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The Dollar Continues To Recover

The Dollar Continues To Recover

Overview: The dollar's recovery begun yesterday has extended into today's activity. The greenback is higher against all the G10 currencies and most emerging market currencies, but the Indian rupee and Mexican peso. The BOJ did not reduce its bond buying at today's operation and the market sold the yen on the news. After reaching JPY153.60 yesterday, the greenback is near JPY156 now. New initiatives to support the beleaguered property market was not enough to offset the disappointing retail sales data and the yuan has pared this week's gains. On the week, the dollar has fallen against the G10 currencies but the yen and Swiss franc. It is also softer against most of the emerging market currencies.

China's new property initiative may not have helped the yuan, but mainland stocks rallied, with the composite indices up over 1% today. Japan's markets were mixed, but South Korea, Taiwan, and Australian and New Zealand shares fell. Europe's Stoxx 600, which snapped a nine-day rally yesterday is off about 0.25% today. US index futures are flattish. Benchmark bond yields in Europe are paring this week's decline with a 2-4 bp increase today. The 10-year US Treasury is up one basis point to 4.38%, leaving it down about 10 bp on the week. Gold is consolidating after reaching a four-week high yesterday near $2400. It is up around 1% this week. July WTI set the high for the week yesterday near $79.30. It is consolidating inside yesterday's range so far today.

Asia Pacific

The US tariffs announced this week impact an estimated $18 bln of imports from China. Since the US imports few electric vehicles from China, the quadrupling of the tariffs will have little immediate impact, but over time will encourage China producers to do what Japanese automakers did in 1980s and that is move some production offshore. The Biden administration appears opposed to allowing Chinese firms to establish production facilities in the US, but Trump's advisors seem less hostile. Europe also seems more open to Chinese direct investment than the US. Note that even without the Chinese competition, Ford and GM EV initiatives are in trouble. Ford is scaling back its EV operations and GM said it will re-introduce plug-in hybrids in the North American market. Separately, earlier today, China reported April economic data that showed a sharp acceleration in the year-over-year pace of industrial output (6.7% vs. 4.5%) but slower retail sales (2.3% vs. 3.1%). Fixed asset investment also slowed on a year-to-date, year-over-year calculus (4.2% vs. 4.5%). The property market continues to struggle. New and used house prices fell (month-over-month for the 11th and 12th consecutive month respectively) and at an accelerated pace. Residential property sales and property investment continue to slump. Beijing did announce remove the floor for mortgage rates, lowered required down payments, and the central bank facilitate lending to local governments (CNY300 bln or ~$41.5 bln) to buy unused houses, in the latest bid to stabilize the property market. 

The dollar's sell-off against the yen began in Europe on Wednesday from around JPY156.50 and bottomed yesterday in the local session near JPY153.60. It steadily recovered yesterday and reached JPY155.50 before European markets closed. The greenback consolidated above JPY155.15 in the North American afternoon. When the Bank of Japan did not announce a reduction in today's bond purchases, as it did on Monday, the dollar traded higher, almost reaching JPY156. Recall that the dollar settled near JPY155.80 last week. The Australian dollar reached a four-month high yesterday (~$0.6715). It pulled back to around $0.6655 by early in the North American morning. It hovered around $0.6680 after Europe closed. It barely rose above there today and is slipping through yesterday's lows in European morning. Initial support is seen near $0.6620-30. The PBOC set the dollar's reference rate at CNY7.1045 (CNY7.1020 yesterday). The average projection in Bloomberg's survey was CNY7.2215 (CNY7.2016 yesterday). Still, when everything was said and done, the yuan may eke out a small gain against the dollar on the week. It would be the third weekly loss for the dollar after a four-week advance, leaving it net-net practically unchanged since the end of March. China's 30-year special sovereign bond sale (CNY40 bln or ~$5.5 bln) produced an average yield of about 2.57% and was oversubscribed by 3.9x.


The spring EC forecast recognized that fragile recovery is taking hold in the eurozone. Its 0.8% growth projection this year, unchanged from its previous estimate, is slightly better than ECB's March forecast of 0.6%. Next year's growth is seen at 1.4%, slightly lower than previously and below the ECB's 1.5% projections. The EC forecasts a slightly faster moderation of inflation to 2.5% and 2.1% for this year and next, respectively. The ECB's March forecast for CPI to ease to 2.3% this year and 2.0% in 2025. The flash May PMI is the data highlight for the eurozone next week, while the UK sees the flash PMI, but also April CPI and retail sales.

The euro approached $1.09 early in the Asia Pacific session yesterday but was gently sold back to around $1.0855 in quiet turnover. An initial bounce seen as Europe prepared to close stalled near the middle of the range. The euro continued to kiss the upper Bollinger Band, which comes slightly below $1.0880 today. The euro is trading near its best level in a couple of months, making it look rich. It is trading with a heavier bias near $1.0840 in the European morning. This month's (steep) trend line comes in today slightly below $1.08. It settled near $1.0770 last week, and assuming it holds, it would be the fifth consecutive weekly advance. That is the longest rally since March-April 2023. Sterling posted an outside up day on Tuesday after approaching $1.25. Yesterday it tested $1.27. Like the euro, after the high was set in follow-through buying from North America early yesterday in Asia Pacific, sterling retreated to around $1.2645 as Europe was closing. It recovered to the $1.2680 area before sellers reemerged and it is sitting new yesterday's lows in late morning turnover in Europe today. While most technical indicators look constructive, sterling has rallied four cents in as many weeks. Initial support is pegged in the $1.2600-25 area. 


Yesterday's flurry of US data continues to general trend of weaker than expected data. The flagging momentum at the start of Q2 is reinforced by the downward revisions in the March series (e.g., retail sales, business inventories, housing starts and permits, industrial production, and manufacturing output). Moreover, the early May Fed surveys (Empire and Philadelphia) were also softer sequentially and below the median forecasts in Bloomberg survey. On tap today is the April Index of leading economic indicators. The 0.2% increase in February was the first uptick since February 2022. The six-month annualized pace of decline has gradually eased. It bottomed in March 2023 at -9.4% and stood at -4.3% in March 2024 and may have recovered to about -3.4%. That would be the least negative reading since May 2022.

The greenback was bought up for the second consecutive session on a dip below CAD1.3600. On Wednesday, the buying interest stalled around CAD1.3660. Yesterday, the buying dried up near CAD1.3640. It is knocking on that area now. From a technical vantage point, the CAD1.3600 area is important. It roughly corresponds to the (38.2%) retracement of this year's US dollar rally. It is also the upper end of the Q1 24 trading range. The lower Bollinger Band is found there, too. The CAD1.3650 offers initial resistance, but near-term potential may extend toward CAD1.3675-80. After posting a big outside down day on Wednesday, the US dollar consolidated near its lows against the Mexican peso yesterday and remains near them today. The greenback reached almost MXN16.65 on Wednesday and held above MXN16.66 yesterday and so far, today. Sellers emerging when the dollar moved MXN16.72, last week's low. The lower Bollinger Band is around MXN16.6135 today.


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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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