US Dollar Consolidates Yesterday's Gains

The US dollar is consolidating the gains scored late in the US session yesterday in response to a Financial Times interview with US Treasury Secretary Mnuchin who seemed to play down the strategic importance of Trump's recent complaint about the greenback's strength.

Mnuchin spun Trump's comments to be consistent with his own earlier comments that a strong dollar was in the US interest though in the short-term it presented challenges. It was not, Mnuchin argued, the beginning of "currency war." The foreign exchange market seemed to accept Mnuchin's explanation at face value, but his distinction between talk and action will unlikely impress his G7 and G20 counterparts. Recall that the efforts to talk down the yen in Abe's campaign in late 2012. He was criticized, and after his electoral victory, the G7 signed a new agreement not to weaponize the foreign exchange market.

The dollar had bottomed earlier yesterday ahead of JPY108 and by the end of the session was near JPY109. Japanese operators helped lifted the dollar to JPY109.20 before the consolidation, and the easing of US yields. Initial support was seen near the 200-day moving average that had been violated on a closing basis in thin activity on Good Friday (~JPY108.85) and then JPY108.60.

The euro approached last week's high in the US session yesterday, reaching $1.0670 before Mnuchin's comments were posted and had been consolidating in a narrow range (~$1.0635 to $1.0660) since then. The first round of the French election this weekend continues to deter activity. In the debt market, the French premium over Germany has edged a touch lower on 10-year rates and is steady to slightly wider on 2-year month.

Sterling, which had appeared to be a beneficiary of the political uncertainty from the eurozone, tested last month's high just above $1.26 before reversing lower ahead of Prime Minister's May slated for later this morning. There is speculation that she could call for a snap election, which given the new electoral law that fixes the election, would require some parliamentary maneuvering. The fact that the statement will be outside 10 Downing Street has fanned such speculation of an important announcement. The UK 10-year yield slipped below 1.0% for the first time in six months.

Still, if an early election is managed, there seems little doubt the Tories would trounce Labour. Yesterday's low in sterling was near $1.2525. Sterling has slipped below there after earlier having taken out yesterday's high. A close below there would constitute a technical key reversal. Initial support is seen in the $1.2480-$1.2500, and a break would suggest a move to at least $1.24.

The dollar-bloc currencies are underperforming. The minutes from the recent Reserve Bank of Australia meeting seemed to be more dovish than many expected. It notes that labor market conditions had softened more than expected. Also, iron ore prices continue to unwind earlier gains. It was off almost 4% today after falling 3% yesterday. The US dollar recovered smartly against the Canadian dollar after slumping to almost CAD1.3260 in the North American morning. It finished the session near CAD1.3320 and took another leg up in Europe today reaching almost CAD1.3360. Trendline resistance (March and early April highs) is near CAD1.3420 today.

A caveat for dollar bottom pickers is that US 10-year Treasuries are unable to find much traction. Mnuchin acknowledged what many have suspected. The obstacles to passing health care reform have complicated the tax reform efforts. Ideas that tax reform can be passed before August always seemed an aggressive goal. The inability of the Republican majority in Congress and a Republican President to agree on legislation is dampening hopes of stronger growth, which in turn weighs on growth and inflation expectations.