Dollar and Yen Push Lower

arrows made of folded bank notes

  • The news stream is actually light, suggesting the pressure on the dollar may be emanating from sentiment and positioning 
  • Japan’s trade figures are under closer political scrutiny given the stance of the Trump Administration 
  • New Zealand reported somewhat higher than expected inflation 
  • Brazil reports mid-April IPCA inflation, which is expected to rise 4.48% y/y; Poland reports March industrial and construction output, retail sales, and PPI  

The dollar is mostly weaker against the majors. The euro and sterling are outperforming, while the Loonie and yen are underperforming. EM currencies are mostly firmer. TRY and ZAR are outperforming, while IDR and PHP are underperforming. MSCI Asia Pacific was up 0.3%, with the Nikkei flat on the day. MSCI EM is up 0.4%, with China markets rising 0.5%. Euro Stoxx 600 is up 0.1% near midday, while S&P futures are pointing to a higher open. The 10-year US yield is up 1 bp at 2.23%. Commodity prices are mixed, with oil up 0.7%, copper up 0.6%, and gold down 0.2%.

With the exception of the yen, the US dollar is lower against all the major currencies. US Treasury yields are firm, extending yesterday’s rise a little. This may help keep the dollar straddling JPY109, but unwinding long yen cross positions is helping underpin the other major currencies. The Dollar Index is making a new low for the week and appears poised to test support around 98.85-99.00.

The news stream is actually light, suggesting the pressure on the dollar may be emanating from sentiment and positioning. There were three economic reports of note. The most important of which was the Japanese trade figures.

Japan’s trade March trade surplus of JPY614.7 bln was larger than the Dow Jones survey of economists projected (JPY576 bln), but still off more than 17% from a year ago. Merchandise exports rose 12% year-over-year, nearly twice the median guesstimate. Exports to Asia were strong (16.3% year-over-year), reaching a record high and helped by Chinese demand for autos and auto parts. Imports rose 15.8%, well above February’s 1.2% gain and half again as much as the 10% anticipated. The value of Japanese exports rose to the highest level since September 2009.

Japan’s trade figures are under closer political scrutiny given the stance of the Trump Administration. Exports to the US rose 3.5%, the second consecutive increase, though auto exports were off 7.2% (in volume terms). Imports from the US rose 16.3% (in value terms). The US bilateral deficit with Japan narrowed 8.1% from a year ago.

Separately, we note that the MOF weekly figures show Japanese investors continue to repatriate funds. Between foreign stock and bond sales, Japanese investors sold a JPY1 trillion of foreign assets last week. For their part, foreign investors bought about JPY726 bln yen of Japanese paper assets, about a 25% decline from the previous week. Evidence that yen strength reflects safe haven demand still seems elusive.

There are some sizeable yen options set to expire today. There are options worth $1.9 bln struck at JPY109 that roll off today, and another $315 mln at JPY108.95. Tomorrow, there is a JPY109 strike that will see another $1.9 bln roll off. It looks like resistance near JPY109.20 will be sufficient to check dollar gains now. Support is pegged in the JPY108.40-JPY108.70.

New Zealand reported somewhat higher than expected inflation. The central bank’s inflation target was reached for the first time in five years in Q1 17. The 1.0% quarter-over-quarter increase lifted the year-over-year pace to 2.2% from 1.3%. However, the overall underperformance of the dollar-bloc currencies continued. The New Zealand dollar stalled near yesterday’s highs (~$0.7050), but support near $0.7000 continues to hold.

For its part, the Australian dollar is a doing a bit better as bids emerged again on the dip below $0.7500. However, the Aussie needs to get back above $0.7540 in order to lift the tone. About A$222 mln in options expire today that are struck at $0.7500. The Canadian dollar is consolidating yesterday’s losses and is practically unchanged on the day. Resistance for the US dollar is seen in the CAD1.3500-CAD1.3535 area. The upper end of the range is the high for the year set on March 9. There are about $380 mln of options struck at CAD1.35 that will test nerves today.

The eurozone reported a strong recovery in February construction output after January’s weather-induced weakness. The month-over-month output jumped 6.9% after a 2.4% slide in January, lifting the year-over-year pace to 7.1%. It was the strongest monthly gain in five years.

We note that the French 10-year premium over Germany has narrowed a little today and now is the narrowest in a month. France raised 5.5 bln euros at today’s bond auctions, on the eve of the election. Demand for French paper was strong. The bid-cover ratio for the 5-year bond was 1.99, up from 1.86 in the January sales.

Demand for the euro against sterling and the yen appear to be helping the single currency against the greenback. The euro, which neared the GBP0.8300 in response to May’s election call, is testing the GBP0.8400 area now. It finished last week near GBP0.8480. The euro reversed higher against the yen on Monday and had been climbing since. Monday’s low was below JPY115, and now it is trading near JPY117.40. The JPY117.80-JPY1180.00 area may offer formidable resistance.

Against the dollar, the euro has approached $1.0780. Many are monitoring the trendline drawn off the high from last November and the late March high. It is found near $1.0835 today Support is pegged near $1.0700. Between $1.0750 and $1.0800, there are around 720 mln euros in options rolling off today. There are another 1.3 bln euro of options rolling off struck between $1.0715 and $1.0725. Tomorrow the $1.07 strike has 1.2 bln euros expiring.

Today’s US session features initial jobless claims for the week of the non-farm payroll survey, the April Philly Fed, and the leading economic indicators. What appears to be the near stagnation of the US economy in Q1 (Atlanta Fed GDPNow tracker is 0.5%, annualized) has given rise to new concerns about the health of the US economy. We suspect the market is exaggerating the significance in terms of Fed policy for the June FOMC meeting. Financial conditions, as we have noted before, are easier now than when the Fed hiked in December 2016 and against last month.

The Indonesian rupiah is one of the few emerging market currencies under water today. This follows what appears to be an electoral defeat for an ally of President Widodo in the Jakarta gubernatorial race. Separately, the central bank kept rates unchanged at 4.75%. It is the fourth consecutive losing session for the rupiah.

Brazil reports mid-April IPCA inflation, which is expected to rise 4.48% y/y vs. 4.73% in mid-March. Minutes released this week suggest that the pace of easing will likely be maintained for at least one or two meetings. The next COPOM meeting is May 31, and another 100 bp cut to 10.25% is likely.

Poland reports March industrial and construction output, retail sales, and PPI. Data are expected to show continued strength in the economy. Central bank minutes will be released Friday. It has maintained a dovish stance, but its desire to keep rates steady until 2018 will be tested by rising inflation and a robust economy. Indeed, some members of the MPC are starting to sound more hawkish. We believe the first rate hike will likely be seen in H2 of this year.