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The Greenback Starts The New Week On A Firm Note

Published 04/18/2022, 06:34 AM
Updated 07/09/2023, 06:31 AM
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With many financial centers, especially in Europe, closed for the long holiday weekend, risk-appetites remained in check. Most Asia Pacific markets fell, and poor earnings from Infosys (NYSE:INFY) and Tata Consultancy Services (NS:TCS), saw India pace the decline with a 2% drop.

US futures were also trading with a heavier bias. Interest rates remained firm. The US 2- and 10-year yields were up a couple of basis points to 2.47% and 2.85%, respectively.

China's GDP inexplicably rose, though March details were poor and the yield on the Chinese 10-year bond rose almost 3 bp to 2.80%. The dollar rose high. Despite more official expressions of concern by Japanese officials over the pace of the move, the dollar was rising for the 12th consecutive session against the yen and reached a new high of almost JPY126.80.

The euro had been trading around a 20-pip range on either side of $1.08. The dollar bloc and sterling were the weakest. Emerging market currencies were also mostly lower.

Gold was up about $14, closing in on the $2000-mark, which had not been seen since Mar. 10. June WTI extended its three-day rally to $108, but returned to the $106 area in quiet turnover. It rose almost 9% last week.

Iron ore fell 2.4% today, giving back last week's gains in full. Copper was firmer, extending its advance for the fourth consecutive session. US natural gas prices were up more than 3%. It was the fifth session of higher prices and last week's 16.3% advance was the fifth consecutive weekly gain. July wheat prices were trading around 2% higher. It rose 4.4% last week.

Asia Pacific

China reported that Q1 GDP rose twice as fast the economists expected (median in Bloomberg's survey) with a 1.3% quarter-over-quarter expansion. The year-over-year rate increased to 4.8% from 4.0%. However, the details do not jive.

Investment rose, but production of steel and cement fell by 10%. Industrial output rose 5.0% year-over-year in March. Economists expected a 4% increase. Real estate sales fell 29% year-over-year in March, while the 100 largest property developers reported a 50% decline.

Still, the takeaway was that March was poor, and April will likely be weaker still. Retail sales fell 3.5% year-over-year in March. The median forecast was for a 3% fall. Joblessness rose to 5.8% from 5.5%. It was expected to be unchanged.

Japanese officials appeared to have stepped up their rhetoric about the yen, but the focus was still on the pace of the move. This took some of the sting away from the jawboning. BOJ Governor Kuroda slowly ratcheted up his remarks, telling the Diet today that the recent yen moves had been rapid. Finance Minister Suzuki said excessive and disorderly moves had negative impact.

Still, if officials wanted to stem the tide, they needed to climb the next rung of the escalation ladder, which would seem to be an acknowledgement that the level that had been reached was problematic.

However, with the divergence of monetary policy and low inflation (deflation, if fresh food and energy were excluded), it was difficult to make a compelling case that the yen's weakness did not reflect fundamentals.

South Korea will formally apply to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership before President Moon Jae-in's term ends early next month. Since last year, South Korea had been moving in this direction, but made the formal announcement before the weekend.

The incoming government (President Yoon Suk-yeol) apparently supported the accession process, which could take a year or more. The ostensible goal was to diversify exports, but a state-run economic institute forecasted that joining the CPTPP would boost GDP by around 0.33%.

The dollar's was pushing higher against the yen for the 12th consecutive session. It rose 1.7% last week, its sixth weekly gain in a row. It had remained below the upper Bollinger® Band (two standard deviations about the 20-day moving average), which was found near JPY127.15 today. Support was seen in the JPY126.00-JPY126.25 area. The JPY130-level as the next target continued to draw attention.

After probing the $0.7400 area repeatedly last week, the Australian dollar settled below it last week and continued to fall today. It found support near $0.7350, the (61.8%) correction objective of the rally from the Mar. 15 low (~$0.7165). Initial resistance was seen in the $0.7380-$0.7400 area.

The US dollar softened a little against the Chinese yuan, but remained within the range set last Thursday (~CNY6.3625-CNY6.3800). As we have noted, the PBOC's use of the fix to send signals appeared to have waned. Again today, the dollar's reference rate was set weaker than bank models suggested. Today, the PBOC's fix was at CNY6.3763. The median in Bloomberg's survey was CNY6.3779.

Europe

In addition to the energy, foodstuffs, and fertilizer that Russia produces, it is also a significant gold miner. It produces around 340 tons a year, worth around $20.5 bln. The sanctions were hitting the gold producers, and to help blunt the impact, the Russian central bank offered to resume its gold purchases that had been suspended in 2020.

On Mar. 25, it offered to pay RUB5000 for a gram of gold. If the dollar was around RUB82, its offer was about $1700 an ounce. Some observers may have mistakenly thought this Putin pegging the ruble to gold. It was no such thing. It was about aiding the gold producers, not hardening the ruble.

Moreover, its commitment to buy gold at a fixed price until the end of June lasted around two weeks. According to press reports, Russia apparently had been buying gold at market/negotiated prices since Apr. 8.

The ruble's appreciation in recent weeks reflected, in part, the positive terms-of-trade shock (the rising price of its exports while sanctions have reduced imports). However, the critical driver was a key capital control: businesses must convert 80% of their hard currency earnings within three days, which was understood to be around $1 bln a day.

This was too much for the domestic market to absorb, hence the apparent appreciation of the ruble.

There was a game of chicken afoot. In effect, Putin said that Europe pays for its gas with euros, but had imposed sanctions on its use of the euros. Gas, after Mar. 31, would be paid for in rubles, he declared. Europe objected because it violated existing contracts. Not to worry, Russia explained that Gazprombank, which was still on the SWIFT system, would take the euros and convert them for European customers, who would have both ruble and euro accounts.

Many Europeans were balking. EU lawyers claimed that abiding by Putin's scheme violated the sanctions. The issue may come to a head soon. Payments for the gas shipped since Apr. 1 will begin being due shortly.

Obviously, Europe was not ready to stop buying Russian gas. They have not agreed to ban Russian oil or coal, for which the dependency was less. There did not appear to be any economic advantage of the proposed arrangement. Rather, it seemed like politics, causing an adversary to be uncomfortable.

The weekend press reported that UK Prime Minister Johnson was the host and poured drinks for colleagues at one of the staff parties during COVID. Reports at the end of last week suggested he will face another fine. Johnson was expected to issue yet another apology as early as tomorrow before Parliament. Meanwhile, the Tory's performance at next month's local election in England and Wales may tip his political fortunes. A YouGov polls found nearly 2/3 want Johnson to resign if there were moves to fine.

The euro briefly slipped through $1.0760 last week in the immediate reaction to the ECB's steady hand. Since then, the euro has not spent much time above $1.0820. It was continuing to absorb bids below $1.08. Today's low was slightly below $1.0785 in light dealings. The euro was off for the third consecutive session, and so far this month, it had enjoyed only two advancing sessions. That said, despite intraday penetration, it had not settled below $1.08 since May 2020.

Sterling posted a key upside reversal in the middle of last week, but the follow-through buying quickly exhausted itself (around $1.3150). It was back near $1.30 today. Like $1.08 in euro, the $1.30 support for sterling was frayed on intraday, but not on a closing basis. We targeted the $1.2830 area in sterling and the $1.06 area for the euro.

America

The US reported a mixed batch of data last week. The headline CPI was a touch higher than expected (8.5% vs. 8.4%) but the core rate was slightly softer than anticipated. Many economists suspected that US CPI may be peaking even if it proved sticky.

Producer prices were stronger than expected. We already knew that auto sales disappointed, but core retail sales rose 1.1%, a little better than expected. Yet the headline measure expectedly fell (0.3%) to 0.5% for the second consecutive month.

The rise in gasoline prices was sapping discretionary spending. Ahead of the weekend, the US data surprised on the upside. February business inventories rose 1.5% (1.3% expected) and the January series was revised higher (1.3% vs. 1.1%).

The April Empire State manufacturing survey jumped to 24.6 from -11.8 (1.0% expected). March industrial output rose by 0.9%, twice the gain expected, and February's 0.5% increase was revised to 0.9%. This meant that Q1 industrial production increased by a little more than 8% at an annualized rate, the strongest quarter since Q4 20.

Capacity utilization stood at 78.3% last month, the highest since 2007. Lastly, defying expectations, the University of Michigan's preliminary April consumer confidence survey increased while the inflation outlook was steady.

It's to be a quieter week for US data. March housing starts and existing home sales may begin seeing the impact of higher interest rates. The Fed's Beige Book for next month's meeting will be due in the middle of the week.

Several Fed officials were scheduled to speak this week, beginning with Bullard late today. The highlight may be on Thursday when Fed Chair Powell shares the IMF stage with ECB's Lagarde on a panel about the global economy.

At the end of the week, the flash April PMI will be released, and a mixed report is to be expected (softer manufacturingand an uptick in services).

Canada's highlights include March CPI, which was expected to have accelerated, and February retail sales, which likely fell. The Bank of Canada does not meet again until June 1 and the swaps market had 48 bp of tightening discounted.

Mexico's data diary will be light this week, and the most important release, the bi-weekly CPI and core rate reading through mid-April will be due at the end of the week. 

Late yesterday, the Mexican Congress defeated AMLO's controversial initiative that would have expanded the state's control of the electricity market. It did win a simple majority, but was well shy of the 2/3 majority needed.

AMLO was not deterred and will open a new front as early as today with a bill to exert more state control over lithium. His resource nationalism estranges investors.  

Weak stocks and defensive attitudes weighed on the Canadian dollar. The greenback was at three-day highs near CAD1.2640. Last week's high was closer to CAD1.2675 and a retracement objective was around CAD1.2700. Initial support today was pegged by CAD1.2620.

The Mexican peso appreciated 3% last month, but its strong run had morphed into a consolidative phase. The greenback appeared to have entered a MXN19.72-MXN20.20 range. It was straddling the MXN20.00 area today, where a $525 mln option was set to expire. A close above MXN20.00 would the first since Apr. 11.

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