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Japan Drives Home Message

, May 2, 2024, 0 Comments

japan-marketexpress-inThe US dollar is mixed, but the spotlight is on the Japanese yen. It appears that with the market challenging Monday’s intervention, Japanese officials entered the market shortly after the US equity market closed yesterday, as the Asia Pacific session got underway and sold dollars again. Initial estimates suggest the intervention amount was two-thirds of Monday’s. The timing caught the markets wrongfooted. Tokyo markets are closed Friday and Monday, but yesterday’s operation will likely make the market cautious about challenging Japanese officials without good cause. Most emerging market currencies are firm, but central European currencies are softer. The offshore yuan is trading stronger than the onshore yuan for the first time this year. Mainland markets re-open Monday.

Japanese equities were little changed while the Hang Seng led the region with a 2.5% rally, matched by the mainland companies that trade in HK. Australia, New Zealand, and India saw small gains, while South Korea and Taiwan shares slipped. Europe’s Stoxx 600 is off for the third consecutive session, which, if sustained would match the longest losing streak of the year. US equity indices are trading stronger. European 10-year bond yields are 3-5 bp lower and the 10-year US Treasury yield is near 4.61%. The high for the year was set last week near 4.74%. Gold rebounded yesterday from nearly one-month lows (~$2281) but stalled around $2329. It is trading heavier today but in yesterday’s range. June WTI broke down yesterday, falling to almost $78.80, its lowest level since mid-March. It has steadied today but so far has been unable to resurface above $80.

Asia Pacific

The market is digesting the meaning of what looks to have been another round of BOJ sales yesterday shortly after the US equity markets closed.

 The dollar was trading near JPY157.50, not far from the session high around JPY158, which as we noted was the (61.8%) of Monday’s intervention-inspired losses. Japan has a large war chest in the form of reserves, and a range of other tactics than can be deployed, such as giving orders on an “all or none” basis, which allows the banks to act as a force multiplier.

Although Japanese officials retain the strategic ambiguity and refused to confirm or deny intervention, changes in the BOJ’s current account balances relative to expectations suggest that the intervention Wednesday afternoon/Thursday morning may have been for about JPY3.5 trillion (JPY5.5 trillion Monday), or around $22 bln. The macro considerations have not changed, but some market segments, like momentum traders and trend followers, may be hesitant to challenge Japanese officials without fundamental cover. That underscores the importance of tomorrow’s US employment report. Strong jobs growth may be dollar positive, while a disappointing report will make the MOF look savvy.

Earlier this week, Australia reported domestic consumption may have slowed in March, as retail sales fell by an unexpected 0.4% (the median forecast in Bloomberg’s survey was for a 0.2% gain). Today, it reported a smaller than expected trade surplus of A$5.0 bln (A$7.3 bln expected). Exports rose by 0.1% in March, after the February drop was revised to -3.2% from -2.2%. Imports rose 4.4% in February (4.8% originally) and 4.2% in March. Overall, Australia reported a goods surplus in Q1 surplus around $21.6 bln. That around 45% lower than the Q1 23 surplus of about A$38.6 bln. The central bank meets on May 7 and is widely expected to stand pat.

The dollar stalled near JPY158, the (61.8%) retracement of the likely intervention-induced losses. It fell to session lows amid a broader pullback after the FOMC meeting. US 10-year yields fell on news of a larger-than-expected tapering of the balance sheet run-off. It fell to near JPY157. After the US equity market closed, the greenback tumbled to JPY153, which was more than a yen below the Monday’s post-intervention low. It rebounded to nearly JPY156.30 and has steadily eased back to JPY155 in the European morning where it appears to be finding new bids. The Australian dollar rallied to $0.6540 yesterday, which met the (61.8%) retracement of this week’s decline. It has approached $0.6550 today. Above there, resistance may be around $0.6570-80. Initial support is probably around $0.6500 and a break of $0.6480 would be disappointing. The greenback fell to its lowest level against the offshore yuan in a little more than a month (~CNH7.2165). Yesterday, it settled below its 200-day moving average for the first time since March 21. Today, the offshore yuan is trading stronger than the onshore yuan, for the first time this year. The onshore market is closed, and the move reflects the dollar’s pullback.


The eurozone flash April manufacturing PMI was 45.6. and the final reading today is 45.7. It bottomed last July near 42.7. After rising for three months through January (to 46.6) is has softened for the past three months. Still, it appears to overstate the case. Consider that Germany’s manufacturing PMI finished last year at 43.3. It was at 42.5 in February, and 41.9 in March, even though industrial output (which includes construction) rose by 1.3% in January and 2.1% in February. The March report is due next week. The French manufacturing PMI remains well below 50 and industrial output rose by 0.2% in February, and tomorrow’s March series is expected to show a 0.3% increase. Italy’s manufacturing PMI rose above 50 in March for the first time since March 2023, but fell to 47.3 in April. Industrial output rose by 0.1% in February and the March report, due May 10, is expected to be flat. Spain’s manufacturing PMI rose to 51.5 in February, its best level since June 2022. It was little changed in March and rose to 52.2 in April. Industrial production is off to strong start this year. The increase in January-February (~1.3%) is the best two-month performance since April-May 2022.

The combination of the reassessment of the trajectory of Fed policy and the better eurozone data are helping to spur an adjustment of expectations for the ECB. There was an overshoot at the end of last year when the swaps market discounted 190 bp of cuts this year. At the end of January, 160 bp of rate cuts were still discounted. In early March, the swaps market still anticipated near 115 bp of cut. Now, the swaps market sees around 68 bp of easing this year. Still, the beneficial impact on the euro has been muted. The US two-year premium over Germany reached 220 bp on April 15, the most since before the pandemic. The euro recorded the low for the year, so far, the following day ($1.06). The two-year differential is hovering around 195 bp now. The euro has straddled the $1.07 level today for the eighth consecutive session.

The UK holds local and mayoral elections today. The immediate market implications look minor. However, there could be implications for national elections that are expected late this year. Prime Minister Sunak has not been able to close the gap with Labour. There is speculation that Sunak could resign or be replaced, especially if the Tories lose the Tees Valley and West Midlands mayoral contests. Yet even that would not necessarily improve the Tory’s fortunes. The Tories have led the UK government since 2010. There is a sense of fatigue, and some Tory supporters now seem to favor the Reform Party (formerly the Brexit Party) and more than 60 Tory MPs are not running for re-election. Meanwhile, Labour appears to have moved more centrist.

The euro recovered from a six-day low ($1.0650) but stalled just in front of the Monday-Tuesday high near $1.0735. There are two sets of expiring options to note. First there are almost 2.75 bln euros in options between $1.0750 and $1.0775. There are also 1.1 bln euro options at $1.0670 that could be operative unless they were neutralized on move to $1.0650 yesterday. The euro traded above the 20-day moving average for the fifth consecutive session and settled a couple of hundredths of a cent below it (~$1.0715). The 20-day moving average is slightly below $1.0710 today. For its part, sterling recovered from a three-day low near $1.2465 to advance to $1.2550. Monday and Tuesday’s high was $1.2565-70. The trendline connecting the March and April highs comes in near there tomorrow. Initial support now is near $1.2500, which is also where about GBP315 mln in options will expire tomorrow, and then the $1.2460-80 area. Lastly, note that the Czech central bank is expected to cut its repo rate by 50 bp to 5.25% shortly. It would be the fourth consecutive cut in the cycle that began at the end of last year from 7%.


The Federal Reserve met expectations. The futures market was pricing in 34 bp of cuts as of the end of last week and settled yesterday discounting 35 bp. When CPI slowed to a 2% annualized rate in Q4, the Fed’s rhetoric changed. The median dot looked for three cuts this year, but market sentiment, reflected in the Fed funds futures and swap market, pivoted much more dramatically. Near the middle of January, the market was pricing in more nearly seven rate cuts this year. That is not all on the Fed. The FOMC statement recognized the lack of progress on inflation in recent months while the economy continued to expand at a solid pace. Powell did not endorse the talk of a rate hike, and this, arguably, encouraged the market to stick to its priors, and react as if Powell was dovish. The tapering of unwinding of its balance sheet was focused exclusively on Treasuries and the pace will slow from a $60 bln cap to $25 bln. Many had looked for a halving, but the MBS will continue to be reduced by up to $30 bln a month.

Today’s non-farm productivity and unit labor costs reports are derived from the Q1 GDP. Productivity is expected to slow dramatically from the 3.3% pace seen in Q4 23 and commensurately, unit labor costs likely jumped toward 3.5% from 0.4% in Q4. These quarterly numbers swing around quite a bit. Taking a four-quarter moving average helps smooth out volatility. In 2023, unit labor costs rose by an average of 2.5% after 4.5% in 2022. In 2019, unit labor costs average quarterly increase was less than 1%. The earlier release of March durable goods orders takes away much of the interest in today’s revision and factory goods orders. The March trade balance, on the other hand, could impact expectations for Q1 GDP revisions.

Canada reports March goods trade balance today. A C$1.2 bln surplus is expected, which would be smaller than February (~C$1.4 bln) but considerably larger than the $22 mln surplus reported in March 2023. In fact, last year, Canada recorded a C$2.1 bln goods deficit (after a nearly C$19.7 bln surplus in 2022). A C$1.2 bln surplus in March would mean that Canada recorded an average monthly surplus of C$1.06 bln in Q1, its best quarterly performance since Q2 22.

Mexico reports April manufacturing PMI, and the IMEF surveys today. Earlier this week, Mexico reported Q1 GDP grew by 0.2%, which was a bit better than expected. The service sector expanded by 0.7%, while industrial output shrank by 0.4%. Agriculture output fell by 1.1%. The year-over-year rate disappointed falling to 1.6% from 2.5%. The median forecast in Bloomberg’s survey was for a 2.3% pace. In a seasonally adjusted basis, the economy grew by 2% at an annual rate. The central bank had projected a 2.8% expansion. Weaker public sector investment was a notable culprit, while consumption was underpinned by low unemployment, higher real wages, and government transfer payments. The central bank meets next Thursday and is widely expected to stand pat with the overnight target rate at 11%.

The US dollar gave back about half of Monday and Tuesday’s gains against the Canadian dollar. It was turned back from around CAD1.3785 and found support near CAD1.3700. There are almost $700 mln in options at CAD1.3740-50 that expire today and the adjustment may have contributed to the price action yesterday. The next retracement (61.8%) is near CAD1.3690, around the 20-day moving average. The week’s low, set on Monday, was about CAD1.3630. It is in a range of about CAD1.3700-CAD1.3745 so far today. The Mexican peso’s 0.80% rally was the best in the world yesterday. The dollar traded at a five-day low near MXN16.9130 and it is holding today. Buying materialized below MXN17.00 but the greenback managed to settle below it. Today’s high so far is slightly above MXN17.01. There are almost $340 mln in options that expire at MXN17.00 today and twice that amount will expire on Friday. Initial support is seen in the MXN16.85-90 area.