Holding on to the Dollar's Null Hypothesis

May 2, 2016Currenciesby Marc Chandler

Investors will likely hold on to the dollar's lack of a pattern in May.

In quiet turnover, with China, Hong Kong, Singapore and London markets closed, the US dollar is trading with a heavier bias against all the major currencies.  Lower commodity prices, including oil and copper, appears to be taking a toll on some emerging market currencies, including the South African rand. 

Japanese markets were closed last Friday and will be closed the next three sessions.  The yen appreciated nearly 5% in the aftermath of the FOMC/BOJ meetings last week.  The greenback's losses were extended to JPY116.15 earlier today, taking a toll on Japanese equities.  The Nikkei gapped sharply lower and ended off 3.1%. 

The MSCI Asia-Pacific Index was off 1.25%.   In the eleven sessions since April 15, the index has closed lower in eight sessions.  Today's losses put it near a potential trendline drawn off the mid-February and early-April lows.

European bourses are narrowly mixed.  The Dow Jones Stoxx 600 lost 2.1% before the weekend and is off less than 0.1% as the North American dealers return to their desks.  Consumer discretionary and telecoms are leading the way. 

Of note, Italian bank shares are under pressure following the poor investor reception to the attempted sale of Banca Popolare di Vicenza, leaving the newly created Atlas fund to pick up more than 90% of the new shares.  A decision by Italian regulators is expected later today regarding the possible listing on the Milan exchange of the shares.

If the listing is declined, Atlas will buy the remaining shares, according to reports.  Other Italian bank shares are also seeing sizable losses.  Another bank is expected to seek capital through an IPO in the coming weeks.  The failure to draw private investors will force Atlas to be the share buyers of last resort. 

Benchmark bond yields are softer today.  The 110-year yield Japan is a basis point away from the record low yield (minus -13.5 bp) set on April 20, while the quest for yield drove the long-term yields, (e.g. 20 and 30-year bond yields) to new record lows today (~25 bp and 27 bp respectively).

Benchmark 10-year yields in Europe are two bp lower.  Before the weekend, DBRS maintained its investment grade rating for Portugal. In the days leading up to the decision, investors had assumed this would be the case, even though according to the other major rating agencies this was no longer the case.

The Reserve Bank of Australia meets tomorrow.  A Bloomberg survey found 12 of 27 expect a cut.  The soft Q1 CPI figures recently reported has fanned such expectations.  Today's news that the AIG PMI fell 4.7 points (from a 12-month high) failed to excite the market.  The Aussie traded below $0.7600 briefly before recovering toward $0.7630.  Nearby resistance is seen in the $0.7640-$0.7660. 

The Eurozone manufacturing PMI showed a small improvement from the flash reading.  The tick up to 51.7 from the preliminary reading of 51.5 (and 51.6 in March) reflects Italian and Spanish upticks, as the German and French results were shaved.  Germany was revised to 51.8 from 51.9.

It should not be lost though that this is a three-month high and compares with 50.7 in March.  Although a surprisingly firm Q1 GDP was reported last week (0.5% after 0.3% in Q4 15), the French manufacturing sector is struggling.  The April PMI slipped to 48.0 from a flash reading of 48.3 and 49.6 in March.  This matches the 12-month low.

In contrast, Italy's manufacturing PMI rose to 53.9 from 53.5.  Many economists had looked for a decline.  Instead, it sits at a four-month high.  Spain's reading edged up to 53.5 from 53.4.  The median expected a continued pullback after two months of declines.  Nevertheless, there is a sense that the Spanish economy has lost some momentum, and the decline in new orders to six-month lows adds to the accumulating evidence.

The euro was trading just above $1.12 a week ago.  Today its pre-weekend gains are being extended to almost $1.15.  We see little resistance until closer to $1.1700.  Sterling is firm, but within the ranges seen before the weekend.  Broad US dollar weakness rather than positive developments in the UK seem to be the driver.  The dollar-bloc currencies are firm.

The dollar is little changed against the yen after its losses were initially extended in the Asian session.  Japan's Finance Minister Aso has escalated the rhetoric warning that the yen's advance is speculative and "extremely worrying."  The US Treasury report before the weekend disagreed and argued that the yen's appreciation has been orderly.  Some observers, who thought the BOJ would intervene near JPY115, then JPY110, now say JPY105. 

Lastly, we note that the US Dollar Index has risen in the month of May for the past six years and eight of the past nine years.  It is interesting.  Note too that in the 11 years before that streak, Dollar Index fell in seven of the Mays.  Over the past 20 years then the Dollar Index rose in twelve Mays, which is probably not enough to get most investors to abandon the null hypothesis (that there is no pattern).  Despite the recent streak, the process still looks random.

New Month, Same Heavy Dollar is republished with permission from Marc to Market

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