Yen Retreats, while Stronger EMU GDP Underscores Nascent Recovery and Lifts the Euro

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Marc Chandler
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Overview:  Stronger than expected eurozone GDP strengthened the sense that a nascent recovery may be taking hold and has given the euro a bid in the European morning. The dollar, though, is enjoying a firmer tone against the other G10 currencies today. Australia's unexpected weakness in retail sales has weighed on the Antipodean currencies. The Aussie and Kiwi are off slightly more than 0.5% today. Japanese data were mixed (a recovery in industrial production but weakness in retail sales) and the market has taken the dollar to almost JPY157. It had settled near JPY156.35 yesterday. The market is still treading gingerly after yesterday's drama and possible intervention. Emerging market currencies are mixed, with Turkey and Hungary leading the advancers and the South Korean won and South African rand off 0.25%-0.35%, to lead the decliners. 

Japanese stocks rallied strong coming back from the long weekend. The Topix rose by more than 2%. Chinese and Hong Kong stocks trading weaker. Outside of Taiwan, other markets in the region generally traded firmer. Europe's Stoxx 600 is off for the first time in three days, and US index futures are trading softer after the major indices gained about 0.35% yesterday. European benchmark 10-year yields are mostly 2-3 basis points higher, and the 10-year US Treasury is near 4.63% (from 4.61% yesterday). Gold, which fell 2.25% last week, its first decline in six weeks, is continuing to trade heavily. It is off around $19 to $2316 today. Last week's low was near $2291. June WTI rose by almost 2% last week, the first weekly advance in three weeks. It gave back a most it with yesterday's nearly 1.5% decline. It has stabilized today and is up around 0.35% to approach $83.

Asia Pacific

China's April PMI softened. The manufacturing PMI slipped to 50.4 from 50.8 while the non-manufacturing PMI eased to 51.2 from 53.0. The composite fell to 51.7 from 52.7. Recall that the composite PMI fell every month in Q4 23 to finish the year at 50.3. It had jumped from 50.9 in February to 52.7 in March. The Caixin manufacturing PMI held in better, rising from 51.4 from 51.1. The March reading was the best since February 2023. Many observers continue to look for additional stimulative measures from the government, but with the yuan under pressure, expectations are for fiscal measures. That said, there is speculation in some quarters that officials will sanction of large depreciation of the yuan. Mainland markets are closed for the rest of the week. 

After a rough start to the year, Japan's industrial production jumped 3.8% in March. The earthquake and auto scandal has spurred a 6.7% collapse in industrial output in January and a 0.6% decline in February. Retail sales had fallen by about 2% in Q4 23 nearly recouped it in the first two months of the year. In fact, the 1.7% February increase was the largest since early post-pandemic period. However, consumers pulled back in March and retail sales fell by 1.2%. Separately, unemployment reportedly slipped to 2.5% in March from 2.6% in February. It has been between 2.4% and 2.6% with one exception since February 2022. It was unchanged in March at the upper end of the range. The job-to-applicant ratio was rose from 1.26, which is the lowest since May 2022 to 1.28. Japan reports Q1 GDP in mid-May. The median forecast in Bloomberg's monthly survey sees the economy contracting by 0.2%.

Australia reported a 0.3% gain in private sector credit and an unexpected 0.4% decline in March retail sales. The extension of credit averaged 0.4% a month last year and closer to 0.65% a month in 2022. Australian retail sales fell in Q4 23 and recovered in Q1 24. Retail sales jumped 1.1% in January and grew another 0.3% in February before the weakness in March. Australia does not report Q1 GDP until early June. Economists expect the economy expanded by around 0.3%. Australia's two-year yield jumped 30 bp last week, the most among G10. It fell two basis points yesterday and a little more than six basis points today.

A few press accounts cited some bankers claiming intervention did take place yesterday. It may have, but the market may have done it to itself, as well. The ambiguity is sufficient to keep many participants away. The dollar reached a high in North America near JPY156.90 and a low around JPY156.10. Still, the close was the highest, with the exception of last Friday's exaggeration (~JPY158.35). The dollar has recovered to almost JPY157 today. Around the time that the dollar peaked against the yen on Monday, the Australian dollar peaked slightly above $0.6585, a 14-day high. It consolidated in North America between about $0.6545 and $0.6575. It has been setback today and was sold to a three-day low near $0.6515. A break of $0.6500 could spur another quarter-cent to half-cent retracement. The five-day moving average crossed above the 20-day moving average, illustrating the strong momentum seen last week as the Aussie rebounded from the year's low (~$0.6365 on April 19). The PBOC set the dollar's reference rate at CNY7.1063 (CNY7.1066 yesterday). The average in Bloomberg's survey was CNY7.2432 (CNY7.2460 yesterday). The dollar fell by about 0.4% against the offshore yuan yesterday, its biggest pullback so far this year. The greenback is slightly firmer against the offshore yuan today, now near CNH7.25. The offshore yuan, like the yen, are attractive as funding currencies. Beijing is a beneficiary of the yen's recovery, through intervention or otherwise. 

Europe 

The eurozone reported Q1 GDP and the preliminary April CPI. The eurozone economy expanded by 0.3%. The economy had contracted in both Q3 and Q4 last year. Germany grew by 0.2% (though Q4 23 was revised to -0.5% from -0.3%). France grew by 0.2%. The periphery performed better. Italy reported a 0.3% expansion and Spain grew by 0.7%, the same as the Q4 23 (initially 0.6%). Separately, and consistent with the better numbers seen from Germany recently, it also reported its first increase in retail sales since last October. The 1.8% gain offset February's revised 1.5% drop (from -1,9%). April's CPI, more important for monetary policy, was in line with expectations. It rose 0.6% month-over-month for a steady 2.4% year-over-year rate. The core rate eased, as expected, to 2.7% from 2.9%. 

The euro remained within the pre-weekend range yesterday (~$1.0675-$1.0755) and continues to do so today. The single currency dipped below $1.07 in early North American turnover yesterday and buyers emerged. It spent most of the session above $1.07. It retested yesterday's low today before recovering with the GDP reports. It traded slightly above $1.0735. The euro needs to get back above Friday's high to be meaningful. The trendline drawn from the March and April highs is approaching $1.08, around where the 200-day moving average is found. Sterling pushed above its 200-day moving average (~$1.2555) yesterday and reached a two-and-a-half week high near $1.2570. It is trading in the upper end of yesterday's range and has held below $1.2665. Nearby resistance is seen near $1.26, which corresponds to the 50% retracement of the losses since the year's high was set in early March slightly below $1.29 and where the trendline off the March and April highs can be found. Support is likely in the $1.2515 area. 

America

Before the pandemic unit labor costs were rising at an average annualized quarterly pace of slightly more than 2.8%. In 2022, it was 5% and last year slowed to almost 4%. It is seen rising at that pace the January-March period this year. This is a more comprehensive view of labor's cost than the hourly earnings data because it includes indirect costs, like Social Security contributions, medical benefits, taxes, and the like). However, even this gives an incomplete measure, as output measures are not included. Unit labor costs include productivity. Also on tap, the US reports house prices and the Conference Board's measure of consumer confidence. Neither are typically market-movers. The same can be said of the Chicago PMI and the Dallas Fed services survey. The market is eager for jobs data, and it will begin tomorrow with the ADP estimate, the JOLTS report, and ISM, ahead of the outcome of the FOMC meeting.

Canada reports February GDP today. The Canadian economy continues to recover after contracting in Q3 24. It expanded by 1.0% in Q4 23 (annualized rate). The economy appears to be maintaining that pace in Q1 24. Canada reported 0.6% growth in January and is expected to have expanded by 0.3% in February. For its part, Mexico reports Q1 GDP today and there may be some downside risk to the 0.1% median forecast in Bloomberg's survey. Weaker public sector investment may have weighed on construction. Industrial production and retail sales have also been soft. Colombia's central bank is widely expected to deliver another 50 bp rate cut later today. It would bring the minimum repo rate to 11.75%. The rate peaked last year at 13.25%. Headline CPI has fallen from about 13.3% at the end of Q1 23 to almost 7.3% last month.

The US dollar recorded the year's high against the Canadian dollar in mid-April near CAD1.3845. It has fell to a two-and-a-half week low near CAD1.3630 yesterday. The CAD1.3620 area corresponds to the (61.8%) retracement of the greenback's gains off the early April low (~CAD1.3480). Still, the US dollar's downside momentum slowed in recent days, and it is trading with a firmer bias today. On the topside, a push above the CAD1.3725 area would suggest a low is in place. The US dollar briefly traded below MXN17.00 yesterday for the first time in three days. Within the emerging market complex, Latam currencies were three of the top four performers. The Chilean peso, South African rand, and Colombian peso all rose by around 1.0%. The Mexican peso, in fourth place, rose by about 0.8%. Participants still want to be compensated for the recent flash crash that saw the peso sell off by nearly 7% in around an hour. One-month implied vol is near 11.1%, near the 200-day moving average. It was below 7.5% at the start of the month. The dollar is soft today, but a break of last week's low, near MXN16.91, is important to continue to healing process after the flash crash.