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dollar (Dixie, U.S. dollar) Losses were recorded following yesterday’s disappointing ISM manufacturing report, which initially spilled over into Asia-Pacific trading volume earlier in the day before recovering. The recovery has extended intraday momentum indicators, warning of the expected strong follow-through Dollar buying in North America, without new momentum. In light of the adjustment of positions and the dismantling of cross currencies, the yen is resisting the recovery of the dollar and is considered the strongest among the G10 currencies. A slightly stronger than expected Swiss CPI reduced the chances of the Swiss Central Bank raising interest rates late this month. This allows the franc to recover a little as well. The other G10 currencies are lower. Most emerging market currencies are also weaker. The South African rand and Mexican peso fell by just over 1%. Modi’s victory in India appears smaller than it did yesterday, and the rupee is also among the weakest emerging market currencies today.
Indian stocks are giving up yesterday’s gains as well as today, falling more than 5%. With the exception of China and Hong Kong, most stock markets in the Asia-Pacific region fell today. The European Stoxx 600 Index (STOXX) fell 0.8%, paring the gains of the past two days in full. US index futures also became softer. Asia-Pacific bonds played catch-up after the strong rally in the US yesterday. European bond yields mostly fell by 1-2 basis points. The 10-year Treasury yield (US10Y) settled near 4.39% after falling by 11 basis points yesterday. Gold recovered yesterday and stabilized above the $2,350 level, but has made a strong comeback today and appears poised to test yesterday’s low (around $2,315). July WTI, which was testing $80 last week, sold below $73 to its lowest level since early February. Finally, natural gas rose yesterday due to a plant outage in Norway, but is recovering today. The Dutch index rose over 5% yesterday, and is down almost 3.8% today. Prices in the United States jumped by 6.5% yesterday, and are stable today.
Asia Pacific
The light economic schedule at the start of this week ends tomorrow with final PMIs for Japan and Australia, China’s Caixin Services and Vehicles, and Australia’s Q1 GDP (expected 0.2%, same as Q423).
Lower US interest rates after a disappointing ISM industrial survey sent the dollar broadly lower, falling below 156 Japanese yen for the first time since May 21. Subsequent selling today pushed the dollar below the trend line connecting the two May high lows which today came in near JPY155.90. The dollar registered a bearish trend offshore yesterday, trading either side of the pre-weekend range and closing below its low. It sold for JPY155.00 today. Nearby support is seen around JPY 154.80. Intraday momentum indicators are extended. The JPY155.90-JPY156.00 level may offer resistance now. The Australian dollar has not settled at the $0.6600 level since May 8. It has almost covered the range in the last three sessions. It was trading at less than $0.6600 on a daily basis on May 30 and reached $0.6695 yesterday, amid widespread losses for the dollar. It made a marginal new high today but remained below $0.6700 and reversed lower to approach yesterday’s low below $0.6640. The sell-off also extended the intraday Momentum indicator, suggesting that support at the $0.6625-30 area may be enough to stem sharper losses today. Many observers are concerned about how Beijing manages its currency. Since we suspect that they change and evolve over time, and that they are intentionally opaque, we believe that this is not the goal for most market participants. What the yuan does is more important than how it does it. More importantly, we believe that Beijing has resisted the magnitude of the decline caused by market forces alone, and that it is not using the exchange rate to encourage exports. In fact, China appears to be shifting towards an FDI strategy, and a stronger yuan is more desirable than speculation of a one-time major devaluation would suggest. The People’s Bank of China set the reference rate for the dollar at 7.1083 Chinese yuan (7.1086 Chinese yuan yesterday). The average in the Bloomberg survey was CNY 7.2295 (CNY 7.2399 yesterday). The dollar has not closed below CNH7.25 in nearly two weeks. Today there is a trend line similar to the one we identified with the yen near CNH7.2535. The lowest level today so far was 7.2490 Chinese yuan, and the dollar recorded the highest low for the fourth session.
Europe
News flow from Europe is weak today. The final Services PMI and Composite PMI are due tomorrow, as are the April Producer Price Index. A few hours before the results of the European Central Bank meeting on Thursday, total retail sales for April are scheduled to be released. It retreated after a 0.8% gain in March. The Swiss Purchasing Managers’ Index (PMI) for May was mixed yesterday. The manufacturing PMI rose to 46.4 from 41.4 in April, and the services PMI fell to 48.8 from 55.6. Today Switzerland announced its Consumer Price Index for May. The combined European Union index rose to 1.5% from 1.4%. The Swiss National Bank meets quarterly, and became the first G10 central bank to cut interest rates in March. The swap market has a little more than a 50% chance of a subsequent cut on June 20. The percentage was close to 60% yesterday, that is, before the release of the Consumer Price Index today. Last week, the euro rose to 0.9930 Swiss francs, its best level since April 2023, but rebounded lower and snapped a three-week advance. Yesterday it approached 0.9750 CHF, a retracement (50%) of the high from April 19, when it initially fell to a low level (about 0.9565 CHF) when Israel responded to Iran. Subsequent selling today saw approximately 0.9720 CHF. The next correction (61.8%) is located near 0.9700 CHF.
The euro rose on the back of a weak US ISM manufacturing index. After hitting it repeatedly in the North American afternoon yesterday, it finally rose above $1.09 for the first time since March 21. Its gains initially extended to around $1.0915, but sellers emerged and lifted it to around $1.0870 early in the European session. Given the intraday momentum indicators, we believe support near $1.0850-1.0850 may be sufficient. The euro’s gains surprised us amid the high probability of an interest rate cut from the European Central Bank on Thursday and strong US job growth on Friday (the average in a Bloomberg survey rose in recent days to 190 thousand). We did not expect the breakthrough. However, we remember that the market has done this before, i.e. rallying the euro ahead of the US jobs report and then selling off afterwards. On Thursday, shortly after the ECB press conference, there were options expiring at around €2.8 billion, split roughly equally between $1.09 and $1.0915. The British pound recovered from a decline of just under $1.27 to just over $1.28 on the back of a weaker US dollar. The pound rose to just above $1.28 last week, its highest level in two months. I took it out yesterday for a few hundredths of a penny. It closed above $1.28 for the first time since March 11. It approached resistance just before $1.2820 and fell again to $1.2760 in the European morning. With signs of oversold momentum during the day, the pound stabilized in late European morning trade. There are options worth around £370 million at a price of $1.2860 expiring on Thursday.
America
The ISM once again outperformed the Purchasing Managers’ Index (PMI). The US manufacturing PMI for May was revised to 51.3 from an initial estimate of 50.9. Remember, the average forecast in the Bloomberg survey was initially 49.9. This means that the market was looking at the third decline in a row, came out stronger and was revised higher. The ISM Manufacturing Survey was announced shortly after the Purchasing Managers’ Index (PMI). It was weaker than expected at 48.7 (from 49.2). It has been below the 50 boom/bust level since November 2022 with the only exception being last March (50.3). In the first four months of the year, it averaged 49.1. Prices paid rose at a slow pace (57.0 vs. 60.9) and new orders continued to decline (45.4 vs. 49.1). New orders are the weakest since last May. The employment rate rose to 51.1 from 48.6. This is the first reading above 50 in eight months. However, US bond yields fell after the release of the ISM report, sending the dollar lower. The Atlanta Fed’s GDP tracker fell sharply in yesterday’s update to 1.8% from 2.7%. Today’s JOLTS report for April is expected to show employment falling (around 130k) and then gradually returning to normal. They are down about 400k in 1Q24 and about 420k in 4Q23. Factory orders for April are also available. Durable goods orders for April, although subject to revision today, were already announced, rising 0.7%. Factory orders are expected to rise by 0.6%. The focus in Canada is the central bank meeting on Wednesday. The market sees a greater chance of a rate cut than last week (about 80% vs. 65%). Mexico’s President-elect Sheinbaum is scheduled to be inaugurated on October 1. There are two concerns among investors. The first concerns what AMLO might do in the intervening months, and the second is what constitutional changes would be possible during a Sheinbaum administration. It may not be able to address the first problem, but a clear statement of its commitment to upholding the independence of the judiciary and the central bank could help ease investor anxiety.
The dollar remained at 1.3600 Canadian dollars during yesterday’s setback. It has not settled below CAD 1.36 since April 9 and the recent price action confirms the importance of this area. On the upside, the US dollar has not closed above CAD 1.3750 since the end of May. The Canadian dollar was the only currency in the G10 that did not achieve gains against the US dollar yesterday. The US dollar is approaching 1.37 Canadian dollars today. Last week’s high was near 1.3735 Canadian dollars. The Mexican peso fell nearly 3.8% yesterday, its largest decline in nearly four years. Highs for the US dollar were recorded in North America near 17.75 Mexican pesos, and not in weak Asia-Pacific markets as was the case with the “flash crash” in April. The dollar’s gains extended to nearly 18.00 Mexican pesos today, before stabilizing. Trading around 17.88 Mexican pesos (up 1%) in late European morning trade, he found little solace in Sheinbaum’s clinging to AMLO’s finance minister. Initial support appears in the MXN17.60-70 area.
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Editor’s note: The summary points for this article were selected by Seeking Alpha editors.
