New Highs For Gold And Yen As Dollar Struggles

Monday May 2: Five things the markets are talking about.

It’s a bank holiday shortened trading week for some (China, Singapore, Taiwan, U.K and Ireland), but for others it’s expected to be a busy week.

The Reserve Bank of Australia meets this coming week – no change in the overnight rate is expected, nevertheless, the odds have fallen since last week’s tepid inflation report.

Elsewhere, manufacturing and composite PMI’s for April will be released and digested around the globe.

Dealers and investors will sign off the week with the U.S’s and Canada’s April jobs reports. Can both economies continue with such a stellar monthly print?

1. China PMIs slow slightly but remain in expansion

China official PMI’s were a mixed bag – both were down slightly from March’s levels, but remained in expansion.

China April Manufacturing PMI (government official: 50.1 vs. 50.3e – second straight expansion; non-manufacturing (services) PMI: 53.5 vs. 53.8 prior.

Amongst the key ‘manufacturing’ components – new export orders matched the headline with 50.1 vs. 50.2 m/m, employment continues to remain under pressure at 47.8 vs. 48.1 m/m, while input prices hit multi-month highs of 57.6 v 55.3 m/m.

A positive for both commodity sensitive currencies and commodities, analysts note that inventories of raw materials fell to a new five-month low of 55.3 vs. 57.6 m/m, suggesting perhaps we have peaked in oversupply?

2. Japan: One-sided speculative moves in FX are a concern.

It’s not a surprise to see that Japanese authorities are worried by the recent currency moves.

Overnight, Japan’s Finance Minister Aso again reiterated his view that one-sided speculative moves in FX were “extremely concerning.” He vowed that authorities would continue to monitor markets and take action as necessary. Nevertheless, his comments did little to stop the yen climbing.

The Bank of Japan (BoJ) in a surprise move last week stood still on rates. The market has been punishing their inaction ever since. Investors pushed the yen to hit a fresh 18-month high against the dollar (¥106.14) in overnight trade.

The BoJ’s inaction has dashed hopes for more stimulus and is forcing the weaker Yen bears to unwind their ‘short’ positions.

3. RBA monetary policy event risk

Monetary policy ‘event risk’ shifts down-under to Australia, where last week’s soft Aussie CPI data has made for a much closer decision by Governor Stevens and company tomorrow.

The RBA is facing one of its toughest decisions in some time, backed into a corner between a interest rate cut to offset falling prices, or hold rates steady to avoid hurting “retirement savers” and fueling fresh doubts about the strength of the economy.

As we draw closer to the decision, fixed income markets are leaning slightly in favor of a -25bp cut with a probability of just over 50% (+53% – compared with a near-impossibility just a week ago).

Overnight data would support a cut, but the immediate problem is would banks pass that on?

4. U.S Treasury releases semi-annual currency report

The U.S Treasury Department has put five new countries on their new ‘Monitoring List’ (China, Japan, Korea, Taiwan, and Germany).

Treasury found that no economy currently satisfied all ‘three’ criteria to be named as a currency manipulator; however, five named major trading partners met two of the three criteria.

The report called the recent yen movements “orderly,” and also urged Japan to adhere to G-20 and G-7 commitments regarding exchange rate policies. This is very much in stark contrast with Japanese authorities – their description of the Yen’s moves as being “one-sided” and speculative driven.

5. Gold hits new heights, shy of $1,300.

Spot gold prices have managed to hit a fresh 15-month high earlier this morning, supported by a weaker dollar and heightened demand for safe-haven assets.

The ‘yellow’ metal has rallied to $1,298.17 ahead of the N.Y open, up +0.4% from the Friday’s close. For many, it’s expected to be only a matter of time before gold will be able to push through the $1,300 psychological handle.

The U.S dollar fell -2% last week, after the Fed indicated that it would be slow to raise interest rates this year. Not helping the ‘mighty’ dollar was the BoJ leaving their monetary policy unchanged.