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Data To Show Surging US Growth, but is that Enough to Lend the Dollar Support?

Summary:
Overview:  Ahead of what is expected to be reports confirming the surging US economy, the dollar remains on its back foot, unable to sustain even modest upticks.  The euro has drawn closer to .20, and the dollar is holding below JPY109 for the first session since March 24.  The dollar-bloc currencies lead today's move against the greenback, but nearly all the emerging market currencies are participating too.  The JP Morgan Emerging Market Currency Index is rising for the third consecutive session. The US threatened sanctions against Russia for cyberwarfare, and election interference has seen the ruble drop 1%.  Turkey's rate decision is expected shortly, and the market expects no immediate reversal of the rate hike that cost the former governor of the central bank his job.  Equities in

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Data To Show Surging US Growth, but is that Enough to Lend the Dollar Support?

Overview:  Ahead of what is expected to be reports confirming the surging US economy, the dollar remains on its back foot, unable to sustain even modest upticks.  The euro has drawn closer to $1.20, and the dollar is holding below JPY109 for the first session since March 24.  The dollar-bloc currencies lead today's move against the greenback, but nearly all the emerging market currencies are participating too.  The JP Morgan Emerging Market Currency Index is rising for the third consecutive session. The US threatened sanctions against Russia for cyberwarfare, and election interference has seen the ruble drop 1%.  Turkey's rate decision is expected shortly, and the market expects no immediate reversal of the rate hike that cost the former governor of the central bank his job.  Equities in the Asia Pacific region were mixed.  Hong Kong, China slipped, but Taiwan's 1.25% gain, helped by strong earnings from TSMC, led the regional rally.  Stocks are firmer in Europe, and the Dow Jones Stoxx 600 is a new record high.  US shares are also trading higher after the S&P and NASDAQ faded yesterday.  The US 10-year yield is softer at 1.61% and is now nearly flat over the past month.  European bond yields are 1-2 bp lower, leaving the core up 6-7 bp over the past month, while Italy's 10-year yield has climbed 17 bp and Spanish Bono yields are 10 bp higher.  Gold is first and continued to knock on $1750.  Oil prices are consolidating after yesterday's surge.  June WTI is in a roughly 50-cent range on either side of $63.  

Asia Pacific

Australia's employment report was mostly better than expected as 70.7k jobs were filled last month, twice the median forecast from Bloomberg's survey.  The unemployment rate slipped to 5.6% from 5.8%, which was also a bit better than expected, especially given the unexpected rise in the participation rate (66.3% vs. 66.1%).  However, the disappointment was in the loss of full-time positions (20.8k), which means the job growth was solely a function of part-time positions (91.5k). That said, we must acknowledge that Australia has recouped all the full-time jobs lost last year.  The unemployment rate remains above the 5.2% averaged in Q1 20.

The Bank of Korea left the seven-day repo rate steady at 0.5%, as widely expected.  It is a little more optimistic/confident in the economic recovery.  It recognizes that its 3% GDP forecast made in February can be overshot, while price pressures remain modest (~2%).  Separately, while the KOSPI reached a new record high market capitalization, South Koreans have been busy buying US shares.  In Q1 21, South Korean investors $128.5 bln in foreign stocks, and the US accounted for more than 93% (or ~$120 bln).  

The summer Olympics are supposed to start in 99 days.  Public opinion in Japan is very much against holding the games. At the same time, Prime Minister Suga seems to be counting on a successful event to bolster his chances of being re-elected in the fall.  The Secretary-General of the LDP acknowledged today that canceling the Olympics is still possible.  Several parts of Japan where the contests would be held are in a formal emergency, and the vaccine rollout is lagging well behind Europe.  Tokyo is reporting a two-month high in the number of cases, and Osaka is setting new record highs.  

The $815 mln option at JPY109 that expires today looks safe as the dollar slips lows for the fourth consecutive session.  It is the first session since March 24 that it has not traded above JPY109.  It is also the first time since then that the greenback has traded below JPY108.70.  The low was recorded in the European morning.  The next area of support is seen closer to JPY108.30-JPY108.40. The Australian dollar appreciated by more than 1% yesterday, the biggest gain in almost two months.  Follow-through buying lifted it through the $0.7750, where a A$740 mln expiring option was struck.  It is at a new high for the month.  The $0.7770 area is the (50%) retracement of the decline since the multi-year high was reached (February 25) a little above $0.8000.  Resistance is seen in the $0.7800 area and then $0.7850.  Chinese officials appear to be allowing the broad pullback in the dollar to be reflected in the yuan's exchange rate.  It has risen for the fourth consecutive session. The PBOC continued to be stingy on its supply of liquidity and, through its medium-term lending facility, injected a little less than is maturing this month, which may have weighed on stocks.  Around CNY6.5240, the dollar is at three-week lows against the yuan.  

Europe

The UK and EU officials meet to discuss the Northern Ireland Protocol, but a major breakthrough is not likely.  The heart of the problem, which has been more or less known since the 2016 UK referendum, is that the UK's entry into the EU made possible peace on the Irish border.  With the out of the EU, the situation is quite complicated and has been obfuscated, forcing complicated mental gymnastics and ultimately threatening the Good Friday Agreement. 

Talks with Iranian officials in Vienna continue for the third day.  The attack on Natanz's electrical system over the weekend, reportedly crippling its enrichment efforts, appears to have succeeded in hardening Iran's position and making an agreement even less likely.   Among other things, it will keep Iran's roughly 2 mln barrel of oil a day off the market.  Meanwhile, the International Energy Association joined OPEC and EIA in offering an upbeat assessment of demand.  At the same time, the US reported its largest drawdown of oil stocks (~5.9 mln barrels) in two months.  It was the third weekly decline, and US oil inventories are near the lowest level since February.  Gasoline demand was strong, and refiners are their busiest in over a year.  Reports suggest American driving is increasing sharply.  

The euro takes a three-day advance into today, its longest in a month.  The market appears to be turning a little cautious as the $1.20-level is approached.  It settled last month near $1.1730.  It may take a break of yesterday's low, a little below $1.1950, to signal anything noteworthy. A move above $1.20 would immediately target the $1.2025-$1.2050 range.  Sterling is trading inside yesterday's range and continues to flirt with the $1.38 area.  Above there, resistance is seen around $1.3840.  Support is seen near $1.3780 and $1.3760.  

America

The market doubts the Feds' timetable.  They do not find it credible that the December-March stimulus of more than 10% of US GDP, a vaccine rollout that is gaining traction, and the wealth effect of rising equity and house prices, will not warrant a move off the zero-bound for more than another two years.  The December 2022 Eurodollar futures contract implies a 45 bp yield (this month's contract implies about 18 bp).  The December 2022 Fed funds futures contract yields about 25 bp.  Fed Chair Powell did not share fresh insight into these issues, besides sticking to the sequence of tapering well before considering a rate hike.  

Powell has sounded increasingly confident that the growth and employment in the world's largest economy are accelerating, and the Beige Book lent credence to the view. Tapering the $120 bln a month in bond purchases has been linked to further "substantial" progress toward the Fed's targets. Arguably, such conditions will be met by the FOMC's mid-June meeting.  However, given the average rate of inflation framework and the seemingly cautious Fed shifting the focus from expectations to actual data, it may mean that the tapering waits until September.  

The US reports a slew of data that cannot only push on this open door.  Economic forecasts, leaving aside the weekly jobless claims (arguably skewed by California, which is not re-opening until mid-June), have not generally appreciated the strength of price pressures (CPI, import/export prices), survey data (PMI/ISM), and real sector data (employment report, auto sales).  March retail sales jumped.  Bloomberg's survey median is 5.8% on the headline and 7.2% for the core (excludes autos, gasoline, building materials, food services).  The risk is on the upside, and some forecasts are 10%+.  Industrial production is forecast to rise by 2.5%, led by manufacturing's 3.6% gain.  Here, too, the risk is on the upside.  That said, US auto producers are extending and expanding production cuts due to the chip shortage.  Capacity utilization rates used to be watched closer than they are today, but the surge output is quickly absorbing idle capacity.  Recall that it averaged almost 78% in 2019.  It was a little above 75% in January before slipping to 73.8% due to the weather-induced hiccup.  New 12-month highs are expected.  The April Empire State survey is expected to reach its highest level since November 2018 (~19.6 vs. 17.4 in March).  

Canada reports February manufacturing sales and March existing home sales.  The reports typically do not move the markets, and in any event, will be overshadowed by the US reports.  The greenback is falling for the third consecutive session against the Canadian dollar and is pushing below CAD1.25 for the first time since March 22.  The US dollar has largely met the (61.8%) retracement objective of the recovery off the multi-year low set on March 18 near CAD1.2365.  A break of CAD1.2475 would likely target CAD1.2430 on the way back to the earlier low.  On the upside, the CAD1.2540 offers the nearby cap.  Meanwhile, the greenback's losses against the Mexican peso are being extended for the fourth consecutive session.  It is approaching MXN20.00.  It has not traded below that threshold since February 16.  Support was found then near MXN19.90.   Yesterday's high was around MXN20.13, and that may offer resistance now.  



Disclaimer

Marc Chandler
He has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.

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