Consolidative Tone to Start the Week

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Marc Chandler
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Overview: The new week has begun off quietly. The dollar is in narrow ranges against the G10 currencies, +/- 0.15% as the North American market prepares to open. The Dollar Index is trading inside the narrow pre-weekend range. With softer US CPI, retail sales, and industrial production due this week, we have a downside bias for the greenback. Most emerging market currencies are firmer. A few Asian currencies, including the Chinese yuan and Philippine peso are among the exceptions.

Equity markets are mixed. The MSCI Asia Pacific Index was flat last week after rally more than 6% in the previous two weeks. Japanese, Chinese, and South Korean markets traded heavier today, while other large bourses in the region advanced. Europe's Stoxx 600 is threatening to snap a six-day advance and is slightly softer in late morning turnover. US index futures are a little firmer. The S&P and NASDAQ have three-week rallies in tow. The BOJ offered to buy few JGBs, and this pushed the 10-year yield up a few basis points. China is preparing to sell CNY1 trillion (~$138 bln) long-term bonds (20-50 years) starting at the end of the week. European benchmark 10-year yields are off 1-2 bp. The US 10-year Treasury yield is a little softer after settled near 4.50% before the weekend. Gold peaked before the weekend near a three-week high ($2378.50) but is heavier now and trading below last Friday's low. Nearby support is seen around $2334. June WTI is recovering from a three-day low set earlier today near $77.80. It recorded an outside down day before the weekend, having been turned back from $80. Consolidation is the theme.

Asia Pacific

China reported April inflation measures over the weekend. Consumer prices rose 0.3% year-over-year, an insignificant change from the 0.1% reported in March. Month-over-month, CPI rose by 0.1% after tumbling 1.0% in March. The conventional narrative sees weak demand as the cause of low inflation in China. While there is a kernel of truth to it, it is overstated and obscures other elements. For example, China's CPI is heavily weighted toward food for which demand is not particularly elastic. Food at home accounts for 8.7% of the US CPI, for example, bumped by the 2020 pandemic behavior. In China, food is a fifth of the CPI basket. Food prices are of 2.7% year-over-year. Excluding food and energy, core CPI rose 0.7% year-over-year in April (0.6% in March). Also, frequently in China it appears that there is often intense competition domestically and the price wars drive down prices. The survivors are national champions and become global players. Producer price deflation continues, but at a moderating pace. The 2.3% year-over-year decline in April is the least since February 2023, and three-month average has slowed for the past three quarters. Separately, China also reported lending figures and aggregate financing show an unexpected and rare contraction. However, this seemed to reflect technical issues and is unlikely to be the signal of the direction of lending. The bank lending did increase to CNY10.19 trillion year-to-date from CNY9.46 trillion. The PBOC sets the benchmark one-year medium-term lending facility rate this week, but officials seem in no urgency to cut rates. 

There are three data points in the region this week. Two take place on May 16 and the other on May 17. First is the initial estimate of Japan's Q1 GDP. A small decline of 0.2% (quarter-over-quarter annualized) is expected, but the weakness appears broad-based. Consumption, business investment, exports, and industrial output all likely contracted. However, economic activity seemed to pick-up and Japan is likely returning to growth this quarter. Shortly after Japan's GDP, Australia reports April employment. Australia averaged job growth of almost 41k a month in Q1 24, which is the best quarterly performance since Q1 23. In the first quarter of this year, full-time positions accounted for all the job growth. The third set of data points comes from China. It will likely report that that the economy is off to firm start to Q2. Retail sales, industrial output, and fixed asset investment likely improved sequentially on a year-over-year basis. However, the property sector remains a drag. New and used home prices likely extended their decline and property investment and sales are expected to have continued to decline. 

The dollar rose by about 1.75% against the yen last week to recoup a little more than half of the losses the previous week. It closed firm, near the week's high of almost JPY156, which is about the halfway mark of the intervention-inspired losses (~JPY160.15 to JPY151.85). Many market participants are looking for near-term re-test on the JPY160 area. We are less sanguine given the likelihood of softer US data this week. The BOJ announced it would purchase fewer 5–10-year government bonds in its regular operation (~JPY425 bln vs. JPY475.5 bln, or $2.7 bln vs. $3.02 bln). It is seen as a protest against the weak yen, and the first such reduction since December. The next retracement objective (61.8%) is around JPY157. On May 16, the day after US CPI and retail sales, there are options for almost $2.5 bln that expire in the JPY159.30-50 area. The dollar continues to hold below JPY156. The Australian dollar consolidated last week and finished almost unchanged (<0.10%). It had appreciated around 3% in the previous two weeks. Except for a brief exception in the middle of last week, the Aussie was confined to the range set with the May 3 US jobs data (~$0.6560-$0.6645). It is near $0.6615 in the European morning. The intraday momentum indicators are stretched in front of the pre-weekend high closer to $0.6625. The PBOC set the dollar's reference rate at CNY7.1030 (CNY7.1011 on Friday). The average in Bloomberg's survey was CNY7.2261 (CNY7.2128, previously). Although we would attribute most of the yuan's minor loss over the past two sessions to the weakness of the yen, some observers attribute it to the US tariffs that reportedly will be announced tomorrow on Chinese electric vehicles, solar panels, and batteries. Ironically, some of the same observers think that China should be mounting a stronger defense of its currency because it has a trade surplus. The US does not import many EV (or steel) from China, so the new tariffs are likely preventative in nature and more symbolic as nothing material will change. At CNH7.2380 the dollar has recouped almost two-thirds (61.8%) of its losses against the offshore yuan. It reached CNH7.2435 today. The CNH7.2500-50 area the next chart resistance.

Europe

The eurozone reports its second look at Q1 GDP and will provide more details on May 15. The initial estimate was 0.3%, its first expanding quarter since Q2 23 and its strongest since Q3 22. Even though the eurozone economy contracted in Q4 23, consumption recovered from the 0.3% contraction in Q3, rising by 0.6%. It is seen matching that in Q1 24. Government spending is expected to have risen, while business fixed investment may have slowed. March trade data is not yet available (Due May 21), but the current account surplus appears to have narrowed in Q1 24 from Q3 23. The UK reports employment data on May 14. The data may pose headline risk but before the BOE meets again on June 20, it will have seen two more inflation reports and one more employment report.

The euro edged slightly higher for the fourth consecutive week, but it went nowhere. In fact, the euro, like the Australian dollar, traded within the range set on May 3 all last week, with one brief exception in the middle of the week. It traded up to about $1.0810 on May 3. The 200-day moving average is around $1.0790, which the euro is testing in Europe. It has not closed above it since April 4. The downtrend line we have been monitoring drawn off the March and April highs is found near $1.0780 today and falls to falls to around $1.0765 at the end of the week. Instead of consolidating, sterling fell last week. It recorded a two-week low near $1.2445 on a dovish hold by the Bank of England. It recovered to post an outside up day by closing above the previous day's high. Follow through buying ahead of the weekend was aided by the stronger than expected Q1 GDP (0.6%, double what was expected) and lifted sterling to a three-day high to $1.2540, slightly below the 200-day moving average. That area is also the (50%) retracement of the losses since the May 3 high near $1.2635. There are GBP725 mln options at $1.2530 that expire today and another set for GBP545 mln at $1.2565 that also roll off today. 

America

The US economy appears to have lost some momentum at the start of Q2. This will likely be evident in this week's reports. Consumer prices probably moderated, retail sales likely slowed markedly despite the stronger auto sales, and industrial output and manufacturing production probably softened. If true, it would push against arguments that the economy is re-accelerating and that price pressures were building. Headline CPI may slow to 3.4% year-over-year from 3.5% and the core rate may ease to 3.6%-3.7%, depending on the rounding. To be sure, this will not be sufficient to get the Fed to cut rates in June, but it could still weigh on yields. On the other hand, housing starts likely bounced back from the heady 14.7% decline in March. It is too early in the quarterly cycle to put much credence on the Atlanta Fed's GDP tracker (3.3%) and the median forecast in Bloomberg's survey is for 1.6% Q2 GDP. The survey shows the median forecast remaining under 2% on a quarterly basis through H1 25. The rise in inflation expectations in the preliminary University of Michigan's survey before the weekend spurred a backing up of US rates. However, a switch to more internet surveying seems to be a factor. Internet surveys reportedly show higher inflation expectations than telephone surveys. 

The US dollar has been trading between roughly CAD1.36 and CAD1.38 for the past month. The five- and 20-day moving averages are hovering near the middle of that range. Net-net, the greenback is flat against the Canadian dollar over the past two weeks. The low for the week was set after the stronger than expected employment data ahead of the weekend near CAD1.3635. But the dollar bounced back, as it did more broadly even if not deeply after the uptick in the University of Michigan's preliminary May survey that showed an uptick inflation expectations. The greenback settled virtually unchanged. Continued consolidation may be the most likely near-term scenario. The Mexican peso was a different story. The 1.15% gain in the peso was second to the Chilean peso last week to lead emerging market currencies higher. New highs in copper prices, as China producers try to organize a cut in output, may have helped underpin the Chilean peso. Before the weekend, the Mexican peso reached its best level in three-and-a-half weeks. The higher-than-expected CPI and cautious central bank was greeted with peso buying. The carry remains attractive and the implied volatility, which soared are the flash crash, is calming. One-month implied volatility peaked near 14% on the flash crash (April 19) and ahead of the weekend it fell to about 9.6%, which is the lowest since April 12. The greenback is holding slightly above the pre-weekend low set around MXN16.7215. The next target may be near MXN16.65.