Overview: The sharp sell-off of US equities yesterday weighed on global equities today.  The Asia Pacific bourses were a sea of read with many of the large markets off 2%-3%.  Japan, which returned from a three-day holiday was the exception and it managed to eke out a small gain.  Europe's Stoxx 600 gapped lower after yesterday's outside down session and US futures are trading around 0.3%-0.5% lower.  Meanwhile, the US 10-year yield is ending further above the 3% threshold, while European benchmarks are mostly 3-4 bp higher.  Here UK Gilts are an exception with the 10-year yield a couple of basis points lower.  The dollar is mixed.  The Scandis and euro are firm, while the Australian dollar, Japanese yen, and sterling are heaviest.  Among emerging market currencies, most central European currencies are higher as is the peso.  Asian currencies and the Turkish lira are sporting modest losses.  Gold is closing in on its third weekly loss and is trading around $1882.  June WTI is flirting with $110.  It has not closed above it since March 25. US natgas is extending its advance for a sixth session.  It is up about 23.5% this week after rising nearly 11% last week.  Europe's natgas benchmark is off 5.6% today to halt a four-day advance.  It is up 6.6% this week and was up almost 3.2% last week.  Iron ore slumped 4.7% today and is off nearly 5.9% on the week, its third consecutive weekly loss.  Copper is a little heavier after reversing lower yesterday to lose 1%.  It is off 2.7% this week after having fallen in the past two weeks.  July wheat has come back lower after rallying around 5.8% in the past two sessions.  It is up nearly 4% net this week.   

Asia Pacific

Tokyo's April CPI jumped to 2.5% from 1.3%.  This was a touch higher than expected.  The two key drivers were energy prices and the base effect from the cut in last year's mobile phone charges.  Excluding fresh food prices, Tokyo's CPI rose to 1.9% from 0.8%.  Excluding fresh food and energy, Tokyo's consumer prices rose by 0.8% from -0.4%.  Energy prices are up about 25% year-over-year and lifted overall rate by 1.1 percentage points.  The mobile phone charges added 0.8%.  While influences of the Tokyo CPI will be evident in the national figures due out later this month, the BOJ insists on looking through the data on the grounds that the current spurs are not sustainable.  Wage growth is not strong enough.  At the same time, the new economic package is projected to lower inflation by 0.5 percentage points from May through September.  

The US appears to be getting close to adding China's Hikvision to the "Special Designated Nationals and Blocked Persons list on human rights violation grounds.  Hivision sells surveillance software to governments and corporations, including CCTV cameras.  Although it operates globally with some 53k employees, its biggest customer is China itself.  While the US has been escalating and expanding its use of sanctions since 9/11, one of the things that draws attention to Hikvision, in addition to its size, is that the category of violations, human rights, could very broad and elastic. Meanwhile, we note that a bill passed the Senate committee stage yesterday that would allow the US to sue OPEC for manipulating the energy market.  The White House expressed concerns but has not formally opposed it yet.  

Beijing announced that all government and state-sponsored businesses should replace all foreign brand personal computers with domestic ones within two years.  This is the latest effort by Beijing to reduce its reliance on foreign technology.  Estimate suggest there are some 50 mln personal computers at the central government alone. The shares of many of non-Chinese brands sold-off on the news.  Note too that has been an effort elsewhere to reduce the use of Lenovo PCs, which is a Chinese brand.  

The dollar recovered from about JPY128.75 yesterday and closed a little above JPY130 as US yields jumped. Japanese markets re-opened from the extended holiday today, and the greenback rose to JPY130.80 in Asia, a new high for the week.  Initial support now is seen near JPY130.  The US 10-year yield is extending its gains above 3.0%, and this could help lift the greenback above the two-decade high recorded in late April near of JPY131.25. The Australian dollar peaked on Wednesday and Thursday near $0.7265 and between yesterday and today shed two cents to hit a low around $0.7065.  The week's low was set Monday closer to $0.7030 and the low for the year was set in late January by $0.6970.  A close today below last week's low around $0.7055 would a particularly bearish technical development.  The yuan's slide continued.  Recall that at the end of last week, before the holiday, the greenback settled near CNY6.6085.  Today, it reached CNY6.6955, its highest level since November 2020.  The 200-dy moving average, which it has not traded above since September 2020, is now near CNY6.73 and is the next technical target.  The PBOC set the dollar's reference rate lower than expected for the fourth consecutive session.  Today's fix was at CNY6.6332, while the projections (median forecast in Bloomberg's survey) was for CNY6.6379. 

Europe

It almost seems that the Bank of England goes out of its way to keep the market wrongfooted.  The BOE delivered the 25 bp rate hike, indicated that rates would likely rise further, and said, by the way, the economy will contract sharply in Q4, and 2023 as a whole, before stagnating in 2024.  And by the way, a technical recession (two quarters of shrinking output) may be avoided.  The vote to hike was with a 6-3 majority.  Despite the dour economic forecast, the dissenters favored a 50 bp hike, concerned about wage growth.  The swaps market has 30 bp of tightening priced in for the June 16 meeting.  The BOE also announced it would sell its corporate bond holdings in September.   It has a more passive approach to its government bond holdings.  As they mature, the proceeds will not be reinvested.  The BOE estimates that it may cost 600k jobs to bring inflation under control.   

Reports indicated that BOE Governor Bailey will not take a raise this year, but the focus is on what the government says about the tips for employees in the Queen's speech that lays out the parliamentary program.  The Tories have long promised to ensure that employees keep the tips have not carried through with it.  The reduction of cash payments also means that the tips are increasingly charged taking it out of the employee hands.  The issue may also take on a larger political significance given the largest cost-of-living squeeze in a generation and in the face of regressive policies.  Separately, the votes are still being counted in the yesterday's local elections, in which the Tories appear to have lost many councils.  However, the fact that the Lib Dems may emerge as the chief beneficiary rather than Labour is notable.  

Following the sharp slide in factory orders yesterday, Germany reported that industrial output collapsed by 4.7% in March.  This is more than four-times more than the median forecast in Bloomberg's survey.  Spain's industrial production was forecast to fall by 0.5%.  Instead, it contracted by 1.8%.  The aggregate figure for the eurozone will be reported at the end of next week and the 0.8% median forecast in Bloomberg's survey will have to be re-thought.  

The euro came within about a tenth of a cent from the multi-year low set in late April slightly above $1.0470 before bouncing in early European turnover to $1.0580. It stalled there.  The market may be hesitant to take it further ahead of the US jobs report.  There are options for almost 600 mln euros at $1.06 that expire today.  The high for the week was recorded yesterday near $1.0640.  A move above there would target $1.07.  After an outside up day on Wednesday, sterling reversed lower yesterday despite the BOE's hike.  It collapsed 2% and fell to $1.2325.  The losses were extended to nearly $1.2275 today.  A break of the $1.2250 area could spur losses toward $1.2075 on the way to $1.20.  Of note, the lower Bollinger Band (two standard deviations below the 20-day moving average) is around $1.2235 now.  Initial resistance is seen in the $1.2380-$1.2400 area. 

America

The main narrative that seems to have emerged is that Fed Chair made what some have dubbed an "unforced error" in taking a 75 bp off the table.  But was it ever really on the table?  Yes, the Fed funds futures market had thought it was possible in the coming meeting or two.  This was a fantasy of speculators and was not a policy signal.  The market and some in the media who cover them simply read the Fed wrong and then blamed the Fed.  The most hawkish FOMC member is the St. Louis Fed President Bullard.  In the context of talking about how the central bank is not as far behind the curve as it may appear, using his own calculation of the Taylor Rule, which links the GDP and labor market output gaps to the overnight target rate, Bullard, said 75 bp move could be considered at some juncture.  He quickly added that was not his base case.  It does not seem as if any other Fed official endorsed a 75 bp hike and some pushed against it. Central bankers seem to be characterizing their challenge as threading a needle.  Push the inflation genie back into the bottle without driving the economies into recessions.  

Powell is leading down the middle.  A steady and predictable course might be the best tactic now. Strategic ambiguity may be the more traditional approach, but these are not traditional times. It seems common at recent FOMC meetings for the market to react one way initially and subsequently reverse it. This time it was exaggerated in both directions.  The market "corrected" itself yesterday without a word from a Fed official.  In fact, the market has about a one-in-four chance that the Fed hikes by 75 bp at the June 15 meeting.   We note that several Fed presidents will be speaking today (Williams, Kashkari, Bostic, and Daly). As the Vice Chair of the FOMC, NY Fed President Williams has a permanent vote.  He can also be expected to articulate the opinion of the leadership.  Governor Waller speaks with Bostic and is seen as among the more hawkish governors.  

Solid but a bit slower job growth may be exactly to the Fed's liking.  The median forecast in Bloomberg's survey has slipped recently but at 380k, it is still a "good" number.  At the same time, it would the slowest since last April.  Nonfarm payrolls rose by an average of 562k in the first quarter.  In Q1 21, average job growth was 645k. The risk may be on the downside after the ISM and ADP reports.  Weekly jobless claims rose a little.  A rise in the participation rate is also something that the Fed would like to see.  A greater participation rate would ostensibly help curb rising labor costs. The participation rate was at 63.3% before the pandemic and was at 62.4% in March.  Anecdotal stories suggest it ticked up.  Canada, which also reports its April jobs data has seen its participation rate nearly fully return to pre-pandemic levels.  It was at 65.5% at the end of 2019 and 65.4% in March.  Canada grew 70k jobs a month in Q1, of which 44k were full-time positions.  In Q1 21, job growth averaged 114k a month, and 88k of them were full-time. The market goes into the jobs data with 50 bp hike priced in for Canada on June 1.

After approaching CAD1.27 yesterday, the US dollar surged to nearly CAD1.2870 as US stocks cratered.  The greenback's high recorded on Monday was the high for the year by CAD1.2915. It is consolidating ahead of the job reports and is holding above CAD1.2800.  A convincing break of CAD1.2770 would weaken the US dollar's technical tone.  There is an expiring option for $1.4 bln at CAD1.2840.  The equity market performance may be just as important for the exchange rate today as employment reports.  The US dollar has been in a roughly MXN20.00-MXN20.31 range for the past two sessions.  It peaked on Monday near MXN20.50.  Initial support is in the MXN20.10-MXN20.15 area.  April CPI will be released next week, and it is expected to have accelerated, but the highlight next week is the central bank meeting.  A 50 bp hike is widely expected and the risk is a 75 bp move rather than 25 bp.  

Opinions expressed are solely of the author’s, based on current market conditions, and are subject to change without notice. These opinions are not intended to predict or guarantee the future performance of any currencies or markets. This material is for informational purposes only and should not be construed as research or as investment, legal or tax advice, nor should it be considered information sufficient upon which to base an investment decision. Further, this communication should not be deemed as a recommendation to invest or not to invest in any country or to undertake any specific position or transaction in any currency. There are risks associated with foreign currency investing, including but not limited to the use of leverage, which may accelerate the velocity of potential losses. Foreign currencies are subject to rapid price fluctuations due to adverse political, social and economic developments. These risks are greater for currencies in emerging markets than for those in more developed countries. Foreign currency transactions may not be suitable for all investors, depending on their financial sophistication and investment objectives. You should seek the services of an appropriate professional in connection with such matters. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete in its accuracy and cannot be guaranteed.

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