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Overview: The US dollar is firmer in the European morning after starting out with a softer bias in Asia Pacific turnover. The dollar-bloc currencies, sterling, and the Swiss franc are heavy, but ranges are narrow, and consolidation seems to be the flavor of the day. Central and Eastern European currencies are faring best among emerging markets, but the JP Morgan Emerging Market Currency Index is little changed. Benchmark 10-year yields are also hovering around unchanged levels in Europe, and the US 10-year yield is flat at 1.62%. Equity markets are off to a better start. The MSCI Asia Pacific Index and Europe’s Dow Jones Stoxx 600 are trying to extend the advance for the third consecutive session. At the same time, US futures point to recovery after the pre-weekend fall. China stepped up its warnings about the rise of commodity prices, and iron ore fell for the fourth consecutive session, for a cumulative 15% decline. Steel rebar futures price fell for the sixth session in the past eight for a nearly 19% decline in total. Copper prices are steady after falling more than 4% in the second half of last week. July WTI recovered before the weekend after falling nearly 7% in the previous three sessions and is up another 1.8% today to resurface above the 20-day moving average (~$64.55). Gold continues to trade within the range set in the middle of last week (~$1852-$1890).

Asia Pacific

Chinese officials escalated their threats against speculation and hoarding of commodities. This is having a cooling-off effect. Top executives were summoned for a meeting with various government officials yesterday, according to press reports. Severe punishment was threatened for a range of activities, including “excessive” speculation, hoarding, and spreading fake news. Officials had warned about the rise of commodity prices before, but there has been little enforcement outside of some rule changes in the futures market. Recall that the April producer price index rose at its fastest level since 2018.

There was a suggestion last week by a PBOC official that suggested yuan appreciation could be used to counter the rise in commodity prices. However, subsequently, it appears that the original internet post has been removed, and other, more senior officials have downplayed it. The pledge to keep the yuan basically stable has been reiterated. Although many expect the PBOC to eventually relax its control over the yuan, this is not it. Separately, we note that PBOC Governor Zhou again has played down the digital yuan’s challenge to the dollar. It seems that some in the US press have played this threat up more than the Chinese themselves.

Meanwhile, China reiterated its ban on financial institutions and payments companies from transacting with crypto and made clear that mining activity (solving terribly sophisticated computer problems that are rewarded with new tokens) was prohibited. China’s ban on the use of crypto for financial transactions goes back to 2019 but did not seem to be enforced much. The mining activity in Mongolia, Sichuan, Xinjiang, and other mainland locations continued. China-based crypto exchange  Huobi reportedly announced it reduced or suspended several of its service and product offerings. Ir also said it stopped its miner hosting services in mainland China in response to the recent crackdown on crypto in that country. That said, Huobi, the eighth largest mining pool in the world, did not stop its own operations but pulled back from its hosting services and the sale of mining machines. India wants to go further and ban possession of crypto. Several G10 central bankers have warned of the risks of crypto as an asset. However, rather than a ban, it seems more likely that the high-income countries will tighten the regulatory environment, spurred perhaps by the recent ransomware case, and more cynically, the desire for more revenue.

The US dollar is a 30-pip range against the yen below JPY109.00, holding just below the 20-day moving average. Last Wednesday, the dollar traded between roughly JPY108.55 and JPY109.35 and had not been out of the range since. The Australian dollar fell for the second consecutive week last week and is trading with a heavier bias today, slipping to a seven-day low near $0.7705.  It was turned back from $0.7800 last week. The month’s low was set near $0.7675. The bounce in late Asian trading stalled in front of $0.7750, where a A$555 mln option expires today. The Chinese yuan strengthened slightly today and has not fallen since the middle of last week. Still, the consolidative phase continues. The dollar is tracing out a triangle pattern, and tomorrow the borders are found near CNY6.4240 and CNY6.4385. Technically, it is mostly seen as a continuation pattern, which would suggest a downside break for the greenback. However, the pattern will be neutralized if there is no break before the end of the week. The PBOC set the dollar’s reference rate at CNY6.4408, every close to what the bank models in Bloomberg’s survey anticipated.

Europe

Two new areas of tension in eastern Europe have surfaced. First, at the end of last week, the European Court of Justice granted a temporary injunction against mining brown coal (lignite) at a major Polish mine (Turow) on the Czech border. The Czech Republic had sought action in March due to the negative effects on the level of its groundwater. At the start of the year, the German city of Zittan made similar charges. The owner of Poland’s mine, PGE, argues that the continued operation of the mine is necessary to make the transition away from black coal.  Black coal accounts for almost half of Poland’s energy production compared with less than a sixth for lignite, while renewables account for around a quarter. Poland is threatening to defy the court order. PGE argues that to permanently close the mine hit the nearby power plant that provides 7% of the country’s electricity and power to around 3 mln households. Second, Belarus President sent a fighter jet to ensure that a Ryanair plane with an opposition journalist (Pratasevich) aboard was forced to land in Minsk, and the journalist was arrested. The flight was on its way from Greece to Lithuania, and its route took it into Belarus airspace. Lithuania, the EU, and the US have condemned the Belarusian action.

The UK holds the rotating G7 presidency and is credited with a breakthrough when the environmental ministers agreed to stop the financing of all overseas coal projects by the end of this year.  It appears that Japan, which is reliant on coal, made some key concessions. The agreement came days after the International Energy Agency called to end all new oil, gas, and coal exploration. There are clear political implications in this green effort. It isolates and increases pressure on China, a heavy user of coal. However, the story is far from over. Next month, the UK hosts the G7 meeting, and these efforts will likely feature in the joint statement. Also, the UK will host the 26th UN Climate Change Conference in November, at which it is hoped that an agreement on climate-aid to developing countries can be reached. The G7 reiterated the goal of $100 bln a year of funding through 2025 but remains unmet. The EU heads of state meet today and tomorrow, and greenhouse emissions are on the agenda.

A free-trade deal between Norway and the UK is looking increasingly unlikely. An agreement needs to be struck that could be approved before Norway’s elections in mid-September. This gave a late May time frame. The challenge is that the Christian Democrats, along with the Conservatives and Liberals, make up the governing coalition and have voiced opposition on at least three grounds, none of which can be easily overcome. First, it argues that the UK should not be rewarded with greater access to Norway’s markets than it had within the EU Second, it was concerned that Norwegian farmers would be at a disadvantage, especially for meat and cheese. Third, the Christian Democrats raised issues about food quality, non-agricultural employment ramifications (food processing and distribution). The Christian Democrats draw votes heavily from rural areas, and its fortunes in the polls appear to be sinking. Still, it does not help the UK’s cause that the talks over a fishing treaty collapsed a few weeks ago.

The euro is trading quietly in a narrow range, mostly between $1.2175 and $1.2205, well within the range that has prevailed over the last few sessions (~$1.2150-$1.2245). North American participants will return to their posts with the intraday technicals stretched. Look for the $1.2210-$1.2220 area to cap gains and the $1.2175-$1.2180 area to offer initial support. Sterling is a bit heavier. It was turned back before the weekend after briefly poking above $1.4200. It was the fourth time this year that sterling trading above $1.4200, but it has not closed above it once. It is approaching support found in the middle of last week near  $1.4100. Later today, four BOE officials, including Governor Bailey and the outgoing chief economist Haldane testify before Parliament’s Treasury Select Committee. Haldane has been a lone voice at the central bank, urging action to ensure inflation is kept in check.

America

For the first time since last July, speculators (non-commercials) are net short Eurodollar futures contracts, according to the latest CFTC data. The net long position has been falling since the end of March, but the reporting week ending May 18 saw the decisive move. The net position swung from long, almost 70k contracts ($1 mln notional each) to short, a little more than 247k contracts. The gross longs were shaved by 31.7k contracts, but this was no capitulation. The bulls still have 2.7 mln contracts. Rather it was the bears that pressed. Their gross short position jumped by 285.5k contracts to almost 2.9 mln. The gross short position has grown every week this year but one (mid-March).

The Chicago Fed’s National Activities Index for April is due out, but it hardly a market mover even in the best of times. The report comes ahead of tomorrow’s house price index, new home sales, and the Richmond Fed’s manufacturing index (May). The highlight of the week comes late with the April goods trade figures (new record deficit) and the income and consumption figures. The PCE deflator is expected to jump toward 3.5% from 2.3% in March. Four Fed officials speak today, and Governor Brainard’s address at the Crypto Currency Conference may draw the most interest.

Canadian markets are closed today for Victoria Day, but it is a quiet week in any event for Canada’s economic diary. Separately, note that the US issued a preliminary ruling that would double the tariff on Canadian softwood to above 18%. A final determination is expected in H2. The tariff was originally set at over 20% (January 2018) and was cut to just below 9% last November. However, in 2019, the WTO ruled that the way the US calculated the tariff was improper.

Mexico reports its bi-weekly CPI figures today, and although the pace may have eased a bit, it will remain well above the 2%-4% range. Tomorrow, the April trade figures will be released. In March, Mexico was surprised with a large ($3 bln) deficit. In addition, minutes from the recent Banxico meeting will be released tomorrow, and the tone is expected to be less dovish. Meanwhile, some reports estimate that violence during the campaigns for the legislative election on June 6 is around 2/3 above what was experienced during the 2018 presidential race.

The US dollar is trading in a 15-pip range on either side of CAD1.2070, within the pre-weekend range (~CAD1.2030-CAD1.2100). On a weekly basis, the greenback has not risen against the Canadian dollar since the week ending April 2. Neither the Slow Stochastic nor the MACD confirmed last week’s new four-year low (~CAD1.2015). However, the upside stalled in the middle of last week around CAD1.2145. Last week was only the second weekly increase in the US dollar against the Mexican peso here in Q2. It is bumping against the 20-day moving average (~MXN20.00), which it has not closed above in nearly two weeks. The technical indicators suggest the upside may be challenged. A convincing break of the MXN20.00 area could target the MXN20.20 area.

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