Overview: The US budget agreement passed a House
committee vote by 7-6 and the bill is scheduled to be voted on by the entire
House today before the Senate take it up with the idea of passing it Monday.
The procedural step plus the weakness of China and Japanese data and soft CPI
figures from Europe has lifted the greenback against all the major currencies. The
euro and Australian dollar have been sold to new lows, while the dollar holds
ever so slightly below JPY140. Despite a stronger-than-expected Q1 GDP (4.0% vs.
3.5%), the Turkish lira leads emerging market currencies lower. The weakness of
the euro and escalating hostilities in Kosovo is weighing on the central
European currencies. The Philippine peso and Mexican peso have edged higher and
stand out among the emerging market currencies today.
The weaker growth impulses send
Asia Pacific stocks lows and snapped a three-day advance in MSCI regional
index. Europe's Stoxx 600 is off for the third consecutive session and the
sixth in the past seven. US equity futures are trading with a slightly heavier
bias. European benchmark 10-year yields are off 8-9 bp with some soft inflation
reports in hand. The 10-year US Treasury yield is around four basis points
lower to 3.65%. It peaked at the end of last week near 3.86%. Gold posted a
potential key reversal to the upside, recovering from almost $1930 to $1963.50.
It is stalling today after nearing $1965.50, as it is pulled between falling
rates and a stronger dollar. July WTI fell 4.4% yesterday to almost $69 a barrel.
The selling pressure was not satiated, and it is trading below $68.50 now. OPEC
is meeting in a few days and the sharp fall in prices may encourage a few to
enact more voluntary cuts.
Asia Pacific
Japan's economy grew by a
stronger than expected 1.6% at an annualized pace in Q1 and the question is
whether the growth impulses carried over into Q2. Today's report for April retail sales and
industrial production figures give some evidence Q2 is off to a slower start. Retail
sales fell 1.2% month-over-month in April. Economists had expected a 0.5% rise.
It is the first decline in five months. Industrial production also disappointed.
It fell by 0.4%. The median forecast in Bloomberg's survey looked for a 1.4%
gain. After a sharp 5.3% drop in output in January, industrial production
bounced back 4.6% in February and another 1.1% in March. Chip fabrication
equipment and aircraft parts production slowed, while the auto sector output
improved.
China's May PMI disappointed
and underscores fears that the Covid recovery was short and shallow. At 48.8 (vs. 49.2 in April), the
manufacturing PMI was below the 50 boom/bust level for the second consecutive
month. It has spent the first quarter above it after being below it in Q4 22.
Economists in Bloomberg's survey had looked for a small bounce. The
non-manufacturing PMI slowed more than expected: 54.5 (from 56.4) and
expectations for 55.2. The composite eased to 52.9 from54.4. The Caixin
manufacturing PMI will be reported tomorrow. It stood at 49.5 in April and
peaked at 51.6 in March, the highest since last June.
Australia's newly minted
monthly CPI rose for the first this year in April. The year-over-year pace rose to 6.8% from
6.3% in March. The median in Bloomberg's survey was for 6.4%. This measure
peaked in December at 8.4%. The surprise has boosted the risk of another rate
hike. The central bank meets next week, and the odds of a hike risen to a
little more than 20%, the most this month. Still, a hike is nearly priced in
for the August 1 meeting.
The dollar's potential key
reversal yesterday against the yen saw follow-through selling today to almost
JPY139.30. However, it
has recovered smartly in the European morning back to almost JPY140. It has
stretched the intraday momentum indicators. US rates are also softer, which if
sustained may help cap the greenback. A close above JPY140.10-30 would lift the
greenback's tone. After stabilizing in the first two sessions of the week,
the Australian dollar has broken down to new lows near $0.6475. There are
options for about A$570 mln at $0.6450 that expire today, which is near the
lower Bollinger Band. Still, there appears to be little meaningful support
ahead of $0.6400. Disappointing Chinese data and the broad strength of
the dollar saw the Chinese yuan weaken to new six-month lows. The dollar
pushed above CNY7.11 after settling near CNY7.08 yesterday. The yuan has fallen
in 15 of the past 18 sessions. The PBOC set the dollar's reference rate today
slightly below expectations (CNY7.0821 vs. CNY7.0824). Yesterday's fix was at
CNY7.0818.
Europe
The focus is eurozone
inflation. The
aggregate preliminary estimate for May will be reported tomorrow. Spain's
national figure on Tuesday may have set the tone. The EU harmonized measure
fell by 0.2% in May. The median forecast in Bloomberg's survey was for a 0.2%
increase. The year-over year rate fell back to 2.9% after April's spike to 3.8%
(from 3.1% in March). Today, Germany and France reported their figures today. France's
harmonized measure unexpectedly fell by 0.1%. It is the first decline this year
after rising by an average of about 0.8% in the first four months of the year. The
year-over-year rate eased to 6.0%, the least since last May. Germany's EU
harmonized measure also rose by an average of around 0.8% in the first four
months of the year. The states' reports were soft, and suggests that the EU
harmonized national figure, which is due shortly, may undershoot expectations
for a 0.2% increase. There are downside risks the median forecast in
Bloomberg's survey for a 6.7% year-over-year rate (from 7.6% in April).
The euro recovered from the
yesterday's pushed below $1.0680 and close near $1.0735. However, selling pressure re-emerged in
Asia, sending it to $1.0660 where it is finding some bids in the European
morning. Some pressure on the euro may have come from option-related
selling: options for a billion euros at $1.0675 expires today. The large
net long position in the futures market was scaled back but remains historically
large. The lower Bollinger Band is found slightly below $1.0625 today. The
US-German two-year rate differential is near 173 bp, the most since the banking
stress emerged in March. The $1.0680-$1.0700 offers nearby resistance. Sterling
is trading heavily, off around a half-of-a-cent, but is within yesterday's
range. It saw a low yesterday near a little above $1.2325. Last week's low
was closer slightly below $1.2310. It too found a bid in the European morning. Initial
resistance is seen $1.2380-$1.2400.
America
In the US, employment moves
front and center. Starting
with today's April JOLTS report is expected to show a continued decline in job
openings. Tomorrow's ADP's May private sector jobs estimate is projected to
slow to 170k from almost 300k. It has been alternating between increases and
declines this year and has averaged 204.5k this year. In the first four months
of the last year, ADP estimated that private sector payrolls increased by
nearly 347.5k jobs. The comparable numbers from the BLS establishment survey are
225k average in Jan-Apr this year and 473k in the first four months of 2022.
The Beige Book will be
released later in the session as input into the June 13-14 FOMC meeting. The pendulum of market sentiment has swung
from pricing in steady policy as recently as May 11 to discounting slightly
more than a 60% chance. A quarter-point hike is fully discounted at the July
25-26 meeting. Today, two Fed governors speak (Bowman and Jefferson). Boston
Fed President Collins (non-voter) and Philadelphia Fed President Harker (vote)
speaks, as well. Note that the May CPI will be reported as the June FOMC
meeting gets under way. Given the base effect (CPI rose 0.9% in May 2022 and
1.2% in June), making some conservative assumptions, the year-over-year rate is
likely to fall to around 3.5% in by the end of H1 23. That said, the comparison
will be considerably more difficult in H2 23 as headline CPI rose at an
annualized rate of 2.8% in H2 22.
Canada reports March and Q1
GDP today. The Canadian
economy began the year on a strong note, with output rising by 0.6% in January.
It slowed to 0.1% in February. The median forecast in Bloomberg's survey calls
for a 0.1% contraction in March. For the quarter, the Canadian economy is seen
expanding by 2.5% at an annualized rate after stagnating in Q4. There has been
a dramatic swing in rate expectations in Canada. The market is pricing in
about a 30% chance of a hike next week, up from less than a 10% chance at the
end of April. A hike is fully discounted by the end of Q3. As recently as May
4, indicative pricing in the swaps market had greater than a 50% chance of a
cut. The year-end policy rate is seen near 4.75%, up from 4% on May 12.
Mexico's central bank
publishes its quarterly economic outlook today. It will likely reinforce expectations for
a prolonged period that the overnight target rate will remain at 11.25%. After
the Banxico meeting earlier this month, officials saw average inflation falling
to 4.7% in Q4 and 3,1% next year. The core rate is seen averaging 4.9% in Q4 23
and 3.1% in 2024. Today's forecasts are unlikely to deviate much from the
post-meeting indications. Given the relatively strong Q1 performance, this
year's growth forecast may be revised higher from the current 1.6% projection. This
implies that the output gap is closing faster than the central bank anticipated.
The US dollar closed
slightly above CAD1.3600 yesterday and reached CAD1.3650 today. Last week's high was about CAD1.3655 and
the high from the end of April was just shy of CAD1.3670. Initial support is
now seen near CAD1.3625 and a close below CAD1.3600 would suggest a near-term
top for the greenback. However, a close above the CAD1.3655 area could signal a
move toward CAD1.3700-30. The US dollar also recovered yesterday in North
America against the Mexican peso. Support near Monday's low (~MXN17.5350) held
and the dollar bounced to MXN19.6930. It rose a little more today to MXN17.7050
where offers emerged and sent it back to about MXN17.6355. A convincing move
above MXN17.71 could spark gains toward MXN17.80, but we favor a consolidative
session.
Overview: The debt ceiling drama is not over.
The agreement between the negotiating teams of President Biden and House
Speaker McCarthy sets the stage for the next act in the drama: each side must
deliver the votes. A preliminary vote today in the House of Representatives is
likely today ahead of floor vote tomorrow. Still, the market is optimistic, and
risk is favored. Asia Pacific bourses were mixed today. We note that the chip
sector helped lift South Korea's Kospi up over 1%. Europe's Stoxx 600 is
recouping yesterday's marginal loss, and US equity futures are trading higher.
The S&P 500 and NASDAQ are poised to gap higher. Bonds are rallying. European
yields are mostly 4-6 bp lower, though Gilts are lagging. The 10-year US
Treasury yield is off nearly eight basis points to 3.72%.
The dollar is offered. Among
the G10 currencies, only the New Zealand dollar and Swedish krona are nursing
small losses. Sterling is doing best with a nearly 0.5% gain and resurfacing
above previous support near $1.2400. The euro slipped through $1.07 but
rebounded in the European morning. Emerging market currencies are mixed. The
Turkish lira has been hammered for around 1.5%. The Hungarian forint and
Mexican peso lead the advancer. Gold initially fell to two-month lows near
$1932 but has rebounded as the dollar and interest rates have come off. It is
probing the $1950 area. July WTI is posting an outside down session. It is off
around 2.1% today to test the $71 area. Last week's low was closer to
$70.65.
Asia Pacific
China reports its May PMI
tomorrow. Even
though economists expect Beijing to achieve its growth target this year of 5%,
many express disappointment with the pace. They will see the 20.6% decline in
the January-April industrial profits year-over-year as confirmation. Still,
given that industrial profits were off 21.4% in Q1, the April data point,
released over the weekend, is consistent with a rebound in profits at the start
of Q2 (~3.7%). Moreover, the official data suggest that foreign profits are
holding up better than China's private sector and state-owned enterprises.
There appears to have been a
subtle but potentially important shift in Bank of Japan Governor Ueda's
assessment. At the
end of last week, he told the Wall Street Journal that "There appear
to be moves leading towards sustainable inflation." Service prices, which
were still falling a year ago, are now up 1.7% year-over-year. Wage growth,
which former BOJ Governor Kuroda emphasized, has been downplayed a bit by Ueda,
who argued sustainable inflation is a broad measure, and no single data set
captures it. The rise in global rates have also helped push up JGB yields. The
yen is approaching the levels that sparked concern among Japanese officials
last year. This is not to suggest that there is a line in the sand or that
strong foreign buying of Japanese stocks (from insurance companies?) and the
lower oil prices do not change the calculus. Separately, Japan reported its
unemployment rate fell back to 2.6% in April from 2.8% in March. Economists in
Bloomberg's survey expected a 2.7% rate. The job-to-applicant ratio was steady
at 1.32.
The US led the Indo-Pacific
Economic Framework of 13 other nations in the region to boost supply chain
cooperation. Ostensibly, this is part of the US attempt to fill the vacuum created when it withdrew from
the Trans-Pacific Partnership negotiations (although Trump did the deed,
Clinton and Sanders opposed it in their campaigns). Another prong of the US
economic effort in the region is the Asia-Pacific Economic Cooperation (APEC),
21-coutries and US will host the annual summit in San Francisco in November.
The dollar initially slipped
briefly below JPY140 in early Asian turnover before rallying to a marginal new
high for the year of almost JPY140.95. It was sold into the European morning, where it found support near
JPY140.00. There are $1.72 bln in options at JPY140 that expire tomorrow. The
next important chart area on the upside is around JPY142.50. Watch the five-day
moving average (JPY140.20). The dollar has not closed below it since May
11. Weakness in Australia's April house permit has helped keep the
Australian dollar pinned in the trough it began forging last week
($0.6490-$0.6500). It did make a four-day high in early trading today
reaching almost $0.6560, but the upside momentum was not sustained. There are
about A$510 mln options at $0.6550 that expire today and another A$560 mln that
expire there tomorrow. The weakness of the yen and euro pointed to continued
weakness in the Chinese yuan, which fell to new six-month lows today. The
greenback neared CNY7.10. The PBOC is not protesting the dollar's strength in
the setting of the daily reference rate. Today it was set at CNY7.0818 compared
with the median projection in Bloomberg's survey for CNY7.0811
Europe
The fourth meeting of the
US-EU Trade and Technology Council (TTC) will be held today and tomorrow. It is not working toward a free-trade
agreement. Instead, as with the US efforts in the Asia Pacific, it is said to
represent the next generation. It is about standard setting, and other elements
of cooperation, like with supply chain transparency and AI, and on external
trade issues, like deterring forced labor. The TCC also helps coordinate export
controls on and has found opportunities (e.g., Kenya and Jamaica) to
support infrastructure efforts, which some suggest is a way to counter Chinese
influence.
It will come as no surprise:
Erdogan has been re-elected president of Turkey. The unorthodox policies are widely
understood to be unsustainable and borrowing the future. There is some
speculation that he may bring in more market-friendly officials into the new
cabinet. But this would not necessarily be positive for the lira. After selling
off 0.7% yesterday, the lira is off around 1.25% today, the most since last
July. Spain held local and regional elections over the weekend. They
are important in their own right but also as a bit an of a sense of the mood of
the electorate ahead of the general election. The Socialists suffered a heavy defeat,
and to regain the initiative Prime Minister Sanchez called for a snap election
on July 23. A general election was required by early December. The People's
Party, sometimes joined by the anti-immigration, nationalist Vox party, looks
to have won 8 of the 12 regions that were contested, including Valencia and
Madrid. The PP garnered about 31.5% of the municipal vote nationwide, up from
22% in the previous local election in 2019. Vox doubled its vote to 7%. The
Socialists fell to 28%. Unidas Podemos, which is the Socialist coalition
partner in the national government, also polled poorly. Spanish stocks fell on
Monday (~-0.20%), while Spanish bonds rallied. The nearly 10 bp decline in the
Spain's 10-year was in line with the declines in Germany, France, and Italy.
Today, Spain's 10-year yield is down four basis points, in line with the
regional move. Its stock market is up about 0.65% through late morning and
outperforming the Stoxx 600. In Greece, the governing New Democracy
fell five seats shy of an outright majority in the 300-seat parliament in the
May 21 elections. Rather than seek a coalition government, Prime Minister
Mitsotakis has called for new elections June 25. The other main parties agreed.
The vote will take place under somewhat different rules and give a bonus of as
many as 50 seats to the winner. Mitsotakis, who has led a business-friendly
reform agenda, is most likely to be reelected.
The euro is recovering from
the initial sell-off that brought slightly below $1.0675. It was bought back in the European morning
to a little through $1.0730. Some of early selling pressure may have been exacerbated by
the trading around 1.15 bln euros in options at $1.07 that expire today. There
are options for 2.2 bln euros at $1.0750 that expire tomorrow. We note that the
US 2-year premium over Germany continues to trend higher. It is above 170 bp
today for the first time in a couple of months and has risen for the past six
weeks. The high for the year is a little above 185 bp. Sterling is posting a
big outside up day, having first slipped through yesterday's lows (~$1.2335)
and then proceeded to rally through yesterday's high (~$1.2370). It
reached a four-day high near $1.2430. The intraday momentum indicators are stretched,
suggesting some consolidation is likely in early North America.
America
The deal worked on the debt
ceiling and spending still requires a vote in the House of Representatives and
the Senate. The
negotiators likely anticipate some concessions to individual legislators. Even
if there is more work to be done, and the final shape of the agreement has yet
to be determined, the deal boosts confidence that a default will be avoided.
The market can now turn more of its mindshare to what happens after the debt
ceiling is lifted. The initial focus will be on the likely boost in T-bill offering
and the replenishing of the Treasury's general account (TGA). The tightening of
financial conditions that this entails is a function of the T-bill demand. The
increase in T-bill issuance can come from funds that ae currently parked in the
Fed reverse repo facility. The alternative is that in effect it comes out of
bank reserves. Therein lies the tightening that some estimate can be worth a
quarter-point hike.
A deal also removes a
potential wild card for the FOMC meeting. The market went into the long US holiday with almost
a 58% chance of a hike discounted. Ironically, the odds rose sharply even as
the Atlanta Fed's GDP tracker estimate for growth this quarter was sliced to
1.9% from 2.9%. It sees a bigger drag coming from the wider trade deficit,
which also reflects stronger domestic demand (imports rose, exports fell)
picked up in the personal consumption report. Consumption is off to a good
start in Q2. Personal spending rose by 0.8% in April. Only one economist in
Bloomberg's survey of economists forecast more than 0.7%. Fed officials talk
about different measures of inflation, the strength of demand influences their
outlook. The year-over-year measures are sometimes helpful, but now the base
effect may exaggerate the improvement. We have preferred to look at the
annualized rates. In the first four months of the year, it is running at a 4.2%
annualized rate. In the last four months of 2022, the PCE deflator rose at 3.3%
annualized rate. The core PCE deflator is running ever so slightly slower (and
rose nearly 4.1% at an annualized pace in the last four months of 2022. Hence,
the conclusion by several Fed officials that there has been not material
improvement so far this year.
The US reports March house
price data today, the Conference Board's May survey, and the Dallas Fed's
manufacturing survey. These
reports do not often more the foreign exchange market. The Fed's Barkin speaks
today ahead of five Fed officials that speak tomorrow, ahead of the Beige Book.
A close in the Dollar Index below 104.00 could be a preliminary crack in the
rally. The US dollar is trading lower against the Canadian dollar for the
third consecutive session. Recall that ahead of the weekend, the
greenback reached CAD1.3655, a new high for the month. It has dribbled lower to
nearly CAD1.3565 today. A break, and ideally a close below CAD1.3550 would
weaken the US dollar's technical tone. Tomorrow Canada report Q1 GDP. The
median forecast in Bloomberg's survey looks for a 2.5% annualized pace. The
swaps market now looks for a hike by the end of Q3 (to 4.75%). The US dollar
was turned back from MXN18.00 early last week and reached almost MXN17.5350
yesterday. It is trading quietly in a narrow range
(~MXN17.5540-MXN17.6265). The multi-year low set in the middle of the month was
near MXN17.42. This can be tested in the coming days.
The Canadian dollar is trading close to a two-month low, as the currency remains under pressure. USD/CAD is trading at 1.3646 in the European session, up 0.34%.
Canada’s GDP expected to improve in Q1
Canada releases GDP later today, and the markets are projecting a modest 0.4% q/q for the first quarter, after flatlining in Q4 2022. On an annualized basis, GDP is expected to jump by 2.5%, after stalling at 0% in Q4.
The GDP report takes on even more significance as it is the last tier-1 release ahead of the Bank of Canada rate meeting on June 7th. A strong GDP release would support the Bank raising rates, while soft growth would give the Bank room to continue pausing rates at 4.25%. The key to the BoC’s decision could well depend on the GDP release.
The BoC has a tough decision to make at next week’s meeting. The BoC would like to extend its pause of rate hikes but inflation hasn’t cooperated, as it ticked upwards to 4.4% in April, up from 4.3% in March. Inflation has been coming down, but remains well above the Bank’s target of 2%.
In the US, the debt ceiling deal between President Biden and House Speaker McCarthy now has to be approved by both houses of Congress. Some Republicans are against the agreement, but the deal is expected to go through. The markets are optimistic, as 10-year Treasury yields dropped sharply on Tuesday in response to the agreement, which was reached on the weekend (US markets were closed on Monday). The 10-year yields are currently at 3.65%, after rising to 3.85% on Friday, their highest level since March.
.
USD/CAD Technical
Australian inflation rose in the first quarter, but the Australian dollar is considerably lower today due to soft China PMI reports. AUD/USD is trading at 0.6481, down 0.54%. Earlier, AUD/USD dropped as low as 0.6480, its lowest level since November 7th.
Australia’s inflation rises
Reserve Bank of Australia Governor Lowe was on the hot seat earlier today, as he testified before a Senate committee. Lowe defended the Bank’s aggressive tightening, saying he was aware of the financial pain to families but insisted that high rates were necessary. Lowe said it was too early to declare victory over inflation. It’s a good thing he didn’t because his testimony came around the same time as Australian CPI for the first quarter, which surprised to the upside. CPI rose to 6.8%, up from an upwardly revised 6.3% and above the estimate of 6.4%.
With the RBA meeting next week, today’s inflation report could have ramifications on the Bank’s rate decision. The markets have trimmed the odds of a pause to 78%, down from 90% just a day ago, according to ASX RBA Rate Tracker. This means there is an outside chance of a 25-basis point hike, and the RBA could feel compelled to hike again, with inflation remaining stubbornly high.
China PMIs ease lower
China’s services and manufacturing PMIs fell in May, pointing to a rocky recovery from Covid. Services dipped to 54.5, down from 56.4, but beat the estimate of 50.7. Manufacturing dropped from 49.2 to 48.8 and missed the estimate of 49.4. A reading below 50.0 points to contraction. The weak data has weighed on the Australian dollar, which is sensitive to Chinese releases, as China is Australia’s number one trading partner.
In the US, the debt ceiling deal between President Biden and House Speaker McCarthy is expected to pass through Congress. There could be some hurdles, as some Republicans are against the agreement. The markets are optimistic, as 10-year Treasury yields dropped 2.6% on Tuesday in response to the agreement, which was reached on the weekend (US markets were closed on Monday). The 10-year yields are currently at 3.65%, after rising to 3.85% on Friday, their highest level since March.
.
AUD/USD Technical
In stark contrast to the recent findings of China's manufacturing sector survey done by China Beige Book, a US-based data provider that has indicated a rebound in manufacturing activities in May from April, the latest data released today on the official NBS Manufacturing PMI as well as the Non-Manufacturing PMI have showed another month of contraction and growth slowdown in May.
Fig 1: NBS Manufacturing PMI for May 2023 (Source: MacroMicro, click to enlarge chart)
Fig 2: NBS Non-Manufacturing PMI for May 2023 (Source: MacroMicro, click to enlarge chart)
Headline manufacturing activities (PMI) contracted further to a five-month low at 48.8 in May from 49.2 in April; two consecutive months of contraction and came in below consensus estimates of 49.4. Key sub-components of NBS Manufacturing PMI such as new orders (48.3 vs 48.8), new export orders (47.2 vs. 47.6), and purchasing volume (49.0 vs. 49.1) have shrunk at a faster rate too. In addition, the production output sub-component contracted for the first time in four months to 49.6 in May from April's 50.2.
Services activities (Non-Manufacturing PMI) also further cooled down to 54.5 in May from April's 56.4, its second consecutive month of growth slowdown and its softest pace since January.
The latest reading from China's PMI data for May has further reinforced an increasing slowdown in external demand (global growth) and lacklustre internal domestic demand ex-post re-opening from Covid-19 stringent lockdowns.
A closer inspection of the input and output prices sub-components for both the PMIs has indicated a risk of a deflationary spiral at play. The input cost (main raw material purchase price) sub-component of the Manufacturing PMI declined at the fastest pace in May since July 2022 (40.8 vs. 46.4) while the output cost (producer prices) sub-component fell for the third consecutive and recorded its steepest decline for ten months in May to 41.6 from 44.9.
Also, the input price sub-component of the Non-Manufacturing PMI contracted for the first time in five months to 47.4 in May from 51.1 coupled with a downside reversal in the sales price sub-component that slipped back to a contraction mode of 47.60 in May from a prior rise of 50.3 in April.
All in all, these weak input and output prices surveyed from the manufacturing and services sector in China are likely to cause a further dampening in the upcoming May reading for consumer inflation and factory gate prices (PPI) that are scheduled to release next Friday, 9 June. April's reading of 0.1% year-on-year for consumer inflation and -3.6% year-on-year for PPI were the weakest inflationary data for China within the G-20 nations.
Given China's central bank, PBoC current accommodative monetary policy stance is to adopt a targeted and "wait and see" approach rather than "opening the liquidity floodgates", the foreign exchange rate may be used as a tool in the short term to alleviate the current downturn.
As highlighted above on the risk of the deflationary spiral in China, a weaker yuan at this juncture is unlikely to trigger a significant spike in imported inflation, and on the contrary, it may help to improve export numbers in the short term.
Hence, Chinese authorities and PBoC seems to be willing to accept a weaker yuan in the past two weeks and allow market forces to dictate its move. Yesterday's onshore USD/CNY mid-point fixing rate was set at 7.0818, the weakest for the CNY seen in six months and today's (31 May) fixing was set slightly higher at 7.0821.
This latest "implied weak onshore CNY guidance" from PBoC has further reinforced weakness in the offshore CNH. As seen from a technical analysis perspective, the bullish momentum of the medium-term uptrend phase of the USD/CNH in place since 16 January 2023 remains intact. The key medium-term resistance zone to watch will be at 7.1445/7.1730.
Fig 3: USD/CNH trend as of 31 May 2023 (Source: TradingView, click to enlarge chart)
The continuation of weaknesses and underperformance of China equities and its proxies. At this time of writing, the CSI 300, Hong Kong's Hang Seng Index, Hang Seng Technology Index, and Hang Seng China Enterprises Index have shed between -1.2% to -3.00% intraday. China's export-dependent Asia ex-Japan markets such as Singapore and Australia equities may also face renewed downside prices in the short to medium term. Click here to read our previous analysis, "Yuan weakness spooks China and Asia ex-Japan stock markets".
Fig 4: G-10 JPY crosses trend as of 31 May 2023 (Source: TradingView, click to enlarge chart)
Thus, if a weaker yuan continues to play out and the tentative US debt ceiling extension deal vote that is being scheduled later today in the House hits a roadblock, these JPY crosses may see further weakness at least in the short term.
Fig 1: US Nas 100 daily trend as of 31 May 2023 (Source: TradingView, click to enlarge chart)
Fig 2: US Nas 100 4-hour trend as of 31 May 2023 (Source: TradingView, click to enlarge chart)
The US Nas 100 Index (a proxy for the Nasdaq 100 futures) has staged a stellar up move seen in the past four weeks where it rallied by +24.50% from its 13 March 2023 minor swing low of 11,676 to yesterday, 30 May high of 14,533; outperformed the other major US benchmark stock indices (S&P 500, Dow Jones Industrial Average & Russell 2000) by a wide margin.
Interestingly, this steep up move has reached a key resistance level at around 14,380 which is defined by a confluence of elements; the upper boundary of the medium-term bearish "Ascending Wedge" configuration in place since 28 December 2022 low and the 61.8% Fibonacci retracement of the prior major down move from 22 November 2022 all-time high to 13 October 2022 low.
In addition, several exhaustion elements have emerged as well as the price actions of the Index hit the 14,380 key resistance level. Yesterday, it formed a daily bearish "Gravestone Doji" candlestick pattern coupled with an overbought bearish divergence signal seen on its lower time frame, 4-hour RSI oscillator.
These observations suggest that the up move from the 13 March 2023 low has started to lose bullish momentum where the odds have increased for a potential mean reversion decline in the first step.
Key medium-term pivotal resistance will be at 14,540 (an excess above 14,380) with near-term supports coming in at 13,910 followed by 13,550.
On the flip side, a clearance above 14,540 sees the next resistance at 15,270 (76.4% Fibonacci retracement of the prior major down move from the 22 November 2022 all-time high to the 13 October 2022 low & swing highs of 2 February/30 March 2022).
Oil
Oil is on the ropes as upcoming week will likely contain further confirmations that China's recovery is struggling, the US labor market is cooling, the Fed will likely deliver more tightening that will eventually cripple the economy later this year, and as everyone waits to see if the debt deal can make it to the President's desk.
It is hard to get excited about jumping back into oil as we have an upcoming OPEC+ meeting that seems poised to be just a review of production levels, but no announcement of further cuts. Tonight's Chinese data should confirm views that the recovery has stalled and that the economy will need more stimulus.
Gold
Gold is getting its groove back as debt deal optimism has June maturity T-bill yields returning to earth. Last week, the June 1st Treasury bill was yielding around 7% and now it has tumbled back to 4.51%. Gold can be a safe-haven for a lackluster China recovery and as the US works its way towards a recession. A complete collapse in confidence that comes with a US default would trigger a de-risking moment that would take down everything including gold.
Gold could start stabilizing here even as the market becomes more convinced that the Fed has one more rate hike in them. If the economy proves to be too resilient and the risk of two hikes grows, that could limit gold's gains.
Bitcoin
Bitcoin is steady as investors await to see how the cryptoverse will react to the tightening of conditions once the debt deal gets passed and a trillion dollars worth of Treasury bills gets issued by the Treasury. Typically, when governments issue debt that takes their debt to GDP at uncomfortable levels, that should be good news for crypto, but too many crypto companies might deal with difficult financing options over the next year.
