Softer Yields = Softer Dollar

With the Olympics set to start in Tokyo in a little more than two months, Japanese business executives have stepped up their criticism of the Suga government for the slow vaccine rollout. Reports suggest around 2% of Japan has been vaccinated, putting it at the bottom of the OECD. Separately, despite the Topix falling nearly 2.6% this week, its largest decline in nearly two months, and the biggest three-day decline since last June, the BOJ did not intervene and buy ETFs. It appears to have bought ETFs only one day (April 21) since the start of April as its new rules came into effect (scrapping the JPY6 trillion target of ETF purchases).

The dollar stalled yesterday at its highest level against the yen in a month near JPY109.80, as US rates pulled back. Initial support near JPY109.25 is being tested in the European morning, and a break could signal a test on JPY108.90. The key ahead of the weekend is the bond market's response to the US data. The intraday technical readings appear to be bottoming in late European morning turnover. The Australian dollar is approaching the $0.7750 area, which holds an expiring option for A$1 bln. The $0.7765 is the (38.2%) retracement of this week's decline (~$0.7890-$0.7690). The next retracement (50%) is at $0.7790. If the intent of Chinese officials was to steady the yuan after its recent advance, it appears to have succeeded. The yuan gained a little more than 0.25% against the broadly softer greenback today, making it the strongest in the region, but it is virtually unchanged on the week. The PBOC set the dollar's reference rate at CNY6.4525, in line with the bank models in Bloomberg's survey.

Europe

The week is winding down quietly in Europe. There are two main talking points today, and they both involve the UK. First, Northern Ireland's Democratic Unionist Party will pick a new leader today. Donaldson, who heads up the DUP members of the UK parliament, is seen to have an inside edge over the region's Agriculture Minister Poots. Both are critical of the Northern Ireland Protocol, which controversially instituted custom checks on Northern Ireland's border with Britain, seemingly violating the Good Friday Agreement. This and Scotland's independent-minded majority will be a persistent pressure on UK Prime Minister Johnson.

Second, BOE Governor Bailey said that inflation was being watched closely and noted the elevated readings in the US. Bailey sounded increasingly optimistic about the UK economy. He said it was rapidly recovering and that the labor-intensive sectors that had been the hardest hit are poised for a fast recovery. The economy is on track for a full reopening on June 21. The Bank of England slowed its bond purchases this week and aims to complete them by the end of the year.

The euro fell to almost $1.2050 yesterday and has rebounded to about $1.2130 today, which is roughly the (61.8%) retracement of the loss from the $1.2180 week's high seen on May 11. However, the buying appears to have dried up in the European morning, and initial support is in the $1.2080-$1.2100 band. After gaining 1.2% last week, helped by that shockingly disappointing US jobs report, the euro is off about 0.4% this week (near $1.2115). Sterling held $1.40 support yesterday and has stalled today near yesterday's high, just shy of $1.4080. It gained almost 1.2% last week, and near $1.4065 is up about 0.6% this week. It is poised to finish above $1.40 this week for the first time since mid-February. 

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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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