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FX Daily, May 31: Don’t Confuse Calmer Markets with Resolution

Swiss Franc

The Euro has fallen by -0.42% to 1.1485 CHF.

 

 

 

EUR-CHF and USD-CHF, May 31

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EUR-CHF and USD-CHF, May 31

Source: markets.ft.com - Click to enlarge

FX Rates

The global capital markets that were in panic mode on Tuesday stabilized yesterday, and corrective forces have carried into today’s activity. However, the underlying issues in Italy and Spain are hardly clarified in the past 48 hours.  Moreover, the US push on trade is intensifying again. The temporary exemptions for the EU, Canada, and Mexico from the steel and aluminum tariffs are set to expire. The US has signaled its intention to go forward with the tariffs on $50 bln of Chinese goods in retaliation for the violations of intellectual property rights on the eve of Commerce Secretary Ross’s trip to Beijing for more talks.

FX Daily Rates, May 31

FX Daily Rates, May 31

- Click to enlarge

Month-end sees a flurry of large option expirations: $1.1650 (1.8 bln euros), $1.1700 (2.2 bln),  $11.725 (1.4 bln), $1.1745-$1.1750 (1.8 bln). There is also 3.5 bln euros struck at $1.1700 which expires tomorrow.

The US dollar is down against all the major currencies and most of the emerging market currencies today. There are $1.2 mln in options struck between JPY108.90 and JPY109.00 that expire today. The dollar is trading inside yesterday’s range against the yen, which was inside Tuesday’s range. This kind of pattern is often associated with continuation of the near-term trend, which warns of a re-test on JPY108. Sterling rose to new highs for the week today just shy of $1.3350. There are GBP640 mln in options struck at $1.3395-$1.3400 that expire today. The intraday charts warn that if a high is not in place today, it came close.   The Canadian dollar rallied more than 1% yesterday after the Bank of Canada signaled it was nearing another rate hike. There has been no follow-through buying today as yesterday’s US dollar low near CAD1.2835 has held.  The large option ($2.9 bln) struck at CAD1.29 that expires today no longer seems relevant.  However, there are large Aussie options that are still in place. There are A$1.8 bln struck $0.7600-$0.7605 that expire today.

FX Performance, May 31

FX Performance, May 31

- Click to enlarge

Eurozone

The euro is enjoying its biggest bounce since the sell-off began in late-April.  The euro bottomed on Tuesday near $1.1510. It approached $1.1725 in Europe today, retracing a bit more than the 38.2% we had anticipated. Corrective pressures in Italy and month-end related demand seemed to provide the fuel.  However, we suspect that if the bounce is not over, it is nearly so. The euro was unable to extend its gains after the higher than expected preliminary May inflation figures were reported.  Headline inflation rose to 1.9% from 1.2% in April.

Eurozone Consumer Price Index (CPI) YoY (flash), May 2013 - 2018

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Eurozone Consumer Price Index (CPI) YoY (flash), May 2013 - 2018

Source: Investing.com - Click to enlarge

Country reports favored a strong number, but the core rate, which the national estimates typically do not identify in the preliminary release, rose to 1.1% from 0.7%.

Eurozone Core Consumer Price Index (CPI) YoY (flash), May 2013 - 2018

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Eurozone Core Consumer Price Index (CPI) YoY (flash), May 2013 - 2018

Source: Investing.com - Click to enlarge

Separately, eurozone unemployment was firmer than expected. The March series was revised to 8.6% from 8.5%. In April, it slipped to 8.5%.

Eurozone Unemployment Rate, April 2018

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Eurozone Unemployment Rate, April 2018

Source: Investing.com - Click to enlarge

China

China reported somewhat better than expected PMI. The manufacturing PMI rose to 51.9 from 51.4. Manufacturing output reached a six-month high, while new orders rose to an eight-month high. Caixin’s surveys will be reported on Friday. Separately SWIFT reported that the yuan’s share of payments rose to 1.66% in April from 1.62% in March.  It matched the January high, which was this year’s peak thus far. Last April it was at 1.60%. The highest share last year was 2%.

Exports were expected to have helped lift Japanese industrial production in April, but today’s reported 0.3% gain disappointed. The Bloomberg median forecast called for a strong 1.4% gain to match the March rise. We note that the weekly MOF data shows that last week, while the yen appreciated by more than 1.2% against the dollar, the most in three months, rather than seek the ostensible safe haven of Japanese assets, foreign investors sold Japanese bonds and stocks (~JPY600 bln).

China Manufacturing PMI, May 2013 - 2018

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China Manufacturing PMI, May 2013 - 2018

Source: Investing.com - Click to enlarge

Non-manufacturing PMI edged up to 54.9 from 54.8. The composite stands at 54.6 from 54.1 and matches the high for the year.

China Non-Manufacturing PMI, May 2013 - 2018

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China Non-Manufacturing PMI, May 2013 - 2018

Source: Investing.com - Click to enlarge

There has been little new apparently from Italy. A technocrat government led by Cottarelli appears to be waiting in the wings, as the President gives the M5S and League a last chance to see if they could put together a government. The former seems more willing to put forward another candidate for finance minister while the League, whose support has risen in the polls since the March election, continues to take a more strident position. Given the incredible magnitude of the moves seen earlier this week, it is difficult to be too confident of what the market is saying, but investors seem to prefer a new government to new elections.

Two polls out confirm that a majority of Italians prefer to stay in EMU. Di Maio and Salvini may be sincere in saying that they don’t want to leave either. What is not said, is that they are demanding that the EMU changes in profound ways in favor of the region’s largest debtors. And if those changes are not made?  If the EC rejects the proposal to lower the retirement age? What if the EC rejects that proposal that the bonds that it has authorized the Bank of Italy to buy no longer count toward the debt-GDP ratio? Some portray the League’s plan to leave the monetary union as some kind of innocent contingency plan. This seems to risk being naive.

Spain’s parliament is debating today ahead of a confidence vote tomorrow. It may be that  Rajoy’s fate is in Basque Nationalists’ hands. If they support the Socialists, Podemos, one of the Catalan parties in the non-confidence motion, Rajoy might simple resign, forcing elections.  Instead, if Rajoy were to lose a confidence vote, then the head of the Socialists (Sanchez) would become Prime Minister. New elections would seem to benefit the centrist Ciudadanos.

The MSCI Asia Pacific Index rose 0.85%, stabilizing after the 1.8% fall in the previous two sessions. The Dow Jones Stoxx 600 is posting a minor gain, but it would be the second day of gains, after dropping 1.7% on Monday-Tuesday. US shares are building on yesterday’s gains. Core bond yields are slightly firmer, while European peripheral bonds, led by Italy, are falling, paring this week’s rise.

Graphs and additional information on Swiss Franc by the snbchf team.

Full story here
Marc Chandler
He has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.
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