Tuesday, May 25, 2021

Capital Markets: "Softer Yields Weigh on the Greenback "

 Marc Chandler at Bannockburn Global Forex:

Overview: The decline in US 10-year rates to two-week lows below 1.59% is helping rebuild bullish enthusiasm for stocks and weighing on the US dollar. The NASDAQ reached two-week highs yesterday, and almost all the large markets in the Asia Pacific region rose, though India struggled. Europe's Dow Jones Stoxx 600 is at a new record high, paced by real estate and information technology. US futures are firmer, pointing to a possible gap higher opening. European yields are mostly 2-4 bp lower, and premiums over German are narrowing. The spread between Italy and German 10-year rates has narrowed more than seven basis points from last week's peak, for example. The dollar is on its back foot. The Swedish krona's 0.65% gain is leading the move against the dollar. It is at a three-month high versus the greenback, while the euro and Swiss franc are about 0.30% higher. The Canadian dollar and Japanese yen are laggards and little changed. Emerging market currencies are also mostly higher. Hungary, whose central bank is expected to standpat later today, and Turkey, where a central bank's deputy governor has been dismissed, are struggling. Industrial commodity prices are firm, but July WTI is coming back offered after briefly rising to nearly $66.35. A week ago, it set the contract high a little above $67. Gold remains firm but holding a little below last week's high, around $1890.

Asia Pacific
The US issued a do-not-travel advisory to Japan, the most serious warning due to the outbreak of the covid infection.
The inoculation rate is reportedly around 4%, the least among high-income countries (OECD 37 members). The opening ceremony for the summer Olympics is less than two months away. Initially, the Olympics were expected to draw 600k foreign visitors, not counting the athletes. In March, this was cut to around 78k. The US warning raises new questions. Next month, a decision will be made whether local spectators can attend the events. Meanwhile, there is pressure to extend the formal emergencies in Tokyo and Osaka into next month, and Prime Minister Suga is expected to decide in the coming days.

The Shanghai Composite jumped 2.4% today, the most since last October to reach a three-month high.
A record amount of A-shares was bought through the HK links (CNY21.7 bln or ~$3.4 bln). Efforts to rein in commodity prices were cited as a factor that boosted confidence. Financials did particularly well. The offshore yuan (CNH) was particularly strong, and the dollar is trading below CNH6.40 for the first time in three years. The onshore yuan held up a little better. The greenback held above CNY6.40 but still made a marginal new three-year low. There was talk that state-own banks were dollar buyers late in the session after selling earlier in the session. Some observers link the dollar buying to "stealth" intervention, but of course, they also operate for their own accounts, and taking some profits with yuan at three-year highs could be good trading and rebalancing after the surge of inflows. Note that exporters often convert their proceeds toward the end of the month....