Dollar Pares Gains but is Poised to Recover in North America

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Marc Chandler
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Overview:  A rise in US yields, with the two-year Treasury closing yesterday at its best level in more than three weeks help fuel follow-through dollar buying yesterday after an upside reversal at the end of last week. Key levels were approached, like $1.09 in the euro, $1.2345 in sterling, and JPY135 held, and the dollar has consolidated in Asia and Europe. The euro and sterling recouped around half of the losses seen from the Friday's high to yesterday's lows. Concern that weak tax revenues in the US given the asset sell-off last year could lead to the Treasury running out of room to maneuver around the debt ceiling saw three-month bill yield jump at the $57 bln sale yesterday to 5.08%, 21 bp on top of the six-month that was sold at the same time.

Asia Pacific equity markets, except, Japan were mostly lower. Although China's Q1 GDP surpassed expectations, some of the details disappointed. Europe's Stoxx 600 is up around a third of a percent, after minor slippage yesterday. US equities recovered yesterday, and the futures are trading firmer today. Bond markets are quiet, with the UK 10-year Gilts a notable exception, with the yield up around 3.5 bp to 3.72% after an unexpected increase in average weekly earnings. The 10-year Treasury yields is a little softer near 3.58%. Gold has stabilized. After falling to almost $1981 yesterday, it is knocking on the $2000 area again. June WTI peaked last week near $83.40 and is testing the $80.40 area today. Last week's low was near $79.40. Lastly, we note that US natgas is firmer for the third consecutive session as colder weather in parts of the country is boosting demand. The European benchmark is also firmer, underpinned by maintenance in Norway.

Asia Pacific

China's economy expanded by 2.2% in Q1 23 on a quarter-over-quarter basis after stagnating in Q4 22. The year-over-year pace improved to 4.5% from 2.9%, surpassing expectations for a 4.0% pace. The March data showed improvement in retail sales (10.6% year-over-year vs.7.5% expected) and the surveyed jobless rate eased to 5.3% from 5.6%, which was more than expected. However, industrial output rose 3.9% year-over-year, missing expectations for 4.4%. Fixed asset investment also unexpectedly slowed to 5.1% from 5.7%. The contraction in property investment accelerated to -5.8% from -5.7% but had been expected to fall by 4.7%. Residential property sales increased to 7.1% from 3.5%. Other details were also disappointing. Output of semiconductors fell almost 15% in Q1 23 over Q1 22. Smartphone production slumped 13.8% over the same period.

The minutes from the Reserve Bank of Australia's meeting earlier this month, where a pause in the tightening cycle was announced, contained no surprises. It had considered a 25 bp hike. Although the central bank kept is options open, suggesting the pause was to gather more data. The market increased the likelihood that the RBA resumes its hikes, but it is still not the base case. The futures market sees the RBA on hold for the remainder of the year with the cash target rate at 3.60%. It meets again on May 2. The preliminary April PMI will be released Friday. The composite, which spent four months through January below the 50 boom/bust level rose to 50.6 in February before falling back to 48.5 in March. Recall that the Reserve Bank of New Zealand surprised with a 50 bp hike earlier this month (bringing the cash target rate to 5.25%). It meets next on May 24. The swaps market is pricing in about a 70% chance of a quarter point hike, which is seen as the last in the cycle. Nevertheless, the Australian dollar is at its best level against the New Zealand dollar in over a month, rebounding nearly 2.5% from the spike low on April 5 when the RBNZ surprised.

The dollar reached a new one-month high against the yen near JPY134.70 and met sellers in front of important chart resistance at JPY135. It fell to almost JPY134 in the European morning. The intraday momentum indicators are stretched and support near JPY133.75 will likely hold. The Australian dollar rebounded from yesterday's low near $0.6680 to $0.6745 today, which is where the 200-day moving average is found. It is also the middle of the range set from the pre-weekend high near $0.6805 to yesterday's low. The next retracement is seen around $0.6760. It may be a sufficient cap today. The greenback is mired in a narrow range against the Chinese yuan. It traded between CNY6.8650 and CNY6.8780, which is just inside yesterday's range. The PBOC continues to set the dollar's reference rate close to market expectations (median from Bloomberg's survey):  CNY6.8814 vs. CNY6.8811. 

Europe

Weekly earnings growth in the UK was stronger than expected even though job growth slowed, and the unemployment ticked up. Average weekly earnings rose 5.9% in the three months through February, unchanged after the previous period was revised from year ago 5.7%. Excluding bonuses, weekly earnings was also unchanged after revisions at 6.6%. Economists had expected earnings to slow. The claimant count rose for the first time in four months (28.2k). Most encouraging was the employment growth of 169k in the three months through February rather than slow to 50k as expected from 65k previously. The ILO measure of unemployment ticked up to 3.8% from 3.7%. Tomorrow, the UK reports March inflation gauges. The headline pace is expected to slow to 9.8% from 10.4% in February. It peaked at 11.1% in October 2022. The core rate is seen easing to 6.0% from 6.2%. It reached a high of 6.5% last September and October. The swaps market remains confident (~90%) of a quarter-point hike on May 11 that would take the base rate to 4.50%, up from around 80% yesterday. The market leans toward one more hike in Q3 for a terminal rate of 4.75%.

Sentiment among German investors waivered. The assessment of the current situation rose to -32.5 from -46.5 and was better than expected. It is the best reading since last June. It bottomed in October near -72.2. However, the expectations component was much weaker than expected, coming in at 4.1 rather than 15.6 projected and 13.0 in March. Over this past weekend, Germany's last three nuclear plants were closed. They provided about 6% of Germany energy last year, down from around 30% in 2000. Eon hiked electricity prices nearly immediately. The end of German nuclear power and reliance on Russian gas is forcing Germany into a significant transition. It may have to import for nuclear-powered electricity from France, which is having its own challenges. This past winter, Germany burned coal. Ironically, as German nuclear plants closed, Finland opened the newest and largest EU nuclear facility. Separately, France, the Netherlands, Poland, and the Czech Republic intend on build new nuclear plants.

The euro stabilized after falling to around $1.0910 yesterday. It recovered to almost $1.0985. There are nearly 1.55 bln euros in options that expire today at $1.10. The $1.0990 area is the halfway point from the pre-weekend high (~$1.1075) and yesterday's low. The $1.1010 area is the next retracement (61.8%). We suspect the high may be in for the day and the intraday momentum indicators have turned down in late morning European turnover. For its part, sterling has taken out yesterday's high (slightly above $1.2435) to reach $1.2445 after the employment report. Yet it too stalled, near the halfway mark between the pre-weekend high and yesterday's low (found by $1.2450). The intraday momentum indicators have also turned down. Initial support is seen in the $1.2380-$1.2400 area. 

America

Survey data for this month kicked off yesterday with the NY State manufacturing survey. While it is early in the month, and typically elicits little market reaction, the unexpected strength helped the dollar extend its earlier gains and may suggest a strong start of Q2. It was the first positive reading since last November and the highest since last July (10.8 vs. -24.6 in March). Orders surged by a record 46.8 index points to 25.1, the highest in a year. Shipments also surged (37 index points). The other elements of the report were mixed. Prices paid fell but selling prices edged up. Employment fell for the third month, and hours work slipped. Inventories rose, and unfilled orders were steady. The Philadelphia Fed's April survey is released on Thursday and confirmation will be sought. Today, March housing starts and permits are on tap. After surprisingly strong gains in February (9.8% and 15.8% for starts and permits, respectively), economists expect a pullback in March. Still, many suspect the worse of the housing market slump is behind us and mortgage applications in most of March until the last week and recouped one week decline in the first week in April. In March, the average 30-year fixed-rate mortgage eased by about 20 bp to 6.81%. The National Association of Home Builders gauge of sentiment rose for the fourth consecutive month in April. It now stands at a seven-month high.

Canada reports March CPI today. The base effect warns of a further slowing. Canada's CPI surged 1.4% last March. The median forecast in Bloomberg's survey projects a 0.6% rise last month. This could see the year-over-year rate slow to 4.3%-4.4%. The last time it was below 4.5% was in September 2021. The median and trimmed core readings are expected to ease as well and converge around 4.4%-4.5%. Interest rate expectations have swung away from a rate cut this year. The target rate is 4.50% and during the bank stress in March, the swaps market was priced in a year-end rate near 3.60%. This seemed like a stretch, and the swap market has corrected back above 4.40%. The adjustment appears to have largely run its course, with the Bank of Canada on hold. 

The Canadian dollar is recovering from yesterday's decline. However, like a few of the other major currencies, it recovered about half of what it lost Friday-Monday and stalled. The US dollar tested the CAD1.3360 area, where it found bids in Europe. The intraday momentum indicators have turned up and there is initial potential back to the CAD1.3400 area. Yesterday's high was near CAD1.3420. Stronger resistance is seen in a CAD1.3430-60 band. Meanwhile, the greenback is narrow range against the Mexican peso, straddling MXN18.00. Yesterday, it traded in a wide range, roughly, MXN17.9315 to MXN18.1540. We suspect that MXN17.95-MXN18.05 may contain most of the price action today.