Overview: Equities are recovering from dramatic losses. Today, the Nikkei, Hang Seng, and Kospi surged by more than 2%. The large markets in the region advanced except India. Europe's Stoxx 600 is up about 1.2% near midday after falling 0.75% yesterday. It is nearly flat on the week after falling for the past four weeks. US futures are 1%+ higher. Benchmark 10-year yields are firmer across the board. The 10-year US Treasury yield is slightly below 2.90%, while European yields are 4-8 bp higher and the peripheral premiums are a little wider. The dollar is mixed with the Scandis, Canadian dollar, and Swiss franc posting modest upticks. The euro, sterling, and yen are struggling. Emerging market currencies are mixed with little obvious rhyme or reason geographically. The freely accessible emerging market currencies are also mixed. Gold extended yesterday's sell-off to test the $1812 area before stabilizing. Now near $1821, gold is off about 3.3% this week. June WTI posted an upside reversal in the middle of the week, after falling to $98.20. It is extending yesterday's gains and testing the $108 area. US natgas is edging higher. It has not fallen since Monday. Europe's benchmark surged 12% yesterday as Russia reduced gas supplies to Germany, but is almost 3% lower today. Iron ore is up about 1.2% to pare this week's loss to a little less than 8%. Copper is off slightly and is down 4% this week. It is the fourth consecutive weekly fall and it has shed around 15% during this run. After being up yesterday on the back of a sobering report from the USDA, July wheat has stabilized so far today.

Asia Pacific

News that the extended lockdown of Shanghai may end as early as this weekend appears to have helped global markets stabilize today. Reports suggested officials expect "no community spread" of Covid by mid-May. There was a slight rise in cases in Beijing but officials deny that it was edging toward a lockdown as it tries to calm fears that appeared to have spurred panic food shopping and hoarding. Separately, China reported its lending figures collapsed in April. Aggregate financing, which includes banks and shadow bank lending, fell to CNY910 bln. Economists had under-appreciated the impact of the lockdowns and had forecast (median Bloomberg survey) a CNY2.2 trillion increase. Bank lending accounted to about 2/3 of the increase.

The Hong Kong Monetary Authority stepped up its intervention to defend the currency peg to the dollar. There have been three rounds of intervention over the past two sessions. After not needing to intervene to support the Hong Kong dollar since March 2019, the de-facto central bank has bought a little more than $1 bln between yesterday and today. The US dollar is allowed to trade between HKD7.75 and HKD7.85. If the broad upward pressure on the greenback does not subside, HKMA intervention could be more persistent. Despite Beijing's desire to reduce the influence of the US dollar, the officials remain committed to the peg. It has hiked rates alongside the Federal Reserve and will continue to do so.

The US dollar is recovering after approaching JPY127.50 yesterday, which is low since April 27. It finished below the 20-day moving average (~JPY129.15) for the first time in two months. Higher US yields today helped the greenback recover to around JPY129.35. The dollar's nine-week advancing streak is coming to an end. Recall that last week, it settled near JPY130.55. The Australian dollar is also stabilizing, after falling around 2.25 cents in the past two sessions. The recovery off yesterday's low (~$0.6830) has stalled slightly above $0.6900, which leaves the Aussie more than 2.5% lower on the week. Without a stronger recovery in North America today, it will be the third week in the past four that it has recorded more than 2% depreciation. That said, a close above $0.6940 would help lift the tone. The greenback initially pushed above CNY6.80 for the first time since October 2020. The recovery of the mainland stocks and the broader pullback in the dollar steadied the yuan. The exchange rate is little changed net-net around CNY6,7860. Still, the dollar is up around 1.8% this week, its sixth consecutive weekly advance. Again, the PBOC set the dollar's reference rate lower than the market (Bloomberg survey) expected: CNY6.7898 vs. CNY6.7967. It was the ninth consecutive session, and the lower fix is a way officials can moderate the yuan's depreciation.

Europe

Tensions over the Northern Ireland protocol are rising and may come to a head next week. Apparently, no progress was achieved in yesterday's talks. The EC has indicated it could consider modifications in the agreement but the UK says it is untenable. Without greater EC flexibility, the UK is threatening unilateral action. The government is reportedly preparing domestic legislation to override large parts of the agreement. Prime Minister Johnson will deliver a speech on Northern Ireland next week. As a domestic issue, it has become more salient not just because of the disruption of internal trade, but in terms of the post-election assembly in Northern Ireland. The power-sharing arrangements are being threatened by the DUP's refusal to participate unless the protocol is abandoned.

The dollar traded above CHF1.0 yesterday for the first time since 2019. It has straddled that level today. The divergence of monetary policy is the chief driver. The Swiss National Bank is widely understood to be lagging far behind other central banks in adjusting monetary policy. Attempts by the SNB to intervene primarily to keep the franc at "reasonable" levels against the euro have incurred criticism from the US. After intervening against the euro, the SNB tries to maintain its reserve allocation and appears to later sell the euros for dollars. Switzerland enjoyed a bilateral trade surplus with the US of about $14 bln in Q1 22. According to the WTO, the EU accounts for about 40% of Swiss exports and the US, a little less than a quarter. When considering the bilateral trade between the US and Switzerland, one cannot only think about pharma and watches. In 2020, for example, the US bought around $28 bln of gold from Switzerland. In 2019, the US gold purchases were less than $850 mln.

The euro stabilized today in yesterday's trough that extended to $1.0355 yesterday. The session high near $1.0420 was recorded a little before the eurozone reported a 1.8% drop in March industrial output figures. It was slightly less than expected but the February series was revised to show a 0.5% gain instead of 0.7%. Given the magnitude of the euro's slide, today's upticks have been unimpressive. This, in turn, warns that the low is not in place. A break of the $1.0340 area would embolden the calls for a move to parity. Sterling also can hardly sustain even modest upticks. It has not been able to distance itself from yesterday's low near $1.2165. When it poked above $1.2200, new sellers were lurking. Indeed, sterling is threatening to extend its losing streak for the seventh consecutive session. It is the fourth consecutive weekly decline, and each week of the previous three weeks has seen losses of more than 1.5%. A break of the $1.2100 area sets up a test on what is expected to be more formidable support near $1.20.

America

San Francisco Fed President Daly revealed that the debate about 50 bp or 75 bp is not the Fed's primary consideration and Chair Powell acknowledged that if the data warrants it, more can b done. Not only do we argue that a 75 bp hike was not on the table, but it seems clear that when Powell said that 75 bp was not under consideration it was a near-term assessment, not a fixed position. Even the more hawkish voices, like Waller, Bullard, and now Mester are not advocating a more aggressive move now. There seems to be a consensus to hike 50 bp in June and July. The market strongly leans to another 50 bp move in September, but it is a bit less confident than it was earlier this month.

The US economic calendar is light today of market-moving data. Import and export prices are more for economists than traders. Benchmark revisions of manufacturing shipments, orders, and inventories do not capture the imagination of market participants. The preliminary May University of Michigan's consumer confidence may draw some attention. Confidence may ebb but greater interest may be in the inflation expectations. Last month, the 1-year outlook stood at 5.4% and the 5-10 year expectation was at 3.0%. Fed presidents Mester and Kashkari are scheduled to speak. Mester has suggested that if inflation does not ease here in H1, a larger move (75 bp) may be necessary. Kashkari, among the least hawkish members, estimates that the neutral rate could be around 2%, which is a bit lower than most Fed officials, judging from the March dot plot.

Mexico's central bank delivered the widely expected 50 bp hike yesterday. There was one dissent in favor of a 75 bp move. This coupled with the statement indicating that officials were considering more "forceful" action seemed to have helped the Mexican peso recover yesterday. The central bank raised its headline and core inflation forecasts, despite AMLO's initiative that persuaded around two dozen businesses to limit price increases for common household products. The swaps market is pricing in 200 bp of tightening by Mexico over the next six months. Separately, Peru also delivered a 50 bp hike (to 5%) yesterday and Argentina raised rates by 200 bp (to 49%).

The US dollar reached almost CAD1.3080 yesterday, a new high since November 2020. It is consolidating quietly today. It has held just below CAD1.3050, where an $820 mln option expires today. Initial support for the US dollar has been found slightly below CAD1.30, but a close below CAD1.2980 is needed to give some hope that a near-term high is in place. The greenback closed around CAD1.2875 last week. Assuming it holds above there today, it will be the seventh consecutive weekly advance. The US dollar fell to the lows of the week earlier today near MXN20.1535. However, it turned better bid in the European morning. Initial resistance now is around MXB20.25-MXN20.27. Quietly, the dollar has fallen for the last three sessions against the peso. It settled yesterday around MXN20.2480. If equities can hold on to some of their gains, the greenback's streak can be extended for a fourth session.

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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