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Dollar is Softer Ahead of the Employment Report

Started by PocketOption, May 28, 2024, 04:44 am

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Dollar is Softer Ahead of the Employment Report

Overview: The greenback is trading with a
softer bias ahead of the US jobs report. Solid, even if not spectacular job
growth, is expected. However, recent survey data warns of the downside risks. Moreover,
counter-intuitively, the dollar has not often rallied this year into the
employment data, but frequently has in response. The dollar is softer against
the G10 currencies. The Norwegian krone is the strongest, up about 0.6% after
the central bank delivered a hawkish hold, by warning that rates may need to
stay restrictive longer than it has previously anticipated. Also, of note, the
greenback made a new low for the week against the yen near JPY152.75, which is
also a new three-week low. Emerging market currencies, but the Czech koruna and
South African rand are also firm against the dollar today, and the offshore
yuan firmed to its best level since mid-March. 

Asia Pacific
equities are mixed, but the highlight is the ninth consecutive rally in the
Hang Seng, and over the run it is up almost 14%. The mainland shares that trade
in HK have risen in eight of the past nine sessions and has also risen nearly
14%. Europe's Stoxx 600 is rising for the first time since Monday, and it needs
some follow-through gains to negate this week's decline after rallying 1.75%
last week. Encouraged by some corporate earnings, US index futures are extended
this week's gains, but the US jobs report is key. Benchmark 10-year yields are
slightly softer in Europe and are little changed on the week. The 10-year US
Treasury yield is near 4.57%, off about four basis points this week. Gold is
consolidating quietly, straddling $2300. It looks to be the first back-to-back
loss since February. June WTI is consolidating after falling about 6% in the
past four sessions. It reached nearly $78.40 yesterday, its lowest level since
March 13. It has fallen by about 5.8% so far this week, which is the largest
decline in three months.

Asia Pacific

Chinese and
Japanese markets are closed for national holidays today. 
Next week,
Japanese highlights include March labor earnings and household spending. Cash
earnings continue to lag inflation but using the same sample base, cash
earnings are faring slightly better. The weakness in March retail sales (-1.2%
vs. median forecast in Bloomberg's survey of a 0.2% decline) warns of continued
weakness in household spending. On a year-over-year basis, Japanese household
spending last increased in February 2022. The Japanese economy appears to have
contracted slightly in the first quarter. Note that Japanese markets are closed
on Monday. In this week's rounds of intervention, Japanese officials took
advantage of thin market conditions to boost the impact of its operations. The
prospect of another bout of intervention may keep many participants cautious. 

China's Caixin
service and composite PMI will be reported early Monday. 
China is due
to report its foreign reserves. The decline in the other reserve currencies in
April (-4.1% JPY, -1.2% Euro, and -1.0% GBP) suggests a decline in the dollar
value of China's reserves from $3.245 trillion in March, which was the highest
since the end of 2021. Lending and trade figures are also due. The April price
gauges will be reported next Saturday, May 11. Beijing recently announced that
the third plenum (third since the 2022 when the current central committee was
selected. Many expected the third plenum would be held last October-November
but it was not. It is typically devoted to economic issues. The main topic,
according to the state press, will be "deepening reforms and promoting

The Reserve
Bank of Australia meets on May 8.
 At the end of last year, the
futures market was pricing in almost two rate cuts this year. The market has
not been fully discounting even one cut since around mid-March. However, since
the slightly firmer than expected Q1 CPI on April 24, the market has priced in
a risk of a hike this year (slightly less than a 25% chance). The Reserve Bank
of New Zealand meets on May 22. The swaps market shows little chance of a
change in stance, but it still is discounting a cut this year and it is fully
discounted at the last meeting of the year (November). The pricing in the swaps
market is consistent with a quarter-point cut and a 40% chance of a second one. 

The dollar
swung from a post-Thursday intervention high near JPY156.30 to nearly JPY153 in
the North American afternoon yesterday. 
It was sold to about JPY152.75
in the thin Asia Pacific session today. The JPY152.55 area corresponds to
the (38.2%) retracement target of this year's dollar rally. The halfway mark is
around JPY150.20. Although implied volatility has fallen this week, historic or
actual volatility has risen. One-month historic vol is above 12% from 7.6% at
the end of last week when the spike to JPY158.45 spooked officials. It was
around 4.7% the previous day (April 25). The Australian dollar extended
Wednesday's recovery to reach almost $0.6575 yesterday and is testing the
week's high set on Monday near $0.6585. 
Nearby resistance is in the
$0.6600-$0.6625 area. Note that there are options for A$1.2 bln at $0.6625 that
expire Monday. Initial support is seen around $0.6650. The US dollar
plunged to CNH7.1950 yesterday, its lowest level since the Ides of March.
selling today has seen nearly CNH7.1855 before steadying. The dollar has fallen
by a little more than 1% against the offshore yuan this week, ahead of the US
jobs report. If sustained, it would be the largest weekly loss since last
November. Assuming that the onshore yuan will open sharply higher on Monday, it
underscores our sense that the weakness of the yuan was more a reflection of
the US dollar's broad strength rather than Beijing seeking export advantage
through the exchange rate.


The eurozone
March unemployment was steady at 6.5%. 
It was between 6.5% and 6.6%
last year. Eurozone unemployment has not been lower under monetary union. US
unemployment is also low, but the economy has been strong (above trend growth).
The eurozone economy has been week and contracted in the second half of last
year. Next week, the EC updates its economic forecasts. Its last forecast was
for 0.8% growth this year and 2.7% CPI. The ECB's March forecast saw growth at
0.6% and CPI at 2.3% this year. Lastly, the eurozone will also see March retail
sales. With Q1 GDP already reported, March retail sales report is not a market
mover. However, the recovery in German retail sales (1.8% vs. -1.5% in
February). French retail sales saw the first year-over-year gain since May
2022. Spanish retail sales disappointed falling by 0.5%. Italy does not report
March retail sales until after the aggregate figure is out, but household
consumption looks to have been a drag on Q1 GDP.

The UK
reported the final services and composite PMI today. 
Recall that on
Wednesday, the final manufacturing PMI was reported. It was revised to 49.1
from 48.7 but did not appear to have much market impact. The services PMI was
revised to 55.0 from 54.9 (53.1 in February). The composite PMI edged up to
54.1 from 54.0 flash reading and 52.8 in February. It was at 52.1 at the end of
2023 and 54.9 last April. There are two highlights next week, the Bank of
England meeting on May 9. The swaps market has the first cut priced in for
September (though there is nearly an 80% chance of a cut in August). The market
has one cut and about a 60% chance of a second cut discounted before the end of
the year. Separately, the results of yesterday's elections are still being
tallied. The results will be released today and tomorrow. The initial results
seem to be in line with polls showing Tories losing broadly with Labour,
Liberal Democrats, Greens, and independents doing better. Still, it does not
seem like much of a market factor today. 

The euro
reached $1.0730 in the North American afternoon yesterday. 
Every day so
far this week, the euro has been capped at $1.0730-35 but today it has reached almost $1.0750. Last Friday, it approached $1.0755. The $1.0745 area is the (50%)
retracement of the euro's decline from the high set last month (~$1.0885). The
(61.8%) retracement is near $1.0775 and the 200-day moving average is around
$1.08. Sterling has chopped between about $1.2465 and $1.2570 this
It remains in that range today, though approaching the
high. The $1.2555 area corresponds to the (61.8%) retracement of
sterling's losses from last month's high (~$1.2710). The downtrend line from the March and April highs comes in today near $1.2575. The intraday momentum
indicators of both currencies are extended in the European morning. Lastly, we
note that as widely expected, Norway's central bank left its deposit rate
unchanged at 4.50%. The swaps market is not pricing in a rate cut until next
year. Sweden is a different story, and the Riksbank could become the second G10
central bank to cut rates (after Switzerland) next week.


It is about
the US jobs report today. 
Some survey data warns that the
economy may have lost some momentum and warn of the risk of disappointing
employment data today. The ADP private sector jobs estimate was slightly better
than expected but is not material. Consider that through Q1, ADP estimated that
private sector job growth averaged 158k while the BLS said 212k, and average
miss of 44k. The median forecast for private sector job growth in Bloomberg's
survey average about 168k in Q1. However, last year, the BLS reported private
sector job growth averaged 192k a month, while the ADP estimate averaged 208k.
California's minimum wage for fast-food workers rose by more than 25% to $20 an
hour. Economists expect average hourly earnings rose by 0.3% last month for a
4.0% year-over-year pace, which if true, would be the slowest since June 2021.
The unemployment rate is expected to hold steady at 3.8%. Next week, the
calendar turns quieter. The senior loan officer survey and the preliminary
University of Michigan survey, alongside the quarterly refunding, are the

Canada sees
the services and composite PMI today. 
They stood at 46.4 and 47.0 in
March, respectively. The reaction to the US employment report will likely
overwhelm the Canadian PMI. Next week, Canada reports its April employment
data. The market is looking at slightly better jobs creation, but another tick
up in the unemployment rate (to 6.2% from 6.1%). Last April it was at 5%.
Turning to Mexico, it reports April domestic vehicle sales. Through March, they
are up about 4.7% year-over-year. US vehicle sales rose by about 4.5% in the
first quarter. Several hours before the central bank makes its rate
announcement on May 9, Mexico will report April CPI. The improvement appears to
be slowing, and the central bank is widely expected to standpat after cutting rates
at its last meeting (March).

risk-on mood and the US dollar's broad pullback helped the Canadian dollar
recoup the losses seen earlier this week. 
The unexpected
deterioration of Canada's March trade balance (C$2.28 bln deficit compared with
the median forecast in Bloomberg's survey for a C$1.2 bln surplus) and the
sharp downward revision to the February surplus (~C$0.50 bln vs. C$1.4 bln) did
not seem to impact the Canadian dollar. On Tuesday, the greenback surged from
about CAD1.3660 to CAD1.3785. It pulled back to CAD1.3700 on Wednesday and
CAD1.3670 yesterday. It eased to about CAD1.3655 today. The US dollar saw
CAD1.3635 last Friday and almost CAD1.3630 on Monday. A break of CAD1.3620
could spur a leg lower toward CAD1.3550-CAD1.3565. Initial resistance is seen
around CAD1.3720. The US dollar fell to a new two-week low against the
Mexican peso yesterday (~MXN16.9020). 
But again, the greenback was
bought and recovered back above MXN17.00 in late dealings, though settled near
MXN16.9850. A break of MXN16.88-MXN16.90 may bolster sentiment. Other Latam
currencies performed considerably better. The Brazilian real' nearly 1.6% rally
led emerging market (and G10) currencies. The Chilean peso was a close second,
rising 1.5%. The Peruvian sol's nearly 1% gain rounds out the top three currencies
against the greenback yesterday.


Source: Dollar is Softer Ahead of the Employment Report