Dollar Pullback Continues; Focus Turns to Non-Farm Payroll Data

Forex

Summary:

Dollar is extending the near term pull back in Asian session today, driven by a combination of factors including a risk-on market sentiment, falling Treasury yields, and growing market expectations of a Federal Reserve "skip" in June. However, the greenback, along with other currencies, will be closely watching today's non-farm payroll data for further direction. As it stands, Swiss Franc is trailing Dollar as the week's second worst performer, followed by Euro. On the other hand, Sterling is actually the quiet star of the week, followed by Aussie and Loonie. Yen is currently mixed as near-term consolidation extends.

Technically, Gold is now eyeing 1985.08 minor resistance with current rebound. Break there will indicate that a short term bottoming is formed at 1931.84. More importantly, such development will keep the medium term rising channel intact. That is, rise from 1614.60 is indeed not over yet. Retest of 2062.95 or even 2074.48 record high could be seen soon, which could also correspond to near term selloff in Dollar.

Dollar Pullback Continues; Focus Turns to Non-Farm Payroll Data_1

In Asia, at the time of writing, Nikkei is up 1.03%. Hong Kong HSI is up 3.79%. China Shanghai SSE is up 0.78%. Singapore Strait Times is up 0.24%. 10-year JGB yield is down -0.0074 at 0.413. Overnight, DOW rose 0.47%. S&P 500 rose 0.99%. NASDAQ rose 1.28%. 10-year yield dropped -0.029 to 3.608.

Fed Harker: We are clearly in restrictive, we can sit there for a while

Philadelphia Fed President Patrick Harker recommended a pause in interest rate hikes at the upcoming FOMC meeting, stating. "It's time to at least hit the stop button for one meeting and see how it goes," he said yesterday.

Harker also noted, "I think we are at the point, or very close to the point now, where we are clearly in restrictive territory, and we can sit there for a while," he explained. "We don't have to keep moving rates up, and then have to reverse course quickly."

Looking ahead, Harker expects the US economy to grow less than 1% this year, and anticipates unemployment rate, currently at 3.4%, to increase to around 4.4%. Additionally, he forecasts a decrease in inflation to 3.5% this year and 2.5% next year, predicting it to reach Fed's 2% target only by 2025.

BoJ Ueda: No time frame to achieve inflation target, but not so long as 10 years

In a parliamentary address today, BoJ Governor Kazuo Ueda said "The time it takes for the impact of monetary policy to appear on the economy could move around a lot depending on circumstances."

"We therefore do not have any time frame in mind" in achieving the inflation target, he added.

"Having said that, our baseline view is that it won't take so long as over 10 years. We'll still seek to hit the target at the earliest date possible," he remarked.

Ueda reiterated that the Bank of Japan's purchases of Real Estate Investment Trusts (REITs) form part of their expansive monetary easing strategy. He noted, "We are conducting the purchases (of REITs) as part of our massive monetary easing program. Given it will take more time to achieve our price target, we will maintain the easy policy."

US non-farm payroll in spotlight, NASDAQ presses key resistance

Today, market watchers are turning their attention to US non-farm payroll report, a key indicator of the health of the American labor market. Economists are forecasting job growth of around 180k in May, with the unemployment rate predicted to slightly increase from 3.4% to 3.5%. Meanwhile, average hourly earnings are expected to continue a trend of robust growth with another 0.3% mom rise.

Looking at some related economic data, ISM manufacturing employment index showed a modest rise from 50.2 to 51.4, while ADP private job data indicated a strong increase of 278k. The four-week moving average of initial jobless claims saw a slight dip from 239k to 230k. All these numbers suggest a job market that remains steady, showing no significant signs of weakening.

In terms of monetary policy, Fed funds futures are currently pricing in 76% probability that Fed will opt to "skip" a rate hike at the upcoming FOMC meeting on June 14. Nevertheless, there is still around a 60% chance of another 25bps increase in June to a range of 5.25-5.50%. Today's data could significantly alter this picture if it brings any surprises.

Over in the equity markets, NASDAQ is once again testing a crucial cluster resistance level at 13181.08, following a brief retreat earlier this week. The level represents 100% projection of 10088.82 to 12269.55 from 10982.80 at 13163.53, as well as 50% retracement of 16212.22 to 10088.82 at 13150.52.

Decisive breakthrough above this 13150/80 range would confirm underlying medium term bullish momentum in NASDAQ, potentially sparking upward acceleration towards 161.8% projection at 14511.22. Let's see how NASDAQ reacts to today's data.

AUD/USD Daily Report

AUD/USD's strong break of 0.6558 minor resistance confirm short term bottoming at 0.6457, just ahead of 61.8% projection of 0.7156 to 0.6563 from 0.6817 at 0.6451. Intraday bias is back on the upside for 55 D EMA (now at 0.6659). Sustained break there will target 0.6817 resistance next. Nevertheless, rejection by 55 D EMA will keep near term outlook bearish. Firm break of 0.6451 will resume the fall from 0.7156 to 100% projection at 0.6224. Dollar Pullback Continues; Focus Turns to Non-Farm Payroll Data_3

Dollar Pullback Continues; Focus Turns to Non-Farm Payroll Data_3

In the bigger picture, rejection by 55 W EMA (now at 0.6822) keeps medium term outlook bearish. Current development suggests that down trend from 0.8006 (2021 high) is possibly still in progress. Retest of 0.6169 (2022 low) should be seen next. Firm break there will confirm down trend resumption. For now, this will remain the favored case as long as 0.6817 resistance holds. Dollar Pullback Continues; Focus Turns to Non-Farm Payroll Data_4

Dollar Pullback Continues; Focus Turns to Non-Farm Payroll Data_4

Source: ActionForex.com

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Warren Takunda

Traders' Opinions

In a recent turn of events, South Africa finds itself in a difficult position as it grapples with the implications of an arrest warrant issued by the International Criminal Court (ICC) against Russian President Vladimir Putin and Maria Lvova-Belova, the Russian Commissioner for Children's Rights. The warrant accuses them of the war crime of unlawful deportation and transfer of children from occupied areas of Ukraine to Russia. The gravity of this allegation has sparked international condemnation and concern, prompting South Africa to consider relocating the upcoming BRICS summit.

According to various news sources, South Africa is actively weighing the option of shifting the venue of the BRICS (Brazil, Russia, India, China, and South Africa) summit to another country. The aim is to sidestep the diplomatic dilemma of whether to execute the arrest warrant against Putin, a potential attendee of the summit. Potential alternative locations being considered include China and Mozambique, where the summit could be held without the specter of Putin's presence and the associated legal complexities.

The move to change the summit's venue demonstrates South Africa's desire to navigate a sensitive situation while upholding its commitment to international justice. By considering alternative locations, the country aims to preserve the integrity of the BRICS summit and ensure that the focus remains on fostering economic cooperation and strategic partnerships between the member nations.

This development has sparked intense speculation and discussions within the international community, with opinions varying on the potential ramifications and diplomatic implications of such a decision. Some argue that moving the summit to another country altogether might undermine the original purpose of the event and diminish the significance of South Africa's role as the host nation. On the other hand, proponents of the venue change argue that it would send a strong message in support of international justice and accountability.

The BRICS summit, originally scheduled to take place in South Africa, serves as a crucial platform for member countries to discuss pressing global economic issues, enhance trade relations, and explore avenues for collaboration. However, the recent arrest warrant against Putin has complicated matters and necessitated careful consideration from South African authorities.

It is worth noting that the decision to relocate the summit is a delicate one, as it involves multiple stakeholders and considerations. South Africa must balance its obligations as the host nation with the need to address the serious allegations leveled against a potential attendee. The final decision will have far-reaching implications not only for South Africa but also for the BRICS alliance as a whole.

As the situation unfolds, global attention remains fixed on South Africa and the outcome of its deliberations. The handling of this intricate matter will undoubtedly shape perceptions of South Africa's commitment to justice and its ability to navigate complex diplomatic challenges.

In conclusion, South Africa finds itself at a crossroads as it contemplates a venue change for the upcoming BRICS summit. The ICC arrest warrant against Vladimir Putin and Maria Lvova-Belova has presented the country with a significant diplomatic dilemma. The decision to potentially relocate the summit demonstrates South Africa's dedication to upholding international justice while ensuring the continuity and effectiveness of the BRICS alliance. The world awaits the outcome of this crucial decision, which will undoubtedly have far-reaching implications for both South Africa and the broader international community.

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Owen Li

Commodity

Booming soybean demand from China early this century drove extensive crop expansion across the Americas, but while production is set to swell even further in top exporter Brazil, growth in Chinese imports has cooled.

That dynamic is seen lifting world soybean stocks to all-time highs by mid-2024, including above-average but not record stocks-to-use, which measures supply against demand.

Global soybean prices have fallen significantly in the last few months and are well below the levels of the last two years. But if prices continue their fall, Brazilian farmers may be less incentivized to boost the area when planting begins later this year, especially if the top importer is less engaged.

Brazil

Brazil's 2023 soybean harvest, estimated by the U.S. Department of Agriculture at 155 million tonnes, topped the prior record by 11%. Production had never exceeded 100 million prior to 2017, though USDA sees the 2024 crop jumping to another new high of 163 million tonnes.

That includes a 4.3% expansion of harvested area, just under the recent five-year average of 4.5%. Current economics suggest 2024 soybean profitability in Brazil could return to the lower levels of the late 2010s, when the average yearly area expansion was below 3%.

Brazilian farmers have been slow to sell the 2023 soy crop amid easing prices, and 2024 may be less exciting. Producers in top grower Mato Grosso had sold just over 9% of their 2024 soybeans as of early May, the smallest portion in over five years and below the average and year-ago 23%.

The last time Brazil harvested fewer soy acres than in the previous year was in 2006-07, so acres are likely to increase, though the degree is questionable.

No. 2 soy exporter the United States is currently slated for a record 122.7 million tonnes in 2023, included in the 2023-24 marketing year along with the 2024 Brazilian and Argentine harvests. A return to average yields in Argentina in 2024 could produce a crop nearly twice as large as this year's drought disaster.

Strong 2023-24 harvests in the three bean exporters could raise global production nearly 11% from this year, the largest annual increase in seven years.

China

China's soybean imports increased five-fold throughout the first decade of the 2000s, but demand growth began steadying off later in the 2010s. The 2018-19 African swine fever outbreak in China's hog herd highly disrupted soy consumption, though recovery has been somewhat lackluster ever since.

The 2018-19 fall in soy consumption was China's first yearly drop in 15 years, though another decline was seen in 2021-22. China's zero-COVID policies and economic slowdown, poor profitability for Chinese hog producers, a weak crop from Brazil and near-record mid-2022 soybean prices all contributed.

USDA last month set China's 2023-24 soy imports at 100 million tonnes, up from 98 million in 2022-23 but only barely above the prior record of 99.7 million from 2020-21. That would be 7% higher than in 2016-17, though the 2023-24 global crop is seen 17% larger than in that year.

Domestic demand is forecast to rise 4.7% to a record 118 million tonnes in 2023-24, the biggest increase in four years though weaker than the projected global demand increase of 5.9%, a nine-year high. China's soybean consumption had been rising more than 8% per year in the mid-2010s.

China for a couple of years has been reducing guidelines on soymeal use in animal feed in an effort to curb reliance on imports. As of last month, excessive, cheap wheat supplies in China had been replacing corn and soymeal in feed rations, lowering corn and soy import needs.

But ongoing torrential rains in China's heaviest wheat-producing province may have damaged up to 20 million tonnes of the grain, a significant portion of the expected 137 million-tonne crop.

That wheat would not be suitable for human consumption, though sprouted grains can be used in livestock rations if not excessively damaged, potentially putting even more pressure on China's soybean and corn demand.

Source: Reuters

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Republican Leader's Proposal Sparks Controversy and Intrigue Within Party Ranks

In a bold move that has left the political landscape abuzz, House Speaker Kevin McCarthy, a prominent Republican figure, successfully navigated the passage of a bill to raise the US debt limit by a staggering $1.5 trillion. However, this victory, achieved through a delicate compromise involving $4.5 trillion in spending cuts, has put McCarthy's own job security on the line. The Speaker's proposal has faced staunch opposition from Senate Democrats and President Biden, further complicating the already tumultuous political climate.

McCarthy's debt-limit bill, widely known as the Limit, Save, Grow Act, has been a contentious issue from the moment it was introduced. The proposed legislation, as outlined in sources such as Reuters and CNN, aims to tackle the mounting national debt crisis by combining an increase in the debt limit with significant spending reductions. McCarthy's bill managed to secure passage in the House on May 30, 2023, marking a significant achievement for the Republican leader.

However, the victory has come at a price. McCarthy's deal has faced backlash from within his own party, with some conservatives expressing discontent over the compromise and its perceived abandonment of their staunch fiscal principles. These disgruntled members have hinted at using a motion to vacate the chair as a means to potentially oust McCarthy from his position as Speaker.

One key aspect that has fueled dissatisfaction among conservatives is McCarthy's apparent concession of power to the hard-line Freedom Caucus, a group known for their uncompromising stance on fiscal matters. In order to secure their support for his speakership, McCarthy has seemingly acquiesced to their demands, thereby amplifying concerns among party loyalists who fear a shift towards more radical policy positions.

Nevertheless, allies of McCarthy insist that he is being underestimated and emphasize the significance of his achievements. They argue that McCarthy's ability to navigate the delicate balance between differing factions within the Republican Party is a testament to his political acumen and leadership skills. They contend that his willingness to make difficult compromises reflects a pragmatic approach to governance, which is necessary in a polarized political climate.

The controversy surrounding McCarthy's debt-limit win has undoubtedly cast a shadow of uncertainty over his future as Speaker of the House. While his success in passing the bill showcases his ability to rally support and make significant legislative strides, it remains to be seen whether the dissatisfaction within his party will translate into a serious threat to his leadership position.

As the Senate Democrats and President Biden continue to scrutinize McCarthy's proposal, the national debt limit debate remains a pivotal issue with far-reaching implications for the country's economic stability and financial reputation. The outcome of these deliberations will undoubtedly shape the future of McCarthy's tenure as Speaker and could have lasting consequences for the Republican Party as a whole.

In these turbulent political times, the fate of Kevin McCarthy and the debt limit issue hang precariously in the balance. Whether McCarthy's risky gamble will ultimately solidify his position as a resilient leader or spell the end of his speakership remains to be seen. As the nation watches with bated breath, the intricate dance between political pragmatism and ideological steadfastness unfolds, leaving its mark on the future of American politics.

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Devin

Central Bank

Market expectations for the Bank of England reminiscent of last year's crisis

UK investors would be forgiven for feeling a sense of déjà vu over recent days. An unexpectedly high inflation reading helped send market expectations for the Bank of England into territory last seen in October and November in the aftermath of the fateful 'mini budget'. That remains true whether you look at the peak rate being priced (5.5%) or the spread between expected policy rates in the US and UK in 6-12 months.

That equates to four more rate hikes, and incidentally, these are the same levels that prompted BoE policymakers to offer some rare pushback against market expectations at last November's meeting.

All of this seems excessive – and the BoE itself has repeatedly stated that much of the impact of past rate hikes is still to hit the economy. That being said, the Bank may be more reluctant than it was last November to push back against these lofty expectations. Given the tendency of recent inflation figures to come in hot, policymakers won't want to pre-commit. The current 'data-dependent' approach points to another hike in June – and perhaps one more in August.

Dig deeper and inflation doesn't look as bad - but we could be wrong

It's worth emphasising that beneath the surface of the recent shock CPI numbers, the story is not quite as bad as it looks. Recent strength is partly down to goods categories, like alcohol and vehicles, and these are trends that are unlikely to last. Services inflation, which is the Bank's main focus, would have been roughly in line with expectations had it not been for a highly unusual month-on-month spike in rents.

Broader measures of inflation, including the BoE's survey of CFOs, point to lower inflation and wage expectations over the coming months. The latest jobs data points to cooling hiring demand and more muted pay pressure.

In short, we expect rates to peak below where markets expect and we think that rate cuts (when they eventually materialise in mid-2024) could be deeper, too. Investors expect Bank Rate to settle around 4% in three years' time, which seems high.

Where our view could start to fall apart is if services inflation fails to come down over the rest of this year. We think lower gas prices will alleviate a key source of price pressure, particularly in the hospitality sector, which has accounted for much of the rise in services inflation. There's a clear risk that firms bank some of these lower costs to rebuild margins, and that's essentially the view of the BoE hawks right now. In other words, what went up pretty quickly could be much slower to come down.

Worker shortages are also undoubtedly still a big issue for employers, and that looks like a structural rather than a cyclical challenge. We can't rule out a rebound higher in wage growth. Though not our base case, in this scenario markets may well be right that interest rates end up rising above 5% and stay very restrictive for longer.

Source: ING

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Warren Takunda

Stocks

The US stock market experienced a notable upswing on Thursday, as investor optimism soared following the successful passage of the debt bill in the House of Representatives. The Dow Jones Industrial Average, a prominent blue-chip index, surged over 150 points, while the broader S&P 500 index gained nearly 1%, and the tech-heavy Nasdaq reached a new 40-week high, registering a robust 1.3% increase.

The House's approval of the debt bill late Wednesday evening was met with enthusiasm from investors, who viewed it as a significant step toward averting a potential default crisis. This development brought a sense of relief and boosted market confidence, fostering a favorable environment for stock market growth.

Furthermore, market participants closely monitored the monetary policy outlook, which played a pivotal role in driving the positive sentiment. Recent data from the Institute for Supply Management (ISM) revealed that manufacturing activity contracted for the fifth consecutive month. Additionally, price pressures showed a notable easing, further reinforcing expectations that the Federal Reserve would likely pause its tightening cycle during this month. In response to these prospects, Treasury yields declined, while technology shares witnessed a significant boost, contributing to the overall market rally.

However, amidst the general optimism, Salesforce, a leading technology company, faced a setback as its stock declined by 5%. The decline was triggered by the company's report of higher capital expenses than initially anticipated. Despite this isolated occurrence, the overall market sentiment remained bullish, with investors focusing on the positive aspects of the debt deal and monetary policy expectations.

Adding to the positive developments, the market celebrated the passage of the Fiscal Responsibility Act of 2023 by a vote of 314-117 in the House of Representatives. This legislation, which aims to address fiscal concerns, is now making its way to the Senate and is anticipated to receive approval prior to the June 5th default deadline. Investors welcomed this news, as it provided further assurance of a stable economic environment, instilling confidence in the market's long-term outlook.

In summary, the US stock market experienced a significant rally driven by the successful passage of the debt bill and optimistic expectations regarding the Federal Reserve's monetary policy stance. The improved sentiment resulted in impressive gains across major indices, with the Dow Jones, S&P 500, and Nasdaq all exhibiting notable increases. While Salesforce faced a setback due to higher-than-expected capital expenses, the broader market remains buoyant as investors eagerly anticipate further positive developments in the coming weeks.

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Owen Li

Commodity

U.S. oil and gas production continued to rise strongly in March - the delayed impact of very high prices that prevailed until the third quarter of 2022.

Oil output increased by 171,000 barrels per day (b/d) in March compared with February, according to the U.S. Energy Information Administration ("Petroleum supply monthly", EIA, May 31).

The gains were led by the Lower 48 states (+137,000 b/d) and Gulf of Mexico (+45,000 b/d), which more than offset lower production from Alaska (-11,000 b/d).

Output rose by almost 10% in the first three months of 2023, compared with the same period a year earlier, and was the second-highest for the time of year after 2020.

On the gas side, dry production hit record 3,171 billion cubic feet in March and was more than 7% higher than in the same month a year earlier ("Natural gas monthly", EIA, May 31).

Gas output climbed to a record 9,180 billion cubic feet in the first quarter and was also 7% higher than a year before.

Shale production is often characterised as "short cycle" because wells have a relatively rapid decline rate and new ones must be drilled constantly to replace the dwindling output from older ones.

But there is still typically a delay of up to 12 months between a change in prices and a change in recorded production.

The pandemic saw a much faster pass-through from prices to production in 2020, but that was in response to an exceptional once-per-century crisis.

After adjusting for inflation, U.S. crude prices peaked at a monthly average of $119 per barrel in June 2022 (87th percentile for all months since 2000) providing a strong impetus to increase drilling and output.

Real gas prices peaked at a monthly average of $9 per million British thermal units in August 2022 (82nd percentile for all months since 2000) again giving strong impetus for more production.

Since then, prices have fallen to $72 per barrel (45th percentile) and $2.30 per million British thermal units (2nd percentile).

But the impact of these very high prices during the second and third quarters of 2022 was still filtering through into production growth in the first quarter of 2023.

The lagged impact of these earlier high prices should start to fade from the third quarter, and especially the fourth quarter.

The total number of rigs drilling for oil and gas was already down by around 7% in May 2023, compared with its peak in December 2022.

Slower drilling activity will eventually translate into slower production growth with a typical delay of up to 6 months.

In the meantime, however, high levels of production are keeping inventories elevated, especially in the case of gas, which is in turn keeping prices under pressure.

U.S. commercial crude inventories were still +24 million barrels (+5% or +0.43 standard deviations) above the prior 10-year seasonal average at the end of March. They have since normalised.

U.S. gas stocks were +214 billion cubic feet (+13% or +0.47 standard deviations) above the 10-year average at the end of March and were still +270 billion cubic feet (+13% or +0.63 standard deviations) above it in late May.

The contrast between fairly average crude inventories and a large surplus in gas explains why oil prices are close to the post-2000 average in real terms while gas prices are still trading near to their lowest point.