Dollar and Yen Heavy as Markets Reopen

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  • The eurozone manufacturing PMI ticked down to 56.7; the UK surprised with an exceptionally strong manufacturing PMI of 57.3 
  • As widely expected, the RBA kept policy unchanged 
  • We note that Greece and the official creditors appear to have reached a tentative agreement 
  • The US reports auto sales figures today 
  • April EM inflation readings are coming in on the soft side; Brazil reports April trade

The dollar is mostly softer against the majors as markets return to full liquidity after the May Day holiday. The Swiss franc and Kiwi are outperforming, while the yen and Nokkie are underperforming. EM currencies are mostly firmer. KRW and ZAR are outperforming, while RUB and PHP are underperforming. MSCI Asia Pacific was up 0.4%, with the Nikkei rising 0.7% on the day. MSCI EM is up 0.7%, with China markets falling 0.4%. Euro Stoxx 600 is up 0.3% near midday, while S&P futures are pointing to a lower open. The 10-year US yield is up 2 bp at 2.33%. Commodity prices are mixed, with Brent oil up 0.7%, copper down 1.3%, and gold down 0.1%.

The US dollar is sporting a softer profile against most of the major and emerging market currencies. The Japanese yen is the main exception. The greenback is rising against the yen for the fourth session and the sixth of the past seven. The dollar’s gains against the yen coincide with the 10-12 bp recovery in the US 10-year yields over the past ten sessions.

The latest uptick in US yields, with the 10-year yield trying to re-establish a foothold above 2.30%, may have been spurred by the strong reiteration by the US Treasury Secretary that extra-long maturity is being analyzed. Mnuchin has been saying this for some time, but yesterday’s comments seemed to be a strengthening of the likelihood that a 50-year bond will be issued. Reports have suggested that primary dealers are less enthusiastic and are concerned about liquidity and costs. Mnuchin is more interested in the appeal of locking in low rates longer. Other countries, including Canada, France, Switzerland, and the UK have issued 50-year bonds. The US did to fund the Panama Canal over a century ago.

At the end of March, which also marked the end of Japan’s fiscal year, the US dollar reached a high of JPY112.20. Today it is edged through there. The JPY112.15 area also corresponds with the 38.2% retracement of the dollar’s decline since the high near JPY118.60 on January 3. The trend line connecting that January high and the March 10 high near JPY115.50 comes in now near JPY113.10. There is a large (~$1.1 bln) option struck that JPY111.80 that expires today.

The eurozone manufacturing PMI ticked down to 56.7 from 56.8 flash reading and 56.2 in March. It is a new multi-year high, helped by employment and order backlog. The French and German readings were unchanged from the flash estimate. Italy’s reading of 56.2 was a little above expectations and above March’s 55.7. It is also a new multi-year high. Spain’s manufacturing PMI rose to 54.5 from 52.9. It snapped a two-month decline.

However, the survey data has been running ahead of real sector performance. Last week, the US, UK, and France reported Q1 17 GDP estimates and each was below expectations. The eurozone reports its estimate tomorrow. The Bloomberg median calls for a 0.5% increase, which would leave the year-over-year pace steady at 1.7%. We note that despite the increase in the employment sub-component to its best level in six years, the region’s overall unemployment rate in March disappointed by being unchanged at 9.5%. That said, a year ago it was at 10.2%.

The euro continues to chop around in the upper half of its $1.0850-$1.0950 range. A $1.10 strike, estimated at 1.4 bln euros, expires today and tomorrow the $1.0925 strike sees 1.0 bln euros roll-off. Our reading of the near-term technicals does not rule out a move to $1.10 or even a bit through it. However, the technical indicators are getting stretched.

The UK surprised with an exceptionally strong manufacturing PMI. It rose to 57.3 from 54.2 and is the highest in three years. Most expected a slightly softer report. Forward-looking new orders rose to 60.7 from 56.1, which is its best showing since January 2014. The BOE meets next week, and it will likely put more emphasis on the services reading. Last week, the UK reported Q1 GDP of 0.3%, which disappointed.

Sterling recovered from a three-day low near $1.2865 on the news but barely poked through $1.29. Resistance in the $1.3000-$1.3055 area is expected to be formidable and is spurring some caution. Here too the technicals are getting stretched, but a marginal new high cannot be ruled out. The euro is recovering from a test of GBP0.8400 at the end of last week and yesterday. It appeared to find offers as its approached GBP0.8500 and a downtrend line drawn from the end of March high.

As widely expected, the Reserve Bank of Australia kept policy unchanged. Many economists still think the RBA will have to ease monetary policy later this year. The RBA shows little sign of moving in that direction. Instead, it appears to be putting more hope on fiscal policy. An infrastructure plan will likely be unveiled in next week’s budget. It may include rail and road projects and a second airport. The Australian dollar initial extended yesterday’s gains but lost momentum around $0.7550. This area corresponds with the 38.2% retracement of the decline from the March 21 high near $0.7750. The $0.7600 area is the 50% retracement and the high from late April.

We note that Greece and the official creditors appear to have reached a tentative agreement. Greece has to approve a few concessions, including another pension cut and increase in the tax-free threshold, and open more shops on Sunday in order to get another payment for which it turns over the bulk of which to the official creditors. Again, we are struck by who is really being bailed out. Without debt relief, it is the creditors, not debtors. And as if to drive the point home, Markit noted that all the EMU countries it surveys for the PMI showed an increase in manufacturing but Greece. The IMF still is not participating with fresh funds, though the German and Dutch parliaments seemed to have its participation as key criteria.

The US reports auto sales figures today. A strong recovery from the weather-depressed March pace (16.53 mln) is expected, with domestic producers gaining market share. The FOMC meets tomorrow, and it is expected to be uneventful. The ADP jobs estimate will also be reported tomorrow. It was off by a mile last month, and this may dampen interest in tomorrow’s report.

Korea reported lower than expected April CPI, which rose 1.9% y/y vs. 2.1% expected and 2.2% in March. Given downside risks to the economy from political uncertainty (both domestic and regional), we think the BOK will remain on hold for now. Next policy meeting is May 25, no change expected then.

Note that this continues a string of lower than expected inflation reading in EM, including Peru and Thailand. The notable exception is Indonesia, where inflation came in slightly higher than expected at 4.2% y/y. Turkey, Taiwan, the Philippines, and Colombia all report CPI data later this week.

Brazil reports April trade data. Exports are expected to rise 18% y/y and imports by 4% y/y, leading to a large surplus of $7.1 bln. Brazil then reports March IP Wednesday, which is expected to rise 2.2% y/y vs. -0.8% in February. The economy remains fairly weak, and so the central bank is likely to continue frontloading its rate cuts. Next COPOM meeting is May 31, and another 100 bp cut to 10.25% seems likely.