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Jump in Japanese Bond Yields Fails to Lift the Yen

Jump in Japanese Bond Yields Fails to Lift the Yen

Overview: The foreign exchange market is quiet. Most of the G10 currencies are +/- 0.1% against the dollar. The crash that took the of Iran's president and foreign minister may have helped lift gold to new record highs ($2450), the impact seems more muted, as poor weather rather than foul play, seems to be main narrative. July WTI reached nearly $80, its best level since May 1 but is hovering around unchanged levels (~$79.50). Canadian markets are closed today for a national holiday, while no fewer than five Fed officials speaks today, which includes three governors and two regional presidents who vote on the FOMC this year. 

The MSCI Asia Pacific Index rose 2.4% last week and it has not had weekly loss since the week ending April 19. It is off to a firm start this week. All the large and most small bourses in the region rose. The market initially seemed impressed with Beijing's latest initiative to support the property market but shares in the sector fell today (snapping a three-day rally). It is seen as too small. Europe's Stoxx 600 fell in the last two sessions but has come back from the weekend a bit firmer. US index futures are also trading with a firmer bias. Japan's 10-year yield has taken out the high set at the end of last year, edging closer to 1.0%. It has risen for six of the past seven weeks coming into this week. The 30-year JGB is pushed above 2.0% today for the first time since 2011. European bonds are narrowly mixed, and the 10-year US Treasury is off one basis point to 4.41%. Last week's low was near 4.30% and the high was near 4.53%.

Asia Pacific

It is likely to be a fairly subdued week in the region. Japan and Australia will see the preliminary May PMI reports on Thursday. Ahead of it, Japan reports April trade figures Wednesday. Its trade balance typically deteriorates in April (16 times in the past 20 years). April 2023 was one of the exceptions that showed improvement over March, but this year, back to seasonal form. The JPY387 bln March surplus may be followed a shortfall of almost the same magnitude. China's loan prime rates were left unchanged earlier today, as widely anticipated following the PBOC's decision last week to keep the one-year Medium-Term Lending rate unchanged at 2.50%. Expectations for lower rates lingers and the one-year AAA CD rate is near 2.0%. The Reserve Bank of Australia is seen as the least likely in the to cut rates this year and the minutes of its recent meeting will be released the first thing tomorrow. The April employment data was a weaker than expected with a larger rise in unemployment (4.1% from 3.9%, revised from 3.8%) and a net loss of full-time positions (-6.1k) for the first time this year. It spurred some speculation of a rate cut before the end of the year. The futures market upgraded the risks to about 66%. It was about a 25% chance at the end of April and about 40% before the jobs report. The Reserve Bank of New Zealand meets first thing Wednesday. It is seen holding its cash rate at 5.5% until possibly Q4.

The dollar spent most of the pre-weekend session above the previous day's range high (~JPY155.55). The BOJ's reluctance to continue to reduce its bond purchases seemed to strengthen perceptions that it was not as concerned about the yen's weakness as was the Ministry of Finance. However, BOJ Governor Ueda's rhetoric does appear to be slowly changing. The dollar has been confined to about a JPY155.50-JPY155.95 range so far today. A move a JPY156 would target the JPY156.75-JPY157 area. The Australian dollar tested previous resistance near $0.6650 that has turned into support. It made new session highs in late dealings before the weekend, slightly above $0.6700. Last week's high was about $0.6715. It is trading quietly in a narrow range of about $0.6685-$0.6710. The next upside target is the $0.6730-50 area. The PBOC set the dollar's reference rate ate CNY7.1042 (CNY7.1045 Friday) and the average in Bloomberg's survey was CNH7.2158 (CNY7.2215 Friday). The dollar was virtually flat against the offshore yuan last week, slipping by about 0.1%. This preserved that saw-tooth pattern of alternating between weekly gains and losses since early April. The greenback is trading firmer today and looks poised to test last week's high near CNH7.2470. 


The economic diary of the eurozone is pretty light on market-moving data with Thursday's preliminary PMI the highlight. March's external balances and construction output are less impactful given we are halfway through Q2, and Q1 GDP has already been announced. We do not know what goes on behind closed doors, but it seems like the bevy of tariffs announced by the US last week would be better coordinated with Europe. All else being equal, one would expect US tariffs to deflect Chinese goods toward Europe. Brussels has several trade investigations open and new tariffs are likely, though probably after next month's European Parliament elections, which will result in a new European Commission. The US actions limit Europe's degrees of freedom, but Europe seems to see climate change as more urgent than the US and seem to be more open to Chinese direct investment, as they were Japan's in the 1980s. It is a busier week for the UK and mostly in the second half of the week at that. April CPI (look for a sharp fall in the year-over-year headline rate) is due Wednesday, and retail sales on Friday (the timing of Easter may have impacted). The preliminary May PMI is between the two government reports, on Thursday.

The euro rose by nearly 1% last week, its fifth consecutive weekly advance. It finished firmly near $1.0870. The momentum indicators are stretched but have not yet begun turning. Still, it seems to be like being at the end of a boxer's punch. The euro is trading in around a fifth of a cent range today below $1.0885. A break of the pre-weekend low near $1.0835 is needed to boost ideas a top is in place Sterling finished last week above $1.27 for the first time in two months. It is still straddling the area today, in a roughly $1.2680-$1.2710 range. The momentum indicators are stretched here too, and sterling settled above its upper Bollinger Band (~$1.27). Still, there may be scope for another half-of-a-cent advance or so. A break of $1.2640 warns a top may be in place. 


Leaving aside the April PMI and PPI, nearly all the other high-frequency US economic data have been reported below expectations. Often March readings were revised lower, as well. However, the adjustment to expectations may have run its course. The two-year yield fell from almost 4.90% before the PPI to 4.70% after the CPI and retail sales report. It was unable to make further headway despite a series of disappointing data the following day, May 16. The data due in the coming days do not have the gravitas to impact expectations much one way or the other. The early Fed surveys suggest the softer economic tone carried into May and it would be a surprise if the preliminary PMI does not confirm. Canada reports April CPI tomorrow and provided that the underlying core measures continue to ease, the odds of a cut at the June 6 meeting may be boosted. It is currently seen as around a 40% probability in the swaps market. Canada shoppers are missing in action. March retail sales, due Thursday, likely fell for the third consecutive month. Mexico reports March retail sales today and a small gain is likely. However, Thursday's reports are more important. Not because of the final read of Q1 GDP, but because of the first half of May CPI and the minutes from the recent central bank meeting. The pace that CPI was moderating by has slowed and this, coupled pushing out the first Fed cut, and the general resilience of the economy allow the central bank to be patient.

The greenback is probing support at CAD1.36, its lowest level in a month. A convincing break could see CAD1.35. The momentum indicators allow for it, but the lower Bollinger Band is nearby, around CAD1.3585. Nearby resistance is seen near CAD1.3650. Canadian markets are closed today for Victoria Day. The US dollar tested the MXN16.60 level before the weekend and has pushed through it today. The weekly settlement was the lowest since April 11, two days after the multiyear low was recorded near MXN16.2615. The dollar has fallen for three consecutive week and by more 1% or more each week. The lower Bollinger Band is near MXN16.5550. Still, several Latam currencies outperformed the Mexican peso last week. The Chilean peso, aided by the rally in copper prices, rose by nearly 4%. The Colombian peso appreciated by 1.55%, and the Brazilian real rose a little more than 1%. The usual memes are being discussed:  rates and commodities. 


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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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