While most centers were closed for holidays on Friday, the Asia Pacific equity markets, which were open, moved lower following Wall Street's losses on Thursday.
The weakness of the yen failed to underpin Japanese shares. China disappointed most observers by failing to cut the one-year medium-term lending facility rate (2.85%) and shares slipped.
The dollar was mostly higher, up for the 11th consecutive sessions against the Japanese yen. The euro fell to its lowest level in nearly two years Thursday (slightly below $1.0760) following the ECB's meeting that failed to bring forward a change in guidance. Its recovery was capped around $1.0830.
The Antipodeans continued to trade heavily, while the Canadian dollar and Swiss franc edged higher. The weakness of the euro weighed on the central European currencies, but the South Korean won, and Taiwanese dollar were the weakest among the emerging market currencies (~-0.4%).
Commodity markets were mostly closed on Friday, but gold was firm near $1975. It was the seventh session in the past eight that the yellow metal was appreciating.
Asia Pacific
The most important development on Friday was something that did not happen. Despite signs that the Chinese economy was weakening amid the COVID lockdowns, port congestion, and a surge in energy and metals prices, Beijing failed to deliver the expected cut in the benchmark one-year Medium Term Lending Facility.
This would make it somewhat more difficult to cut the loan prime rates this coming week. The State Council (similar to the cabinet) seemed to say earlier last week that the required reserves would be cut at the "proper time." The focus shifted to this after standing pat on the MLF. Officials wanted banks to cut the deposit rates.
China reports Q1 GDP early Monday in Beijing. The median forecast (Bloomberg) was for a 0.7% quarter-over-quarter expansion, down from 1.6% in Q4 21. The lockdown of Shenzhen, and now Shanghai, however, was expected to take a significant toll. The virus has still not been contained, and the economic impact was serious.
The social pushback represented President Xi's biggest challenge as he seeks to secure a third term later this year. On the other hand, there may be incentives to err on the side of minimizing the estimate of disruption.
Here we were in the middle of the month, and the dollar has closed lower only once against the yen in April. Thursday was the first day this month that it slipped below the previous session's low. It recovered and approached JPY126.70. The dollar has risen for the sixth consecutive week and for a little more than 10% over the run. The upper Bollinger® Band (two standard deviations above the 20-day moving average) was close to JPY127.00. The push above JPY125-JPY126 fanned talk of a move to JPY130.
The Australian dollar was trading heavily and remained pinned around $0.7400. If it didn't recover, it would be the seventh loss in the past eight sessions. Note that the lower Bollinger Band will start the new week near $0.7390. A convincing break of that support would target the $0.7350 area.
Thursday, the dollar tested the upper end of its range against the Chinese yuan that goes back to last November, around CNY6.38. It pulled back on Friday to trade slightly below CNY6.37. Support was seen around CNY6.36. The PBOC set the dollar's reference rate at CNY6.3896. The median projection (Bloomberg survey) was for CNY6.3880. China's 10-year yield was at a discount of about seven basis points to US 10-year Treasuries. At the end of last week, it offered around a five-basis point premium.
Europe
The ECB affirmed its intention to end its bond purchases at the end of Q2. The rate decision won't be forthcoming for months, while this past week, both the RBNZ and the Bank of Canada accelerated their hikes, and the Federal Reserve is now widely expected to raise rates itself by 50 bp next month.
The timing of the ECB's move will be "some time" after the bond-buying ends. "Some time" was defined as a week to several months. The euro slumped on the news, or lack thereof, and the German yield curve steepened. In addition to monetary policy divergence, the energy disruption could intensify and the proximity of the polls for the second round of the French elections (Apr. 24) also weighed on sentiment.
Although foreign exposure to the Russian ruble was slashed, many observers remained fascinated with its vagaries. The ruble appeared to have recovered so much after the initial hit that some capital controls have been relaxed and there may be more to come. However, there was one critical one that explained the ruble's recovery.
Russian companies must turn over 80% of their hard currencies to the central bank within three days. In effect what that meant was that the gas and oil exporters, like Rosneft (OTC:OJSCY) and Gazprom (MCX:GAZP), were doing what the central bank couldn't do with the lion's share of its assets frozen. They were buying rubles every day at an estimated rate of more than $1 bln.
Euro activity on Good Friday was light, as one would have expected. There was little enthusiasm for the single currency. The bearish potential of Thursday's big outside day (traded widely on both sides of Wednesday's range) was neutralized by the close slightly below $1.0830. There were a couple for option expirations of note Friday. The first was for about 475 mln euros at $1.0825 and the other around 540 mln euros at $1.0810.
Sterling was turned back from $1.3150 Thursday. It retreated to about $1.3035 before finding support. It was in a narrow range on Friday—roughly $1.3050-$1.3080. It settled around $1.3025 last week. For four sessions through the middle of this past week, sterling traded below $1.30. On Wednesday, sterling fell to about $1.2975, its lowest level since November 2020.
America
The NY Fed's president is the only regional Fed president to have a permanent vote on the FOMC. And in the case of NY Fed President Williams, he is also the Vice-Chair of the FOMC as well. As part of the central bank's leadership team, it would be important then that both positions would be on message. There may have been some adjustment when Williams took the helm of the NY Fed, replacing Dudley, but since then, Williams has consistently expressed the views of the Fed's leadership. Thursday's comments about a 50 bp rate increase as being a "reasonable option," provided the latest evidence that a consensus had emerged in its favor.
The Fed funds futures strip had a 50 bp hikes nearly fully discounted for May and June. For the July meeting, the market was leaning towards a 50 bp hike as well, but was not quite there yet. It appeared to be consistent with about a 30% chance of 50 bp instead of 25 bp.
The US reported March industrial output data on Friday. The expected 0.4% increase after a 0.5% gain in February came through. However, manufacturing output, which jumped 1.2% in February, moderated to 0.9%, which was still solid. The capacity utilization rate rose to 78.3% from 77.7%. Recall that it stood at 76.5% before the pandemic struck and peaked in 2018 near 80%.
Before the industrial production figures, the April Empire State manufacturing survey were released. The survey came through with a recovery to +24.60, realized after the March drop to -11.8 from 3.1 in February. Last April it was at 26.3.
Late in the day, the February TIC data, (portfolio flows) were reported. Net Long-Term Transactions showed a gain to 141.7B, with TIC Transactions including swaps coming in at 184.60B. The data typically has been more of interest for economists than market participants and it was doubly true now.
Falling stocks and the jump in US yields (two-year yield rose 10 bp Thursday, the most in two weeks) helped the greenback recover from CAD1.25 to around CAD1.2640. It was straddling the CAD1.26 area in Friday's quiet turnover. The CAD1.2580-CAD1.2620 may contain the price action into next week.
Among the coming week's highlights, Canada reports March CPI and February retail sales. The former is expected to have accelerated while the latter probably softened.
Meanwhile, the greenback rose against the Mexican peso Thursday for only the fourth time since Mar. 10. Given persistence of the trend, the counter-trend bounces have been dramatic. That was to suggest that market positioning lent itself to such exaggerations.
Still, the truck protest of the stepped-up inspections at the border with Texas may have been a spark that spurred the profit-taking. The dollar initially made a new low for the year on Thursday against the peso (~MXN19.7325) before reversing higher and closing above Wednesday's high. This was a key reversal, but there was no follow-through on Friday.
The dollar was in a narrow range near Thursday's high (~MXN20.0280). The 20-day moving average was around MXN20.0165. The greenback has not closed above the 20-day moving average since Mar. 15.