Scandis and Antipodeans Lead the Greenback’s Recovery

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Marc Chandler
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Overview: The market continues to resist the Fed's signal that another 50 bp of hikes may be necessary to ensure inflation is headed toward its target. Previously, the market had rate cuts priced in, and it took some time for the Fed's push back to be accepted. The market converged with the Fed, and this helped the dollar recover. We suspect a similar pattern to play out again. The market does not have even one of the two Fed hikes discounted. As it moves in this direction, we look for the dollar to get better traction. Today's it is mixed but mostly stronger. It is reversing lower against the yen after reaching new highs for the year. Like yesterday, the dollar-bloc currencies and Scandis are the heaviest. Emerging market currencies are mostly lower. The Mexican peso, which reached new multiyear highs before last weekend is the heaviest, with around a 0.3% pullback. 

Equity markets are lower, and the Hang Seng and mainland stocks that trade there were the hardest hit and the cut in the loan prime rates were widely expected and specifics on new stimulus measures has been light. Europe's Stoxx 600 is off almost 0.40% today after falling more than 1% yesterday. US equity index futures are trading heavily. European bond yields are mostly 2-3 bp lower, though the UK Gilts, which have underperformed recently, after rallying today, with the 10-yield off five basis points. The 10-year US Treasury yield is up a couple of basis points near 3.79%. Gold is trading in around a $5 range on either side of $1950. August WTI reached an eight-day high near $72.40 before succumbing to some profit-taking that pushed it back toward $71.80 in the European morning. 

Asia Pacific

Following a cut in deposit rates, and the PBOC reduction in the 7-day repo rate and the benchmark one-year medium-term funding rate, Chinese banks shaved the one- and five-year loan prime rates by 10 bp. Small beer. New and larger fiscal efforts are expected and the fact that these have been discussed but not delivered is a source of angst and weighed on Chinese equities and the yuan yesterday and today. Separately, US Secretary of State Blinken met with is counterpart and Chinese President Xi. This might set the stage for a Biden-Xi meeting later this year. Still, the key question is if this marks a substantive change in the relationship. Without being cynical, there are good reasons to suspect that neither side is going to change their behavior. The first test could be next month's Northern Atlantic Treaty Organization's summit. NATO recently authorized an office be established in Japan. Japan was invited to the July summit and China sees it as evidence of the "containment" strategy and cautioned Japan from attending. We note that China's Premier Li made his first foreign trip, while Blinken was in Beijing. It was to Germany.

The minutes from the Reserve Bank of Australia's meeting from earlier this month at which the central bank delivered a surprise 25-bp rate hike indicated that it was a "finely balanced decision."   The market's take was that the minutes were less hawkish than expected, even though the RBA noted that service price inflation was not easing, and goods disinflation was less than in some other countries. Last week's stronger than expected employment report underscores that the RBA monetary cycle is not over. The odds of a hike next month slipped from about 50% to about 33%, according to the futures market. The market remains fairly confident of a hike in August, but the odds slipped slightly. Another hike remains largely priced in for Q4. 

The dollar rose to JPY142.25 a new high for the year. However, it ran into a wall of sellers and the greenback pushed back to yesterday's lows (~JPY141.45). There are options for $2.1 bln at JPY142.00 that expire today. A close below yesterday's lows would be a bearish technical development (potential key reversal). The Australian dollar peaked at $0.6900 before the weekend and after settling lower then has proceeded to pare the gains. It bottomed near $0.6460 at the end of May. Today's low was slightly below $0.6790. The first set of expiring options today are struck at $0.6775 (~A$670 mln). The initial retracement target is around $0.6730. Since the session low was recorded, the Aussie has held below about $0.6815. The greenback bottomed before the weekend near CNY7.1060, and after rising yesterday and today, it is knocking on last week's high (which was also the high for the year) near CNY7.1800. We have noted potential toward CNY7.20 but this may be too conservative, and above there, the next area is around CNY7.24. That said, we note that the PBOC set the dollar's reference rate at CNY7.1596, lower than the CNY7.1628 that was anticipated.

Europe

The eurozone unexpectedly reported a 7.1 bln euro trade deficit in April. The median forecast in Bloomberg's survey projected a 17.5 bln euro surplus. The deterioration was not a function of Germany. It reported an 18.4 bln trade surplus, about 15% larger than expected. The French deficit of 9.7 bln euros was more than 25% larger than projected. Italy and Spain also reported significant deterioration in their April trade account. The current account figures reported today showed a small surplus of 4 bln euros, which compares with a 17.7 bln euro deficit last April. The euro area recorded a current account surplus of almost 74 bln euros in Q1 23 after near 600 mln euros in Q1 22. Separately, construction spending in the eurozone stabilized in April after falling 2.4% in March. Economists in Bloomberg's survey expect the euro area economy to expand by 0.1% here in Q2 after contracting by 0.1% in Q4 22 and Q1 23.

UK politics dominated the start of this week with "Partygate" embarrassment playing out. After a lengthy debate yesterday, the House of Commons endorsed (354-7) the privileges committee's finding that former PM Johnson lied to parliament, and it was on his birthday to boot. Another Tory MP resigned over the weekend, bringing it to at least three and possibly four (a resignation was threatened but has not been acted upon). At least two byelections will be held next month. Today, the House of Commons will hold a post-Covid hearing. Tomorrow the UK reports May CPI figures and on Thursday, the BOE is expected to hike 25 bp. The swaps market has about a 15% chance of a 50 bp move instead.

The euro peaked near $1.0970 before the weekend and has found support yesterday and today near $1.0905-10. It reached a high today in late Asia Pacific turnover near $1.0945. We like it lower, and a break of the $1.09 area could see $1.0860. That said, the daily momentum indicators have not turned lower yet. A close below the five-day moving average (a little above $1.0910), which it has not done in nearly two weeks could be a signal of a coming correction. For its part, sterling peaked at the end of last week a little shy of $1.2850. Today is set a three-day low near $1.2765. The price action looks somewhat more constructive than for the euro, which makes sense ahead of the BOE meeting on Thursday. Initial support in North America may be seen near $1.2740.

America

The Federal Reserve had told the market through various channels that it was not considering a rat cut this year. The market resisted. We anticipated that the market would converge with the Fed rather than the other way around and that this would help the dollar recovery from those March lows. Last week, the Fed's updated forecasts indicated that another 50 bp increase this year would be appropriate. The market is resisting. It does not even have one more hike discounted. We think it begrudgingly will, and that this will also help the dollar recover from its recent decline. Today's May housing starts and permits pose headline risk but are unlikely to drive sentiment. That said, there seems to be some signs that the housing market is bottoming. Homebuilder sentiment reached an 11-month high this month, exceeding expectations. Limited supply, especially single-family houses, has apparently helping spark optimism from builders. The survey found a quarter of builders have reduced prices to boost sales, down from the peak of 36% last November. 

The US dollar fell to new lows for the year yesterday against the Canadian dollar near CAD1.3175. It is holding above CAD1.3200 today. Nearby resistance is seen in the CAD1.3245-65 area, with stronger resistance at previous support around CAD1.3300. A pullback in US stocks warns of a risk off session, which may challenge the Canadian dollar bulls. The horrific heat wave in Mexico may hinder economic activity. Today, it reports April retail sales, and a small gain is expected. The US dollar recorded new multiyear lows near MXN17.0250 at the end of last week and continues to consolidate in its trough. Yesterday's high was around MXN17.1720, and, so far today, the high has been about MXN17.1440. A move above MXN17.19 would confirm a near-term low is in place. The central bank meets Thursday and is widely expected to standpat.