Election News India Rises, Mexico Suffers

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dollar(DXY, USDOLS) is back with a better bidding tone from the weekend. It strengthened against all G10 currencies, but the yen, Swiss franc and Swedish krona strengthened slightly. I see the market There is reluctance to extend the euro or Canadian dollar gains ahead of this week’s central bank meeting, but ironically the 0.25% decline in the pound is leading the major currencies. Election news is a key driver today. The dramatic victory of Mexico’s Morena party, which could allow AMLO to avoid constitutional changes, has sparked a sell-off in the Mexican peso. It was the worst performing EM currency, up more than 2%. A coalition government is needed in South Africa and this appears to be constructive. The rand is up about 0.25% and is one of the strongest EM currencies today. As Modi has, the Indian rupee has become stronger. After the 2019 election, approval ratings expanded.

Indian stocks rose more than 3%, nearly matching their year-to-date gains. Stocks are generally more solid. Markets in Japan (NKY:IND), Hong Kong (HSI), Taiwan (TWSE) and South Korea (KOSPI) were up more than 1% today. The European Stoxx 600 (STOXX) rose for the third straight session, and US index futures are trading with a firmer bias. Bonds rallied. European benchmark 10-year yields are 2-4 basis points lower. The 10-year US Treasury yield (US10Y) fell 2 basis points to 4.48%. Gold prices continued to decline ahead of the weekend, falling as low as $2,015 today, the lowest since May 9, before recovering back to nearly $2,030. Markets are puzzled by OPEC+’s decision to extend voluntary production cuts but begin phasing out a 2 million barrel production cut agreement in the fourth quarter. In July, WTI rose above last week’s low (~$76.65) and topped out near the 200-day moving average near $77.50.

Asia Pacific

China’s Caixin PMI is stronger than the China Logistics and Purchasing Federation’s PMI. It is not particularly revealing that today’s Caixin manufacturing PMI rose from 51.4 (expected to be 51.6) to 51.7, while other PMIs unexpectedly fell below 50 (49.5 vs. 50.4). Other components of the Caixin survey are expected to be released early Wednesday. But this data will not change the general expectation that more needs to be done if China sets its GDP target of 5%. Last week, China announced that starting July 1, export permits will be required for a wide range of products with dual civilian/military purposes, including airplane parts, gas turbines, aerospace engines and bulletproof materials. The United States is among the top three destinations for these Chinese exports. Separately, another very sensitive issue after China’s automobile exports is China’s military support to Russia. However, most approaches seem too narrow. Consider nitrocellulose, one of the main components of gunpowder. China accounts for 70% of global supply, but when critics talk about overcapacity, they aren’t necessarily referring to nitrocellulose. In any case, earlier this year some European officials blamed limited shipments from China for preventing some weapons from reaching Ukraine. In Japan, first-quarter cap spending and corporate sales/profitability were reported to be weaker than expected (6.8% vs. 11.0%), but corporate profitability was higher (15.1% vs. 8.3%). The final May manufacturing PMI confirmed preliminary estimates and was above 50 for the first time since October 2022 except May 2023. However, this is slightly lower than the flash figure (50.5) at 50.4. The highlight of the week is Wednesday and Friday, when the April labor income and household spending reports come out. Both will highlight the economic recovery in the second quarter. Australia’s May manufacturing PMI was 49.7, up from 49.6. The highlight of the week is that first quarter GDP (up 0.2% quarter-on-quarter) is expected to be equal to the Q4 23 on Wednesday and the April trade balance on Thursday.

The dollar recovered from a six-day low last Thursday (~JPY156.40) to its pre-weekend high, with the yen rising. Japanese data late last week confirmed market suspicions about the scale of intervention in late April and May. This confirmation and a drop in US interest rates could result in a market pause near JPY158 without any fundamental measures to challenge Japanese officials. The dollar found support near JPY157 in Europe after reaching nearly JPY157.50 in the local session. The Australian dollar has not broken out of this range since May 8, cutting between $0.6600 and $0.6700. It sits just over a 15-tick range around $0.6650. It’s not going anywhere fast. The PBOC set the dollar-based exchange rate at CNY7.1086 (CNY7.1088 on Friday). The Bloomberg survey average was CNY7.2299 (CNY7.2398 on Friday). The dollar found good bids in the offshore market last week around CNH7.25. Consolidating within range for the weekend with quiet turnover. Last week’s high was slightly above CNH7.2750.

europe

The Eurozone final manufacturing PMI (47.3 vs. 47.4 preliminary estimate) shows that the ongoing recovery is not yet complete. This reflects the unexpected decline in the Italian figure (45.6 vs. 47.3 in April) and the downward revision in France (46.4 vs. 46.7). Manufacturing PMI has not exceeded the 50 boom/bust level since June 2022. The final overall figures (and services) will be released on Wednesday, but the preliminary reading rose to 52.3 from 51.7 in April, the highest since last May. It has not fallen since October 2023. There is no doubt that the ECB will deliver its first rate cut of the cycle on June 6. At the same time, voting for the European Parliament begins. A decision on tariffs on Chinese electric vehicles has been postponed until the new European Commission takes office. An overall shift to the right is expected. The final UK manufacturing PMI was 51.2, down from the original estimate of 51.3 and 49.1 in April. Elections in the UK are due on July 4th. Having moved to the right and dislodged many on the left, Labor appears poised to lead the next government, but some observers doubt it will be able to secure an outright majority. The UK is very uncomfortable with the coalition government, often referred to as the ‘Hung Parliament’. The UK economy has also recovered from its contraction in the second half of 2023, but growth is expected to slow by 0.6% quarter-on-quarter in the first quarter of 2024 results.

The euro underwent a downward correction in the second half of last month. We were looking for a deeper correction of the 3 cent rally from the mid-April lows. It held important support near $1.0785 last week and was trading almost a cent higher ahead of the weekend. It hasn’t traded above $1.09 since March 21st. Above that, resistance could be in the $1.0935-50 area. Still, a rally like this ahead of the ECB meeting where there are universal cut expectations and/or US jobs data on Friday would be surprising. In particular, the futures market is net long euros. The single currency has been trading in a range of about a quarter of a cent below $1.0860 so far. Sterling is up 5 cents from its April low set a week behind the euro. It has fallen sharply since last week when it touched $1.28. It fell as low as $1.2680 from where it picked up a good bid ahead of the weekend, rising as high as $1.2765. Nonetheless, we think Sterling is coming out on top. In Europe, it fell below $1.27. A clear break of the $1.2675 area would add credence to that view. Sterling’s appreciation against the euro appears to have risen sharply since mid-May. The euro fell from GBP0.8610 in mid-May to GBP0.8485 at the end of May. This is a level not seen since August 2022. There may be resistance near the GBP0.8550-70 area.

USA

Today marks the start of the most important two weeks until early September for US data. The ISM Manufacturing and Services Survey appears to carry more weight than the PMI. May car sales and April trade balance will help provide a solid forecast for second quarter GDP. The median forecast in Bloomberg’s most recent monthly survey is an increase from 1.6% to 2.3%. The Atlanta Fed’s GDP Tracker was recording 2.7% as of the end of last week. Still, the most important high-frequency data point this week is Friday’s jobs report. The median of the Bloomberg survey is an increase in nonfarm payrolls of 185,000 jobs (175,000 in April). Although trends are sometimes difficult to discern given the monthly volatility, job growth is clearly slowing. And it’s gradual. Consider that the six-month average in April was 242,000. The six-month average after the revision in April 2023 was 265,000. The Bank of Canada will meet on June 5 before receiving the Canadian jobs report on June 7. Swaps market and Bloomberg findings converge to give the Bank of Canada about a two-thirds chance of being the first to cut interest rates, becoming the third G10 central nation to do so. You need banks to do that (Switzerland and Sweden are behind them). But after the weaker-than-expected first-quarter GDP before the weekend, markets had increased the odds to just over 80%. The market expects further cuts in the fourth quarter. In Mexico, we see some survey data and worker remittances, but the election results and broader dollar direction could be key for the peso. Sheinbaum won a landslide victory and Morena’s party secured a two-thirds absolute majority, ostensibly enabling them to change the constitution, which is surprising investors today.

The U.S. dollar hit its lowest since May 20, before the weekend, around CAD1.3635. It has not closed below CAD1.3600 in almost two months. The US dollar approached CAD1.36 in Asia Pacific activity today but reversed higher and is testing CAD1.3660 in Europe. With the Bank of Canada having about an 80 per cent chance of cutting interest rates on Wednesday (according to the swaps market), it would seem surprising to see the dollar soar to its lowest in two months. The Mexican peso strengthened for the first time in three sessions in the last session before the election. Nonetheless, the peso continued to decline for two weeks in a row. The peso initially strengthened as early election results were announced. But as the scale of Sheinbaum’s victory became clear, the peso sold off. The dollar, which settled slightly north of MXN17.0, surged to MXN17.38. Recall that the flash crash of the peso in April pushed the dollar to MXN18.21. The Chilean peso has fallen 3% over the past two weeks due to a reversal in copper prices. The Brazilian real has fallen 2.8% over the past two weeks. Concerns over fiscal policy and devastating flooding weighed on sentiment.

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Editor’s note: The summary bullet points for this article were selected by Seeking Alpha editors.