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Overview:  The jump in US rates after the employment report failed to ignite a sustained rally in the dollar and this shaken the market's near-term confidence. The dollar has been mostly confined to narrow ranges and the low-yielding Swiss franc and Japanese yen are softest with the G10 complex today. The dollar is knocking on JPY152. The Scandis and Antipodeans lead the advancers. The euro has made little headway despite a much stronger-than-expected German industrial output. Mainland China markets re-opened, and the dollar remains at the upper end of the 2% band and above it against the offshore yuan. Most emerging market currencies are softer, but the South African rand's 0.5% gain stands out, which some see as a gold play. The yellow metal reached a new record high near $2354 today in Asia but has pulled back to about $2233.

The US 10-year yield is at a new high for the year near 4.45% and it appears to be dragging global yield higher. European benchmark yields are up 3-6 bp today. The US two-year yield is also at a new high since last November near 4.78%. Equities are mixed. Most of the large markets in the Asia Pacific rose except China. Europe's Stoxx 600 is firmer after falling 0.85% before the weekend, its largest decline since mid-February. US index futures are slightly softer after the strong rally at the end of last week. May WTI gapped lower and fell to about $84.70 before recovering to almost $86.50 in Europe to close the gap, which extended to around $86.30. The Fed's Goolsbee and Kashkari speak today. The former is seen as among the more dovish and the latter, among the hawkish members. 

Asia Pacific 

China returned from its four-day holiday weekend. With the mainland closed, the dollar remained above the onshore band against the offshore yuan. The greenback traded roughly between CNH7.24 and CNH7.2550. The upper end of the 2% band was almost CNY7.2370. China is expected to report March lending, and trade figures this week. The CPI and PPI are due early Thursday. It reported that March reserves rose to $3.245 trillion, a $19.8 bln increase. It is the most reserves since 2015. The MSCI Asia Pacific equity index was unchanged over the past two sessions when mainland markets were closed. The CSI300 fell by almost 0.9% today.

Japan's labor earnings rose by 1.8% year-over-year in February after the 2.0% pace in January was revised to 1.5%. There were sample changes and five-year benchmark adjustments. Excluding the sample changes, cash earnings rose by 1.9% (2.0% in January). Unlike in the US where average earnings growth continues to outstrip inflation, real wages in Japan have fallen year-over-year since the end of Q1 22. Prime Minister Kishida is in Washington later this week. We suspect that it would be an awkward time to intervene, even if officials wanted. With the Fed still wanting restrictive policy to moderate price pressures, intervention to weaken the dollar is unlikely to be looked at favorably in Washington. 

The dollar set an 11-day low against the yen in the local session ahead of the weekend near JPY150.80 and recovered to JPY151.75 in North America. The dollar edged up a little further today and traded slightly above JPY151.90 in Europe. The dollar has held below JPY152 primarily, it would seem, out of concern material intervention. Japan does not appear to have intervened since 2022. Many observers, however, deny Beijing that same kind of influence and consistently see the large banks as acting on behalf of the officials, as if they have no commercial business or are not responding to the same sort of considerations as yen traders have shown. Even the US Treasury has cited press reports of the large banks intervening on behalf of the central bank. There are about $750 mln in options at JPY151.85 that expire today. The dollar has traded above JPY151.85 in only one session in each of the past three weeks. The Australian dollar posted what a bullish outside up week by trading on both sides of the previous week's range and settling above the high. After the US employment data, the Aussie found support near $0.6550 (slightly above the 200-day moving average) before recovering to around $0.6585. Options for about A$370 mln at $0.6580 expire today. Last week's high was near $0.6625. It is firm today in a $0.6560-$0.6590 range. Mainland China's markets re-opened from the long holiday weekend. The PBOC set the dollar's reference rate at CNY7.0947. For the last seven sessions, the fix has been between CNY7.0938 and CNY7.0949. The average in the Bloomberg survey was CNY7.2279 (CNY7.2299 before the holiday). What strikes us is not the stability of the onshore yuan, but the offshore yuan. The dollar closed at CNH7.2478 before the mainland holiday and settled last week at CNH7.2488. It is in a CNH7.2428-CNH7-2549 range, within the pre-weekend range (~CNH7.2401-CNH7.2548).

Europe 

The ECB meets on Thursday. It is difficult to imagine a hawkish surprise. Most likely, ECB President Lagarde continues to prepare the investors and businesses for a June cut. Last week, the final March composite PMI was reported above the 50 boom/bust level for the first time in 10 months. This supports ideas that the regional economy is bottoming, even if the upside momentum is uninspiring still especially in the core.

Germany reported February industrial production today. It rose for the second consecutive month and the 2.1% gains was well above the 0.5% increase expected by the median forecast in Bloomberg's survey. Excluding energy and construction, industrial output rose 1.9% month-over-month. In January and February combined output is about 1% above the Q4 average, suggesting support for Q1 GDP. At the same time, Germany reported its February trade figures. The January trade surplus of 27.5 bln euros was a record and it slipped to about 21.4 bln euros in February. The German trade balance has recovered from the recent shocks. In 2019, Germany's average monthly trade surplus was 18.9 bln euros. In 2022, it has fallen to a 7.1 bln euro average and last year averaged 18.8 bln. Looking at the non-EU exports: Exports to Mexico have risen the most on a year-over-year basis in February and were up nearly 18%. Exports to the UK were up 9.3%, while shipments to the US increased by 5.5%. Exports to China were practically flat (0.3%). Exports to Russia were off by a little more than a fifth. They were down by nearly 11% to South Korea and about 12% lower to Brazil. 

The euro fell to about $1.0790 after the US jobs data but recovered back to about $1.0845. We had suggested a solid jobs report could see $1.0780 but did not anticipate such a strong recovery. Still, the divergence between expectations for the ECB and Federal Reserve, which may be underscored this week by a firm US CPI and an ECB that is preparing the market for a June cut, seems euro negative. Speculators in the future market have culled the net long euro position from about 74.5k contracts to less than 17k in the three weeks through last Tuesday. It is the smallest since September 2022, when "non-commercials" were last net short euros. The euro is trading quietly today between $1.0820 and $1.0845. For its part, sterling fell to $1.2575 in response to the US employment report. We had seen potential toward $1.2580, but here, too, the strength of the recovery was unexpected. It rose to about $1.2640 and settled slightly below there. It has been confined to a narrow range so far today: $1.2615-$1.2640. Follow-through buying can lift into the $1.2680-$1.2700 area. Speculators in the future market added to the net long sterling position for the first time in three weeks, in the CFTC reporting period through April 2. Around 43.5k contracts, the net long position is nearly three times larger than at the end of last year.

America

The US jobs report seemed unambiguously strong. Recent reports had been marred by weakness in the household survey and downward revisions to past months' job growth. Not this time. There was a small upward revision and the household survey saw a nearly 500k employment increase, after three months of decline. The unemployment rate edged lower even though there was an increase in the participation rate (62.7% from 62.5%). Average hourly earnings eased to 4.1% from 4.3%. That is the lowest since June 2021. The average workweek increased to 34.4 hours from 34.3. With the solid labor market report in hand, attention shifts to inflation this week with the March CPI and PPI on Wednesday and Thursday. The FOMC minutes on Wednesday will draw attention. Recall that the Fed was nearly evenly split between those who saw at least three cuts this year and those who saw fewer.

In contrast, Canada's employment data disappointed. It lost a couple of thousand jobs. The median forecast in the Bloomberg survey looked for an increase of 25k. Despite a steady participation rate (65.3%), the unemployment rate rose to 6.1 % from 5.8%. It was at 5.0% last April. Wage growth (permanent employees) edged back up to 5.0% from 4.9%. The March PMI was all below the 50 boom/bust level, though ahead of the weekend, the IVEY survey rose to 57.5 from 53.9. That is the highest since last March. The Bank of Canada meets on Wednesday. The market expects it to remain on hold. The swaps market has about a 20% chance of a cut discounted. During the tightening cycle, the Bank of Canada did surprise the market, including a 100 bp hike in July 2022. The Canadian dollar fell to new lows for the year before the weekend and a surprise rate cut would likely send it lower still. 

The diverging jobs report sent the Canadian dollar to new lows for the year. After repeatedly trying in recent weeks, the greenback moved above CAD1.3615 to nearly CAD1.3650. But amid the broader pullback, the US dollar returned to CAD1.3575. It is straddling CAD1.36 in about a 15-tick range on both sides. We see initial support near CAD1.3560 but are not convinced a durable high is in place. The next upside target maybe near CAD1.3700. Speculators in the futures market have not been net long Canadian dollars since last August. As of last Tuesday, their net short position of about 51.2k contracts is the largest this year. The Mexican peso rallied about 0.8% ahead of the weekend to a new nine-year high. For attractive carry it is not just against the US dollar, but the Swiss franc, Japanese yen, and offshore yuan too. Momentum and trend followers, whose timeframe may not be sufficient to draw much carry, also seem to be participating. Speculators in the futures market have the largest net long peso position in four years (almost 134k contracts). Yesterday's first TV debate between the presidential candidate appears to be having little market impact, leaving the dollar in a narrow range today: MXN16.45-MXN16.4950. Initial resistance is seen MXN16.50-MXN16.52.

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