Yen Bucks Heavier Dollar Tone

Rising Sun and Wave Asia Marc

  • Yellen dropped the guidance used at the end of May, when she said in the “coming months”uidance used at the end of May, when she said in the “coming months”
  • The RBA statement was considerably less dovish than the market is expected
  • Sterling inexplicably shot up almost two cents in a matter of minutes in Asia; it quickly came off amid talk of a trading error
  • Germany reported stronger than expected IP
  • The US economic data today is not the kind that moves the markets
  • Reserve Bank of India kept rates steady at 6.5%, as expected
  • Taiwan reported May trade earlier today; Chile reports May trade later

The dollar is mostly softer against the majors. The Aussie and sterling are outperforming while the yen and the euro are underperforming. EM currencies are mostly firmer. KRW, MYR, and IDR are outperforming while CNY and the CEE currencies are underperforming. MSCI Asia Pacific was up 1%, with the Nikkei rising 0.6%. MSCI EM is up 1.6%, with Chinese markets up modestly. Euro Stoxx 600 is up 1.3% near midday, while S&P futures are pointing to a higher open. The 10-year UST yield is flat at 1.73%. Commodity prices are mixed, with oil up 0.5% and copper down nearly 2%.

The Japanese yen is the only major currency not to be gaining against the US dollar today. Emerging market currencies, save the Chinese yuan, are also advancing against the greenback today.

The yen rose 3.5% against the dollar last week, and rising equities and commodities are weighing on the yen now. The dollar rose to almost JPY108 in Asian trading and is consolidating in the European morning. The JPY108.30 area is the first retracement objective, which is a little above the five-day moving average (~JPY108.05).

Asian equities gained today, with the Thai market only exception. The MSCI Asia Pacific Index gained 1% and extended its advancing streak to a third session. It has risen in eight of the last 10 sessions. European shares are also advancing, with the Dow Jones Stoxx up 1.25% after gapping higher at the open. Energy and materials are leading the advance, as commodities have rallied (with Brent nearing $51), though financials are right up there as well.

There are five main developments. The first was Yellen’s speech yesterday. While the Fed Chair expressed concern about the disappointing employment data, she continued to suggest a rate hike would be appropriate if the economic data continued to strengthen. However, she dropped the guidance used at the end of May, when she said in the “coming months.” Her speech yesterday did not offer a time frame.

The August Fed funds futures contract, the cleanest read for expectations of the late-July FOMC meeting firmed further as the market reduced the odds of a July move. At 43 bp, the August contract is pricing in a 24% chance of a hike. On May 27, the August contract implied 56 bp or a 76% chance of a hike. This has helped keep the dollar on the defensive.

The second development is the Reserve Bank of Australia meeting. There was no change in rates, as widely anticipated, but the statement was considerably less dovish than the market is expected. This sent the Australian dollar up a little more than 1% to lead the majors. The Aussie was bid through $0.7400 to $0.7450. The next retracement is found near $0.7500. The RBA’s assessment that the current cash rate may be sufficient for CPI to return to target effective dashes ideas for a follow-up rate cut after the April move.

The third development today is sterling’s strength. Sterling inexplicably shot up almost two cents in a matter of minutes in Asia (~$1.4475 to $1.4660). It quickly came off amid talk of a trading error. However, on the push back, it found support near $1.4500 and managed to trade back above $1.4600 in the European morning. One-month implied volatility is making new highs today above 22% (it was near 16.6% on May 27) and the put-call skew is at a new record extreme (~6.9%). UK stocks are underperforming, but the FTSE is the best performingG7 equity market over the past week. UK gilts are also underperforming, with 10-year yields three bp higher near 1.30%, while most eurozone benchmark yields are lower.

Fourth, yesterday’s unexpectedly poor German factory orders (-2.0% vs. expectations for a 0.5% fall) left investors ill-prepared for the stronger than expected industrial production report today. The 0.8% gain follows a revised 1.1% decline in March (initially -1.3%) and February (-0.7%).   Going back to through the second quarter last year, German industrial output has risen only one month every quarter. The weak orders data warn that although output began Q2 on a firm note, there may not be much follow-through.

If, as we have argued, the euro is correcting the slide from May 3 (~$1.1615) to May 30 (~$1.11), then at its current level (~$1.1370), it has retraced 50% of the move. The next retracement is found near $1.1420.

Fifth, given the primary results in Puerto Rico and the Virgin Islands over the weekend, and super-delegate (party officials rather than chosen in a primary) pledges, it appears that Clinton has sufficient delegates coming into today’s primaries (five states including California) to secure the Democratic nomination. Today’s primaries are still important, as Clinton would like to secure as many delegates as possible and to be able to claim victory without the super-delegates. Sanders performance may determine his negotiating strength in setting the platform or other key decisions going forward.

Typically, when a candidate secures their party’s nomination, they see a bump in the polls. Trump has had a particularly rough time over the last two weeks. Even some of his supporters have cringed at some of the remarks. To win, of course, Trump has to do better than Romney, the 2012 Republican candidate. Most surveys show that Trump is a few points ahead of Romney with the non-college educated white vote, but is lagging Romney by low double digits among the college educated whites. Meanwhile, Clinton appears to be a couple of percentage points ahead of Obama with the African-American and Latino vote.

The US economic data today is not the kind that moves the markets. Non-farm productivity is likely to be revised up following the upward revision to Q1 growth. However, it will likely remain negative, and the weak productivity growth remains an important economic puzzle. Unit labor costs may edge lower from the 4.1% initial estimate. Consumer credit is due out late in the session. After a record level (~$29.7 bln) in March, a return to trend (six-month average is ~$18.4 bln) is expected. Canada reports the IVEY PMI. A softer number from April’s 53.1 reading is anticipated. The US dollar is approaching the CAD1.2740 area, which is the 62% retracement of May’s run-up.

Reserve Bank of India kept rates steady at 6.5%, as expected. The RBI said that its inflation forecasts are retained, but with an “upside bias.” Both CPI and WPI inflation have been ticking higher, which clearly warrants caution ahead of the monsoon season. Until the inflation outlook is clearer, the RBI is likely to remain on hold. Governor Rajan would not comment on reports that he does not intend to return for a new term is concerning, as he is well-respected by the markets. We expected Prime Minister Modi will do his best to keep him on, but some of his allies want a more dovish choice.

Taiwan reported May trade earlier today. Exports came in at -9.6% y/y vs. -9.9% expected, while imports came in at -3.4% y/y vs. -10.8% expected. This comes after weaker than expected Korean exports last week, with exports -6% y/y and imports -9% y/y. Chile reports May trade later today, with exports seen at -6% y/y and imports at -5% y/y. Overall, forward looking indicators such as export orders and PMIs suggest little relief ahead in terms of global trade.