The week was supposed to be dominated
by the UK election and the ECB meeting, but the yen is stealing the show in the
first part of the week. The US dollar has been
sold through JPY110 for the first time since late April. The euro has
fallen from JPY125.30 before the weekend to JPY123.25 today.
In our work, we tend to emphasize the yen’s sensitive to the interest
rate differential with the US. The US 10-year yield cannot find
traction. It is off three basis points to 2.15%. It is a single
basis point above the low seen in response to the tepid US employment data at
the end of last week.
Old gaps are providing good mile markers, if not attractors.
The US 10-year yield gapped higher last November 14, and that gap was a breakaway
gap, and the yield did not look back.
That gap is found between roughly 2.15%
and 2.165%. It was closed following
the jobs data. The 2.17% area
corresponds with a 50% retracement of the rise in yields since the US
election. The next retracement level is near 2.07%.
In response to Macron’s victory in the first round of the French
presidential contest, the dollar gapped higher on April 24. It
briefly entered the gap the next day, but was not able to close it and the
dollar rallied over the next several weeks. However, the recent dollar deterioration, and today’s drop,
that gap is in play today. It extended to JPY109.40 and a break warns of
a test on the year’s low set in mid-April near JPY108.
Adding to the upward pressure on the yen, according to reports, was news
that a stronger than expected increase in Japan’s cash wages. The
0.5% year-over-year increase in April. It is the highest of the year and matches the highs seen in Q4 16.
|T|he erratic nature of the time series may be
traced to bonus payments. They rose 5.6%. In Japan, the shift from
part-time workers to full-time positions is being associated with upward
pressure on cash wages, while in the US, that shift is thought to put downward
pressure on average wages.
While cash wages rose, when adjusted for inflation, real cash earnings
were flat in April from a year ago. This
matches the best reading so far in 2017. Wage growth is understood as a
necessary even if the insufficient
prerequisite for stronger consumption.
The yen’s strength weighed on Japanese share prices. The Nikkei
lost almost 1%, its largest loss in 2.5 weeks. The retreat was led by health
care (-2.2%) and telecom
(-1.6%). On the other hand, the 30-year bond auction drew the highest
bid-cover seven months
As widely anticipated, the Reserve Bank of Australia left rates on hold,
as it has done now for 10 months.
The RBA seemed to want to look the prospect of near-term softer growth.
While the central bank was meeting, Australia reported a much larger than
expected Q1 current account deficit (A$3.1 bln vs. median forecast for an A$0.5 bln shortfall). Net exports contracted to -0.7% of GDP from +0.2% in
Q4 16. This risks a weaker than
expected Q1 GDP that will be reported
tomorrow. The median forecast was for a 0.3% expansion.
The Australian dollar initially fell around a quarter of a cent on the
news but rebounded to approach yesterday’s higher just shy of $0.7500.
After a strong two-day rally (that began from ~$0.7375), the Aussie is
consolidating. A move above $0.7520 would likely signal the next leg up
that could carry it toward $0.7600 initially.
The news stream in Europe is light. The eurozone reported another rise in Sentix Investor Confidence
survey. It is at a 10-year high. Despite the improving
wealth effect from rising equities, and falling unemployment, European shoppers
are still lethargic. Retail sales rose a stingy 0.1% in April, and the March series was revised to show
a 0.2% rise rather than 0.3%.
The euro is trading inside yesterday’s range, which was inside the
pre-weekend range. The euro has not traded below $1.12 since May
31. The upside is stymied by the
$1.1300 level, which matches the high seen in the immediate response to the US
election last November. There are some large euro options that roll off
today. The $1.1200-$1.1220 area houses 1.4 bln euro option expires
today. The $1.1250-$1.1275 see another 2.5 bln euros
expires. Options struck at $1.12 expire tomorrow (2.8 bln
euros) and on Thursday (1.6 bln euros).
Sterling is firm but does not
appear to be going anywhere quickly. It did rise to its highest level
in nearly two weeks at $1.2950. The options market continues to be
investors anxiety is being expressed. The one-week
put-call skew is the most extreme 3.89% discount for sterling calls over puts) since the referendum. It briefly
pushed through the 4% mark. One-week implied volatility reached 14%
yesterday and softer today nearer 13.20%.
The US reports JOLTS, the job opening index. It tends not to be
a market mover. Last week’s jobs report was disappointing, but
yesterday’s non-manufacturing ISM’s employment component shot up to 57.8 from
51.4 in April. It was the highest in nearly two years. The
composite employment report was also strong. Canada reports its IVEY
Purchasing Manager Index. It had rallied strongly in March and April, and we would not be surprised to see a small pullback. Meanwhile, the US dollar
is trading heavily against the Canadian dollar for the third day, after moving
higher in a four-day run until the jobs data on June 2.