Dollar Gains Extended, Oil Steadies at Higher Levels after Saudi’s Cut, US Bill Deluge Begins Today

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Marc Chandler
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Overview:  The US dollar has extended its post-employment gains today, helped by firmer rates and several countries seeing downward revisions from the preliminary May PMI. The greenback is trading with a firmer bias against all the G10 currencies and most of the emerging market currencies, including Turkey, India, and China. July WTI gapped higher after the Saudi Arabia announced a voluntary and unilateral cut of one million barrels a day in output starting next month. July WTI opened at $75 after settling near $71.75 before the weekend. However, that was more or less than the high, and it is near $73 now.

The US 10-year yield gapped higher today too and is near 3.73%, a four-day high. European 10-year benchmark yields are 5-7 bp higher. After strong pre-weekend equity gains in the US, most bourses rose in the Asia Pacific regions though China's CSI 300 slipped by almost 0.5%, despite unexpected gains in the Caixin services and composite PMI. Europe's Stoxx 600 is slightly firmer, after rising more than 2.2% in the past two sessions. US equity futures are narrowly mixed. The combination of a stronger dollar and firmer rates saw gold extended pre-weekend losses from about $1948 to about $1938.50. Last week's low was set near $1932, a two-month low. 

Asia Pacific

China's Caixin services and composite PMI were in stronger than expected. The services PMI rose to 57.1 from 56.4. The market had looked from a small decline. The combination of the stronger manufacturing PMI last week and the services PMI today lifted the composite to 55.6 from 53.6. It is the highest since December 2020. Many remain skeptical about the strength of the world's second largest economy, and expect more support for be forthcoming, perhaps later this month. Weakness in exports and prices price pressures to be reported later this week may help build the case. The CSI 300 was one of the few bourses in Asia to decline today (-0.45%).

One cannot tell it by the yen's 6.3% depreciation against the dollar this year, but the Japanese economy is 1.6% (annualized growth) in Q1 was second best in G7 behind Canada. The preliminary May's service PMI record high (56.3) was revised to a still strong 55.9, while the composite slipped to 54.3 from the 54.9 flash reading. Tomorrow, Japan reports April labor cash earnings. They are expected to have accelerated to 1.8% year-over-year from 1.3%. However, support for consumption is weak. It fell 1.9% year-over-year in March and is expected to have fallen by 2.2% in April. In April 2022, household consumption was 1.7% lower from April 2021. The BOJ meets next week, and positioning ahead of what many see as a window of opportunity for an adjustment, the exchange rate may become somewhat less sensitive to the change in US yields.

The final May PMI reading is unlikely to impact the Reserve Bank of Australia rate decision tomorrow. The services PMI was revised to 52.1 from 51.8 and the composite to 51.6 from 51.2. The higher-than-expected April CPI (6.8% from 6.3% and median projections for 6.4% in the Bloomberg survey) and the 5.75% increase in the minimum wage (as of July 1) prompted the market to take more seriously the possibility of a hike this week. The odds of a hike rose from practically nothing on May 26 to about a 36% chance the end of last week. It slipped to about 25% today. The probability of a hike at the July 5 meeting is almost 75%. A quarter-point hike puts the overnight target rate at 4.15%. The terminal rate is now seen near 4.20% by the end of Q3. It has edged higher for the past four sessions before slipping today. It was slightly below 3.85% a month ago. The Aussie has not been rewarded for the shift in rate expectations. A month ago (May 5) the Australian dollar settled near $0.6750.

Rising US rates helped lift the dollar to nearly JPY140.45 today, a four-day high. Recall that last Thursday, the dollar traded down to JPY138.45 after it peaked near JPY140.95 last Tuesday, May 30. It looks set to challenge that. As next week's BOJ meeting comes into view, the market may turn more cautious. The Australian dollar recovered last week from near $0.6460 at end of May to nearly $0.6660 before the US employment data. It is inside the pre-weekend range today. The session high was a little below $0.6625, where options for nearly A$550 mln expire today. It has drifted down and slipped below $0.6590. Last Friday's low was near $0.6560. The yuan's weakness in the face of the dollar's broad strength ought not to be surprising. The greenback gapped above last Friday's high (~CNY7.1030), went down to fill the gap before rising to a new high near CNY7.1250. The PBOC set the dollar's reference rate slightly lower than expected at CNY7.0904 rather than at CNY7.0909.

Europe

Most of the reaction to the PMI comes from the preliminary estimate which frequently comes close enough to the final reading. The final services PMI stands at 55.1, down from 55.9 preliminary estimate and from 56.2 in April. The final composite reading stands at 52.8. The flash estimate was 53.3, a three-month low. Among the largest EMU members, Italy and Spain do not have a flash estimate. Today's reports showed activity slowed from strong levels. At the end of the week, Eurostat is seen revising its estimate for Q1 growth to flat from 0.1%. Economists expected EMU to grow by 0.1% in Q2.

Germany also reported April trade figures. The key takeaway is that although exports fell for the second consecutive month, the terms-of-trade shock is waning, and Germany's surplus is "normalizing.". In Q1, Germany recorded a trade surplus of 15.8 bln euros. That compares to 8.6 bln euros in Q1 22, 18.4 bln euros in Q1 21 and 19 bln euros in Q1 19. The April surplus stood at 18.4 bln euros compared with 3.6 bln last April. Exports rose 1.2% in the month, and imports fell by 1.7%. Tomorrow, Germany reports April factory orders. They are seen rebounding from the March's dramatic 10.7% month-over-month plunge. Industrial production, reported on Wednesday is also expected to have recovered after declining by 3.4% in March.

The UK's economic calendar is light this week and today's final PMI readings are the highlight. The UK economy has avoided a recession, but growth remains slows. The service PMI spent Q4 22 and January 23 below the 50 booms/bust level. It reached 55.9 in April before slipping to 55.2 in May (55.1 flash estimate). After spending August through January below 50, the composite PMI has been above 50 since February and reached 54.9 in April before falling back to 54.0 in May (53.9 flash estimate).

The euro reached almost $1.0780 before reversing lower on the US jobs data and jump in US rates ahead of the weekend. It held above $1.0700, but today follow-through selling saw it dip below $1.0685. It retraced more than (61.8%) of its bounce from $1.0635 on May 31. There are options for around 950 mln euros that expire today at $1.0675. It needs to resurface above $1.0720 to stabilize the technical tone. Sterling reversed from $1.2545 and settled a cent lower. Selling pressure did not abate over the weekend and sterling fell slightly below $1.2390. There are options for GBP300 mln at $1.2375 that expire today. It too exceeded its (61.8%) retracement objective of the rally from the May 25 low (~$1.2310). A break of $1.2365 signals a re-test.

America

US economic data and the Treasury's bill auctions are front-loaded this week. In terms of the data, the final services and composite PMI are on tap, as are factory and durable goods orders (factory orders are likely to be softer than the 1.1% increase in the preliminary durable goods orders report), leaving the ISM services survey to be the new news. The preliminary PMI services rose for the fifth consecutive month in May and at 55.1 was the highest since April 2022. ISM services have trailed. April's 51.9 was off this year's high set in January at 55.2. In terms of Q2 GDP, the most important report this week will be the April trade deficit on Wednesday. Based on the advanced merchandise report, the largest shortfall in six-months (~$75.5 bln) is expected. The Atlanta Fed's GDP tracker, which stands at 2.0% as of June 1 will be updated after the trade figures. 

It was well understood that after the debt ceiling drama ended, Treasury would sell a ton of bills and it would rebuild its cash account at the Fed (TGA). No time is being wasted. Today, 3- and 6-month bills ($123 bln) will be sold, and a 44-day cash management bill ($100 bln). Wednesday, Treasury will see $90 bln of 4- and 8-week bills. The impact on financial conditions is understood to be a function how the bills are bought. If it pulls funds away from the Fed's reverse repo facility, it is seen as less impactful. On the other hand, it banks buy, and their reserve balances fall, it is seen as tightening. Meanwhile, the Fed's quantitative tightening continues and that targets $95 bln a month. In addition, there is the June 15 tax date approaching, which also serves to drain liquidity. Note too that window dressing is often evident beginning a couple of weeks before quarter-end, which has seen the funds in reverse repo increase. One cushion could be foreign buying. As we noted (here), foreign central banks have been on a buying spree and have lifted their holdings at the Federal Reserve by $110 bln over the past nine weeks 

Canada and Mexico have busy weeks, but it begins slowly. The Bank of Canada meets Wednesday, and the May employment report is out on Friday. The odds of a quarter-point hike stand near 40%, up from less than 15% two weeks ago. Canada's two-year yield has risen 30 bp over those two weeks, fueled by ongoing resilience of the economy and the stronger than expected Q1 GDP (3.1% annualized), and arguably the rise in US rates. The US dollar tested support near CAD1.34 ahead of the weekend. In the past three sessions, the greenback has dropped from CAD1.3650. A break of CAD1.3400 targets CAD1.33, which it has not traded below since mid-February. It is trading quietly in roughly CAD1.3420-CAD1.3450 range. A move above CAD1.3450 could see CAD1.3500. The US recorded a marginally now seven-year low against the Mexican peso (~MXN17.42) before reversing higher and closing virtually flat near MXN17.5560. A possible bullish hammer pattern was created and buying today lifted the US dollar to almost MXN17.60. AMLO's Morena Party candidate Gomez was elected governor of Mexico State, one of the last PRI holdouts. A move above MXN17.60 could target MXN17.75-MXN17.77 initially. 

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