Capital Markets: "Dollar Consolidates Fed-Inspired Recovery"

From Marc to Market:

Overview: The US dollar is consolidating yesterday's post-Fed rally, and this is giving it a slightly heavier tone today. Equities are mostly lower and Europe's Dow Jones Stoxx 600 is off about 0.5% in late morning turnover, which if sustained would be the largest decline in three weeks. The S&P 500 posted a potential key reversal yesterday by setting new record highs and then closing below the previous session's low. Benchmark 10-year bond yields are mostly a couple basis points firmer, though Italian bonds are the exception. A stronger than expected manufacturing PMI appeared to spur demand. Meanwhile, press reports seem to be playing up the possibility that a Brexit agreement between Labour and the government and a US-China trade deal may be struck in a week.

Asia Pacific
Chinese and Japanese markets are closed and will remain so tomorrow. China's markets reopen on after the weekend while Japan's markets will be closed on Monday. Heightened speculation that the Reserve Bank of New Zealand may deliver a rate cut next week appeared to lift local shares 1.2% to lead the region. The manufacturing PMI among developing Asia were mixed. Of note, South Korea's reading rose to 50.2 from 48.8, while Taiwan's eased to 48.2 from 49.0. Indonesia reported a tick up in inflation (2.83% from 2.67%), but the focus on the MSCI decision to drop PT Bank Danamon Indonesia from its index, which triggered a sell-off that push the Jakarta Composite (-1.2%). Note that Japan's Mitsubishi UFJ has a majority stake in the bank. On the other hand, S&P upgraded the Philippines credit rating one-notch to BBB+. The benchmark 10-year bond yield fell six basis points (to ~5.80%). The currency edged higher and as did shares.

In recent days, reports have suggested that the US has softened its position in trade talks with China on patents for biologics and on cyber espionage. Reports also indicated that if a deal is not wrapped up later this month, President Trump may lose his interest. The reports give a sense that the Trump Administration wants a deal and soon. China's Vice Premier will be in Washington next week. There is the hope that this is the last round before a date for a meeting between Trump and Xi is announced. The media built up market expectations in the past for such an announcement, but now the timeframe may be a bit more compelling.

Today is the first session in six that the dollar has risen above the previous day's high against the Japanese yen. It has traded a little through JPY111.65. So far, it has stopped shy of the 20-day moving average and the 50% retracement of the drop since the year's high was recorded (~JPY112.40) on March 25. Both are found near JPY111.70, and above there, another push on JPY112.00 is likely. Before that though, the JPY111.50 level houses an $850 mln expiring option and may be sticky. The Australian dollar fell back to nearly $0.7000 in the greenback's post-Fed rally yesterday. Last week's low was set slightly below $0.6990. It would make a technically more compelling case of a resumption of the US dollar's uptrend if the Aussie were sold through there. Without the break, near-term consolidation is likely. The week's high was set just below resistance we identified near $0.7070.

Europe
Three of the four largest eurozone countries reported stronger than expected April manufacturing PMI. German was the exception. France's flash PMI of 49.6 was revised to 50.0, and this follows a 49.7 reading in March. Spain's PMI increased to 51.8 from 50.9, and Italy's rose to 49.1 from 47.4. For the EMU as a whole, the PMI ticked up to 47.9 from the 47.8 flash report. It was at 47.5 in March. It is the first increase since last July, which was the only time it increased in 2018....

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