Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Softer Yields Weigh On The Greenback

By Marc ChandlerForexMay 25, 2021 07:05AM ET
www.investing.com/analysis/softer-yields-weigh-on-the-greenback-200582182
Softer Yields Weigh On The Greenback
By Marc Chandler   |  May 25, 2021 07:05AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

The decline in US 10-year rates to two-week lows below 1.59% was helping rebuild bullish enthusiasm for stocks and weighing on the US dollar.

The NASDAQ reached two-week highs yesterday, and almost all the large markets in the Asia Pacific region rose, though India struggled.

Europe's Dow Jones Stoxx 600 was at a new record high, paced by real estate and information technology. US futures were firmer, pointing to a possible gap higher opening. European yields were mostly 2-4 bp lower, and premiums over German are narrowing. The spread between Italy and German 10-year rates narrowed more than seven basis points from last week's peak, for example.

The dollar was on its back foot. The Swedish krona's 0.65% gain was leading the move against the dollar. It was at a three-month high versus the greenback, while the euro and Swiss franc were about 0.30% higher.

The Canadian dollar and Japanese yen were laggards and little changed. Emerging market currencies were also mostly higher. Hungary, whose central bank is expected to stand pat today, and Turkey, where a central bank's deputy governor has been dismissed, are struggling.

Industrial commodity prices were firm, but July WTI was coming back offered after briefly rising to nearly $66.35. A week ago, it set the contract high a little above $67.

Gold remained firm, but holding a little below last week's high, around $1890.

Asia Pacific

The US issued a do-not-travel advisory to Japan, the most serious warning due to the outbreak of the COVID infection. The inoculation rate is reportedly around 4%, the least among high-income countries (OECD 37 members).

The opening ceremony for the summer Olympics is less than two months away. Initially, the Olympics were expected to draw 600k foreign visitors, not counting the athletes. In March, this was cut to around 78k.

The US warning raises new questions. Next month, a decision will be made whether local spectators can attend the events. Meanwhile, there is pressure to extend the formal emergencies in Tokyo and Osaka into next month, and Prime Minister Suga is expected to decide in the coming days.

The Shanghai Composite jumped 2.4% today, the most since last October to reach a three-month high. A record amount of A-shares was bought through the HK links (CNY21.7 bln or ~$3.4 bln). Efforts to rein in commodity prices were cited as a factor that boosted confidence. Financials did particularly well.

The offshore yuan (CNH) was particularly strong, and the dollar was trading below CNH6.40 for the first time in three years. The onshore yuan held up a little better. The greenback held above CNY6.40 but still made a marginal new three-year low.

There was talk that state-own banks were dollar buyers late in the session after selling earlier in the session. Some observers link the dollar buying to "stealth" intervention, but of course, they also operate for their own accounts, and taking some profits with yuan at three-year highs could be good trading and rebalancing after the surge of inflows. Note that exporters often convert their proceeds toward the end of the month.

The US was confined to a narrow 30-pip range against the Japanese yen. It found support near last week's low that was just above JPY108.55, and the greenback was offered near JPY108.85. Only a move above JPY109.05 or below JPY108.35 is of note.

The Australian dollar also appeared to be going nowhere quickly. It was in about a 15-tick range on either side of $0.7760. The aussie has not settled off the $0.7700-handle for two weeks.

The PBOC set the dollar's reference rate at CNY6.4283, which was a bit stronger than the bank models Bloomberg survey projected (CNY6.4263). Tomorrow's fix will be closely scrutinized for policy signals. 

Europe

Although political uncertainty ahead of the September German elections has been heightened by the tightening of the polls, economic confidence is strong. The May IFO survey results were better than expected, encouraged by the accelerated vaccination effort that has seen about 40% of adults now have at least one shot.

As a result, the current assessment rose to 95.7 from a revised 94.2 in April (initially 94.1). Expectations, which stalled in April (falling to 99.2 from 100.4 in March), jumped to 102.9 in May. That lifted the overall view of the business climate to 99.2 from 96.6 (initially 96.8).

It is the highest since May 2019. The fact that Q1 GDP was revised to show a contraction of 1.8% instead of -1.7% had little impact.

The EU's confrontation with its neighbors is running at a high level. It is preparing more sanctions against Belarus. Brussels is also pushing back against the UK's demands that the withdrawal agreement be renegotiated. It continues to have regrets about the Northern Ireland protocol.

The EU is also at odds with Switzerland. A pandemic seems to be an awful time to do it, but the EU will go forward with downgrading Swiss medical technology exports to the EU. Starting next month, Swiss medical firms cannot export into the EU duty-free. Instead, such firms need to be represented within the EU and meeting product-labeling requirements.

The euro was trading above last week's high (~$1.2245) and, for the first time in four months, has not traded below $1.2200. The next hurdle was seen near $1.2275, where an option for about 980 mln euros will expire today. The intraday momentum indicators were stretched. Initial support was seen in the $1.2220-$1.2230 area.

Sterling was firm, and although it has traded above $1.42, there has not been much follow-through buying, and it has held below the pre-weekend high (~$1.4235). It retreated earlier and could return to the $1.4150-$1.4160 support area.

America

The Federal Reserve bought $2 bln of Treasury Inflation-Protected Securities yesterday and insists on using it as a clean signal of the market expectations. Today, new housing price data and new home sales will be reported. It makes one wonder why the Fed is still buying $40 bln a month in agency mortgage-backed securities.

Case-Shiller house price index of 20 cities is expected to continue to accelerate over 12% in March, the fastest in seven years. New home sales may have pulled back in April after a nearly 21% jump in March. Constraints in supply are an important factor. The median forecast in Bloomberg's survey calls for a 950k seasonally-adjusted annual pace. A 13-year high was set in January 2020 at an almost 775k pace. It has not been below an 840k rate since May 2020.

Mexico reported its biweekly inflation read yesterday. It eased to 5.80% from 6.12% but was higher than expected, and the core rate rose by 0.33% on the month, twice the median forecast in Bloomberg's survey. It confirms, though, what was already known. The Banixco easing cycle has ended.

Today's focus turns to the trade balance, where March's $3 bln deficit was a surprise. Economists forecast another deficit in April but a fifth of the March shortfall.

A caveat is in order. There seems to be a strong seasonal pattern of deterioration in April from March (16 of the past 20 years, the April shortfall was larger than March). 

Brazil reports the IPCA inflation, and prices continue to surge. It is expected to rise to 7.38% from 6.17% in April. There is some base-effect, but prices in the January-April period have risen at an annualized rate of more than 11%.

The central bank has already indicated it will follow up the two 75 bp rate hikes (lifting the Selic rate to 3.50%) with a third one when it meets next on Jun. 16. The Selic rate was at 4.40% at the end of 2019.

The US dollar remained trapped in its trough against the Canadian dollar. It remained just inside the pre-weekend range of roughly CAD1.2025 and CAD1.2095. A four-year low was set on May 18, a little below CAD1.2015. A convincing break of CAD1.2000 would have significant technical implications. Last week's high near CAD1.2145 seems like a distant memory.

The greenback held below MXN20.00 yesterday, and follow-through selling today pushed it below MXN19.82. Last week's low, which is the next target, was around MXN19.72.

Softer Yields Weigh On The Greenback
 

Related Articles

Al Brooks
EUR/USD: Is A Move Higher Likely? By Al Brooks - Jul 30, 2021 1

EUR/USD has 5 consecutive bull bars after consecutive wedge bottoms, which is a high probability buy setup. Testing the July 6 and July 9 double top so might pull back for a...

Ashraf Laidi
Dollar Dips, PCE Next By Ashraf Laidi - Jul 30, 2021

by Adam Button We said on Monday here this would be a pivotal week and it certainly proved to be so. The US dollar steadily sold off on Thursday and was the worst performer; we...

Softer Yields Weigh On The Greenback

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email