Rising Rates Help Extend Dollar Gains

The new week has begun much like last week ended, with rising rates
helping to extend the dollar’s recent gains.
 The US 10-year yield is
flirting with the 3.0% threshold.  The
two-year yield is firmer, and, like in the second half of last week, the US
curve is becoming a little less flat.

The market, as we had anticipated, was not so impressed with North
Korea’s measures, and Korea’s Kospi edged lowed, and the region-leading KOSDAQ
fell a little more than 1% (still up 10% year-to-date).
  Foreign investors
sold $400 mln of Korean shares today.  The amount is large in this
context, and foreign investors had only
sold $100 mln this month coming before today and $1.1 bln

The MSCI Asia Pacific Index fell 0.5%, extending the pre-weekend nearly
1% decline to slip below the 20-day moving average. 
European markets
are mostly heavier too.  The Dow Jones Stoxx 600 is off 0.2%, lead by
utilities (rate sensitive), real estate and consumer staples.  This is a big
week for bank earnings, and the financial component of the index is
flat-to-firmer.   US shares are trading fractionally

The main economic news has come in the form of the flash PMI readings.  Japan’s April manufacturing
April PMI edged higher to 53.3 from 53.1 in March.  It is the first
increase since January.  The eurozone
flash composite was unchanged at 55.2, reflecting a small increase in services
offsetting a somewhat larger decline in manufacturing.  The flash
manufacturing PMI fell to 56.0 from 56.6 and the services PMI is at 55.0 rather
than 54.9.

We suspect three forces are at work behind the apparently stalled
momentum in the eurozone this year.
  First, Q4 likely overstated the
growth, so call this reversion to mean.  Second, the poor weather dampened
activity in Q1, so this should fade.  Third, the eurozone economy is
entering the latter part of the expansion cycle.  The first two forces may
be more evident than the third.  

The North American session calendar is light.  Canada reports a wholesale trade, after soft CPI and retail
sales reports before the weekend.  The US dollar is extending last week’s
recovery against the Canadian dollar and is testing the CAD1.28 level, which
was the neckline of the technical pattern that had informed our near-term view.  
A move above CAD1.2830 could spur a move to the CAD1.29 congestion

The US sees Markit’s flash US PMI, which may not spur more than a flutter
around the headlines and existing home sales for March. 
They are
expected to have edged higher for the second consecutive month, and remain near
cyclical highs.  The two highlights come at the end of the week, the first
estimate of Q1 GDP and the Employment Cost Index.  

The dollar is near session highs as American participants return. 
The Dollar Index is at its best level since March 1.  We suspect that the
top of the range three-month range near 91.00 is too far today, given the
stretched intraday technical readings.  But if it does, a breakout may be
at hand.  

Having closed just below $1.23 last week,
the euro has approached $1.22, the lowest end of its range, though it did spike
to $1.2155 on March 1.
  The intraday technicals are extended.  On the other hand, the
greenback is pushing above JPY108.00 for the first time since
mid-February.  Although the dollar was firmer in Asia, it has been gaining in the European time zone that has driven the gains.  The bottoming
pattern we have been monitoring projects toward JPY110.00.  

Sterling has been sold to a marginal new low for the month near $1.3965. 
A break of this area could signal another near-term, even if not today, cent
decline.   The Brexit debate became more complicated last week as the
House of Lords endorsed remaining in the customs union by a wide margin. 
A poor Tory showing in next month’s local elections and defeat in the House of
Commons could spur a leadership challenge.  Separately, after the recent
soft data and comments from Governor Carney last week, the odds of a BOE rate
hike were downgraded from nearly a done deal (87.5% on April 13) to a strong
maybe (49%) before the weekend.  The odds are slightly higher

The Australian dollar is making new lows for the year today, as it is sold through last month’s lows.  Recall
the Aussie posted a key reversal on April 19 and saw strong follow-through selling ahead of the
After pushing through $0.78, it finished last week near $0.7670 and is approaching
$0.7600, where a 2.5-year trendline is found


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