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. It’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 the 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 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 is
barely poked through $1.29. Resistance in the $1.3000-$1.3055
area is expected to be formidable and 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 on GBP0.8400 at the end of last
week and yesterday and 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
at 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.
Lastly, 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, and 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.