The Trends, Continued: Dollar, Stocks, Yield Rose

While there were some brief setback over the week, the trend in the financial markets were unchanged. Up trend in US equities continued with DOW making another record close at 15354.4 while S&P 500 also had another record loss at 1667.47. FTSE 100 made another five year high at 6723.06 while DAX also closed at another record high of 8389. Nikkei also closed above 15000 handle at 15138.2. US 30 year yield once dipped back to below 3.1 level but managed to close the week higher at 3.165%. 10 year yield moved in tandem and closed the week higher at 1.949%. One important development to note, though, was the sharp decline in gold. Gold traders seemed to be finally giving up which sent comex gold to close at 1358.3, comparing to prior two week's range at around 1450. Dollar index extended recent rally to close at 84.20.

In the currency markets, Aussie and Kiwi were the weakest currencies for another week, with AUD/USD and NZD/USD down around -2.9%. Canadian dollar followed after weak inflation data with USD/CAD up 1.64%. Yen extended recent selloff after G7 signed acceptance of yen's deprecation with USD/JPY leading the way. Among European majors, Swiss franc was the weakest with EUR/CHF breached 1.25 handle. EUR/GBP traded sideway though in spite of positive news from UK. So in short, the trends of strong equities, strong US yields, strong dollar continued.

Technically, dollar's rally has been accelerating as seen in daily charts against other major currencies and we'd expect such strength to continue. Out strategy of long USD/JPY last week was correct and would maintain the long position. An important recent development was that commodity currencies were sold off sharply and broadly as funds have been flowing back to major markets, i.e. US, UK and EZ. Aussie have been the weakest one in Q2 comparing to Kiwi and Loonie. However, AUD/USD would possibly be getting some support from 0.95 level on oversold condition. NZD/USD could also get some support from 0.80 on oversold condition. Instead, USD/CAD is likely catching up and should break through 1.0341 to 1.0445 in near term. Hence, in addition to USD/JPY long, we'd like favor USD/CAD long this week.

To recap, we'd emphasize again that recent movements in markets argued that funds were flowing back to major stock markets for higher returns. The funds were from bonds (as seen in rally in yields), yen, and even the so called higher yield Aussie and Kiwi. Gold also followed last week. US, UK and EU would continue to benefit from the fund flows with US and dollar having an upper hand.

Dollar was not too bothered by weak economic data. Instead, comments from a known dove, San Francisco Fed's Williams were taken seriously. He noted that the labor market has clearly "improved since September" and Fed could reduce the pace of the open ended asset purchase "as early as this summer". Also, he noted that if "all goes as hoped", Fed would even end the program "some time late this year". Talk of tapering QE3 will continue as lease in near term and should support the greenback.

In Eurozone, GDP contracted -0.2% qoq in Q1. While that was an improvement from Q4's -0.6% qoq, it missed expectation of -0.1% qoq. France slipped into recession with -0.2% qoq contraction, also worse than expectation of -0.1% qoq. Italy stayed in recession with -0.5% qoq contraction versus consensus of -0.4% qoq. Even Germany just barely managed 0.1% qoq expansion, comparing to expectation of 0.3% qoq. The German ZEW economic sentiment just inched higher by 0.1pt to 36.4 in May, comparing to expectation of 40. Current situation gauge even deteriorated to 8.9. Various ECB officials already said that the central bank is technically ready for negative deposit rates. While there is no sign of another move in near term, talk of ECB negative deposit rates will keep Euro under perform comparing to dollar.

In governor King's last quarterly inflation report, BoE projected that GDP would grow 0.5% in Q2, accelerating from Q1's 0.3% growth. CPI is expected to fall back to 2.02% in two years time, close to BoE's target, revised down from February projection of 2.23%. King said that growth are to be "a little stronger" and inflation " a little weaker" than expected three months ago. He was optimistic that a recovery is "in sight" even though "it won't be a typical recovery. Overall, the report suggests that BoE would keep rates unchanged at 0.5% and asset purchase target at GBP 375b for some time.

Japan's economy expanded at a faster than expected pace of 0.9% qoq in Q1 comparing to consensus of 0.7% qoq. That's a notable improvement from Q4's 0.0% qoq. And, translated into annualized rate of 3.5% growth, that's also the fastest in a year. It's noted that solid personal consumptions and better than expected exports thanks to the yen's depreciation were factors contributing to the growth. And, prime minister Abe's first two arrows of monetary and fiscal stimulus had positive impacts on the economy and markets will look forward to his so called third arrow of structural reforms. Nonetheless, note that the GDP deflator dropped more than expected by -1.2% yoy, the steepest since 2011. That suggested that deflation remained a challenge or Japan.

Canadian dollar drops sharply after release of much weaker than expected inflation data. Headline CPI unexpectedly dropped -0.2% mom in April versus expectation of 0.2% mom rise. The year-over-year rate than dropped sharply to 0.4%, down from 1.0% and compared to expectation of 0.9%. That's well below BoC's target range of 1-3% and was the lowest level since October 2009. Core CPI also moderated more than expected to 1.1% yoy. The data basically indicated that there is no pressure for BoC to raise interest rates.

Australian federal budget release showed that GDP growth in 2013/14 fiscal year would decelerate to 2.75%, down from current fiscal year's 3%. Unemployment is projected to pick up to 5.75% at mid-2014, up from current 5.5%. Inflation is expected to be staying at around 2.25% during the period. Meanwhile, the budget won't be balanced until 2015/16 fiscal year, delayed by four years. The news raised speculation that RBA would continue to cut rates from the current 2.75%.