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Post-Holiday Blues In China While UK Sends Navy Vessels To Deter French Fisherman

By Marc ChandlerForexMay 06, 2021 06:42AM ET
Post-Holiday Blues In China While UK Sends Navy Vessels To Deter French Fisherman
By Marc Chandler   |  May 06, 2021 06:42AM ET
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China returned from its extended May Day holiday to find fresh confrontation over its domestic and international actions. Its equity market fell even though most of the other large Asia Pacific bourses moved higher.

European markets were heavier after the Dow Jones Stoxx 600 posted its biggest gain (1.8%) in nearly two months yesterday. US futures were firmer, including the NASDAQ, which fell for the fourth consecutive session yesterday, its longest slide since last October.

The US 10-year yield also fell for the fourth session in a row yesterday, the longest decline since last September, but was stable near 1.57%. European yields were hovering around little changed levels.

The Norwegian krone was among the strongest of the major currencies (~0.3%) after the central bank reiterated intentions to raise rates later this year. Ironically, the Swiss franc was outperforming the krone even though the Swiss National Bank is expected to be among the last major central banks in Europe to raise rates.

The Antipodeans and sterling were trading with a slight downside bias, while the Canadian dollar rose to its best level since September 2017. Helped by the firmer euro, most Eastern and Central European currencies were firmer, while most Asian emerging market currencies—Indonesian rupiah, Indian rupee, and Philippine peso were softer. The JP Morgan Emerging Market Currency Index is posting gains for the third session this week.

Gold was edging closer to $1800 again, but held back. In fact, the yellow metal has not been above $1800 since late February.

Oil was a little softer, with the June WTI contract mostly holding above $65 a barrel. Yesterday it retreated after reaching roughly $66.75.

Asia Pacific

We have argued that President Xi is undermining the strategic interests of China and is isolating it on the international stage. As China's long May Day holiday ended, the news stream underscores this concern on several fronts.

Consider: The investment pact with the EU that was seven years in the making has not been ratified, and it might not be any time soon. The EU denies it has suspended the ratification process (individual members and the EU Parliament), but the interest and ability to do so is clearly waning.

The G7 foreign ministers' statement was critical of China on many familiar grounds and advocated meaningful participation by Taiwan in the World Health Organization. This is partly in preparation for the G7 summit next month in Cornwall.

Australia, which is not a member of the G7, is reviewing the Port Darwin lease to China. This follows its recent decision to cancel two deals that the State of Victoria had signed under the Belt Road Initiative.

New Zealand, which has towed a less aggressive line than Australia, formally condemned China for "abuse of the Uyghurs" while still shying away from calling it "genocide." New Delhi has decided to ban Chinese companies from conducting 5G trials in India.

Besides being some rhetoric of displeasure, Beijing has suspended the formal economic dialogue with Australia. This 2014 arrangement has been inactive for a few years and appears largely symbolic. Beijing may step up efforts to encourage consumer boycotts of some "Western" brands.

The re-opening of Japan's markets failed to breathe fresh life into the dollar-yen exchange rate. The greenback remains within the range set on Monday (~JPY108.90-JPY109.70). Today, it was in about a quarter of a yen range above JPY109.15. Unless US yields rise (maybe tomorrow's employment data), the risk is that the dollar pulls back. There is a roughly $650 mln option struck at JPY109.00 that expires today.

Australian stocks traded with a heavy bias, and the Aussie slipped through yesterday's low (~$0.7705) but held $0.7700 and was almost flat on the day ($0.7745). The $0.7800-level, which the Australian dollar has not closed above since early March, holds a A$1.08 bln option that expires tomorrow.

Although the US dollar rose against the offshore yuan while the mainland was on holiday, the onshore yuan strengthened slightly today, and the offshore yuan converged around 6.4745. The PBOC set the dollar's reference rate at CNY6.4895, a little weaker than the median bank model in Bloomberg's survey projected.


Norway's central bank, the first of three European central banks that meet today, reaffirmed its intention to raise rates later this year. Core inflation has exceeded the 2% target for more than a year. The firm price pressures translate into the lowest real policy rates among the major economies and a strong housing market. September or December seems the likely timeframe.

Bank of England's policy decision was today; Turkey's was still pending at time of writing. The Bank of England was likely to upgrade its outlook as it becomes more confident that the vaccine rollout, fiscal support, and the ongoing monetary stance will make for a robust recovery. Although it is not prepared to taper yet, it remains a strong likelihood for later this year.

Turkey's central bank would like to cut the one-week repo rate now at 19%, but the high inflation (~17.1%) and even higher core rate (~17.7%) means that if it did, the lira depreciates, spurring more inflation and higher market rates. Any unorthodox relaxation of funding costs would also weigh on the lira.

The dispute over fishing rights in UK waters, a difficult negotiating point in last year's trade talks, has escalated this week. French fishermen are threatening to blockade Jersey and Paris threatened to cut off electricity to the island.

The UK responded by sending a couple of navy vessels to the area. This comes as the UK holds local elections. Much interest is in the elections in Scotland, which was opposed to Brexit. However, a solid majority for those favoring independence cannot but help intensify the confrontation with the UK government over a referendum.

Although Germany already reported that Q1 GDP fell by 1.7%, news that March factory orders rose 3% or twice as much as the median forecast in Bloomberg's survey would have it fan some optimism that tomorrow's March industrial production report may be stronger than expected (2.2% after a 1.6% fall in February).

The vaccine rollout is accelerating, and Q2 is expected to begin a more sustained recovery.

Separately, Eurozone March retail sales rose by 2.7% (Bloomberg's survey median forecast was 1.6%), and adding to the positive news, the February series was revised to 4.2% from 3.0%. This also seems to be part of an emerging pattern, where EMU data surprises on the upside, while more US data misses.

The euro recovered from the dip to almost $1.1985 yesterday and was back near $1.2050. This week's high is about $1.2075, and participants may be reluctant to take it there ahead of tomorrow's US employment data.

Note that there are chunky options at $1.21 expiring (~944 mln euros today and ~750 mln euros tomorrow). The intraday technical indicators were stretched near midday in Europe as the session highs were recorded.

Sterling was in a narrow range of a little more than a third of a cent, centered around $1.39. So far this week, it remains confined to the range set last Friday (Apr. 30) of roughly $1.38 to $1.3960.


The Biden Administration committed to waiving intellectual property protections for the COVID vaccines. After some debate, it will join the effort to boost the manufacturing capacity of the vaccines and help shape the waiver at the WTO. The change in the US position may be sufficient to sway the EU.

The rub is that the WTO effort will take time, and there does not appear to be a moment to spare, given the tragedy that is unfolding in several countries, including India, and South Africa, which have been advocating the move. As one would expect, many of the drug makers were opposed, partly on practical grounds, that few countries have the capacity to produce more vaccines even if they had access to the formulas.

That said, a few large countries, like Japan and India, for example, could add significant capacity. As a result, the share prices of Moderna (NASDAQ:MRNA), Pfizer (NYSE:PFE), and BioNTech SE (NASDAQ:BNTX) fell. The idea is that the Biden administration's decision could influence the decision of many other countries.

India and South Africa are revising their proposal that was first introduced last October to make it ready for a WTO meeting scheduled for later this month (see "Vaccine Wars," a six-part podcast on NPR for the overview of the brief history of the vaccine, competition, and debate over covering costs and making a profit).

The US Q1 nonfarm productivity and unit labor costs are derived from the GDP data and do not contain new information. The implication is that productivity likely recouped the lion's share of the 4.2% decline in Q4, and unit labor costs pared its 6% gain.

The weekly jobless claims may draw more interest. They are expected to have fallen for the fourth consecutive week, which would match the longest decline since last May-July. Canada and Mexico's economic calendars are sparse today ahead of tomorrow's jobs report and CPI, respectively.

Brazil's central bank hiked the Selic rate by 75 bp as widely expected yesterday and indicated it was prepared to hike rates next month. Yesterday's hike puts the Selic at 3.50%. The next hike would put it above the Mexican target (4.0%). Brazilian inflation is at a four-year high, but the economy has been weakened by the pandemic.

Food and energy prices have risen sharply this year. In April, the government distributed another round of monthly checks (~BRL44 bln or ~$8.2 bln). The only way the central bank could now deliver a 50 bp hike next month is if inflation were to come off quickly, but this does not seem likely, even though the real's 4.4% increase over the past month may slow the increase in prices.

The shelf the US dollar had built in the CAD1.2265-CAD1.2275 area gave way yesterday, and the greenback slipped to CAD1.2240 today. There was little chart support ahead of CAD1.2200. The previous shelf may now serve as resistance.

Meanwhile, the US dollar remains rangebound against the Mexican peso. The range this week has been roughly MXN20.1450-MXN20.3270. It found support in the European morning near MXN20.20.

Post-Holiday Blues In China While UK Sends Navy Vessels To Deter French Fisherman

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Post-Holiday Blues In China While UK Sends Navy Vessels To Deter French Fisherman

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