3.7%. Economists had expected a 5% decline, according to the median forecast in the Bloomberg survey. It slipped by 0.3% in February. Retail sales fell 4.5% in March after rising 0.5% in February. Japan has not reported Q1 20 GDP, but the BOJ’s forecast for FY19 projects a contraction of no more than 2.75% in the last three months of the fiscal year. The official report is due May 17.

China’s April PMI was mixed. Manufacturing disappointed. The manufacturing PMI slipped to 50.8 from 52.0, and the Caixin measure, which has smaller companies than the official PMI, fell back to 49.4 from 50.1. The service sector, which speaks more to the domestic economy than the export sector, beat estimates with a 53.2 reading, up from 52.3 in March. The PBOC is expected to ease policy further in May to solidify the recovery.

The dollar is trading just inside yesterday’s range against the yen (~JPY106.35-JPY106.90). There is a set of options between JPY106.60-JPY106.65 for around $1.1 bln that expires today. Another set for about $1.6 bln between JPY107.00 and JPY107.15 also are set to expire today.

The US dollar has closed lower against the yen for six consecutive sessions coming into today. When the streak began, the dollar had been turned back from JPY108. The greenback had fallen for the past six sessions against the Australian dollar, but profit-taking is threatening to end that streak today. The Aussie approached $0.6570, its highest level since March 10.

Initial support is seen in the $0.6520-$0.6530 area. An option for A$2.7 bln that expires today is struck at $0.6570. The US dollar fell against the Chinese yuan for the third day. The more than 0.3% decline was the largest dollar fall in three weeks. The greenback slipped below CNY7.05, which with few exceptions, has been the lower end of the range since mid-March.


Europe’s data was dismal. The French economy contracted by 5.8% in Q1, and Spanish output fell by 5.2%. Italy’s economy shrank by 4.7%. The eurozone has a whole reported a 3.8% contraction, though Germany, the biggest economy, does not report Q1 GDP until May 15. Still, Germany reported a 373k jump in unemployment in April, roughly five times more than the median forecast in the Bloomberg survey.

The ECB meets on the heels of the poor data. They are unlikely to have surprised officials. The question is, what else can the ECB do? A couple of ideas have been circulating. One is to increase the amount of bonds it is buying under the Pandemic Emergency Purchase Program currently at 750 bln euros. This seems an issue of timing as at the current pace, it will run out of runway probably in late Q3, which incidentally is when some of the Fed’s programs are anticipated to wind down.

Given the expected supply, the ECB will likely want to buy more bonds. However, six weeks after it announced, PEPP might not be the best time to seek a change. Moreover, it does not appear clear whether it needs another 250 bln euros, 500 bln, or 750 bln. It might be able to achieve the desired impact by saying that it anticipates buying more.

Another idea is to lower the rate on the June TLTRO, which is now set at minus 75 bp. This is seen as innovative because it is below the deposit rate. In essence, banks can take a three-year loan from the ECB at minus 75 bp and deposit the funds with the ECB and pay 50 bp, for a 25 bp subsidy. Italian banks are seen as the most eager users of the facility and bigger subsidy, say 50 bp, would obviously be even more attractive.

We suspect that the ECB was sufficiently creative with the dual rate and that a wider gap may be difficult to justify. A third measure that some suggest is for the ECB to indicate it would buy “fallen angels” (until recently investment-grade credit) as part of its asset purchases. The central bank has taken two steps in this direction.

It gave sub-investment grade Greek sovereign bonds a waiver, and it indicated it would accept some below investment grade bonds as collateral for loans. Taking junk as collateral means one is willing to own it, but that is still different than buying it outright. Crossing this Rubicon does not seem particularly urgent. As capital distribution is bank-centric in Europe, the focus is likely to remain on encouraging bank lending.

The euro approached $1.09 but was turned back. It has not traded above that level since April 16. The risk seems to be on the downside on the ECB day. Initial support is seen in the $1.0840-$1.0850 area, but may not be particularly strong. Better support is likely in the $1.0800-$1.0820 area. Sterling is firm and continues to push against the $1.25 level, which it has not closed above since April 15. A convincing close above it would likely negate the bearish topping pattern is emerging. The high for the week is $1.2520.


The Federal Reserve did not surprise. Policy was maintained, and the somber outlook and medium-term risks. Rates would remain near-zero until the central bank was confident that jobs and prices were moving toward their targets. While we had suggested that with key rates below the interest the Fed pays on reserves and the rate at which it conducts reverse repos, there was scope for a technical tweak, The FOMC chose not to make address this issue now, but it is unlikely to go away.

Powell warned that the economy may require more support to ensure a robust recovery, and he explicitly played down concerns that the government was spending too much. By underscoring that the Fed was interested in ensuring markets were working, which ironically requires its assistance, rather than asset prices, Powell’s seemingly innocuous comment has far-reaching implications. Contrary to speculation spurred in part by the recent op-ed piece by the former president of the Minneapolis Federal Reserve, Powell showed little inclination to adopt negative interest rates or introduce yield curve control, for that matter. This assessment also seems to imply the Fed interested in buying equities, which would require an act by Congress.

Yesterday’s Q1 GDP (-4.8% annualized pace) report steals the thunder from today’s release of March’s personal income and consumption data. Income fell sharply and consumption even more. Instead, the weekly jobless claims with command attention. The weekly surge peaked in the last week of March and the first week of April at about 6.9 mln and 6.6 mln, respectively.

Last week was likely the third consecutive decline, but around 4.4 mln, the deterioration of the labor market continues. It would bring the cumulative filings over the past six weeks to about 30 mln. Continuing claims (reported with an extra week lag) are approaching 20 mln. On May 8, the April employment report is published, and the early call is non-farm payrolls to have fallen something on the magnitude of 22 mln, with the household survey showing a jump in the unemployment rate toward around 16.5% from 4.4% in March.

Canada reports February GDP. It is too dated to be of much interest, but it is expected to have expanded by 0.1%. It would lift the year-over-year rate to 2.2% from 1.8%. Mexico reports Q1 GDP. It is expected to have fallen by a little more than 1%. It would be the fifth consecutive quarter without growth. Meanwhile, the US appears to be getting ready to announce support for the oil sector. It may include bridge loans from Treasury (in exchange for equity?) and possibly an SPV program from the Federal Reserve.

The US dollar is on its lows for the month against the Canadian dollar around CAD1.3855. The next target is near CAD1.3800, the (50%) retracement of this year’s greenback rally. The dollar-bloc currencies have led the move against the US dollar this month, but the Canadian dollar is the clear laggard with a roughly 1.4% gain.

The New Zealand dollar is up nearly twice as much and the Australian dollar, almost five times the advance. The Mexican peso is also extending its recovery and is now roughly flat on the month. The US dollar poked above MXN25 last Friday and is now near MXN23.68. Chart support is seen MXN23.25-MXN23.30.

Equities Rally and the Dollar Eases to Start the Week

All the industry groups are participating and financials and consumer discretionary leading the way.  The Dow Jones Stoxx 600 has been in a 320-340 range for the better part of three weeks and is approaching the upper end. The S&P 500 looks poised to gap higher at the opening.  The April high just below 2880 is coming into view.

Core benchmark yields are a little higher, but the peripheral European bonds are rallying with risk assets.  Yields in Italy, Spain, and Portugal are 5-10 bp lower, while Greece’s benchmark yield is off 12 bp.  The dollar is softer against all the major and most emerging market currencies.  The dollar bloc is the strongest, while the euro and Swiss franc are laggards. JP Morgan’s Emerging Market Currency Index is snapping a five-day slide. Gold is off almost 0.5% as it consolidates above $1700.  Crude oil is snapping a three-day advance, and the June WTI contract is near $14 a barrel.

Asia Pacific

The Bank of Japan made modest adjustments to its policy earlier today.  Three steps were taken. First, it removed the JPY80 trillion cap on government bond purchases. This is largely symbolic as the yield curve control policy has seen its bond purchases fall well shy of the cap (~JPY14 trillion over the past 12 months).

It did make a minor tweak to the different buckets (maturities) that it will buy.  Second, it doubled the amount of corporate bonds, and commercial paper it will purchase (to JPY20 trillion). This was as expected.  Third, it expanded access to its emergency loan facility to a wider range of banks.  Its forecasts were sobering.  Growth, it suggested, could contract by up to 5% (IMF -5.2%), and inflation could be -0.7% this fiscal year.

India’s central bank opened a new credit facility for mutual funds after Franklin Templeton shut six funds last week, citing a lack of liquidity.  The new facility is for INR500 bln (~$6.6 bln) as of today that can be lent to the mutual fund industry or buy investment-grade debt held by the funds.  Corporate borrowing costs soared after the funds were closed.

The dollar slipped toward the lower end of its two-week trading range against the yen (~JPY106.90-JPY108.10). There is an option for $1.2 bln struck at JPY107.00 that expires today.  There are also options for $1.1 bln placed in the JPY107.55-JPY107.60 range that also expire today.  The options may mark the range in the North American morning.

The Australian dollar was bid to new highs for the month today near $0.6470.  Note that $0.6450 corresponded to the (61.8%) retracement of this year’s decline.  The next immediate target is near $0.6500, though a close below $0.6445 would be seen as a failure.  The Chinese yuan was sidelined and little changed with the dollar near CNY7.08030.


S&P maintained its BBB rating of Italy and its negative outlook.  It noted the ECB’s backstop, and that in nominal terms, assuming no further deterioration in borrowing costs, Italy may pay less to service its sovereign debt the next few years than it did in 2019.

It seemed to suggest that it needed so see improvement in the debt trajectory over the medium-term (three years).  It suggested the same thing about the UK’s debt trajectory as the rating agency maintained its AA rating.  S&P cut the outlook of Greece’s BB- rating to negative.

The Swiss National Bank appears to have stepped up its intervention.  Sight deposits jumped by CHF13.4 bln (~$14 bln) in the week ending April 24.  They can be influenced by other activities but are believed to reflect ongoing attempts to limit additional strength against the euro.

The euro had been hovering just above CHF1.05 over the last couple of weeks, which is its lowest level in about five years.  Today, the euro traded near CHF1.0560, its highest in a couple of weeks.  A move above CHF1.06 is needed to signal anything important from a technical perspective.

The euro had fallen to its lowest level in a month (~$1.0725) at the end of last week before recovering to settle on the session highs, almost a cent higher.  Follow-through buying today lifted it to about $1.0860 in late Asian turnover.  It has consolidated in the European morning.   The $1.0800-$1.0820 area holds expiring options worth about 1.7 bln euros.

Last week’s high was near $1.09, and this needs to be convincingly taken out to lift the tone.  Sterling reached a five-day high today near $1.2455.  Last week’s top was just above $1.2500.  A gain above there is needed to undermine a potential head and shoulders topping pattern some see.  Initial support is seen near $1.2420.


The busy week in North America begins slowly.  The US and Canada have a light schedule today, with Mexico reporting March unemployment statistics.  The first look at US Q1 GDP and the FOMC meeting are the highlights.  Canada reports February monthly GDP later this week.  Mexico also reports Q1 GDP, which is expected to have fallen for the fifth consecutive quarter.

US oil inventory data will draw attention.  Despite cuts in output, and the shuttering of more oil rigs (-60 last week, leaving 378, a four-year low), US storage space is quickly becoming exhausted, and there is concern that the problem will persist through the expiration of the June WTI contract.

Over the weekend, Treasury Secretary Mnuuchin reiterated that the US was looking at how to help the oil sector.  It is not clear if it would be another facility that Fed supported or whether it would be the Treasury or Energy Department taking a leading role.  Last week, President Trump again threatened tariffs on oil imports.

Trump has also spoken about boosting the Strategic Petroleum Reserves and giving some private producers access to some of its storage capacity.  Several of the largest oil companies, including Exxon, Mobil, British Petroleum, and Royal Dutch report earnings this week. Many still insist the lower oil prices are a function of a dispute between Saudi Arabia and Russia. Yet, since 2008, the US has doubled its output, which reached 13 mln barrels per day by the end of last year.

The US is not the low-cost producer, though access to cheap capital helped.  The industry was set for consolidation even before the latest drop.  Failures and acquisitions are rationalizing the fragmented shale industry and the larger players finding opportunities.  Diamond Offshore Drilling became the latest casualty over, filing bankruptcy after missing a debt servicing payment a week and a half ago. Last year, its losses doubled to almost $360 mln as revenues fell by about $100 mln to $980 mln.

We suspect that most of the US assistance would not go to the small fledgling producers, many of whom are not investment grade.  If this is true, it may accelerate the re-shaping of the industry, while at the same time, putting down a marker that claims the US will not bear the burden of the global adjustment: Saudi Arabia and Russia need to accommodate it.

The Brazilian real slumped to record lows before the weekend following the resignation of the Justice Minister Moro, who was held in high regard as the driving force behind the anti-corruption Car Wash investigation that ultimately jailed former President Lula. It followed the dismissal of the head of the Federal Police.  President Bolsonaro has been widely criticized for the handling of the health crisis and last week dismissed the Health Minister that favored social isolation.  The Bovespa lost roughly 5.5% at the end of last week.

The US dollar traded between CAD1.40 and CAD1.42 last Thursday.  This range is still key for the near-term outlook. After finishing last week near CAD1.4100, the US dollar slipped to about CAD1.4040 before finding support.  We continue to see the Canadian dollar more sensitive to the risk appetite (S&P 500 proxy) than oil prices per se.

A convincing break of the CAD1.40 area would target the month’s low near CAD1.3860. The greenback closed firmly against the Mexican peso at the end of last week after poking above MXN25.00 for the first time since April 6, when the record high was set (~MXN25.7850). It is trading within the pre-weekend range and found support near MXN24.75, just above the five-day moving average.

This article was written by Marc Chandler, MarctoMarket.

Investors Take PMI Crash in Stride

The Nikkei rose for the first time this week, and its 1.5% gain led the region. Europe’s Dow Jone Stoxx 600 is little changed as it continues to move sideways in a 320-340 range. US shares are slightly firmer.  In the bond market, the rally in the European periphery is the standout, as the ECB liberalized its collateral rules further. The US 10-year year is virtually unchanged at around 62 bp. In the foreign exchange market, the dollar is mixed.
The Norwegian krone is surging more than 1%, and the dollar bloc is also firmer, while the euro complex (euro, Swiss franc, and Danish krone) are nursing small losses. JP Morgan’s Emerging Market Currency Index is snapping a three-day slide. Gold, which approached $1660 earlier this week, is extending its recovery to press against $1725. Oil continues to recover from this week’s epic sell-off.  June WTI is a little below $16, and June Brent is a little above $22 a barrel.

Asia Pacific

Japan’s preliminary PMI fell further, though the market reaction was minimal. The manufacturing PMI eased to 43.7 from 44.8, and the service PMI fell to 22.8 from 33.8.  This saw the composite slide to 22.8 from 36.2. The BOJ meets next week. While it is unlikely to cut rates deeper into negative territory, many expect the BOJ to announce new efforts to ensure bank lending.
Australian’s preliminary PMI also fell. The composite slumped to 22.4 from 39.4. It is the sixth decline in the past seven months. Manufacturing slipped to 45.6 from 49.7, while the services component nearly was halved to 19.6 from 38.5.
South Korea’s economy contracted 1.4% in Q1 from the end of last year. It was largely in line with expectations.  It offset the 1.3% expansion in Q4 19. Household consumption fell 6.6% on the quarter. During the Asian financial crisis in the late 1990s, consumption crashed twice as much. Imports fell more than exports, which means that the net export component contributed to GDP. Public spending rose a little less than 1% on the quarter after a 2.5% jump in Q4 19. The risk is still on the downside this quarter.
Hong Kong Monetary Authority intervened for the third consecutive session to sell Hong Kong dollars and buy US dollars. It appears to have bought nearly $1 bln this week so far. The relatively wide interest rate differential of around 90 bp boosts the demand for HKD.
The dollar is in less than a 20 tick range on either side of JPY107.70. It has not moved off the JPY107-handle this week yet. Large option expirations today may reinforce the narrow band. There are about $3.6 bln in options struck between JPY107.25 and JPY107.50 that expire today. On the topside, are options for about $1.3 bln placed between JPY107.90 and JPY108.00.
The Australian dollar is firm within the range established earlier this week between roughly $0.6250 and $0.6400. It fell in the first two sessions this week and is edging up today for the second session. Net-net, it is off slightly on the week. The greenback drifted a little lower against the Chinese yuan.  It has gained once in the last five sessions.


The flash PMI readings were worse than expected. The broad story is the same, nearly everywhere. Manufacturing fell while service activity imploded. The composites reflect the importance of the latter. German manufacturing PMI fell from 45.4 to 34.4. France’s fell to 31.5 from 43.2. The service PMI fell to 15.9 in German (from 31.7) and to 10.4 in France (from 27.4).
The composite reading was halved in Germany to 17.1 (from 35.0) and even more in France (11.2 from 28.9). The composite reading for the eurozone as a whole stands at 13.5, down from 29.7. The UK’s reading was similar. The manufacturing PMI is at 32.9 from 47.8. The service PMI fell to 12.3 from 34.5, while the composite stands at 12.9 (down from 36.0).
Ahead of next week’s meeting, the ECB announced yesterday that it would accept as collateral bonds that had been rated investment grade before April 7. The concern is that in the period ahead, some companies, and perhaps some sovereigns, may lose their investment-grade status, which would further disrupt the ECB’s transmission mechanism by adversely impacting the ability of banks to borrow from the ECB.
The Federal Reserve indicated that it would buy some bonds that recently lost their investment-grade ratings. The ECB has not indicated it would purchase such instruments, but it did leave the door open for a future move. S&P announces the results of its review of Italian debt tomorrow. It is expected to cut it by one notch, which would leave it at its lowest investment grade reading. Recall, the ECB takes the highest rating of the top four agencies (including DBRS).
The EU leaders meet today to find an agreement on a larger assistance package. The size and modalities are not clear. Two things seem likely. First,  a compromise will be on the EU level, not the eurozone. Second, a substantially larger budget and an EU debt instrument look likely. The European project, as it were, is shaped by its responses to crises, and although many argued that it was mutualization of debt or bust, a compromise that falls shy of it,  is likely.
The euro has been sold below $1.08 for the first time in a couple of weeks today. It has tested the month’s low near $1.0770. Last month’s low was near $1.0635. There are large options that expire today that may influence the price action. There are 3.2 bln euro in options between $1.0800 and $1.0810 and an option for 525 mln euros at $1.0790.
There is a billion-euro option at $1.0750. On the upside, there is a two-billion euro in options struck in the $1.0830-$1.0840 area. The intraday technicals are overextended for the euro as the North American session is about to start. Sterling is trading quietly inside yesterday’s range, which was inside Tuesday’s range. It has spent most of the past 24-hours between $1.2300 and $1.2360.  It finished last week near $1.25.


The US sees the preliminary April PMI, March new homes sales, and the April Kansas Fed’s manufacturing survey, but it will be the weekly jobless claims that command the most attention.  It is the closest thing to a real-time economic snapshot.  The Good Friday holiday may have dampened the number of people filing for unemployment benefits for the first time. The median forecast in the Bloomberg survey is for a 4.5 mln jump. Ideas that the backlog from some states are being absorbed has fanned talk of another reading above 5 mln. Separately, the House of Representatives is expected to approve the new spending bill (~$485 bln) that replenishes the funds for the Payroll Protection Plan. The bill is expected to pass before midday. Another bill that provides state and local governments money will be on next month’s agenda.
The US dollar gained about 1.45% against the Canadian dollar during the first two sessions this week and pared those gains yesterday and is slightly heavier today as well. Initial support is seen a little above CAD1.4100. Resistance is seen in the CAD1.4235-CAD1.4265 area. Firmer equities and oil favor the Loonie.
The US dollar settled last week a little below MXN23.70 and has risen in the first three sessions this week. The greenback is firm near MXN24.50 after having earlier approached yesterday’s high near MXN24.69.  Mexico reported over 1000 new virus cases yesterday for the first time as the contagion looks to be spreading quickly. The IMF says Mexico has committed among the least resources to combat the economic and financial consequences even though it estimates Mexico’s economy will be among the hardest hit.



Investors Catch Collective Breath, but Sentiment remains Fragile

In Europe, the Dow Jones Stoxx 600 is recouping about a third of yesterday’s loss. The S&P 500 gapped lower yesterday, and although US shares are firmer, that gap (~2785.5=2820.4) is the key to the near-term outlook, Core yields are a little higher, and the US 10-year is around 58 bp. Italian bonds are little changed, but Spanish and Portuguese yields are more 7-8 bp higher.
The US dollar is lower against the major currencies, with the dollar bloc outperforming and the euro complex is little changed. For the first time in three sessions, JP Morgan’s Emerging Market Currency Index is posting small gains. Gold, which had tested the $1660 area is back knocking on $1700. June WTI was sold when it poked above $14 and is now around $10. June Brent reached $16 a barrel, its lowest since the late 1990s, and is now a little below $19.

Asia Pacific

Singapore, which had done well in the early phases of the pandemic, has seen a reversal of fortunes. It now has the most case in Southeast Asia, according to reports. Foreign worker dormitories apparently have been a crucial center of the outbreaks.
Preliminary March retail sales data from Australia saw a surge in hygiene products and dried food as households prepared to be homebound. Sales appeared to peak in mid-March as the lockdown began. The strong rise in sales (estimated at about 8.2% on the month) should be recognized as a one-off event, and consumption will likely be a drag on Q2 GDP.
There are two developments in Hong Kong to note. First, interest rate differential has seen the Hong Kong dollar trade on the top side of the band, and like yesterday, the Hong Kong Monetary Authority intervened and bought around $360 mln US dollar (selling HKD2.79 bln).
It represented a modest increase from Tuesday’s operation. Additional intervention is likely in the near-term. Second, HK’s Chief Executive Lam announced the most prominent cabinet reshuffle to date, involving five senior officials, including the minister that oversees the relationship with Beijing. The arrests of more than a dozen leaders of the recent protest movement over the past weekend will add to the social tensions.
For the third consecutive session, the dollar has held below JPY108.00. Support has been found in the JPY107.30-JPY107.50 area. The intraday technicals suggest the market is more likely to test the upside in North America. There is an option for $1.7 bln at JPY108.25 that should limit any breakout.
The Australian dollar is has recouped yesterday’s roughly 0.9% fall to briefly poke above yesterday’s high just below $0.6350. The intraday technicals suggest the upside may be limited. Support is seen near $0.6300.  The Chinese yuan edged slightly higher today after the dollar approached CNY7.10 yesterday.  


Italy’s bonds sold off hard yesterday. The 10-year yield jumped nearly 22 bp to 2.15%. The 30-year soared 30 bp to 3.00%. One would have thought that the ECB’s flexible Pandemic Emergency Purchase Program would have been deployed to prevent precisely this. It is not as if there is a buyers’ strike. Consider that for the syndicated five-year bond that was sold yesterday, orders were for 110 bln euros for the 16-bln euro issue. S&P will announce the conclusion of its rating review of Italy at the end of the week. It is rated BBB. Moody’s will review its Baa3 (BBB-) rating next month.


Reports suggest the ECB will have a teleconference call today to discuss whether it should further liberalize its collateral rules to allow below investment grade securities. The problem is that it is possible that a sovereign (see Italy above) and some businesses may lose their investment-grade status during the crisis. The ECB has tried to gain some room to maneuver so as not to be beholden to the rating agencies. It tends to rely on the highest of the four major rating agencies, which includes DBRS.
Separately, the EU heads of state hold their teleconference tomorrow. There is a debate now over the form of assistance, grants, or loans. One is reminded of the incredible problems caused by inter-ally debts of World War I, and the innovation for World War II, of the Lend-Lease program, which minimized loans, and arguably helped facilitate a quicker recovery.
The euro has been confined to a little more than a quarter-cent range today, mostly above $1.0850. Large expiring options today and tomorrow may serve to keep it on a $1.08-handle. Today there are options at $1.0825 (1 bln euros) and $1.0900 (1.5 bln euros) that expire. Tomorrow,  there are options at $1.08 (1.6 bln euros) and $1.09 (1.4 bln euros) that expire.
Disinflationary forces in the UK (slower increase in CPI and outright declines in PPI) failed to impact sterling. It is stabilizing after falling 1.2% yesterday, the most in a little more than a month. It pushed above $1.2350 in the European morning after testing the $1.2250 area yesterday. The intraday technicals are stretched ahead of the North American open, and the $1.2380 area may be sufficient to check stronger gains.
Lastly, the central bank of Turkey is widely expected to announce a 50 bp rate cut shortly. However, the risk is of a larger rather than a smaller move. The dollar holding just below the TRY7.0 level ahead of the announcement.


The Fed has bought nearly as many assets as it did under QE1 (2009, $300 bln) and QE2 (2010 $600bln) put together. This aggressiveness will weigh on the dollar down the road is increasingly cited as a bear case for the greenback. Yet there two good reasons not to over-emphasize this consideration. First, the relative size of central bank balance sheets was not particularly helpful in understanding or anticipating exchange rate changes in recent years. Second, the Fed’s balance sheet is now about 30% of GDP. The ECB’s are around 40% of its GDP, and the BOJ’s balance sheet is over 100% of Japan’s GDP.
Even a balance sheet focus would not necessarily point to a weaker dollar.  There are other factors. Emerging from the Great Financial Crisis, the dollar rallied on a divergence of policy thrusts and later on the policy mix.  Interest rates were higher, as was the return on capital.
The US Senate approved a roughly $485 bln package that includes about $320 bln for the Payroll Protection Plan that turns loans into grants for small and medium businesses that maintain or rehire employees. There are also funds for coronavirus testing and for hospitals. The House is expected to now vote on the bill tomorrow.  Meanwhile, another aid package that includes assistance for state and local government is in the early stages of negotiations.
There are two other talking points today. The first is the US oil inventory report. Late yesterday, API estimated that US holdings rose by 13.2 mln barrels last week, and combined, the gasoline and distillate stocks from by a11.1 mln barrels. The EIA estimate is regarded as more robust and is expected to show a 14 mln barrel build. Cushing’s holdings will be watched closely as it is approaching capacity. The other talking point is about Missouri’s lawsuit against China over Covid-19. This is more about thunder than rain. US states suing foreign governments is a difficult legal course to tread, and the case will be most like dismissed, not on merit but on procedural grounds.
The Mexican peso was trading near two-week lows when the central bank surprised with a 50 bp rate that brought the target rate to 6.0%. It is the third cut in three months for a total of 125 bp. There is scope for more cuts as inflation was at 3.25% in March and falling. President AMLO is reluctant to deploy its fiscal powers, which so far has been mostly about speeding up payments of existing programs to low-income households and loans to small businesses.
The IMF estimates its fiscal support to be less than 1% of GDP.
Between the domestic economic hit, hard currency inflows from tourism, worker remittances, and oil are drying up. The IMF projects the Mexican economy to contract by 6.6% this year after failing to grow last year. The price of insuring against a sovereign default for five years (CDS) rose to nearly 300 bp yesterday, the highest since the Great Financial Crisis, when it was twice as high.


The US dollar reached CAD1.4265 yesterday, its best level since April 2, when it tested CAD1.43. It is on its session lows in late European morning turnover and a little above yesterday’s low near CAD1.4115. Although penetration is possible, a deeper pullback by the US dollar seems unlikely as the intraday technicals are already getting stretched. The Mexican peso is also consolidating yesterday’s loss. Support for the US dollar is seen near MXN24.20, and initial resistance is pegged around MXN24.40.
This article was written by Marc Chandler, MarctoMarket.

Oil Drilled Below Zero, Equity Rally Stalls, Greenback Advances

First, reports suggest that North Korea’s Kim Jong-Un maybe in critical condition after surgery. He apparently was absent from last week’s events celebrating his grandfather.
The concern is about a potential power vacuum and the command and control of North Korea’s weapons. Second, in a tweet late yesterday, US President Trump said he would sign an executive order suspending immigration, ostensibly to fight the virus and protect jobs. No details were provided. Trump has also renewed his threat to stop imports of Saudi and Russian oil.
These disruptions have seen global equities fall. Following yesterday’s 1.8% decline of the S&P 500, most of Asia Pacific’s major bourses (including Japan, Australia, Hong Kong, Taiwan, and India) fell 2% or more. Europe’s Dow Jones Stoxx 600’s three-day advance is ending, and the benchmark is off about 2% in late morning turnover.
US shares are lower, with the S&P off by almost 1.0%. Bond markets are firm, with core yields off 3-4 bp, which puts the US 10-year near 57 bp. Italian bonds are under-performing. The dollar is well bid against nearly all the major and emerging market currencies.
The yen is also benefiting from the risk-off. The dollar-bloc and Norwegian krone are the weakest of the majors, while the Russian rouble, South African rand, and Hungarian forint are leading the EM complex lower. Gold is heavy, near two-week lows (~$1670), and oil remains on the defensive. The May WTI jumped in early Asia above $2 but is back below zero, while the June contract has collapsed to nearly $11 from $20 yesterday and is around $16.50 as this is written.

Asia Pacific

Fitch downgraded Hong Kong’s credit to AA- yesterday from AA, noting that it has been hit with two shocks–the demonstrations and now the virus. It warns that growth may contract 5% this year after falling 1.2% last year. Nevertheless, the relatively wide interest rate differential over the US has sent the Hong Kong dollar to the strong part of the band for the first time in nearly four years. The LIBOR spread was its widest in 20 years. The key spot level is HKD7.75. The Hong Kong Monetary Authority intervened, selling HKD for the first time in four years.
South Korea reported exports fell 27% in the first 20-days of April compared with a year ago. Exports to China were off 17%, while shipments to the US fell 18%, and to Japan, down 20%. In terms of products, semiconductor shipments were off 15%, and autos, nearly 30% lower. The data was poor but likely overstated. The period had two fewer working days than a year ago. Adjusted for this, exports were off about 17% on an average daily basis.
The dollar is trading at three-day lows against the Japanese yen near JPY107.25. There are a couple of option expirations today that may slow the dollar’s descent. There is a $730 option at JPY107.05 and another for $645 mln at JPY106.80.  The greenback dipped a little below JPY107 last week but has not been below JPY106.80 since mid-March.
The Australian dollar failed to resurface above $0.6400 yesterday and has been sold below $0.6300 today. Last week’s low was set near $0.6265, and a break signals a test on $0.6200 and possibly $0.6100 in the near-term. The US dollar is trading near two-week highs against the Chinese yuan, near CNY7.09.


German Chancellor Merkel showed the first sign that the European Council (heads of state) could take new measures on top of the compromise struck by Eurogroup (finance ministers). Without committing, Merkel seemed a bit more sympathetic to increasing the EU budget and a possible EU bond. A joint bond where each member is individually and collectively responsible is difficult to fathom.
Still, a bond where the obligation is limited to a country’s share of the EU budget seems more politically realistic. However, the EU does not have the power to tax, so how it would service the debt would need to be worked out, especially if it is not to count toward the debt of the members. It is also noteworthy that Merkel may be trying to position it as an EU rather than an EMU issue.
Germany’s April ZEW survey appears to have captured the moment. The current assessment is dismal. At -91.5, it is the worst in a decade (from -43.1 in March). However, the expectations component defied expectations. It surged from -49.5 in March to 28.2 in April. This is the strongest reading in five years. Small shops are re-opening in Germany this week, and there is hope that an economic recovery begins in earnest in Q3.
The UK’s employment figures were better than expected. The claimant count in March edged up to 3.5% from a revised 3.4% in February. Jobless claims rose by a mild 12.2k after a 5.9k increase in February. It had originally reported a 17.3k rise in February.
On the other hand, earnings data, which is lagged by another month, disappointed. Average weekly earnings slowed to 2.8% from 3.1% (three-month, year-over-year). The ILO employment rate ticked up to 4.0% from 3.9%. The UK reports March CPI tomorrow. Price pressures are expected to have continued to moderate.
The euro is softer, but it held above last week’s low (~$1.0810) in early European turnover. It seems unlikely to be able to overcome resistance in the $1.0860-$1.0880 area today. A break of $1.08 would spur a test on the $1.0770 area seen earlier this month.  Sterling, on the other hand, has broken down to nearly two-week lows around $1.2350. Yesterday, it had briefly poked above $1.2500. The 20-day moving average is found near $1.2380, and sterling has not closed below it since late March.  Chart support is seen in the $1.2180-$1.2200 area.


The collapse of the May WTI contract was epic. Perhaps lost on many, unlikely many financial futures that are cash-settled, the oil futures contract calls for physical settlement. Some participants had waited for the last day of trading to roll their position from May to June. When they went to sell their May contract, no one wanted to take delivery in Cushing, which is running out of unencumbered storage.
The market imploded, and the May contract at one pointed traded lower than minus $40 a barrel. Participants are likely to make one of two mistakes. The first is to exaggerate the negative price of the May contract.  It applies to a small and nearly inconsequential part of the oil market.  It is due to oil specific considerations, and extrapolations to other markets may not be particularly helpful.
The second mistake is not to appreciate the implications.  A significant imbalance of supply and demand will last a while. Looking at the futures strip, light sweet crude is below $35 a barrel through October 2021. The collapse in the June contract warns that despite expectations of sharp drops in output (OPEC+ agreement and market-forced) will not be sufficient to alleviate the storage shortage.


It is hard to imagine a repeat of yesterday’s action as the June contract nears expiry, even if a negative price is seen again. Speculators will be more nimble in rolling to the next contract earlier. Others, caught off-guard by the developments, will be better prepared next time to take advantage of low if not negative oil prices.
The pace of accumulation of inventories may slow as US production is pinched. Recall that the OPEC+ output cut agreement does not take effect until May 1. Saudi Arabia had already ramped up production this month and cut prices to Asia next month.
US oil rig count has fallen by more than a third in the past five weeks. Low oil prices dampen headline inflation measures, just as some observers begin fretting about the inflation implications of either the federal government or the Federal Reserve policies  A reduction of US shale output may boost the price of some of the byproducts, like gas.  If oil prices remain low for an extended period, as the futures market implies, it risks weakening the shift to non-carbon fuels and materials.
The US Senate is expected to vote today on another emergency stimulus bill for around $500 bln.  Most of the funds will be earmarked for the Payroll Protection Progam that turns business loans into grants if employment is maintained through September (begs the question of what happens in Q4).  The House Democrats were looking for $100 bln for hospitals, but the compromise seems to be around $75 bln.
They were also looking for aid to the state governments. Still, it appears the White House wants it separately, and instead, a compromise for funds to the Economic Injury Disaster Loan program, which includes grants, has been offered. It might pass the Senate without objection, which would allow the Senators not to return to Washington. The House may vote on the bill Wednesday. It is unlikely to be unanimous, which means the Representative would have to return to vote.
Three creditor groups rejected Argentina’s proposal to delay interest rate payments until 2023 and principal payments until 2026 on about $83 bln of foreign debt, which covers past restructured bonds as well as the more recent issues. Unless a compromise can be found, Argentina is headed for its ninth default. Even before the crisis hit, Argentina’s debt seemed unsustainable. The dollar has risen for 14 consecutive weeks.
Through yesterday, the Argentine peso is off about 9.25% against the dollar year-to-date. In comparison, the Mexican peso is off about 21%, and the Brazilian real has depreciated almost 24%. The costs of insuring (five year CDS) against Mexico and Brazilian sovereign default are trading a little below 300 bp. In early March both were near 100 bp.
The combination of weaker equities and the continued drop in oil prices is weighing on the Canadian dollarThe US dollar is near CAD1.4260, its highest since April 6, and is near the (50%) retracement of the decline since reaching almost CAD1.4670 on March 19. The next target is near CAD1.4360, but the intraday technicals suggest scope for a pullback, and the upper Bollinger Band (two standard deviations above the 20-day moving average) is found near CAD1.4270.
Initial support is seen around CAD1.4200. The greenback is bid against the Mexican peso, but it is below last week’s high (~MXN24.43). A move above the MXN24.50 area risks a return toward the spike high seen to the record set earlier this month near MXN25.78.
This article was written by Marc Chandler, MarctoMarket.