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Yen Recovers from New 2023 Low, while Sterling Sets a New Low for the Month

Yen Recovers from New 2023 Low, while Sterling Sets a New Low for the Month

Overview:  The dollar is bid. Only the Japanese yen is holding its own against the greenback but only after it fell to new lows for the year. The Scandis and Antipodeans are the heaviest among the G10 currencies, while sterling has fallen to a new low for the month. The prospect of a rate hike tomorrow has not protected the New Zealand dollar much and it is off nearly 0.5%. Emerging market currencies are more mixed. Outside of the Russian rouble, the South Korean won, Philippine peso, and Mexican peso lead the advancers. The Hungarian forint, the strongest currency this year is off 1% amid expectations that the central bank will cut its overnight rate by as much as 100 bp to 17% (base rate is at 13%).

Most of the large Asia Pacific equity markets fell. Taiwan, South Korea, and India were exceptions. Europe's Stoxx 600 is snapping a three-day advance and is off about 0.3% in late morning turnover. US equity futures are a little softer. European 10-year yields are mostly 2-3 bp higher, but the sell-off in Gilts is stronger and the 10-year yield is up seven basis points to 4.13%, a new three-month high. The 10-year Treasury yield is up a little more than a basis point to 3.73%. Gold is on the defensive and is retesting last week's lows near $1950. July WTI is trading quietly around $72.

Asia Pacific

Japan's preliminary May PMI was stronger than expected. The manufacturing PMI edged higher to 50.8 from 49.5, helped by stronger new orders and output. It is the first time above 50 since last October. The service PMI rose to a new record high of 56.3 (from 55.4). The composite improved to 54.9 from 52.9, its best level since October 2013. The markets do not typically react much to the PMI, instead, the highlight of the week is Tokyo's May CPI. While the headline and core are expected to ease slightly from the 3.5% year-over-year pace in April, the underlying measure, which excludes fresh food and energy, is seen rising to a new cyclical high of 3.9% (from 3.8%).

Australia's flash PMI softened from the final April reading. The manufacturing PMI was unchanged at 48.0. It is the third month below 50. The service PMI slowed to 51.8 from 53.7 in April. The composite PMI eased to 51.2 from 53.0 last month, which was the highest since last April. The data highlight of the week may be the April retail sales report. Australia's retail sales crashed by 3.9% last December and has been recovering this year (1.9% in Jan, 0.2% in Feb, and 0.4% in March). Another small gain is expected. The central bank meets on June 6 and is expected to hold its cash target steady at 3.85%.

The dollar closed the North American session firmly near JPY138.60 and edged higher early in the Asia Pacific turnover to reach a new high for the year a little shy of JPY138.90. It retreated to the five-day moving average near JPY138.25. While a break of JPY138 would signal a loss of momentum, a shelf has been forged in the JPY137.25-50 area and the 200-day moving average is a little lower, closer to JPTY137.15. The Australian dollar remains pinned in the lower end of the two-and-a-half month trading range ($0.6600-$0.6700). The range has fray on an intraday basis but not on closing basis for two months. At the end of April, it spiked to about $0.6575 before recovering and rose to $0.6820 within a fortnight. Despite warnings from the PBOC at the end of last week, the dollar gapped higher against the yuan and approached last week's high for the year. It reached CNY7.0550 today. Last week's high was slightly above CNY7.06. The gap is found between yesterday's high (~CNY7.0370) and today's low (~CNY7.0395). The dollar has been climbing the five-day moving average, found now around CNY7.0260. The PBOC's dollar fix at CNY7.0326 was a little above expectation (CNY7.0322, the median in Bloomberg's survey), seemingly showing little official concern.


The eurozone economy appeared to come to a screeching halt in March. Retail sales fell by 1.2%, industrial output cratered by 4.5%, and we learned yesterday that construction output slumped 2.4% (and the February series was revised to 1.7% from 2.3%). The PMI survey gave little hint of this weakness. In fact, in April, the composite was the highest since April 2022. The manufacturing PMI has been below the 50 boom/bust level since last July, and in April was at its lowest level since June 2020. The manufacturing PMI weakened further in May, falling to 44.6 from 45.8. The service PMI snapped a six-month advance that took it to 56.2 in April, the highest since April 2022. It slipped to 55.9. German manufacturing PMI fell to 42.9 from 44.5 but the services PMI improved to 57.8 from 56.0. The composite edged up to 54.3 from 54.2. France's manufacturing weakness moderated (46.1 vs. 45.6) but service activity slowed (52.8 v. 54.6). The composite eased to 51.4 from 52.4.

The UK's flash PMI showed a stabilization of the manufacturing sector and slower growth in services. The composite PMI reached 54.9 in April, which is also the best level since April 2022, and eased slightly to 53.9 this month. The manufacturing PMI slowed further to 46.9 from 47.8. It was 45.3 at the end of last year and 54.6 last May. The services PMI slipped to 55.1 from 55.9, a 13-month high. It was slightly below 50 at the end of last year and 53.4 last May. The composite is at 53.9 from 54.9. Tomorrow, the UK reports April CPI, which due to the base effect, should see the year-over-year rate fall sharply. The median forecast in Bloomberg's survey sees the year-over-year rate falling to 8.2% from 10.1%. The core rate is expected to be steady at 8.2%. April retail sales are due at the end of the week and a small gain is expected after a 0.9% decline in March.

The euro is softer within its recent range. It had fallen to $1.0760 before the weekend and reached nearly $1.0780 today. The $1.0735 area is the (61.8%) retracement of the rally since the March 15 low near $1.0515. The intrasession momentum indicators are stretched and support near last week's lows may hold today. Sterling has been sold to almost $1.2380, a new low for the month. It is recording a lower high for the fifth consecutive session. The intraday momentum indicators are stretched here too, but we note that the (38.2%) retracement of its rally from the March 8 low near $1.18 is found closer to $1.2345.


The Fed says it is data dependent but what data? Today's Philadelphia Fed's non-manufacturing activity survey is probably not what it means. That said, the Philadelphia's Fed's manufacturing survey was much stronger than the depressing Empire State survey. The Empire State manufacturing survey slumped to -31.8 from 10.8. Economists in Bloomberg's survey projected a -3.2 reading. In contrast, the Philly Fed improved to -10.4 from -31.3. Bloomberg's survey found a median of -20. We suspect there is scope for the non-manufacturing survey to better April's -22.8 reading, which was the worst since December 2020. Nor will the May PMI move the Fed's needle. It is expected to point to a small slowing in activity, but the recent string of US date has been mostly above expectations and there are some (see Atlanta Fed GDPNow) that see evidence that the economy re-accelerated after slowing a 1.1% at annualized pace in Q1. Economists in Bloomberg's monthly survey saw the median forecast for Q2 rise to a still lowly 0.5% from 0.2%. Today, the US also reports new home sales. They rose by an average of 3.3% a month in Q1 and 4.3% in Q4 22, after three quarter of declines. After a 9.6% rise in March, a pullback is expected (~2.5%). It is too unlikely to change the minds of Fed officials.

Comments by two Fed officials seemed to take some of the sting away from Chair Powell's weekend comments. St. Louis Fed's Bullard does not vote this year, but he remains among the leading hawkish voices. Still, his call for two more hikes seemed, well, even hawkish for him. Minneapolis Fed President Kashkari is more activist than hawk. He was a leading dove and now a leading hawk. He said that even if the Fed pauses, it should clearly signal that the tightening cycle is not over. That increasingly seem like a fallback option for hawks. Agree to pause in June but get a commitment of a low bar for hike at the next meeting (July 26). The odds in the Fed funds futures market are of quarter-point hike in June edged up to around 25% yesterday. The implied yield of the January 2024 Fed funds futures contract is about 4.70%. The yield was near 4% on May 4. The high yield point before Powell was 4.73%. 

Canada has a quiet economic diary this week. Today's industrial product price index and the raw materials price index barely get noticed by market participants. The greenback is probing resistance at the upper end of its five-day range near CAD1.3545. The down sloping top is formed by the trendline off the two March highs and the April high, which comes in today around CAD1.3575. Last week's high was almost CAD1.3570. The Mexican peso has fallen for five consecutive sessions coming into today, which is the longest losing streak since January 2022. It is threatening to snap that streak today. The US dollar is trading with a softer bias around MXN17.87 in the European morning. It is consolidating in a narrow range today. The recent weakness seems like a little bit of a shake out of some of the late, and therefore weak long pesos. The fundamental drivers of the peso were never the investment climate under AMLO, but the high interest rates, low vol currency, near-shoring/friend-shoring meme, helped by strong worker remittances, and a strongly independent central bank and Supreme Court. These drivers are still intact, and the technical correction will likely be seen as a new buying opportunity. 

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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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