The Dollar Begins New Week mostly Softer

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Marc Chandler
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Overview:  The dollar is mostly lower, led by the Swiss franc and euro. However, despite softer US rates and a victory for the LDP in local Japanese elections, the yen is trading with a softer bias. Japanese stocks recovered from the pre-weekend profit-taking seen after the Nikkei make new highs for the year. Most other large bourses in the region except Taiwan and India also moved lower. Note that China's CSI 300 fell for the fourth consecutive session and the first back-to-back loss of more than 1% of the year. Europe's Stoxx 600 is flat. It rose last week for fifth consecutive weekly advance. US futures are trading with a lower bias.

European benchmark yields are slightly softer, while the US 10-year Treasury yield is off a little more than 3 bp to slip below 3.54%. European two-year yields are mostly 1-2 bp higher, while two-year US Treasury yield is off 3 bp to 4.15%. Recall that last week, the US 2-year yield reached 4.28%, the highest level since mid-March. Gold is little changed around $1984. It peaked near $2049 on April 13 and tested support in the $1970 area last week. June WTI initially extended last week's 5.5% drop that snapped a four-week rally. It recorded a low today of almost $76.70. The high before OPEC+ output cut announcement at the start of April was near $75.85, which is the bottom of the gap. A move above $78.40 lifts the technical tone. 

Asia Pacific

The Liberal Democratic Party won four of the five parliament seats that were up for grabs yesterday. Prime Minister Kishida support has risen recently, arguably helped by three initiatives--increased defense spending, child support, and especially the subsidies for gas, electricity, and travel. Japanese voters also appear to appreciate Kishida's presence on the international stage. Yesterday's election results will further encourage Kishida on the path he seems to want to go down: snap elections. He will host the G7 summit (May 19-21) is his hometown Hiroshima, which will also show Kishida as a statesman. A June-July election is possible, but the risk is that it is also around the same time that the Bank of Japan is expected to change monetary policy in a less accommodative direction. Kishida also may want to be in a good position ahead of the LDP leadership contest in September 2024. 

China's ambassador to France has sparked a row that could very well jeopardize President Macron's hope that Beijing would act as a mediator of a negotiated settlement between Ukraine and Russia. The ambassador opined ex-Soviet Union republics "don't have effective status under international law." This includes Crimea, and, paradoxically, the Baltics, which Beijing recognized more than 30 years ago. Apparently, official Chinese websites have deleted the ambassador's comments. Separately, reports suggest that Italy may withdraw from the Belt Road Initiative. It is the only G7 country that joined it (2019). Italy's Prime Minister Meloni has been fiercely pro-NATO and Ukraine, even though her coalition partners are considerably less so. Also, Taiwan is considering investing $400 mln in Italy's chip sector. A formal decision is seen likely ahead of next month's G7 summit. Meanwhile, on a different front, earlier this month, Beijing began a national security review of Micron, a key producer of Dram memory chips. China and Hong Kong accounted for a quarter of Micron's revenue last year. The US reportedly requested that South Korea's companies do not make up the difference if Micron is sanctioned. President Biden is hosting South Korea's President Yoon Suk-yeol's state visit today. 

The US dollar is trading in narrow range and held below the pre-weekend high of almost JPY134.50. Although it was frayed last week on an intrasession basis, JPY135 still offers resistance and there is a large option ($1.1 bln) expiring later in the week. Support is seen near JPY133.80 and then JPY133.50. The Australian dollar was sold to an eight-day low near $0.6665 late in the Asia Pacific sessions before recovering to almost $0.6700 in the European morning. The $0.6700-20 offers the nearby cap. Still, it is in the middle of the $0.6600-$0.6800 range that has dominated since mid-March. A breakout does not appear imminent. The greenback traded to nearly CNY6.9065, a new high for the month. It was not able to sustain the upticks and retreated below CNY6.8950. There are options expiring today for around $625 mln at CNY6.8960. The dollar's reference rate was set at CNY6.8835 (vs. the median projection in Bloomberg's survey for CNY6.8843). 

Europe

S&P boosted its outlook for the UK and Greece, while affirming its outlook for Italy. The rating agency had cut the UK's credit outlook to negative last year amid the turmoil of Prime Minister Truss's few days in office. Her successor, Sunak, has overseen the reversal of most of the unfunded stimulus and S&P rewarded it by returning the outlook to stable of its AA-rating. S&P concurs with the Bank of England's forecast of a 0.5% contraction this year. The IMF's new forecasts envisions a 0.3% contraction and the median projection in Bloomberg's survey sees a 0.2% decline in GDP this year. S&P now gives Greece's credit a positive outlook while maintaining a below investment-grade rating of BB+, the same as Fitch, which has a stable outlook. Moody's gives Greece a Ba3 rating (BB-) with a positive outlook. S&P cited the structural reforms, the stronger fiscal position, and the resolution of the lion's share of the bad loans. Greece recorded a primary budget surplus (excludes debt servicing costs) last year after two years of deficits. Tourism has nearly returned to pre-Covid levels. Greece's debt stood at 206% of GDP in 2020 and was a little more than 170% last year. S&P projects it to fall to 135% in 2026. Parliamentary elections will be held next month (May 21). S&P affirmed Italy's BBB rating and maintained its stable outlook. Fitch concurs, but Moody's sees Italy as a BBB- credit (Baa3). S&P expects a small primary budget surplus next year and debt to fall to 136% of GDP in 2026 from 144% in 2022. 

Despite S&P's move, the UK Prime Minister Sunak was dealt a political blow ahead of the weekend. The third cabinet official in around six months has left. An independent investigation into Sunak's ally and Deputy Prime Minister Raab concluded that he was abrasive, aggressive and intimidating to the civil service. Raab resigned and was replaced by his deputy Dowden, who also runs the Cabinet Office. Chalk will assume Raab's other role as justice secretary. Although some national polls suggest the gap between the Tories and Labour has narrowed a bit recently, it is still double-digit, and the Tories appear headed for a shellacking in the local elections next month (May 4, while Northern Ireland elections are May 18). Most of the seats that are being contested last faced election in 2019, when the Tories lost more than 1000 council seats and several councils with the Lib Dems made the most gains. Tory officials acknowledge that the party may lose another 1000 council seats in upcoming election.

The euro turned better bid in early European turnover and pushed back above $1.10 for the first time in six sessions. It appeared to have been helped by the IFO survey that showed German expectations improved (92.2 vs. 91.0) even as the current assessment soften a little (95.0 vs. 95.4), allowing the overall measure of the business climate to tick up (93.6 vs 93.2). The move above $1.10 like spurred some option related buying. There are options for almost 755 mln euros struck at $1.10 that expire today. The intraday momentum indicators are stretched. The high for the year was set on April 14 near $1.1075. Sterling is firm, but so far is holding below last week's high (~$1.2475). That area also corresponds to the (61.8%) retracement of the losses since the April 14 high (~$1.2545). Here, too, the intrasession momentum indicators are stretched. Initial support is seen around $1.2440.

America

The key question remains: how much of the Fed's work is being done by the tightening of lending? Initially, economists, rushed to judgment in our view, claiming it was worth 50-75 bp. Prior to the stress, the futures market had a nearly 5.75% terminal rate discount. Now, the derivatives market is saying that next month's move to 5.25% is the final move. Yet, the risk of another hike seems underpriced. Emergency borrowing from the Federal Reserve rose in the past week for the first time in five weeks. The roughly $4 bln increase (to almost $145 bln) was nearly equally divided between the discount window and the new Bank Term Funding Program. However, commercial, and industrial loans rose for the second consecutive week (through April 12). Over the two weeks, such lending rose by slightly more than $15 bln. The previous two weeks saw a record-decline of $68 bln. 

The KBW bank index fell by a quarter last month. It has stopped falling but has not recovered much (~1% so far here in April). Deposits fell by $76.2 bln as the hemorrhaging continues, mainly from the large US and foreign banks. However, this seems like the financial equivalent of some other businesses raising prices beyond passing along rising input costs. In their recent reports JP Morgan showed a 49% rise in net interest income (the difference between its cost of funds and what it can charge), Wells Fargo reported a 45% increase, while Citi recorded a 23% increase. Meanwhile, ahead of the weekend, Moody's downgraded 11 regional banks, and most of whom had been discussed since last month's failures at Silicon Valley Bank and Signature. It said that challenges to managing assets and liabilities are pressuring profitability.

The quiet period ahead of next week's FOMC meeting has begun. The Dallas manufacturing survey will be reported today, and the retail sales and inventory figures will be revised. Note that around 180 of the S&P 500 companies report earnings this week, accounting for more than $10 trillion in earnings. Earnings are expected to decline for the second consecutive quarter. Mexico reports CPI figures for the first half of April. Although price pressures are easing, Banxico is expected to follow the Fed and hike rates next month.

The US dollar extended its recovery against the Canadian dollar to almost CAD1.3570 before reversing lower. That is a new high for the month. Recall that on April 14, the greenback traded near CAD1.3300. The CAD1.3580 area is the (50%) retracement of the US dollar's decline from the March 10 high (~CAD1.3570). The five-day moving average is nicking the 20-day moving average for the first time since last March. Support is seen around CAD1.3480. Note that options in the CAD1.3565-75 (~$900 mln) expire later this week. The US dollar continued to trade within the range set last Monday (~MXN17.9315-MXN18.1540). The greenback is firm but looks capped near MXN18.05. Support is seen by MXN17.98.