Overview: There is much talk about how the sanctions
being imposed on Russia will hasten the demise of the dollar's role in the
world economy, but today the dollar rides high. There is no sign of its
abandonment as its safe haven appeal shines. The dollar-bloc currencies,
helped perhaps by the commodity exposure are faring best. The Canadian
dollar is the most resilient and that may be a function of expectations of a
rate hike and guidance on the balance sheet later today. Of note, the euro
has been sold to about $1.1060. Among emerging market currencies, eastern
and central European currencies are the weakest. The JP Morgan Emerging Market
Currency Index is off for a third day, and the cumulative loss is around 3.5%. Equities in the Asia Pacific region were lower, snapping a three-day
advance. South Korea and Australia were the exceptions. Europe's
Stoxx 600 is recovering from early losses. US futures are firmer. The US 10-year yield is slightly firmer at 1.74%, while European benchmark yields are mostly 3-5 bp higher. Italy is
an exception, and the bonds are under greater pressure. The 10-year yield is up almost 14 bp. Gold stalled near
$1950 and is offered in Europe below $1930. April WTI rose to $111.50
before stabilizing. It finished last week near $91.60. US natgas is
up about 3% after a nearly 4% advance yesterday. The same can be said for
Europe's natgas benchmark. It is matching and repeating yesterday's gains, except there,
we are talking about something closer to 26%-28%. Iron ore is up around 1.5%, its
third advance this week, while copper is edging higher after yesterday's 3.2%
gain. May wheat is up over 7.0% today to bring this week's gain to over
20% after last week's nearly 7% gain.
Asia Pacific
Chinese banks are treading
carefully and do not appear to be the escape-valve for Russia that was
feared. Chinese
business is concerned about payments, and this impacts not only Russia's
seaborne oil but also commodity shipments, including coal. China's
criticism of Russia has been ratcheted up. Foreign Minister Wang said
China "deplores the outbreak of conflict between Ukraine and Russia, and
yesterday for the first time officials seemed to refer to it as a war.
Russia has been calling it a "special military operation."
Economic data in the region
was not the focus, but for the record, Japan's Q4 capex was stronger than
expected rising 4.3% year-over-year, up from 1.2% in Q3. The median forecast in Bloomberg's
survey was for a 2.9% gain. Corporate profits were also strong, rising
24.7% year-over-year on a 5.7% increase in sales. In Q3 profits rose by
35.1% on an 8.4% increase in sales. Australia's Q4 GDP rose 3.4% after
the virus-induced 1.9% contraction in Q3. South Korea's January industrial
output edged 0.2% higher. The market had expected a decline in output,
though December's 4.3% increase was shaved to a still impressive 3.7% pace.
The dollar is trading just
inside yesterday's JPY114.70-JPY115.30 range against the Japanese yen. The greenback highs were
recorded in the European morning, but the intraday momentum indicators are
stretched, suggesting additional gains may be hard pressed to secure. Resistance
is seen in the JPY115.40-JPY115.50 area. The Australian dollar is
also trading inside yesterday's $0.7240-$0.7290 range. The
positive terms of trade shock appear to have helped make it more resilient in
the face of the risk-off moves that have often weighed on it. With the
exception of January 13 on an intraday basis, it has not traded above $0.7300
since mid-November. The greenback is slightly firmer against
the Chinese yuan for the second consecutive session, but it remains a little
lower for the week. It settled near CNY6.3175 last week. The
dollar's reference rate was set at CNY6.3351 compared with median projections
(Bloomberg survey) of CNY6.3341. Many suspect that the PBOC is quietly
resisting a push below CNY6.30.
Europe
The four large economies in
the euro area reported higher February CPI than expected. It is little wonder that the aggregate
surprised on the upside as well. The month-over-month increase of 0.9%
lifted the year-over-year pace to 5.8%. It was 5.1% in January and the
median forecast (Bloomberg survey) was for a 5.6% rate in February. While
food and energy were important culprits, the core rate, at 2.7% was also a
little stronger than expected, and follows a 2.3% year-over-year rise in
January. Separately, the Bundesbank, in its annual report, warned that German
inflation could average 5% this year. The ECB meets next week
(March 10) and will provide a new economic forecast and is expected to adjust its
forward guidance on asset purchases to secure the flexibility to raise rates
later this year, if necessary.
OPEC+ meet today to decide
next month's output. Most
observers expect it to maintain its declaratory strategy of boosting output by
400k barrels a day. However, operationally, it is well appreciated that
the actual increase is considerably less. Moreover, even though some
Russian oil is still being bought, it seems to be less than before. With
the energy shock sending oil well above $100 a barrel, and Russia increasingly
isolated, a break of the pact, would have significant ramifications.
Separately, there are efforts in the US and UK to ban Russian oil and gas
imports completely. The IEA has coordinated a 60 mln barrel release of
strategic reserves. The US will account for half of it, which is about
five days’ worth of Russian imports. Note that Canada has formally
announced a ban, but it has not bought Russian oil for a couple of years,
according to reports.
The euro has been sold to
about $1.1060 today. That
represents about a two-cent loss from last week's close. We have
suggested a $1.1000-$1.1050 target but did not imagine this is how it was going
to happen. The buying that had offered a shelf near $1.1100 has been
absorbed and that area now offers resistance. Note that the lower
Bollinger Band (two standard deviations below the 20-day moving average) is
around $1.1125 today. The euro closed below it yesterday and remains
below it through most of today's session (high is about $1.1135). Sterling
briefly slipped through last week's low (~$1.3280) to make a marginal new low
on the year (slightly above $1.3270). However, it caught a bid in
early European turnover and is trying to establish a foothold back above
$1.3300. The market continues to price in a 25 bp hike later this month by the
Bank of England. The Bank of England's balance sheet is also
expected to shrink by around GBP23 bln this month as it refrains from recycling
maturing holdings.
America
The Fed funds market has
gone from an 80% chance of a 50 bp hike on February 10 to slightly less than a
100% chance of a 25 bp increase. The market had been divided between 150 bp and 175 bp in
hikes this year. Now the market is pricing in almost 125 bp.
Despite some recent US data and favorable optics, including yesterday's
stronger than expected gain in the ISM and new orders, the US economy appears
to be slowing sharply. The Atlanta Fed's GDPNow tracker puts growth at
zero this quarter, down from 0.6% in late February. Our own guesstimate
was closer to 1% annualized after the 7% expansion in Q4 21.
The ADP private sector jobs
estimate is the data highlight. The median forecast (Bloomberg survey) looks for a 375k
increase. Recall that it has seen payrolls fall by 301k in January even
though the official report showed a 467k gain. While ADP estimates
diverge in the short run, in the medium and longer-term, they are fairly
good. That warns against using it to forecast the jobs report at the end
of the week. Still, the Federal Reserve is front and center today.
Evans and Bullard get the ball rolling, but Powell's testimony in the House of
Representatives is the main event. His comments are expected to shed some
light on the Fed's disposition and balance sheet strategy ahead of the March 16
statement and press conference. After Powell's testimony, the Fed's Beige
Book in preparation for the FOMC meeting will be released. And then,
after the markets close, the Fed's Logan will discuss the Fed's asset
purchases.
The Bank of Canada is widely
expected to join the ranks of central banks hiking rates. A week ago, the swaps market was
pricing in almost a 70% chance of a 50 bp hike. Now the odds of a 25 bp
hike are slightly less than 100%. In addition, the central bank was
expected to announce its balance sheet roll-off strategy could begin as soon as
next month. It may seek to preserve some flexibility given the elevated
uncertainty. The market has about a little more than 100 bp of tightening
priced in over the next six months. That is about 25 bp less than was
expected before Russia's invasion.
After briefly trading above
the top of its range against the Canadian dollar on Monday (above CAD1.28), the
greenback tested the lower-end yesterday in the CAD1.2650-CAD1.2660 area. It held and the US dollar recovered
to around CAD1.2750. Ahead of the central bank meeting outcome, it is in
a CAD1.2700-CAD1.2750 range. We suspect that the risk-off mood will
offset the impact of the rate hike and higher oil and commodity prices.
Look for a retest on the CAD1.2750-CAD1.2800 area. The greenback
is bid against the Mexican peso. It is approaching last week's high
near MXN20.7850. A move above there targets the year's high by
MXN20.9150. We note that with falling output, Mexico is not able to take
advantage of the higher oil prices. The central bank's quarterly
inflation report is released today. The risk is for another 50 bp
hike later this month when Banxico meets.
Disclaimer
Reviewed by Marc Chandler
on
March 02, 2022
Rating:
