Dollar Stabilizes Ahead of the Weekend

Overview:  Long US dollar positions were pared yesterday as rates unwound the gains scored in the wake of the Bank of Canada's surprise hike on Wednesday. It is consolidating today as the market looks toward next week’s central bank meetings (FOMC, ECB, and BOJ) and a flurry of data. It is also possible that China shaves the benchmark one-year medium-term lending facility rate. Broadly speaking the greenback is still tracking rates, and the more than 4% initial drop in the price of July WTI (to $69 before rebounding to ~$71) helped knock US yields down from the upper end of their ranges. Rather than demand factors, it was the potential of Iranian supply that may have been the driver, after reports of progress in US-Iranian talks, which were later played down. July WTI is consolidating in about a $1 range above $70.60 today. The US 10-year yield is up about three basis points to 3.75%. European yield benchmark yields are mostly slightly firmer, though UK Gilt yields are softer.  

Large bourses in Asia advanced and China's CSI 300 pared this week's loss to 0.65%. The MSCI Asia Pacific Index rose for the second consecutive week for the first time here in Q2. Europe's Stoxx 600 is nursing a small loss, but it has only settled higher once this week. US equity futures are slightly lower. The dollar is firmer against most of the G10 currencies today. The Norwegian krone and Canadian dollar are notable exceptions. On the week, the greenback has fallen except against the Swedish krona. Gold recovered from near $1940 yesterday to settled near $1965, just below the 20-day moving average, which it has not closed above since May 15. It is in a roughly $3-range today centered around $1963. 

Asia Pacific

China's CPI rose 0.2% from a year ago in May after a 0.1% increase in April, but to say it doubled mis-characterizes it. On a month-over-month basis, China's consumer prices fell 0.2%. Goods prices fell by 0.3% year-over-year, the second consecutive monthly decline, while services inflation slowed to 0.9% from 1.0%. Food prices rose 1%, while non-food prices were flat. The price of pork declined for the first time in a year (-3.2% year-over-year) The core measure rose 0.6% from a year ago. Deflation in producer prices accelerated, falling 4.6% year-over-year after a 3.6% decline in April. It was the steepest decline since May 2016. Month-over-month, this is a 0.9% decline. The PPI also showed a decline in consumer products. The soft inflation data is seen boosting the chances that the PBOC cuts the one-year medium-term lending facility rate near week (June 15) from 2.75%, where it has been since last September. A reduction in required reserves seen as a possible move ahead of the end of the month tax date.

The dollar is recovering from the low for the week against the Japanese yen recorded in Asia earlier today near JPY138.75 before rebounding with the help of firmer US interest rates. The greenback is trading around the five-day moving average (~JPY139.55). The session high was recorded in early European turnover near JPY139.75. There are options for $970 mln at JPY140 that expire today, and the stretched intraday momentum indicators suggest it might not reach it. Initial support now may be in the JPY139.20-40 area. The Australian dollar settled yesterday above $0.6700 for the first time in nearly a month. It slipped back slightly below $0.6695 where it found new buyers that lifting the Aussie to new session highs near $0.6725. There is little chart resistance ahead of the $0.6800 area. The US dollar traded between about CNY7.1030 and CNY7.1415 on Wednesday and was largely confined to that range yesterday and today. This is the fifth consecutive week that the yuan was weakened. It has only strengthened two weeks here in Q2. The PBOC set the dollar's reference rate at CNY7.1115 today, slightly lower than the CNY7.1121 projected by the median forecast in Bloomberg's survey. 

Europe

The eurozone contracted in Q4 22 and in Q1 23. This Econ 101 definition of a recession is not particularly helpful. Recall that the US economy contracted in Q1 22 and Q2 22 and the Fed had just begun to adjust interest rates (March 2022) and it did not deter them one iota. There were two main drags on the region's growth--a sharp fall in inventories and government spending. The drop in government spending was concentrated in Germany (-5.4%). Germany's GDP contracted by 0.3% and the Netherlands by 0.7%. This alone accounts for a 0.1% decline in the eurozone's output. Irish growth, skewed by the booking of a few multinational activities, went into reverse, and contracted by 5% quarter-over-quarter. This alone cost eurozone growth 0.2%. Strength was seen in France (0.2%) and the periphery. Capex and net exports were contributors to GDP.

The euro closed above the 20-day moving average (~$1.0765) for the first time since May 8. It posted its best closing high since May 22. There has been no follow-through buying today and the euro has pushed back toward $1.0760. The daily momentum indicators look constructive, but the euro needs to convincingly rise above the $1.0810 which is the (38.2%) retracement of the decline from the near $1.11. A push back below $1.0740 neutralizes the tone. Sterling overcame the band of resistance in the $1.2500-40 and settled above last week's high ($1.2545). It also met the (61.8%) retracement objective of the losses since the May 10 high set near $1.2680. Still, follow-through buying today was minimal, less than a tenth of a cent to almost $1.2570. Session lows have been recorded in European turnover near $1.2535. A move back below $1.25 would be disappointing. 

America

The 28k (12%) jump in weekly jobless claims were probably flattered by the Memorial Day holiday and the ongoing dock workers strike on the West Coast. In percentage terms, it was the largest rise since the holiday distortions at the end of 2021. In sheer numbers, it was the largest increase since mid-July 2021. We do think that the labor market is slowing but that jump in weekly jobs claims likely exaggerates it. Still, there is a reason economists focus on a four-week moving average. It helps smooth out the noise of what can be a volatile series. The four-week moving average stands slightly above 237k, which is the highest since the end of April. The high for the year so far was set in in late March near 242k. The four-week high in 2022 was slightly below 240k. The dock workers strike (22k workers at 29 west coast ports) has been working for almost a year without a contract. The dispute over automation and health benefits have been resolved. Wages are not. Labor wants a 7.50% wage increase for each year of the proposed contract, and retroactive to July 1, 2022. The logistics problem for businesses is that the strikes are diverting ships to the Gulf and East Coast Ports. However, due to a drought, transit through the Panama Canal is more challenging. The Panama Canal Authority projects that end of July the water level will set a record low of almost 78 feet (~23.9 meters). The five-year average for July is nearly 85 feet. This warns of the risk of supply chain disruptions and price pressures. 

Canada reports May jobs today. In the first four months of the year, Canada created an average of nearly 62k jobs a month, of which two-thirds were full-time positions. Comparable numbers from the January-April 2022 period were almost identical around 61k and 42.5k, respectively. We think the Canadian economy is slowing markedly after the surge in Q1 and the massive wildfires add to our conviction. It could become more evident with today's jobs report, where overall job growth may have grown at its slowest pace since last September. The pendulum of market psychology in favor of not one but possibly two more hikes in the second half of the year. A disappointing employment report may give the market pause.

The US dollar is offered against the Canadian dollar ahead of the employment data. In the middle of the week, the greenback reached a one-month low near CAD1.3320. It has not traded below CAD1.33 since mid-February. After consolidating yesterday and holding below previous support, now resistance at CAD1.34, the greenback has returned to almost CAD1.3330 today. There are options for about $770 mln at CAD1.3400 that expire today. The low for the year was recorded in early February near CAD1.3260. Meanwhile, the greenback is consolidating above the seven-year low set in the middle of the week by MXN17.3055. Mexico reports April industrial production figures today, which are expected to have recovered after falling 0.9% in March. The decline in May CPI reported yesterday likely keeps the central bank on the sidelines while the swaps market anticipates the first rate cut toward the end of the year. There seems to be little on the charts ahead of the MXN17.00 area.