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Market Pushes the Yen Lower, Helped by a Broadly Firmer Greenback

Market Pushes the Yen Lower, Helped by a Broadly Firmer Greenback

Overview: The dollar is firmer against all the G10 currencies today. The market is somewhat less fearful of intervention and the yen is extending yesterday's losses. It is rivaling the Australian dollar for the weakest of the major currencies after the Reserve Bank of Australia left rates on hold and played down speculation of possibility of a rate hike. Both currencies are off around 0.4% in late European morning turnover. Disappointing German factory orders shows the fragility of the nascent recovery. Emerging market currencies are mostly softer, led by the central European currencies. The Chinese yuan is also seeing yesterday's 0.45% gain pared. It is off about 0.15% today. The offshore yuan is off for the second consecutive session and down almost 0.45% this week after rising slightly more than 1% last week.

Japanese equities rose with the Nikkei tacking on nearly 1.6%. The Hang Seng snapped a ten-session rally, falling by about 0.55% today. Mainland shares that trade in HK fell 0.7%, while the CSI 300 was virtually flat. Europe's Stoxx 600 is about 0.7% higher. If sustained it would be the third consecutive gain, the longest advance since late March. US equities are narrowly mixed. Bonds continued to advance, pushing yields lower. Most European 10-year benchmark yields are off 2-3 bp but 10-year Gilt yields are off seven basis points following the British Retail Consortium report that retail sale fell sharply in April (-4.4% vs. +3.2% in March). The US 10-year Treasury is around two basis points lower near 4.46%. The US Treasury sells $58 bln three-year notes today and $42 bln 10-year notes tomorrow. Gold is trading about $10 lower today but still well within its consolidation range (~$2275-$2335). Despite hopes of a Middle East truce fading, June WTI is pinned near its lowest level in two months but is holding slightly above the 200-day moving average (~$77.85).

Asia Pacific

Japanese markets reopened from the four-day weekend, and officials cannot be pleased. President Biden lumped Japan with China and Russia in claiming it was xenophobic and Treasury Secretary Yellen comments seemed to take the sting from what is widely seen as two bouts of intervention last week for around JPY9 trillion (~$59 bln). By saying that she expects intervention to be rare, it could signal the end of the operation, which in terms of size, was around the same as in September-October 2022. BOJ Governor Ueda met with Prime Minister Kishida and underscored that the yen's impact on prices is being closely monitored. Still, despite softer rates, the dollar reached a three-day high against the yen near JPY154.65. It settled last week slightly above JPY153.

As widely expected, the Reserve Bank of Australia stood pat, leaving the cash target rate at 4.35%. The RBA hiked 25 bp last November, as the new governor (Bullock) cast off aspersions that she was a dove. Firm Q1 CPI (1.0%) sparked some talk of another hike, but this may be wide of the mark. The RBA boosted the year-end's inflation forecast to 3.8% from February's forecast of 3.2%. The forecast for the trimmed mean measure of inflation was lifted to 3.4% from 3.1%. Both measures are seen falling back to 2.8% by the end of next year (i.e., back within the 2%-3% target range). The year-end implied futures rate eased to its lowest level in two weeks. The three-year bond yields fell 10 bp to 3.92%.

Post-intervention, the dollar bottomed ahead of last weekend near JPY151.80, having peaked at the start of last week around JPY160.15. The dollar reached JPY154.65 in the local session today and fell to about JPY153.85. It is back near the highs in the European morning. The JPY155 area represents the (38.2%) retracement and the halfway mark is about JPY156. One-month implied volatility peaked near 12.5% at the end of April. It traded to almost 9.3% yesterday. The 100- and 200-day moving average converge near 8.8%. The Australian dollar was trading at the upper end of a four-month trading range. It has not settled above $0.6650 since mid-January. Since recording the year's low near $0.6365 on April 19, the Aussie has rallied almost three cents. That met the (50%) retracement of the decline (from ~$0.6870 at the end of last year). It has traded on both sides of yesterday's range. A close below yesterday's lows (slightly below $0.6600) would be a bearish technical development. If so, the risk appears to extend back toward $0.6500. The PBOC set the dollar's reference rate at CNY7.1002 (CNY7.0994 yesterday) and the average in the Bloomberg survey was CNY7.2148 (CNY7.2106). Against the offshore yuan, the dollar bottomed at the end of last week (as it did against the yen) near CNH7.1655. It reached almost CNH7.2235 yesterday and slightly higher today (~CNH7.2245). The CNH7.2325 area is the (50%) retracement of the decline since the April 24 high near CNH7.2740.


There were three data points to note in Europe today, ahead of the Riksbank meeting tomorrow and the Bank of England on Thursday. Consistent with the modest recovery meme, eurozone retail sales rose by 0.8% in March. It was the first increase since last November and is the largest since October 2021. It does not really change anything. The swaps market continues to price in the strong chance of a rate cut next month, followed by a cut in Q3 and another in Q4. Second, the UK saw the fifth consecutive increase in the construction PMI. At 53.0 (up from 50.2 in March), it is the highest since October 2022. Still, the drop in BRC April sales seemed to overshadow the construction PMI. The UK reports Q1 GDP on Friday. The economy is expected to have grown by about 0.4% after contracting roughly the same amount in H2 23. The Riksbank is a close call after officials suggested a rate cut could be delivered in May or June. The market sentiment has shifted toward a rate cut tomorrow. The swaps market is discounting about a 60% chance of a cut, the most in around a week and a half. 

The third set of data points came from Germany. It disappointed with a 0.4% decline in March factory orders. The median forecast in Bloomberg's survey was for a 0.4% increase. Adding insult to injury, the February series was revised to -0.8% from 0.2%. Its construction PMI fell to 37.5 from 38.3. Lastly, Germany reported a 22.3 bln euro trade surplus, which was in line with expectations. Exports rose by 0.9% (0.3% expected) and February's 2% decline was shaved to -1.6%. Imports rose 0.3% (-1.0% expected) and February's 3.2% gain was shaved to 3.0%.

The euro traded firmly yesterday reaching almost $1.08 after having briefly traded to 3.5-week high near $1.0810 after last week's US jobs data. It is trading quietly (~$1.0755-$1.0775) inside yesterday's range (~$1.0750-$1.0790). A break of the $1.0740-50 area would weaken the technical tone. Sterling did not sustain its push above $1.26 after the US jobs data but is holding the low set at the end of last week near $1.2525. It is finding support in early European turnover near $1.2530. A break of $1.25 would be disappointing. Nearby resistance is seen in the $1.2560-70 area. 


There are several reasons why the US economy has outperformed. The US fiscal deficit seems to be a factor. Real wages increases have helped underpin consumption, and that has been helped by productivity gains (among the best in the G10). Today's high-frequency data point, consumer credit, is another consideration that has helped consumption. In February, revolving credit (think credit cards) rose by $11.3 bln, a three-month high. Overall consumer credit rose by $14.1 bln. The median forecast in Bloomberg's survey calls for a $15 bln increase in March. If accurate, that would put the Q1 consumer credit growth a little above $46 bln, and that would be the largest increase in three quarters. 

Canada reports the IVEY PMI, but it is not the market-mover it once seemed. The IVEY survey has generally outperformed the S&P PMI. Consider that IVEY averaged about 51.7 in Q3 23, while the composite PMI averaged 47.9. The Canadian economy contracted by 0.5% in Q3 23. The economy recovered in Q4 23 (1.0%) and may have accelerated in Q1 24 (due May 31). The IVEY survey average 54.8 in Q4 23 and almost 56 in Q1 24. The composite S&P PMI averaged 45.4 in Q4 23 and 47.8 in Q1 24. The highlight of the week for Canada will be the jobs report on Friday. Canada lost jobs (2.2k) and full-time posts (less than 1k) in March. April is expected to be better, but the risk is that the unemployment rate ticks up to 6.2% from 6.1%. It was at 5% last April.

Mexico reports vehicle production and exports today. The data is not scrutinized but it is notable that amid the talk of excess capacity, Mexico's auto sector is often not included. In Q1, Mexico produced about 945k vehicles and exported about 825k vehicles (~87%). Last year, Mexico produced almost 3.77 mln vehicles and 3.52 mln. Mexico reports April CPI on Thursday. The headline pace is seeing ticking up to 4.62% from 4.42%. However, the core rate may have slowed to 4.4% from 4.55% in March. The central bank meets later Thursday but is expected to leave rates unchanged at 11.0%. Brazil central bank meets Wednesday and is expected to cut the Selic rate by 25 bp to 10.50%. 

The US dollar turned down after approaching CAD1.37 yesterday in the Asia Pacific time zone. The heavier Dollar Index, rising US equities, and firmer oil gave the Canadian dollar favorable backdrop. Support before the weekend near CAD1.3610. The CAD1.36 area is the (38.2%) retracement of this year's greenback rally. The US dollar is trading within yesterday's range (~CAD1.3650-CAD1.3700). Above CAD1.3700, resistance is seen around CAD1.3720-40. The Mexican peso continues to gently trade with a firmer bias as the flash crash volatility (April 19) recedes. Support for the dollar is seen near MXN16.83 and then MXN16.75. The five-day moving average (~MXN16.94) is slipping below the 20-day moving average (~MXN16.9415) for the first time since mid-April, illustrating the improving of the technical tone. 


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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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