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Yen Slips, Yuan Jumps, Dollar is Mostly Softer

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

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Yen Slips, Yuan Jumps, Dollar is Mostly Softer

Overview: The dollar is mostly a little softer
today in thin market conditions, with Tokyo, Seoul, and London closed for
holidays. The Japanese yen is the weakest G10 currency, losing about 0.5% and
slipping through last Friday's lows. At first, after Fed Chair Powell
did not endorse rate hike speculation, the market thought he was dovish. But after the
softer than expected jobs data and weakness in the ISM services, the market
shifted from doubting one cut to pricing in two. China's markets re-opened for
the first time since last Tuesday. The Chinese yuan played catch-up and has
appreciated by 0.45% today, to lead the emerging market currencies. The yuan
reached its best level since late March amid speculation that Beijing may be
considering a large devaluation (of which we are skeptical).

Equities are off to a constructive start
this week after the strong US rally before the weekend. Of note, the Hang Seng
extended its rally to a tenth consecutive session and mainland shares jumped
nearly 1.5%. Most markets in the region advanced. Europe's Stoxx 600 is up
about a third of a percent, recouping most of last week's loss. US index
futures are firm. The pullback in US yields before the weekend spilled over
into today's activity and benchmark 10-year yields are lower:  4-6 bp softer in Australia and 4-7 bp lower in Europe. US futures point to a slightly lower
rates when the cash market opens. Gold is firm near $2018 but within the ranges
seen most of last week. June WTI is consolidating last week's nearly 7% loss
that brought it to slightly below $78. Cease-fire hopes have faded and June WTI
is firm near $79. Initial resistance is seen around $79.50 but it is likely
headed back into the $81-$82 area.

Asia Pacific

Japan remains on holiday today but the
lingering aftertaste of the two bouts of material intervention last week has
subdued the momentum traders and trend followers. 
The pain threshold of Japanese officials
has been found. Breaking the one-way market that saw the dollar rise from
JPY152.50 in mid-April to above JPY160 on April 29 is one measure of Japan's
success. One-month implied volatility is still elevated near 10.4%. It was
around 7.5% at the end of March and the 100- and 200-day moving averages
converge near 8.8%, to give it some context. Last week's high, around 12.4%,
was the highest since last July. Arguably the extreme volatility or disorderly
market, which could justify intervention under the G7 and G20 statements no
longer exists. Hence, the deafening silence from other governments or central
bank in the face of Japanese intervention may not be unlimited. Indeed,
comments by Yellen did hint in that direction, saying that "we would
expect these interventions to be rare and consultation to take place."
Also, one wonders why Japan did not coordinate the intervention with others
struggling similarly, like South Korea, Malaysia, and Indonesia. And even in
lieu of coordination, why those central banks did not, on their own volition,
intervene around the same time.

China's markets re-open for the first time
since last Tuesday. 
Caixin April services PMI defied expectations, as did its manufacturing PMI
reported last week. The composite PMI edged up as a result, and at 52.8 (from
52.7), it is the highest since the middle of last year. With the Third Plenary
session planned for July, it is not clear what new initiatives, which many
expect is needed to achieve this year's growth target (5%), can be announced
ahead of it. Beijing has been a beneficiary of the Japan's action on the yen.
The offshore yuan posted its biggest weekly advance of the year last week
(~0.80%). It reached the best level since March 21. 

The dollar briefly traded below JPY152
after the disappointing employment data, the lowest since April 10. 
The five-day moving average (~JPY155) is
slipping below the 20-day moving average (~JPY154.50) for the first time since
mid-March. It has done a good job of signaling trend move, with a minimum of
whipsaws for the past few years. Treasury Secretary Yellen calling intervention
"speculation" also indicated she expected the intervention to be rare
and the US consulted. This seemed to downplay significance and likelihood of
persistent operations. The dollar rose to about JPY154. Friday's high was
around JPY153.80. The Australian dollar reached its highest level in nearly
two months ahead of the weekend, slightly shy of $0.6650. 
is seen near $0.6675. The Aussie has rallied three cents in a little more than
two weeks. It frayed the upper Bollinger Band (~$0.6635). There is a band of
support found between $0.6525 and $0.6555. The Aussie remains firm and near the
session high of $0.6630. The RBA is expected to standpat tomorrow. The PBOC set
the dollar's reference rate at CNY7.0994 (CNY7.1063 on April 30). The average
in Bloomberg's survey was CNY7.2106 (CNY7.2432 on April 30). The offshore yuan
strengthened by almost 1% while the mainland market closed for the May Day
holidays on April 30. The dollar traded at its lowest level against the yuan
since March 25 (CNY7.2065) and has steadied to hover around CNY7.21.


The eurozone saw its final service and
composite PMI. 
new information is contained, though both the were revised slightly higher, we
learned of other EMU members results, especially Italy and Spain. Recall that
last week, Italy's manufacturing PMI unexpectedly slumped to 47.3 (from 50.4),
a new low for the year. Maybe it was March that was the fluke; the first
reading above 50 since March 2023. The services (54.3 vs 54.6) and composite
PMI (52.6 vs 53.5) both softened. Spain, in contrast, showed improvement. The
manufacturing PMI rose to 52.2 from 51.4, the highest since June 2022. The
services and composite PMI also improved (56.2 vs 56.1 and 55.7 vs.55.3,
respectively). The takeaway is that a recovery is taken hold in the eurozone.
Government spending was an important factor. The economy expanded by 0.3% in
Q1. Growth in Q2 and Q3 is seen around 0.2%-0.3%. The median forecast in
Bloomberg's monthly survey puts year-over-year growth at 0.5% this year, which
seems on the low side. The ECB is only slightly higher (0.6%) and the EC, which
is due to update its forecast in the next week or two, projects 0.8% growth,
the same as the IMF.

Last week, the final UK April
manufacturing PMI was revised to 49.1 from the preliminary estimate of 48.7. 
This was still the first decline of the
year (50.3 in March, the first reading above 50 since July 2022). The final
service and composite reports were announced before the weekend. The service
PMI stands at 55.0 from the flash reading of 54.9. This is the highest since
last May. The composite PMI is at 54.1, a little better than the 54.0 initial
estimate and 52.8 in March. It has finished last year at 52.1. The UK's Q1 GDP
will be reported on Friday. The economy is seen expanding by around 0.4%, the
first quarterly expansion since Q1 23 and it would be the strongest since Q1 22.
Lastly, the Tories did about as poorly as anticipated in the local elections,
but as was suspected no one is emerging to take what appears to be the poisoned
chalice from Sunak.

Sweden's Riksbank meets on Wednesday and
the Bank of England meets on Thursday. 
The Rikbank is seen as more likely to cut rates than the
Bank of England. The swaps market sees it as almost a 50/50 proposition for
Sweden. In March, the Riksbank signaled that it would likely cut rates in May
or June. The softer than expected March underlying CPI (reported April 12) and
the contraction in Q1 GDP (reported April 29) argue in favor of a rate cut. The
argument against a rate cut is the weakness of the krona. Since mid-March, it
has fallen by almost 6% against the euro and nearly 9% against the dollar.

The euro spiked to about $1.0810 after the
US jobs report, its best level since April 10. 
It was turned back from the 200-day moving
average (~$1.08) and the four-point downtrend line connecting the March and
April highs. The low since the high was seen was around $1.0750. Support is
likely in the $1.0700-25 area. There are also option expirations in this range
(almost 1 bln euros today at $1.07, and about 875 mln euros tomorrow at
$1.0725). Sterling surged to almost $1.2635 after the US jobs
That was its best level since April 10, when the US reported
slightly higher than expected CPI (hot?). However, it reversed its gains and
settled little changed on the session. Recall, sterling set the high for the
year in the run-up to the February jobs report on March 8. The rally at the end
of last week overshot the (50%) retracement of the subsequent losses (~$1.26)
but settled below it (and the 200-day moving average (~$1.2550). Sterling is
firm $1.2580-5 in quiet European morning turnover. 


The market is in between the two (current)
major high-frequency data drivers, employment, and CPI. 
The market responded dramatically to the
last retail sales report as well, and April's CPI and retail sales will be
reported on May 15. Both are likely to have moderated. Yet in terms of Fed
policy, we do not think it was a game-changer. It probably does not reach the
level of unexpected weakness from the Fed's point of view and May's jobs data
will be seen before the June meeting. Chair Powell seemed clear at the
post-FOMC press conference that it would take more than a couple of tenths of a
percentage point in the unemployment rate to qualify as something that would
get officials to re-consider policy settings. Given the general strength of the
labor market, the Fed is more concerned about its other objective, price
stability. After the press conference, conventional wisdom was
that the Fed was dovish by not being more open to a rate hike. Now, after the
softer employment report, the Fed funds futures reflect perceptions of a
greater chance of a two rate cuts. The odds increased to about 85% chance, the
most in three weeks, that the Fed cuts rates twice this year. That is up from
60% the previous day and around a 13% chance day before the FOMC meeting

The Canadian dollar traded miserably. It was the only G10 currency unable to
gain against dollar ahead of the weekend and, last week, more generally. The
losses were minor, but the direction is notable. The greenback bounced smartly
off the three-week low set after the US jobs report near CAD1.3610 and
approached CAD1.3700, leaving a potentially bullish hammer candlestick pattern
in its wake. Follow-through buying has been limited and a consolidative tone
was seen in the thin trading so far today. Nearby resistance above CAD1.3700 is
seen in the CAD1.3725-55 area initially. Last week's high was near
CAD1.38. The US dollar recorded a lower low every session last week
against the Mexican peso, but the settlements in the last three sessions were
in a narrow range of about MXN16.9750 and MXN16.9950. 
The dollar fell
by around 1% against the peso last week, but the scars from the last month's
flash crash do not appear to have fully healed. Mexico reports CPI on Thursday,
a few hours before the central bank meets. Banxico is expected to stand pat. Brazil's
credit outlook was lifted to positive from stable by Moody's, but the currency
was essentially flat on the week before the US jobs report. Brazil's central
bank meets on Wednesday and is expected to cut the Selic rate by 25 bp (to
10.5%) after delivering 300 bp in cuts in half-point increments since last


Source: Yen Slips, Yuan Jumps, Dollar is Mostly Softer