Consolidative Tuesday

Overview: The dollar is consolidating but with a somewhat heavier bias today. The G10 currencies are firmer but for the New Zealand and Canadian dollars, which are slightly softer. Most emerging market currencies are also firmer, except for a handful of Asian currencies. The news steam is light. 

Equities are trading off. The MSCI Asia Pacific Index snapped a seven-day rally, and Hong Kong shares and the mainland shares that trade there led the region lower with a 2% drop. Europe's Stoxx 600 is giving back yesterday's gains plus some. It is off almost 0.4% in late European morning turnover, led by utilities and financials. US index futures are softer. Japan's 10-year yield firmed slightly, while European benchmark yields are mostly 1-3 bp lower. The 10-year US Treasury yield is off almost two basis points to 4.42%. It peaked yesterday near 4.45%. Gold has surrendered yesterday's gains, which initially saw new record highs near $2450. It has fallen to $2406 today and is trading near $2414 near midday in Europe. July WTI poked above $80 a barrel yesterday for the first time since May 1 but settled lower on the day and eased to around $78.50 today. Spikes this month below $77.50 have been bought.

Asia Pacific

China's response to the flurry of US tariffs is still awaited. Its anti-dumping probe in chemicals, specifically polyoxymethylene copolymer (against US, Europe, Japan, and Taiwan), seems to be a small warning shot. China appears to have imported about $600 mln of the chemical last year, and the second largest provider, South Korea, was not included. Given that China mines about 70% of the rare earths, has 87% of refiners, a little more than 90% of the processing capacity, there is plenty of havoc Beijing could wreak if it chose. Japan reports April's trade balance tomorrow. A small deficit is expected after a JPY387 bln surplus in March. Exports are expected to have risen by 11% year-over-year (7.3% in March). Imports are expected to rise by almost 9% (-5.1% March), which would be the largest increase since January 2023. The minutes from the Reserve Bank of Australia meeting earlier this month discussed raising rates but judged the bar is high for a hike but instead may delay a cut that its previously anticipated for November. The futures market downgraded the chances of a September cut from over a 55% chance yesterday to around a 30% chance today. New Zealand's central bank is widely expected to stand pat at tomorrow's meeting. The swaps market is discounted about a 45% chance of a cut in August and more than an 80% chance of a cut in October.

The dollar made a marginal new high in North America yesterday near JPY156.30 and reached JPY156.55 today, before pulling back. It has found support ahead of JPY156. Last week's high, and what arguably is the post-intervention high, was almost JPY156.75. We have noted that the JPY157 area corresponds to the (61.8%) retracement of what was likely intervention-inspired dollar decline. A simple correlation of changes in the exchange rate and changes in yields shows a far greater correlation with US 10-year yields than 10-year JGBs over the past 30 and 60 sessions. We suspect that the market may be cautious, but it wants to challenge Japanese officials. There may be better fundamental cover next week when the PCE deflators do not show the improvement of the CPI and then, the early forecasts for this month's nonfarm payrolls are 200k-225k (175k in April). As we saw last week, the Australian dollar met sellers again above $0.6700 yesterday. The Aussie settled below its five-day moving average for the first time since May 10, illustrating the flagging momentum. It was sold to $0.6645 but has recovered to $0.6675 in the European morning. The intraday momentum indicators are stretched, suggest limited upside from here. A convincing break of $0.6650 may confirm a top in place and could spur a decline into the $0.6580-$0.6600 area. The pressure on the yen does China few favors. The PBOC set the dollar's reference rate at CNY7.1069 (CNY7.1042 on Monday), the highest in three month. The average in Bloomberg' s survey was CNY7.2349 (CNY7.2158 on Monday). The dollar rose through last week's high against the offshore yuan yesterday and extended those gains initially today, stopping slightly shy of CNH7.25. It is finding support now a little ahead of CNH7.24.

Europe

With Q1 GDP behind us, the eurozone's March external balances and construction output are unlikely to be market movers. Russia's invasion of Ukraine in early 2022 and the response sparked a terms of trade shock. However, the external account has recovered. The current account surplus in Q1 was about 103.8 bln euros. In Q1 23, the surplus was almost 28 bln euros. To put it in a larger perspective, the eurozone current account surplus in Q1 2019 was slightly more than 97 bln euros. The eurozone surplus continues to be driven by Germany. Its current account surplus in Q1 24 was 84.3 bln euros, or a little more than 80% of the eurozone surplus. The UK's CBI trends do not capture the market's imagination even in the best of times. The UK's April CPI will be reported tomorrow. The base effect points to a sharp drop in the headline rate (2.1% vs. 3.2%) and the core rate is seen moderating to 3.6% from 5.2%. If accurate, it would be lowest core reading since October 2021. The market is pricing in about a 57% chance of a cut at the June 20 BOE meeting. It is fully discounted for August.

The euro was largely confined to a $1.0855 to $1.0875 range in North America yesterday. It is in a similar range today. Options expirations today include 960 mln euros at $1.0840 and nearly 830 mln euros at $1.0875. A break of the pre-weekend low around $1.0835 is needed to suggest anything important. On the topside the euro traded at a two-month high last week, a few hundredths of a cent below $1.09. The $1.0935 area corresponds to the (61.8%) retracement of the euro's decline from the high set at the end of last year (~$1.1140) to the low in the middle of last month (~$1.06). The euro has surged against the Swiss franc. It reached almost CHF0.9900 yesterday, its best level since April 2023. This is still holding today. Some think it can go to parity, but it is looking stretched. It settled above its upper Bollinger Band as it did before the weekend and extended its streak to the sixth session in a row yesterday. That is the longest advance since October 2022. The swaps market has around a 70% chance of that second SNB rate cut will be delivered next month. Sterling also was confined to a narrow range but was firmer than the euro. Sterling was mostly in a $1.2695-$1.2725 range and held above $1.27 most of the session. It remains in the range today. Last week's high set before the weekend was slightly above $1.2710. For the second consecutive session, sterling settled above its upper Bollinger Band. It comes in today near $1.2730. There seems to be little chart resistance ahead of the $1.2760-$1.2800 area.

America 

The US sees the Philadelphia Fed's non-manufacturing activity survey for May. The manufacturing business outlook softened to 4.5 from 15.5 in April. The median in Bloomberg's survey was for a 7.8 reading. The non-manufacturing survey has been negative since October 2022 with the one exception of December 2023 when it rose to 2.1 (from -9.0). It is not a market-mover. More Fed officials speak today but the views are now fairly well known. April's existing home sales will be reported tomorrow. A small gain after a 4.5% decline in March is expected. Also, tomorrow, the FOMC minutes will be reported. The 10-9 balance seen in March between three or more cuts and two or few cuts most likely shifted in favor of the less dovish camp. One question is what next month’s dot show will. The majority is likely favor two or fewer cuts this year. Might there be one thinking a hike will be appropriate? Canada reports April CPI figures today. A 0.5% month-over-month gain, which the median in Bloomberg's survey forecast, would allow the year-over-year rate ease to 2.7% from 2.9%. That would be the lowest since March 2021. Still, the annualized pace in the first four months of 2024 would be 4.2%. It was negative the last four months of 2023 and above 6% in the first four months of 2023. The Bank of Canada puts more weight in the underlying core measures, and they will likely soften in April. They averaged slightly below 3% in March and may have eased to 2.8%. Ahead of the report, the market has almost a 45% chance of a June cut discounted. It is fully discounted for July. 

The Canadian dollar meandered no place yesterday. For the third time in the past four sessions, the greenback was bought on dips below CAD1.3600. Still, it has not been able to rise above CAD1.3650 since the middle of last week. We suspect this is a bullish US dollar consolidation and that would seem to be consistent with a soft Canadian inflation report shortly. Initial resistance is near CAD1.3700. After falling for the past three weeks against the Mexican peso, the US dollar began the new week with a new low since mid-April. The greenback briefly slipped below MXN16.55, where there are options for $400 mln that expire today. Follow through selling today has seen the dollar slip briefly below MXN16.53. The lower Bollinger Band is around MXN16.4950 today. Nearby support is seen near MXN16.50, and the multiyear low set on April 9 was a little above MXN16.26. The US dollar slipped to an eight-day low against the Brazilian real near BRL5.09. It looks comfortable in a BRL5.0750-BRL5.15 range pending new developments. Brazil began cutting interest rates last August and the Selic rate has been cut by 325 bp to 10.50%. The move earlier this month was for 25 bp. There is growing speculation that it will pause next month. The swaps market pricing suggests the monetary easing cycle may have ended. 

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