Capital Markets: "Heavy Dollar amid Month-End Pressure"

From Marc to Market:

Overview: The dollar is lower across the board as dealers attribute the selling to month-end pressures ahead of the FOMC today and ECB tomorrow and long-holiday weekend for many. Japan's Golden Week holiday has already begun. Despite the loss in US equities yesterday, despite the higher opening, it has not spilled over, as Alphabet earnings helped lift sentiment. The MSCI Asia Pacific Index rose for a third session as is approaching the halfway mark of this year's range. Europe's Dow Jones Stoxx 600 little changed near the month's high. US shares are firm, and the S&P 500 is poised to recover most of yesterday's loss.

Caterpillar earnings before the US are awaited for global economic insight as it operates in nearly all countries. Peripheral European bond yields begin off higher, with Italy under the most pressure after Fitch downgraded it late yesterday. Core bond yields are a little lower, and the US 10-year is near 60 bp. The Antipodean currencies are leading the move against the US dollar by the major currencies, with sterling the laggard, having been turned back from the $1.25 area yesterday. JP Morgan's Emerging Market Currency Index rose a little more than 1% yesterday, its best showing in April, and is extending those gains today. Gold is little changed, hovering around $1700, while oil is firmer.

Asia Pacific
Australia's Q1 CPI was reported a bit higher than expected at 2.2% year-over-year. This was above the Bloomberg survey median forecast of 1.9% after 1.8% in Q4 19.This represents a five-year high. The trimmed mean was also higher at 1.8% (vs. 1.6% in the previous quarter). Food (vegetable prices) and pharmaceuticals lifted the CPI. The rise in price pressures is understood to be temporary with deflationary forces from the compression of demand, and falling oil prices likely be evident in Q2.

South Korea saw March industrial output jump 4.6% or more than three times more than economists expected. In February, industrial production fell by 3.8%. The number of working days may have helped inflate the series. Tomorrow South Korea reports April trade figures as is seen as a barometer of regional and electronic trade. Foreign investors had been large sellers of South Korean equities this month, but it has slowed in recent days.

The dollar is extending its fall against the Japanese yen for the sixth consecutive session. It has not closed above JPY108 since April 10 and is now near JPY106.35, which is the lowest level since March 17. The next important technical target is closer to JPY105.20. Immediate resistance is seen around JPY106.60 and then JPY107.00. The Australian dollar reached almost $0.6550, its best level since March 10. The next target is around $0.6600, and the 200-day moving average is closer to $0.6700. Here is April, the Aussie has led the majors with around a 6.3% rally. The New Zealand dollar is in second place with about a 2.2% gain. The yen is the third-best with roughly a 1% gain. The Chinese yuan is little changed as the dollar is "trapped" in a CNY7.06-CNY7.0950 range. It is virtually unchanged this month.

Europe
Although S&P did not downgrade Italy ahead of last weekend, Fitch moved late yesterday, cutting the sovereign rating to BBB-, but it changed the outlook to stable from negative. Remember how the ECB works. It takes the best rating of the four main agencies (includes DBRS). Also, the ECB has indicated since Italy had an investment-grade rating in early April, that it would continue to accept its bonds as collateral through September 2021, if it lost it. The ECB's backstop may be the critical consideration allowing Italy to keep the investment-grade status.

Italy, Spain, and France will report Q1 GDP estimates ahead of the aggregate figure tomorrow. The median forecast in the Bloomberg survey sees a 3.7% quarter-over-quarter contraction. Separately, the preliminary April CPI will be reported. The headline pace is expected to slow to 0.1% from 0.7%, and the core rate may fall to 0.7% from 1.0%. The ECB meets tomorrow. There is some expectation that it will increase is Pandemic Emergency Purchase Program from 750 bln euros announced six weeks ago. While an increase is likely at some point, we see it as too soon now. In terms of the signaling effect, it could achieve the same by suggesting that its operations are scalable. Separately, alongside a surge in M3 money supply growth (7.5% vs. 5.5%), lending to non-bank financial companies surged in March to about 118 bln euros, which is near twice the previous record from December 2007....

....MORE