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Markets choppy as dollar consolidates

The dollar may be a touch weaker this morning but given how expectations have risen for a June hike – albeit at a 28% probability according to sovereign debt markets – have heightened, we may be simply in a consolidation pattern before the next leg up. CFTC data would imply that the cutting of dollar shorts means that Fed members are marginally succeeding with hawkish comments.

This renewed dollar bullishness seems to forget that the Presidential election will be upon us in a mere 6 months and you’d have to question whether a ‘Trump Tantrum’ should be priced in a little better.
Still, the FOMC seem determined to get the market in a zone that is better prepared for a hike – May employment numbers will now bear even greater importance than  before. Even a number around 150,000 would likely satisfy the conditions needed.
We will perhaps get more clarity when FOMC member, Bullard – an actual voting member – speaks in Beijing later this morning.

The G7 meeting over the weekend was in the main a discussion about Japanese intervention in the FX market. The US is of the view that the recent gyrations in the yen do not warrant intervention and the BoJ deputy governor is having to defend the implementation of NIRP – a tool that has done very little to hold back Yen strength, and has if anything had the opposite effect. Despite quashing fears of a recession with a surprise Q1 GDP beat, the story remains the same – more private investment is needed.
Customs figures released this morning show Japan posted a trade surplus of 823 billion yen ($9.1 billion) in April, compared with a deficit of 58.3 billion yen a year earlier and given that yen strength has only served to exaggerate the decline in exports, shipments also fell in volume terms. Last month’s PMI data, falling to 47.6 would indicate that exports may continue this soft trend. USDJPY remains below the 110 marker.

Oil prices are a touch weaker this morning as are gold prices. One could say that both are at the mercy of the stronger greenback but the firmer global supply in the case of oil is also a key factor.

All eyes are firmly on European PMIs today which has so far managed to beat expectations, with the notable exception of French manufacturing, which came in at 48.3 against the consensus for 49.0. Germany’s private companies are more encouraging – the composite index rose to 54.7 for May from 53.6 in April – better than what was expected. EURUSD is finding buyers at the 1.1180 level and retains the overall uptrend from the mid-March lows for the time being. Any declines through the 1.1150 level would indicate that the monetary divergence trade is actually beginning to work. Any indications that the ECB is ready to up the ante in terms of the assets purchased as well as perhaps being more creative in respect of the variety of assets could well be the catalyst needed to push the single currency lower. This coupled with higher oil prices could stall any recent concerns regarding deflation. Wage growth, or the lack thereof, is still one of the negative omens for Eurozone growth.

While equity markets in Europe may have started the morning underwater, the miss in the European Composite PMI seems have reversed some of the early losses. The potential for a weaker euro is likely helping proceedings here. Despite softness in Bayer AG, the Dax has managed to scrape some 0.4% upside. The $62bn all cash offer for Monsanto is certainly one of the biggest in German history. Bayer’s share price has been under pressure all week. The FTSE is fairly flat with Royal Mail leading the gainers after a surprise upgrade from RBC. Meanwhile, Inmarsat is lagging, down 2.91% owing to a downgrade from Morgan Stanley.

Depending on where you look the Remain camp seems to be ahead in the polls this week. One would question if this will be different next week – the to and fro of the arguments for and against are beginning to heat up and one could say there are issues in both camps when it comes to credibility and factuality. The pound seems fairly well entrenched above the $1.45 level but with a slew of data due this week in respect of the UK economy we cannot rule out some serious choppiness in the FX space over the coming days.