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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. The
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. Resistance
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.

Europe

The eurozone saw its final service and
composite PMI. Little
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
report. 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. 

America

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
concluded. 

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
August. 

Disclaimer 

The resilience of the
US economy and stickiness of price pressures spurred a reassessment of the
trajectory of Fed policy. This sparked a sharp rise in US interest rates and
extended the dollar's advance. The somewhat disappointing April jobs report and
a softer CPI report in the middle of May could signal that the interest rate
adjustment is over. Federal Reserve Chair Powell played down the likelihood of
the need to lift rates again, and as it was in  Q4 23, when CPI moderated to a 2%
annualized rate, the central bank is being prudent in both directions. 

The IMF identified US fiscal policy
as a key to fueling demand, inflation, and the stronger greenback, which has
heightened concern among several countries in the Asia Pacific region,
including Japan, South Korea, China, and Indonesia. It appears that Japan
intervened materially in late April and again in early May. Indonesia hiked
rates to defend the rupiah. South Korea, and a few other countries in East Asia
expressed concern about the pressure on their currencies. 

Europe is not providing anywhere close to the US fiscal support.
As a consequence, the EU and UK are nearly stagnant, and the repair of supply
chains have seen inflation trend lower. That said, both the EU and UK economies
appear to have found better footing here in early 2024 after contracting late
last year. Still, the combination of weak growth impulses and falling
price pressures will likely allow the European Central Bank, the Bank of
England, and Sweden's Riksbank to begin cutting interest rates well before the
United States. Indeed, there is a reasonably good chance that the Riksbank
becomes the second G10 to cut rates, after the Swiss National Bank's move in
March. The movement of interest rate differentials and the dollar's
appreciation reflects the market's recognition of the growing divergence.

At the end of last year, it has looked like US inflation was
moderating quickly and economy has looked poised to slow considerably.
Throughout the most aggressive Fed tightening cycle in a generation, the market
had periodically discounted a more dovish policy only to subsequently
re-converge with the Federal Reserve. In December 2023, the median Fed forecast
was for three cuts in 2024, and the market the Fed funds futures had implied
more than six cuts would be delivered.

The continued employment gains and wage growth faster than
inflation, coupled with expanding consumer credit, helped fuel strong US
consumption. Price pressures proved stubborn, primarily as shelter costs have
not moderated as many economists, both on Wall Street and at the Federal
Reserve expected. Without shelter prices falling, it is difficult to be
confident that inflation is on a sustainable path back to 2% target. By the
March FOMC meeting, the additional confidence that Fed officials sought had not
materialized and March's data, delivered in April, shattered any remaining
confidence in the narrative of a "bumpy path" toward the target. The debate in
the market had transformed from hard landing vs. soft-landing to discussions of
re-accelerating growth.

The market has pushed out the timing of the Fed's first cut and
has reduced the extent of interest rate cuts this year, the derivatives market
is pricing in one quarter-point cut and about a 50% chance of a second cut.
Given the still strong job growth in April and the risk of continued sticky
inflation, the interest rate adjustment may continue. There may be scope for
the two-year note yield to climb toward 5.25% (from slightly below 5%), and
possibly more, in the coming weeks. The rate adjustment has sparked a sharp
setback in equities, after a dramatic rally in the first quarter. This, coupled
with geopolitical tensions, has fostered a risk-off environment, which is also
supportive of the dollar.

The Bank of Japan's rate hike in March failed to stem the yen's
sell-off. The yen appears to be more sensitive to US interest rates than
Japanese. Moreover, even with the rate hike, Japan is still the low yielder,
making in an attractive funding currency. Intensified verbal intervention
seemed largely shrugged off and the dollar broke above the JPY152 area which
had capped it in 2022 and 2023 on April 10 and took out JPY155 about two weeks
later.

Japanese official verbal intervention intensified, but with the
third consecutive US CPI above expectations, the dollar surged to almost
JPY160.20 in late April. The Bank of Japan appears to have sold around $58 bln
over two separate operations at the end of April and early May. Officially
confirmation is unlikely until the end of May. Still, if there was the
intervention, there are two notable features. First, officials intervened in
thin markets. This allowed their size to overwhelm the market. Second, it
appears Japan acted on its own. And even if Japan did not coordinate
intervention with others, no other central bank appears to have intervened at
the same time.

The weakness of the euro is unlikely to stand in the way of the
European Central Bank delivering a June rate cut. The ECB explains that it does
not target the exchange rate, but it is considered when in the forecasts growth
and inflation. Although several high-frequency economic series suggest that the
eurozone economy is off to a firmer start to the year, growth impulses still
seem muted. And while, unemployment in the region remains near cyclical lows,
despite the economic stagnation and rate hikes, the June European parliament
election may see voters express their frustrations.

Using formal and informal mechanisms, Chinese officials have
resisted the pressure on the yuan. As a low-yielder, and with low volatility,
the offshore yuan, like the Japanese yen, is a popular funding currency. If
Chinese officials were to step back and market forces were allowed a freer
hand, the yuan's decline would accelerate. Despite China's mercantilist
policies, it does not appear to be using the exchange rate to boost exports.
The offshore yuan surged on the back of the yen's (likely intervention-induced)
rally, and broader dollar pullback. Assuming it is reflected in the onshore
yuan, it may help to create more space for monetary policy.

The weight on the yuan cannot be dismissed simply because China
runs a trade surplus or that it has plenty of reserves to mount a serious
defense. The key factor is not the market for goods but for capital. The bond
market is not attractive, and investors do not have confidence in Chinese
stocks. The PBOC's continued gold purchases capture the imagination of many
observers and journalists, but Chinese investors themselves also appear to be
keen gold buyers as they seek alternatives to the property market and local
equities under the capital control regime.

Although the Chinese economy appeared to expand by more than
expected in Q1, the March data disappointed. It underscored the need for more
stimulus if the 5% annual growth target is to be achieved. Meanwhile,
China's industry subsidies irk its trading partners from the US and Europe to
some emerging market countries like Brazil. On her recent trip to China, Yellen
warned that China will encounter resistance to it efforts to export the product
of its excess capacity. Electric vehicles, batteries, and solar panels are the
source of the current angst. 

The US political cycle seemed to explain the Biden
administration's increase in tariffs on Chinese steel, which account for less
than 2% of US steel consumption. Around the same time that Biden called for the
increase in tariffs, he also reiterated his opposition to Nippon Steel's bid
for US Steel, ostensibly trying to bolster support in a key state for his
re-election, Pennsylvania. Including Japan in his broad accusation of
xenophobia, Biden seemed a bit exaggerated, or at least dated, as the number of
foreign residents in Japan increased by around 10% last year to 3.4 mln.
Japan's shrinking population is encouraging it to open in a significant way.

 
With the reassessment of the Federal Reserve's trajectory,
emerging market currencies struggled. The JP Morgan Emerging Market Currency
Index fell by about 0.75%. It was the fourth consecutive monthly decline and
left it 4.2% lower on the year. The MSCI Emerging Market Currency Index eased
by 0.55% and it is off about 2.5% below where it finished 2023. However,
emerging market equities outperformed the high-income equity markets. The MSCI
Emerging Markets Index rose by 0.25%, its third consecutive monthly advance.
Through April, it is up a little more than 2% this year. The MSCI World Index
of developed market equities fell nearly 3.9% in April, its biggest loss since
last September. Still, it has risen by about 4.25% in the first four months of
the year. The JP Morgan emerging market bond premium over Treasuries widened to
about 300 bp from 287 bp at the end of March. It had finished 2023 near 319 bp. 

The US dollar's broad strength was reflected in Bannockburn's
World Currency Index, which fell to new multi-year lows at the end of April.
Its 1.1% decline was the fourth consecutive monthly loss and the largest in
seven-month. The BWCI is a GDP-weighted basket of the currencies from the dozen
largest economies, split evenly between high-income countries and emerging
market economies. BWCI fell to new multiyear lows in early May and proceeded to
recover (from 91.70 to 92.20) and looks poised to return to the April high near
93.00, and possibly the March high closer to 93.50. This is consistent with the
consolidative phase for we anticipate for the dollar, which after a four-month
rally, means a weaker dollar bias.

In April, the dollar rose against all the other members of BWCI
but the Indian rupee, which was practically flat. After it, the Chinese yuan
was the next best performer, losing about 0.25%. The Australian dollar was the
strongest among the currencies of high-income countries, and it fell by about
0.75%. All the other currencies lost at least 1% against the dollar. The
Japanese yen saw the biggest decline in April, falling by slightly more than
4%. Since the intervention it is risen by about 3.2%. While the yen's losses
seem outsized, the Mexican peso and Brazilian real fell by a little less than
3.5% in April. Helped by an upgrade in Moody's outlook, which in part reflected
progress on fiscal reforms, the Brazilian real rose by about 2.4% in early May.
The peso rose a more modest 1%.

U.S. Dollar:  The real
broad trade-weighted dollar index rose 1.2% in April. It was the largest rise
since last October. The greenback rose against all the G10 currencies. The
gains were driven by a reconsideration of the trajectory of Fed policy in
response to continued elevated inflation readings and robust demand. By the end
of April, the market had pushed out the first cut to December. Recall that in
December, seeing 2% annualized CPI, the Fed expressed growing confidence that
inflation was on a sustainable path back to its target. The median Fed forecast
was for three cuts in 2024. The market, which often exaggerates in both
directions, had more than six cuts discounted in early January. At the end of
April, the futures market had 28 bp of easing this year and is around 45 bp
after the softer than expected April jobs report. The US economy appears to
have lost some momentum at the start of Q2, and we expect this will also
translate to a softer CPI and retail sales report (consumption) due in mid-May.
This could fuel an extension of the Dollar Index's pullback seen in the second
half of April. It settled near 105 after the jobs report. A break of the 104.25
area could target 102.80-103.00.

 
Euro:  After contracting in
the second half of 2023, the eurozone economy has begun to recover. The economy
expanded by 0.3% in Q1 24, which is the strongest growth since Q3 22. However,
the manufacturing sector remains challenged, and recovery seems fragile. The
progress on inflation appears to be stalling. The headline rate has fallen from
8.5% in the beginning of last year to 2.4% in March. It remained there in
April, and the base effect warns a higher reading over the next few months.
However, the core rate has continued to fall, and this appears helping to boost
confidence that the European Central Bank can deliver its first rate cut at its
next meeting on June 6, which also marks the beginning of the European
Parliament elections that run through June 9. At the end of last year, the
derivatives market had 190 bp of cuts discounted for this year. It has been
scaled back to about 60 bp, which is two cuts and about a 40% chance of a
third. The divergence between the expected trajectory of the Federal Reserve
and European Central Bank has weighed on the euro. The single currency fell to
$1.06 in mid-April, a six-month low but recovered to poke above $1.08 after the
US jobs data. A close above the March and April downtrend ($1.0810, falling to
around $1.0725 at the end of May). The initial target is in the $1.0870-$1.0900
area and then $1.0935-50

.
(As of May 3, indicative closing prices, previous in parentheses)
Spot: $1.0760 ($1.0790) Median Bloomberg One-month
forecast: $1.0830 ($1.0725) One-month forward: $1.0800 ($1.0775)   One-month
implied vol: 5.5% (5.0%) 

 
Japanese Yen: The Bank of
Japan hiked rates in March, but it did not do much for the Japanese yen. The US
10-year yield rose almost 50 bp in April, ostensibly offsetting in full the BOJ
rate hike. Pressure mounted on the exchange rate. The dollar was already
trading above JPY155 when the BOJ met in late April. Governor Ueda sounded
somewhat dovish and the BOJ's core inflation forecast for this fiscal year and
next remained at 1.9%. Ueda seems to show little direct concern about the yen's
weakness. The market responded quickly and before the day was out took the
greenback north of JPY158. Follow-though buying after the weekend (to almost
JPY160.20) appears to have trigged the first material intervention since 2022.
The market appeared to challenge Japanese officials and the BOJ appears to have
intervened again a few hours after the FOMC meeting concluded, when the dollar
was near JPY157.50. We think that what made the 2022 intervention
successful was that it coincided with a near-term top in US Treasury yields.
The 10-year US Treasury yield peaked in late October 2022 near 4.35% and fell
over the next six months by 100 bp. The 10-year US yield peaked on April 25
near 4.75% and traded to 4.45% after the US jobs data and the dollar briefly
traded below JPY152. Japan's Q1 GDP is due May 16. The economy likely
contracted by 0.3%-0.4% quarter-over-quarter, with consumption, investment and
net exports providing headwinds. Tokyo's April CPI fell more than expected
(1.6% core rate from 2.4%) and this signal a pullback in the national core
figures from 2.6% in March to, possibly, below 2%. We anticipate a
consolidative phase (JPY151-JPY156?)
 
Spot: JPY153.00 (JPY151.35) Median
Bloomberg One-month forecast: JPY152.45 (JPY149.15) One-month
forward: JPY152.30 (JPY150.75) One-month implied vol: 9.5% (7.7%) 

  

  

British Pound:  Sterling fell for the fourth consecutive month
in April, and its nearly 1% loss was more than the cumulative decline of the
previous three months. Still, it was the second best performing G10 currency
last month behind the Australian dollar. That speaks to the dollar's broad
strength more than an idiosyncratic challenge problem with sterling. Sterling's
decline came despite the rise in UK rates and a reassessment of the trajectory
of Bank of England policy. At the end of March, the swaps market was pricing in
almost 75 bp in cut this year. That has been reduced to almost 50 bp. The
market is wavering on the timing of the first rat cut between August and
September. There is slightly less than a 50% chance of June cut in the swaps
market. The Bank of England meets on May 9 and Q1 GDP is due the following day.
The market expects the economy expanded by 0.2% after a 0.3% contraction in Q4
23. The UK economy is not contracting as it was in H2 23, but growth is meager:
the labor market is slowing, and over the four months through March, retail
sales, excluding gasoline, were virtually flat in volume terms. The exchange
rate will likely be sensitive to the employment and wage data on May 14 and CPI
on May 22. Sterling recorded the low for the year on April 22 near $1.23. It
reached its highest level since the March US CPI on April 9 after the US jobs
report ($1.2635). The heavier US dollar we envisage could see sterling rise
into the $1.2700-50 area. 

  
Spot: $1.2545 ($1.2625) Median
Bloomberg One-month forecast: $1.2520 ($1.2650) One-month
forward:  $1.2550 ($1.2630) One-month implied vol: 6.3% (5.6%) 

 
Canadian Dollar:  The
Canadian dollar was no match for the greenback in April. It fell by about 1.5%
last month, its largest decline in six months. It was also the first losing
month in six for the S&P 500, illustrating the sensitivity of the Canadian
dollar's exchange rate to the broader risk environment. The swaps market has
downgraded the extent of Bank of Canada easing this year from about 75 bp at
the end of March to about 50 bp at the end of April. After some soft data in
early May, the market discounted nearly 65 bp of easing. The US two-year
premium rose to almost 80 bp last month, the highest since early 2019 and
pulled back to about 65 bp in early May. Still, the most important driver
continues to be the broad direction of the US dollar. The 60-day rolling
correlation of changes in the bilateral exchange rate and the Dollar Index is
near 0.85, its highest in over a decade. At the April meeting, the Bank of
Canada lifted this year growth forecast to 1.5% from 0.8%, encouraged by
stronger than expected exports and strong immigration, which officials think
may have boosted growth potential about 0.25% to 2.5%. Canada's first new major
pipeline in a couple of decades (Trans Mountain pipeline) will become
operational in early May. It will carry an additional 600k barrels of oil a day
from Alberta to the Pacific coast for exporting to Asia. Bank of Canada
Governor Macklem suggested that a June rate cut was possible, and the market is
pricing in a 2/3 chances. It may require a few closes below CAD1.36 for the
market to become more convinced a US dollar high is in place. The April high,
near CAD1.3850 was the highest since last November.

Spot: CAD1.3685 (CAD
1.3540) Median Bloomberg One-month forecast: CAD1.3635 (CAD1.3490) One-month
forward: CAD1.3680 (CAD1.3435) One-month implied vol:
4.9% (4.6%) 

 
Australian Dollar:  The
market has nearly given up on rate cut by the Reserve Bank of Australia this
year. Recall that as recently as early February, the futures market was
discounting two quarter-point cuts and a nearly 70% of a third cut. Now the
futures market points to an ever so slightly higher rate at the end of the
year, which seems to be an exaggeration. The macroeconomic data have been
mixed. Inflation slowed in Q1, though not as much as expected, and although,
full-time employment rose by 126k, offset a little more than the losses last
December, and the unemployment rate ticked up to 3.8%. The RBA meets on May 7
and the lack of urgency to cut rates will likely be expressed. The April jobs
report is a week later. Separately, the rally in the metals like iron ore,
copper, and gold may have helped lift sentiment toward the Australian dollar,
which was the best performing currency among the G10 in April, but it still
lost about 0.40% in April against the US dollar. After the US employment data,
the Australian dollar traded to almost $0.6650. It has traded above there once
since mid-January. A move above $0.6670 could signal a recover toward
$0.6750-$0.6800.

Spot: $0.6610 ($0.6520) Median Bloomberg
One-month forecast: $0.6605 ($0.6580) One-month forward:
$0.6615 ($0.6525)    One-month implied vol: 8.5% (7.5%)

 

Mexican Peso:  The dollar fell to nine-year lows near MXN16.26 in
the first part of April. A bout of profit-taking amid broadly stronger
greenback as the trajectory of Fed policy was reassessed. It has recovered to
nearly MXN17.17 through April 18 before surging above MXN18.21 on what is
dubbed a "flash crash" on news of Israel's retaliatory strike on
Iran. It subsequently traded to almost MXN16.90 before choppy consolidation.
The shock, reflected in a jump in volatility, has shaken the market's
confidence. The underlying fundamental considerations, such as the near-shoring
meme, attractive carry, solid external balances continue to hold. Improvement
in headline inflation appears to be stalling and the moderation in core prices
is slowing. The central bank meets on May 9, and it is likely to standpat after
cutting its overnight rate by 25 bp to 11.00% in March. With the June 2
election looming, and political violence elevated, many participants
may not be in a hurry to re-establish positions squeezed out of in the flash
crash. Although the peso has fully recouped its flash crash losses, market
sentiment seems more fragile than previously. 

Spot: MXN16.9750 (MXN16.56) Median Bloomberg One-Month
forecast: MXN17.0450 (MXN16.74) One-month forward:
MXN17.05 (MXN16.63) One-month implied vol: 10.4% (7.4%)

 
Chinese Yuan: China's
trade policies continue to be broadly criticized, but it does not appear that
officials are seeking export advantage through the exchange rate. The PBOC
continues to resist pressure on the yuan to depreciate. The yuan slipped less
than a quarter-of-one percent in April, and its year-to-date decline of around
1.8% is among the least in the emerging market world. China's stocks and bonds
also fared well. The 10-year government bond yield fell to record lows near
2.22% in late April before recovering to almost 2.40%. At the low, the yield
was less than half rate on the US 10-year Treasury. The mainland's CSI 300
rallied about 2.5% in April. It was the third consecutive monthly advance.
However, mainland shares that trade in Hong Kong surged by more than 8%. It was
nearly flat for the year at the end of Q1 24. We had thought there was
potential for the dollar to return to its previous range of roughly
CNY7.25-CNY7.30, but the greenback peaked slightly shy of the lower end of the
range. There is speculation in some quarters that Beijing is planning of a
large depreciation of the yuan. We are skeptical as officials have been
emphasizing the desire for exchange rate stability. The offshore yuan has been
allowed to trade beyond the onshore band, but it recovered smartly in early May
(while mainland markets were closed for the labor holiday). In order for
Beijing to boost the chances of reaching its 5% growth target, many suspect
more government support is needed. With the yuan recovering off its lower band,
and Chinese equities doing better, monetary policy may have more degrees of
freedom. The Third Plenary session has been set for July and additional
economic reforms may emerge.

Spot: CNY7.2410 (CNY7.2250) Median
Bloomberg One-month forecast: CNY7.2460 (CNY7.2065) One-month
forward: CNY7.0965 (CNY7.1180) One-month implied vol
4.6% (4.8%) 

Disclaimer 

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
modernization." 

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. Follow-through
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.

Europe

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
week. 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.

America

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
highlights. 

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).

The
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.

Disclaimer