Capital Markets: "Greenback's Slide Continues"

From Marc to Market:

Overview: Liquidity trumps everything else. US equities shrugged off the national guard being called into action in nearly a third of US states, and the S&P 500 closed yesterday at nearly three-month highs. Asia Pacific markets followed suit. Most markets in the region rose by more than 1%. The notable exceptions were Australia and China, where benchmarks rose by 0.2%-0.3%. The Dow Jones Stoxx 600 is up more than 1% in the European morning. It has gained about 2.5% this week already after advancing 3% or more in each of the past two weeks. US shares are extending yesterday's gains. Bond yields are mixed, Asia Pacific yields were mostly higher, while European rates are softer, and premiums over Germany are narrowing. The US dollar remains out of favor, with the exception of the Japanese yen. The high beta currencies, like the Australian and Canadian dollars, and the Norwegian krone are leading the move, and recently sterling has joined this camp. Most emerging market currencies are also gaining against the greenback. The JP Morgan Emerging Market Currency Index is rising for the fourth consecutive session today, and for the 10th session in the past 12. Gold is consolidating at slightly lower levels as the three-day rally is checked. Oil is moving higher amid hopes of an extension of OPEC+ cuts, with the July WTI contract at new three-month highs near $36.25.

Asia Pacific
Forward points for the Hong Kong dollar continue to pare recent gains, and the three-month points briefly dipped below 100 to return to the upper end of the previous range. The 12-month points also eased by 400 bp are still nearly twice the pre-crisis level. Meanwhile, the PBOC set the dollar's reference rate at CNY7.1167, weaker than the bank models implied (~CNY7.1203). The yuan strengthened for the fourth consecutive session, and the dollar slipped through CNY7.10 to unwind most of its recent rise.

Moody's cut India's credit rating to Baa3, the lowest investment-grade rating. It cited policy risks and slower growth. The rating now matches S&P and Fitch's assessment. Moody's kept a negative outlook. Nevertheless, India's 10-year benchmark eased 3 bp to 5.78%, a new multi-year low. The rupee is strengthening against the dollar for the third session.

The Australian dollar is moving higher for the eighth week of the past ten. The recent advance is even more impressive in the face of tensions with China, as many observers often emphasize the linkages. As widely expected, the central bank left the cash, and three-month target rates unchanged at 25 bp. Separately, Australia reported a larger than expected Q1 current account surplus (~A$8.4 bln vs. median forecast for A$6.1 bln and the Q4 surplus was revised to A$1.7 bln from A$1.0 bln).

The dollar is confined to a narrow third of a yen range above JPY107.50, where a $1.1 bln option is struck that expires tomorrow. Since May 18, the dollar has not traded below JPY107.00 or above JPY108.10. The Australian dollar is poking above $0.6850 in the European morning. It settled last week almost two cents lower. It is at its best level since late January. The year's high set at the very start was near $0.7020.

Europe
Newswires reported that some ECB members are pushing back against the expansion of the central bank's Pandemic Emergency Purchase Program (750 bln euros). When such inside stories surface, it often makes sense to ask who is helped or hurt by the "leak." Often we find that it is those that are losing or lost the debate try to get a wider hearing for their side. After all, the winners have little reason to do so. The ECB meets Thursday. The PEPP program has plenty of firepower for the next several months. In fact, even the more aggressive estimates do not see it the program's funds exhausted until late Q3. However, it may get a bigger effect to announce its commitment before being backed into a corner. If the ECB does not expand its purchases by at least 500 bln euros, we suspect investors will be disappointed, and that disappointment could be expressed as undoing some of the narrowing of the German premium seen recently....

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