Softer Dollar and Yen to Start the Week

The US dollar has opened the week softer against the major
currencies, except for the Japanese yen. 
 The disappointing US inflation and
retail sales data before the weekend have not been
shrugged off, even though the US 10-year yield is a little higher and
expectations for a Fed hike next month continue to be elevated.  
There is more focus on
positive developments elsewhere, especially in Europe.
  The CDU victory in the weekend election in the largest German
state of North Rhine-Westphalia offers
further evidence that Merkel will most likely be reelected Chancellor for the
fourth time later this year.   The political
risk that was so evident in Europe at the start of the year continues to
unwind.  News that French President Macron is considering naming a prime
minister from the center-right Republican Party is a supportive and suggestive
gesture ahead of next month’s parliament election.  
The collapse of the Austrian
coalition government poses a new opportunity for the populist-nationalist
forces.
  The Freedom Party appears to be polling a little ahead of the Social Democrats.
 Paradoxically, it was the People’s Party, the center-right coalition
partner of the Social Democrats that signaled the end of the grand coalition,
though it is running several percentage
points behind the Social Democrats.
 It has adopted a strong
anti-immigrant stance and apparently hopes to steal some thunder from the
Freedom Party.
Still not only has the
political risk diminished in Europe, but the economic news is also constructive.
  Moody’s upgrade of Ireland’s credit
rating  (A3 from Baa1) is another reminder of the improvement taking
place.  Greece’s 10-year bond yield is near a three-year low.  Growth
in the region has broadened, and expectations are running high for the ECB to
change its risk assessment and forward guidance at next month’s policy meeting.
 The market will likely exaggerate this significance. 
Investors have long
understood that interest rates would unlikely be
cut again and that the risk
assessment has been so diluted at recent meetings as to be fairly balanced in
spirit if not a word. 
However, the minus 40 bp deposit rate will likely persist
well into next year, and the ECB’s balance sheet will also likely continue to
expand into 2018 even if at a somewhat slower pace.  
The euro staged a key
reversal last Monday on a classic “sell rumor buy fact” activity on Macron’s victory.
  It pulled back nearly two cents
before recovering ahead of the weekend and helped by the disappointing data.
 It is now flirting with the 61.8% retracement of last week’s fall
($1.0955).  A move above there signals a retest on the $1.1025 high.
 Support is seen in the
$1.0900-$1.0920 area.  
There is also recognition
that the Chinese economy is likely slowing again after stabilizing in recent
quarters. 
 Retail sales and fixed investment
held up better than industrial output in April. Specifically, retail sales rose
10.7% down from 10.9% in March.  The year-to-date pace of 10.2% is a small
improvement from the 10.0% pace in March.  Fixed investment slowed to an
8.9% increase from 9.2%.  This is a
somewhat larger decline than expected, but the pullback in industrial output
was more pronounced.  It fell to 6.5% from 7.6% in March.  The
year-to-date pace slowed from 6.8% to 6.7%.  
Last week the US and China
announced some details of a tentative trade agreement. 
 The agreement addresses some longstanding issues,
like US agricultural exports to China, especially beef, and access for credit
card companies, bond rating agencies.   US concessions, outside of
willingness to import cooked chicken from China, seems largely political.  The
US may reconsider the extent of arms sales to Taiwan, and President Trump will
reportedly refrain from talking to Taiwanese President Tsai without notifying
Beijing first.  Also, the US
recognized the importance of China’s One Belt, One Road initiative and agreed
to send delegates to the  OBOR forum.  
The markets have not been
disturbed by the North Korean missile test over the weekend.
  Korea’s Kospi gained 0.2% to keep it
near last week’s record high.  The Korean won has gained 0.35% against the
dollar.  It is the fourth consecutive advance and the fifth in six
sessions.  The MSCI Asia Pacific Index rose 0.3% to a new two-year high.
 It is the third advance in four sessions.  
European bourses are
narrowly mixed, leaving the Dow Jones Stoxx 600 little changed. 
 Energy and financials are leading the gaining
sectors.  Health care and consumer discretionary are laggards. Oil is
extending last week’s recovery.  Brent is up 2.5% to push through $52 a
barrel.  The $52.80-$53.00 area is the next immediate target.  Light
sweet crude is up 2.5% as well and is trying to establish a foothold above $49
a barrel.  The next target is seen
in the $50.00-$50.20 area.  News that Saudi Arabia and Russia are talking
about extending the current output targets by nine instead of six months helped
bolster prices.  OPEC meets on May 25.  
Sterling remains firm.  Many still have their sights on the $1.3000-$1.3055
area.  This week’s data is expected to show firmer prices (CPI) and a recovery in the retail sale after March weakness. Meanwhile, the latest polls show
the Tories with a commanding lead ahead of the June election.  
The dollar ran into
resistance in the JPY114.35 area last week. 
 It has back off but found bids ahead
of JPY113.00, but faltered ahead of JPY113.80.  A return to the JPY113.00-JPY113.20 looks likely unless the US
10-year yield gains some traction.  

Dollar-bloc currencies are
making headway against the greenback today. 
 The Antipodeans and the Canadian
dollar are up 0.5%-0.6% late in the European morning. The US dollar is
approaching the 20-day moving average against the Canadian dollar near
CAD1.3620.  Additional bids may be found
near CAD1.3580.  The Australian dollar is also approaching its 20-day
moving average near $0.7465., which also corresponds with the 61.8% retracement
of this month’s decline.   The New Zealand dollar made new lows for the
year last week but has been pulled back
up above $0.6900. The $0.6950 area offers resistance.  

The North American session
features the May Empire State manufacturing survey (small gain expected) and
the TIC data late in the session.
  Canada reports existing home sales.  

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