Powell, PPI, And US Tariff Announcement On China Featured

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Overview: The tone in the foreign exchange market today is mostly consolidative. The two notable exceptions are the yen and yuan. Despite higher JGBs yields amid speculation that the BOJ will scale back bond purchases, as it did yesterday, to support the yen, the greenback is at its best level since the suspected intervention. The next important technical area is near JPY157.00. The US is set to announce a new set of tariffs on a wide range of Chinese goods later today. Expectations that policy is about to be eased, coupled with the yen's weakness, appears to have helped push the yuan to new seven-day lows. Softer UK labor data weighed on sterling, but it recovered after the $1.25 area held. There are GBP1 bln of options that expire there today. Most emerging market currencies are firmer but a handful of Asia Pacific currencies and the South African rand. 

Equities are mixed. Outside of China, Hong Kong, and Australia, most large bourses in the Asia Pacific region edged higher. The longest rally in Europe's Stoxx 600 since October-November 2021 is being challenged today. The benchmark is flat near midday, with a seven-day advance in tow. US index futures are little changed. The 10-year JGB yield rose. It held slightly below 1%, its highest level since last November. The soft labor market report is helping UK Gilts shine, with a nearly two basis point decline in the 10-year benchmark. That is the most in Europe today, where yields are mostly softer by less than a single basis point. The 10-year US Treasury yield a little lower near 4.73%. Gold is firmer near $2346 after falling 1% yesterday. June WTI is flattish near $79. It continues to consolidate, mostly between $75 and $80 so far in May. 
 

Asia Pacific

Japan's April PPI is of little consequence. The year-over-year rate of 0.9% was unchanged from March (revised from 0.8%). The challenge in CPI, which is likely to rise as the household subsidies for energy roll-off this month and next. China set the benchmark one-year Medium-Term Lending Facility rate first thing tomorrow. It is expected to be steady at 2.5%, while the volume may increase from CNY100 bln to CNY150 bln. The focus is on yen following the recent bouts of intervention and the BOJ's decision yesterday to buy fewer JGBs. Meanwhile, reports suggest that the US could announce new steep tariffs on China's electric vehicles, and some other elements of the new economy (solar panels and batteries).

The dollar pushed above JPY156 in North America yesterday. It reached JPY156.25 and follow-through buying today brought to JPY156.55, its best level since post-intervention low of about JPY151.85. While the JPY156 represented the halfway mark of the dollar's drop from nearly JPY160.20 on April 29, the (61.8%) retracement is about JPY157. The dollar's gain against the yen were recorded despite the slippage in US rates, the greenback's heavier bias, and a rise in JGB yields. The Australian dollar traded on both sides of the pre-weekend range but settled little changed. It is continuing to consolidate within May 3 range (US jobs day) of roughly $0.6560-$0.6645. The Aussie has not closed above $0.6650 since mid-January. A break of $0.6550 would warn of a near-term top. A tight range is prevailing today (~$0.6598-$0.6612). There are options for about A$2.1 bln at $0.6590 that expire today. The PBOC set the dollar's reference rate at CNY7.1053 (CNY7.1030 Monday). The average projection in Bloomberg's survey was CNY7.2309 (CNY7.2261 yesterday). Against the offshore yuan, the dollar settled yesterday above its 200-day moving average (~CNH7.2380) for the first time since May 1. The next resistance area may be in the CNH7.2480-CNH7.2550 area. 
 

Europe

A modest recovery seems underway in the eurozone and UK after a poor H2 23. Germany's ZEW survey for May improved for the third consecutive month in May (current assessment) and is at its best level since last August. The expectations component also improved, but as one would expect, it is leading the current assessment. It has risen without fail since last August, and May's reading is the best since Russia's invasion of Ukraine. At the end of last week, the UK reported that the economy expanded by 0.6% in Q1 24, which was above expectations and followed two contracting quarters. It was the strongest growth since Q4 21 and is a bit exaggerated. It is expected to grow by around 0.2% here in Q2. Still, the labor market seems gradually to be softening. This was seen in slightly slower average earnings growth, continued decline in payrolls, and a tick up in unemployment. There is about 60% chance of Bank of England rate cut next month. That is roughly twice the probability seen at the end of April. 

The euro did not trade below $1.0780 in North America and set a new session high slightly above $1.0805 in early dealings. Today may be another day of constructive consolidation. Yesterday was the second time this month that the euro traded above $1.08 intraday but failed to close above it. The momentum indicators appear favorable, and the five-day moving average is above the 20-day moving average. The softer US data that are expected in the coming days may help lift the euro. The immediate target is $1.0835 but maybe there is potential to last month's high, slightly below $1.09 this week. Sterling extended its recovery off last Thursday's BOE-inspired low near $1.2450. It reached almost $1.2570 in early North American turnover. After holding above $1.2550 after the high was set, it was sold to almost $1.2500 earlier today. The selling pressure did not appear sparked by the employment data as much as by the BOE's Chief Economist Pill who seemed to confirm a summer rate cut. The thin markets in early European turnover may have contributed to the slump and quick recovery back to the $1.2545 area. The are options for GBP1 bln at $1.2500 that expire today.
 

America

The markets typically are not particularly sensitive to US producer prices, though health care and portfolio management components feed into the personal consumption expenditures. Shortly after the PPI, Governor Cook speaks a NY Fed event, but the highlight is Fed Chair Powell, who speaks at a Dutch bank event (~10 am ET). Consistent with the "US economic growth is moderating” theme that we think is unfolding we note that April NFIB Small Business Optimism Index is due. It is expected to have declined for the fourth consecutive month. It already was at its lowest level in more than a decade. There were reports last week that the Biden administration may announce new tariffs on China's electric vehicles, batteries, solar cells, legacy semiconductors, ship-to-shore cranes, and rare earths, as early as today. Treasury Secretary Yellen expressed hope that Beijing will not retaliate in the way one may hope that one's provocative actions have not negative consequences. 

The US dollar traded quietly within the pre-weekend range against the Canadian dollar (~CAD1.3635-CAD1.3690) and it remains inside yesterday's range so far today. The greenback is hovering slightly below the middle of the CAD1.36-CAD1.38 range more-or-less seen this month. The momentum indicators are mixed and continued broad consolidation appears to be the most likely scenario. The greenback has been trending lower since the flash crash of the peso saw it spike to MXN18.2135 on April 19 (from ~MXN16.92). Before the weekend and again yesterday, dollar bids emerged below MXN16.75. Yesterday's high was near MXN16.8260. It is holding below there today. Beyond it, resistance is seen around MXN16.90. Recall last week's high was near MXN17.0340. Meanwhile, the dollar appears to have entered a new and higher range against the Brazilian real. For the past month, the greenback is holding above BRL5.05. Nearby resistance is seen near BRL5.20, which it has not traded above since April 22. 


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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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