After Limited Follow-Through Selling, the Dollar has Come Back Bid snbchf.com

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Marc Chandler
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After Limited Follow-Through Selling, the Dollar has Come Back Bid

Overview: Three of the G10 currencies rose by more than 1% against the US dollar yesterday after the softer inflation and weak retail sales readings. The Dollar Index lost almost 0.65% yesterday, the most this year. Among emerging market currencies, only the Mexican and Chilean pesos rose by at least 1%. After extending its losses against most of the major pairs, the dollar has come back bid. Only the yen and Swiss franc are firmer on the day. The dollar-bloc currencies and Scandis are off 0.20%-0.25%. The Mexican peso has also come back offered and off about 0.25% is the weakest of the emerging market complex.

The strong buying that lifted the S&P 500 and NASDAQ to new record highs yesterday carried over into the Asia Pacific session. Nearly all the regional markets gained. The Nikkei, Hang Seng, and Australia and New Zealand benchmarks all rose by more than 1%. The index of mainland shares that trade in Hong Kong gained almost 2% (19.1% year-to-date). Europe's Stoxx 600 is struggling with a nine-day advance in tow. US index futures are slightly firmer. The larger than expected rise in Australian unemployment and a loss of full-time positions helped spark a large rally in the local bonds. The 10-year yield tumbled almost 13 bp. European 10-year yields are little changed as they consolidate the recent decline. Similarly, the 10-year US Treasury yield virtually unchanged near 4.33%. Gold initially extended yesterday's advance, but it has been turned back from a four-week high a little shy of $2398. July WTI rose through yesterday's high to nearly $78.70 before sellers brought it back to $78. Although there have been a couple of intraday spikes to $76.35-60 in recent days, it has not settled below $77.50 in a couple of months.

Asia Pacific

Japan's economy contracted in Q1 24 by 2.0% at an annualized rate and Q4 23 GDP was revised to flat from 0.4%. Nevertheless, halfway through Q2 24, a recovery seems to be underway. In fact, the March industrial output was revised to show a 4.4% month-over-month gain, up from the 3.8% initial estimate. The earthquake on January 1 and auto scandal were significant disruptions. Consumption, business investment, and net exports (despite the weakness of the yen) were drags on growth. Government spending and inventory accumulation were net additives. The GDP deflator moderated to 3.6% from 3.9% (and 5.2% peak in Q3 23). That said, the market expectations for a July rate hike stand near 35%. Australian employment rose by 38.5k in April, slightly better than expected, after falling a revised 5.9k in March (-6.6k initially). Still, the unemployment ticked up to 4.1% from a revised 3.9% (3.8% initially). The participation rate edged up to 66.7% from 66.6% and the number of full-time positions fell by 6.1k, the first decline this year. Lastly, first thing tomorrow, China reports April macro data and sequentially, the year-over-year figures for industrial output and retail sales likely improved. House prices and property investment are expected to have continued to decline.

The dollar gave back four days of gains against the Japanese yen, encouraged by the soft US data and speculation that between buying fewer JGBs and a possible hike in July, the Bank of Japan is offering a defense of the yen. The dollar fell to about JPY154.65 in North America yesterday. The greenback was sold to JPY153.60 in the local session today, which met the (61.8%) retracement of the dollar's recovery from the post-intervention low near JPY151.85 on May 3. It recovered to reach JPY154.80 in the European morning and stretching the intraday momentum indicators. The Australian dollar busted out and reached almost $0.6700, its best level in four months in North America yesterday. The close above $0.6675, the (61.8%) retracement of this year's decline lends credence to the breakout. Follow-through buying lifted it to about $0.6715 today where it met a wall of sellers that push it back to around $0.6675. A break of $0.6650 would frustrate the bulls. The dollar's broad weakness saw the offshore yuan trade at its best level in eight sessions today near CNH7.2040. When the offshore yuan trades at a premium to the onshore yuan, may be one signal that the selling pressure is alleviated. The gap has narrowed but still the offshore yuan is a little weaker than the onshore yuan. The PBOC set the dollar's reference rate at CNH7.1020 (CNH7.1049 yesterday). The average in Bloomberg's survey was CNY7.2016 (CNY7.2274 yesterday).

Europe

Outside of the Norway's Q1 GDP (mainland economy expanded by 0.2% quarter-over-quarter; same as in Q4 23), the economic calendar is light today and tomorrow. The market remains confident (95%+) of a rate cut at the June 6 ECB meeting. Even, some of the leading hawks, like the Dutch central bank president Knot appears to have endorsed it. The pricing in the swaps market is consistent with a cut in late Q3 and late Q4. The Bank of England is a closer call. The swaps market has about 60% chance of a June cut, which is almost double what it was at the end of April. The market has 60 bp of cuts discounted this year, which is two quarter-point moves and a 40% chance of a third. And this is ahead of next week's CPI, where the base effect points to large decline in the year-over-year rate (4% in January, 3.2% in March, 2.5% in April?). The swaps market has a little more than an 80% chance discounted that the Swiss National Bank cuts rates for the second time this year at its June 20 meeting. The Riksbank says that it may cut rates two more times this year, but the market is not fully convinced. It appears to be pricing in one fully and about a 50% chance of a second.

The euro went into the US CPI and retail sales report bid and ran up from about $1.0835 to around $1.0870 before profit-taking set in and drove it back to almost $1.0830. It was from there, the euro lifted to new session highs near $1.0880 and today reached $1.0895 before profit-taking kicked in. The euro has retraced half of this year's decline with yesterday's advance. The next retracement (61.8%) is near $1.0935. Despite what appears to be constructive technical developments, a note of caution is in order. The euro settled above its upper Bollinger Band (~$1.0850). It has not convincingly re-entered the Bollinger Band, which is found near $1.0870 today. Still, the intraday momentum indicators are oversold in late European morning turnover. Sterling reached $1.2680, its best level in a month and meeting the (61.8%) retracement of the losses since the year's high was set in early March (~$1.2895). Last month's high was set a little above $1.2700, which was tested today before sterling was sold to session lows near $1.2665. The momentum indicators do not appears as extended as the euro's, but it too settled above its upper Bollinger Band (found today near $1.2675). From Tuesday's low to today's high, sterling has rallied nearly two cents.

America

The moderation in CPI and weaker than expected retail sales helped bolster the market's confidence that the Fed has scope to cut rates twice this year. The derivatives market is the most confident since April 9 when the March CPI was released. Then, the market was wavering between two and three cuts. Today's data are unlikely to elicit a strong market response. Weekly initial jobless claims jumped last week, and narratives seemed to emphasis school-related positions (California and Illinois cited) qualify for unemployment insurance during breaks) may draw some attention. April housing starts are due at the same time but after an outsized 14.7% decline in March, a jump back is expected. The May Philadelphia Fed survey and is expected to be consistent the moderating activity theme. Shortly after the flurry of reports, April industrial production figures will be released. It is expected to have eked out a 0.1% increase after output was boosted by 0.4% in March.

It was almost as if the Canadian dollar reluctantly advanced yesterday. Its 0.35% gain was the least among the G10 currencies. In fact, through the first half of the month, the Canadian dollar's 1.3% gain also puts at the bottom of the G10 table. Still, the US dollar fell to its lowest level in a month, slightly below CAD1.36 and frayed the lower Bollinger Band (~CAD1.3605). The US dollar met the (38.2%) retracement of this year’s advance, and the (50%) retracement is a little above CAD1.35. It found support today near CAD1.3590. Nearby resistance is seen in the CAD1.3640-50 area. The dollar recorded a bearish outside day against the Mexican peso, trading on both sides of Tuesday's range before settling below Tuesday's low. In fact, the greenback posted its lowest close since April 12. The peso rose by 1%, its second-best day so far this year. However, there has been no follow-through peso gains today and a consolidative tone has emerged. Initial resistance for the dollar is seen in the MXN16.75-80 area. With soaring copper prices, the Chilean peso was able to practically keep pace, but the Brazilian real was one of the few emerging market currencies that could not gain on the US dollar yesterday. The equity market also under-performed. President Lula's shake-up of senior management at Petrobras stoked investor angst.

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About 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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