Dollar surges into the weekend

Overview: The dollar is surging into the weekend, amid tumbling stocks and rising rates. The euro has been sold through $1.08 after reversing lower yesterday, despite the stronger than expected flash April PMI. Poor UK consumer confidence and a sharp drop in retail sales has seen sterling sold to new lows since November 2020, below $1.2900. The beleaguered yen is consolidating its recent drop and remains inside the range seen Wednesday for the second consecutive session. Most Asia Pacific equities fell though China's CSI 300 rose 0.45% to snap a five-day slide. Europe's Stoxx 600 gapped lower and is now lower on the week. US futures are slipping lower. European rates are a bit firmer after yesterday's surge that lifted the 10-year Gilt above 2% for the first time since 2015. The German 2-year trade at almost 0.25%, is the highest since 2014. The US 10-year yield is up around four basis points to 2.95% and the 2-year yield is up seven basis points to 2.76%. It is up about 30 bp this week. Most emerging market currencies are lower. The dramatic sell-off of the Chinese yuan gained momentum. It is about 0.6% lower to bring this week's drop to 1.8%. It is the largest drop in several years. Gold is off around $10 to almost $1940. It settled last week closer to $1978. June WTI is consolidating in a $101-$104 range. US natgas is slightly softer and is set to end a five-week surge. Europe's natgas benchmark is off 2% after rallying 9% yesterday. It is up about 3.7% this week after falling more than 14% in the previous two weeks. Iron ore was firm today but off 3% for the week. Copper is giving back yesterday's 1% gain and is about 1.5% lower on the week, the first weekly loss in three. July wheat is falling for the fourth consecutive session and is around 3.5% lower this week after a 12% gain over the past couple of weeks.

Asia Pacific

Some sensationalized reports played up the intervention angle on talks between Japan's Finance Minister Suzuki and US Treasury Secretary Yellen. The call out from the meeting suggests the rapid yen moves were discussed, foreign exchange was not the main focus. They reiterated the boilerplate G7/G20 stance that markets ought to determine exchange rates, but excess volatility is not desirable. A senior IMF official acknowledged yesterday that the yen's weakness reflects economic fundamentals. The Fed is tightening. The BOJ is not. As we have noted central banks want exchange rates to follow monetary policy, otherwise it offsets or blunts official efforts.

Japan's data showed an economy recovering and energy-led price pressures. The preliminary April PMI shows slightly slower growth in manufacturing activity (53.4 vs. 54.1) and better services (50.5 vs. 49.4). The composite rose to 50.9 from 50.3. The headline March CPI rose to 1.2%, as expected, from 0.9%. Excluding fresh food, its core rate, edged up to 0.8% from 0.6%. However, excluding fresh food and energy, Japan is still in deflation (-0.7% vs. -1.0%). The BOJ meets next week and is expected to lift its inflation forecast from the 1.1% projection in January.

Australia’s flash April PMI shows the economy gaining momentum. The manufacturing PMI edged up to 57.8 from 57.7. The service PMI rose to 56.6 from 55.6. This translated into a 56.3 composite reading after 55.1 in March. It is the highest since last June. After Australia's national elections next month, the central bank is expected to hike rates in June to begin the tightening cycle. The market is pricing in a 40 bp more that would bring the cash target rate to 0.50%.

The BOJ will continue its fixed-rate purchases of 10-year government bonds next Monday and Tuesday. At today's operation it bought about JPY427 bln after not receiving any offers yesterday. The dollar is consolidating against the yen and remains within the range set Wednesday (~JPY127.45-JPY129.40). The five-day moving average is slightly above JPY128, and the greenback has not closed below it since April1. After reversing lower yesterday, the Australian dollar has taken another leg lower today. It is being sold through $0.7315, the (50%) retracement of the gains since the late January low near $0.6970. The 200-day moving average is slightly below $0.7300 and the next retracement (61.8%) is closer to $0.7235. The market may debate about the existence of a Fed put in the stock market, but China seems to have an Xi put. After the recent slide in Chinese shares, China's Securities Regulatory Commission encouraged large financial firms to boost their allocation to stocks. The CSI rose today for the first time in six sessions. However, it offered no reprieve to the slumping yuan. The sharp sell-off continued for the fourth consecutive session to bring this week's loss to 1.8%. The greenback approached CNY6.50, its highest level since last August. The PBOC set the dollar's reference rate at CNY6.4596. The median forecast in Bloomberg's survey was for CNY6.4645. The sudden breakdown of the yuan has seen turnover in the offshore and options market increase dramatically.

Europe

There has been a sharp rise in the implied yield of the December Euribor futures. On Wednesday, the implied yield reached about 0.32% and now it is about 0.56%. ECB President Lagarde warned of downside risks to growth but did not dissuade the market from looking for rate hikes later this year. Some reports played up the push from some hawks for a 50 bp move. The swaps market is pricing in the first move in July and a total now of 80 bp before the end of the year.

The eurozone's preliminary PMI defied expectations that the war in Ukraine was undermining activity. Both the manufacturing and service PMI were stronger than expected. The manufacturing PMI softened a little (55.3 vs. 56.5) but economists had looked for a bigger pullback. The service PMI rose to 57.7 from 55.6. Economists had looked for a decline. The composite rose to 55.8 (from 54.9) and is highest since last September. German figures showed the manufacturing a little slower than expected (54.1 vs. 56.9 in March and expectations for 54.5). The service PMI rose to 57.9 from 56.1. Economists (Bloomberg survey) expected 55.3. The composite eased to 54.5 from 55.1, a bit better than the 54.1 median forecast. France more soundly beat expectations. The manufacturing PMI rose to 55.4 from 54.7 and the service PMI rose to 58.8 from 57.4. Both were expected to have declined. The composite rose to 57.5 from 56.3. It is the highest since before the pandemic.

The UK is not as fortunate. Today's data were disappointing beginning with the slump in the GfK consumer confidence (-38 vs. -31) but the real shocker was March retail sales. Instead of falling 0.3% as the median forecast (Bloomberg's survey) had it, they tumbled 1.4% and the February series was revised to -0.5% from 0.3%. Excluding gasoline, retail sales fell 1.1% after a revised 0.9% drop in February. The flash PMI also disappointed. The manufacturing PMI held up better than expected (edging up to 55.3 from 55.2), but the service PMI dropped to 58.3 from 62.6 (median forecast was for 60). The composite PMI fell to 57.6 from 60.9. This does not offer a good economic backdrop for the local elections early next month. Still, after BOE (Bailey and Mann) comments yesterday, the swaps market is pricing a little more than a 1-in-3 chance of a 50 bp hike on May 5. At the end of last week, it was about a 1-in-4 chance.

The euro reversed lower yesterday after rising to about $1.0925 on the back of some hawkish ECB comments. It lost a cent from the high, and follow-through selling today saw the single currency slip below $1.08. The recent lows were around $1.0760. The low from March 2020 was near $1.06 and a retest may be the most likely scenario. Sterling has approached the $1.2830 target we have highlighted. It is the halfway point of the rally since the March 2020 low near $1.14 to last year's high around $1.4250. A break of that area, signals a test on $1.27, but the important retracement (61.8%) is closer to $1.25.

America

The Fed chief endorsed the quicker pace of tightening. He qualified quicker with “a little”, implying a 50 bp move and not the 75 bp move that St. Louis Fed Bullard suggested may be needed, though it was not his base case. The market has fully taken on board Powell's “front-end loading” which is understood to mean now three 50 bp rate hike (May, June, and July). The market now sees the terminal rate for Fed funds near 3.50% next year. It is still a dynamic situation. The implied yield of the December Fed funds futures is rising today for the sixth consecutive session. It has risen by slightly more than 35 bp this week. The flash PMI headlines may draw attention but barring a significant downside shock, it may not have much impact.

Bank of Canada Governor Macklem also appeared to endorse a faster adjustment of monetary policy. The swaps market has a 50 bp hike at the next four meetings (June, July, September, and October) discounted. The Governor of Mexico's central bank suggested it may have to move quicker as well. Today Mexico reports the bi-weekly CPI through mid-April. Headline and core readings above 7% will reinforce ideas that it will hike by at least 50 bp at next month's meeting (May 12). The swaps market has about 200 bp of tightening over the next six months.

The US dollar initially traded lower to CAD1.2460 yesterday, but as equities reversed lower, the greenback caught a bid. It reversed higher to around CAD1.2590 and today has reached a new high for the months around CAD1.2680. The CAD1.2700 is the (61.8%) retracement target of the decline since the March 15 high (~CAD1.2870). A move above CAD1.2700 could target CAD1.2780 initially. The peso's sell-off is extending too. The greenback began the week near MXN19.90 and is trading now around MXN20.35 in the European morning. It is at its best level since March 22. The dollar is approaching the MXN20.39 area, which holds the (38.2%) retracement objective of the slide that began last month. The potential double bottom pattern and the next retracement target (50%) are near MXN20.60.