Dollar and Yen losing ground
There was little change in currency markets yesterday but the dollar is losing ground in early trading this morning. The US currency dipped back on Tuesday but was largely stable yesterday – on what was a relatively quiet day datawise – but in early trading today the euro has broken back through $1.07 to $1.0720 and GBPUSD is close to breaking $1.25. As a result the euro sterling cross has seen the single currency move down a touch to 85.8p. In Japan, the Bank of Japan starts a two day policy meeting with market speculation that the Central Bank may be about to intervene in the currency market to prop up the ailing yen. The Bank last intervened in currency market in September 2022 and the currency is weaker now than it was then with the Yen weakening this week to Y155 to the dollar, a level not seen since 1990. Finance Minister Suzuki reiterated to media that they are paying close attention to FX markets and BoJ Governor Ueda has said the Bank was ‘keeping an eye’ on the impact of a weak yen on the economy and inflation. If the Bank does not intervene this time around – with a policy statement due tomorrow – we could see further Yen weakness in the days ahead.
Government bond yields rose in the US and Europe, US 10-year yields gained 4bps to 4.64% while UK 10-year and German 10-year yields rose by more, by around 9bps apiece to take them to over 4.3% and just under 2.6% respectively. US 10-year yields are up some 35bps since the start of the month as recent data indicates US inflation is proving stickier and may slow the pace of Fed rates cuts and the timing of when they may start. In Europe, the ECB seems set to cut in June but beyond that the path is less clear with Nagel out yesterday to say the ECB cant commit to what will happen after June with his comments suggesting a rapid easing in rates over the course of 2024 is not certain while in the UK, BoE’s Pill said there is a ‘reasonable way to go’ before he is convinced that price pressures have been tamed suggesting that a rate cut there may be a little further off than market believe. Meanwhile, equities failed to build on two days of gains, with the S&P index closing more or less unchanged on the day with the Eurostoxx, DAX and FTSE losing a little ground on this side of the Atlantic.
The run of disappointing US data this week continued with durable goods orders in March. Orders increased 2.6% month-on-month but February orders were revised lower to 0.7% (from 1.3%). While the gain in overall goods was broad-based – including things like cars and electronic good, core capital goods orders, an indicator of future investment in the economy, was weak at just 0.2%. Core capital shipments, which indicates investment in Q1, was also very shallow at just 0.2% and as shipments fell by 0.6% in February, business investment appears to have been weak in Q1.
In Germany, the IFO confidence index improved in April, adding to better indicator data for Germany of late with the services PMIs coming in strongly yesterday. The expectations index rose to 89.9 this month from 87.7 in March while the current conditions index also rose, to 88.9 from 88.1. This is the highest expectations reading since May of last year and adds to the evidence that the German economy has turned a corner and set to return to positive growth, albeit weak, following a contraction in activity in the final quarter of 2023.
On the data slate today we have the Q1 GDP in the US while there are a number of central bank speakers of note, including ECB President Lagarde.