Overview: Most of the G10 currencies are trading quietly in narrow ranges today. After a slightly firmer than expected national
CPI reading, which still moderated, and a pullback in US yields, the Japanese
yen is the strongest of the major currencies. The dollar has pulled back from
almost JPY151 to nearly JPY150. The New Zealand dollar is the weakest, off
about 0.2% ahead of tomorrow's central bank meeting. After selling $127 bln of
coupons yesterday, the US Treasury comes back with $42 bln seven-year note
sales and $80 bln in a 42-day cash-management bill. A sharp drop in Boeing
orders will make for a poor durable goods orders report, but more generally,
capex looks set to slow after a sharp expansion in Q2 23 and Q3 23, perhaps
ahead of the November election. Meanwhile, congressional leaders go to the
White House today to see if a partial government shutdown at the end of the
week can be averted and aid to Ukraine secured.
After profit-taking was seen yesterday,
most large Asia Pacific equity markets advanced today, including a 1.2% rally
in China's CSI 300 and a nearly 1.5% rally in mainland shares that trade in
Hong Kong. Taiwan and South Korean markets were exceptions and recorded modest
losses. Europe's Stoxx 600 has steadied after losing about 0.35% yesterday, its
biggest loss in nearly two weeks. US index futures are steady to slightly
firmer. European 10-year yields are mostly two basis points lower. Ten-year
Gilt yields are around three basis points lower after the BRC reported the
smallest increase in shop prices (2.5% year-over-year) in two years. Gold is
firm, but the yellow metal remains within last Friday's range (~$2016-$2041). April
WTI recovered yesterday from a six-day low near $75.85 to $7800 and is trading
quietly today with a $77-handle.
Asia Pacific
The moderation of Japan's January CPI was
telegraphed by the Tokyo report out late last month that showed the headline
and core rates falling below 2%. Due to methodological differences, the national figures run a
little hotter than Tokyo, but the headline and core rates eased to 2.2.% and
2.0%, respectively from 2.6% and 2.3%. They have not been lower since March
2022. The measure that excludes fresh food and energy slowed to 3.5% from 3.7%.
That is the lowest since January 2023. Tokyo's February CPI is due next week
(March 5). Although the January CPI was a bit higher than the median forecast
in Bloomberg's survey, the market took it in stride. Japan's two-year yield
edged up by a single basis point and the dollar initially fell from about
JPY150.70 to JPY150.50. It was sold from JPY150.50 to JPY150.10 several hours later
into the end of local sessions, helped by the pullback in the US 10-year yield.
The question for many is whether the
unexpected economic contraction in Q4 23 and core inflation below target will
impact the outlook for BOJ policy. Indeed, we expect more poor real sector data this week, with a
weak recovery in retail sales, and a sharp drop in industrial production and
housing starts. We suspect an exit from negative interest rates at the April
BOJ meeting remains the most likely scenario. Under Governor Ueda's leadership,
the decision to lift the overnight target rate out of negative territory is
more technocratic in nature, it makes the conduct of monetary policy more
difficult, than a reflection of strong price pressures, as was the case in the
US and Europe.
The Reserve Bank of New Zealand meets
first thing tomorrow. Governor
Orr has sounded among the most hawkish of G10 central banks. The quarterly CPI
measure peaked at 7.3% in Q2 22 and stood at 4.7% at the end last year. The
target rate has been at 5.5% since last May. The swaps market has about a
1-in-4 chance discounted for tomorrow and the odds rise to about 50/50 at the
May meeting. However, by the end of the year, the swaps market has the
overnight rate around 5.25%. The economy contracted by 0.3% in Q3 23 but looks
to have returned to growth in Q4 23 (due March 21). The New Zealand dollar
slipped by 0.5% last year after falling 7% in 2022. Amid the broad pullback in
the US dollar in Q4 23, the Kiwi rose by almost 5.4%. It is off about 2.5% so
far this year.
The rise in US yields yesterday,
especially after the weak auction results for a record $64 bln five-year note
sales. helped the greenback climb back up to almost the year's high set after
the US CPI on February 13 near JPY150.90. There are options for around $830 mln expiring today at JPY151
and almost $1.8 bln struck there that expire tomorrow. Above there, the high
from 2022 and 2023 near JPY152.00 beckons. However, with yields pulling back
and some yen purchases after Japan's CPI figures, the dollar fell to nearly
JPY150.10 in late Asia Pacific/early European turnover. The euro recorded an
outside up day against the yen yesterday, trading on both sides of the
pre-weekend range and settling above it high. It set a new 2024 high slightly
above JPY163.70. A 15-year high was set last November near JPY164.30. The key,
we think, is the 10-year US yield and a poor US durable goods orders report
today could cap the yield today. However, tomorrow Japan will likely report a
poor data that may warn of a continued economic contraction at the start of
this year. The Australian dollar's eight-day rally ended
yesterday. The nearly 0.5% decline offset in full last week's gains.
Follow-through selling today was limited to the $0.6525 area. The Aussie
recovered to almost $0.6560, where it has been greeted with by sellers in early
Europe. A close above $0.6565 would be constructive. The bounce in the
yen has failed to lift the yuan and the dollar continues to hover near CNY7.20,
without moving above. The PBOC set the dollar's reference rate at
CNY7.1057 (CNY7.1080 yesterday). Ten institutions contributed their forecasts
leaving eight after the highest and lowest were excluded (range: CNY7.1072 to
CNY7.1982) for an average of CNY7.1966 (unchanged from yesterday). The dollar
is rising against the offshore yuan today for the fourth consecutive session
after ending a six-day rally last Thursday.
Europe
Eurozone money supply M3 bottomed last
August, contracting 1.3%. The 0.01% year-over-year increase in January is the fifth
consecutive month of improvement. Ironically, the better money supply and
better credit figures are being seen as inflation is set to slow markedly. The
preliminary estimate of February CPI, due Friday, is expected to ease toward
2.5%-2.6% (from 2.8% in January and 2.9% in December). The 0.6%
month-over-month rise that the median forecast in Bloomberg' survey would put
the three-month annualized rate around 1.2%. The base effect warns that the year-over-year
measure will fall sharply in the next two months (March and April) and a
sub-1.5% reading seems reasonable.
The euro reached $1.0860 yesterday, a
little shy of $1.0865 where almost 2.4 bln euros in options expire
tomorrow. It briefly
traded above the strike in early European activity before sellers emerged and
knocked it down to session lows near $1.0840. Another set of options for
1.75 bln euros expire at $1.0850 tomorrow too. The euro recorded the low for
the year on February 14, the day after the US January CPI. Since then, it has
risen in eight of nine sessions through yesterday. Last week's high was near
$1.0890. We have identified the $1.0900-20 area as important resistance. So
far, today is the fourth consecutive session the euro has not traded below
$1.08. Nearby support is seen in the $1.0830 area and intraday momentum
indicators are stretched. Yesterday, sterling traded inside the
pre-weekend range, which itself was inside last Thursday's range
(~$1.2610-$1.2710). Still, sterling managed to extend its advance for
the fifth consecutive higher close. However, it does not seem to be going
anywhere quickly. It is trading within yesterday's range (~$1.2655-$1.2700). A
move- above $1.2710 may run into offers around $1.2750. The 2024 high was set
on January 12 near $1.2785. The GBP400 mln of options at $1.28 will off today
uneventfully. With the setback to session lows near $1.2670 in the European
morning, the intraday momentum indicators are oversold.
America
The US economy expanded by 4.9% in Q3 23
and 3.3% in Q4 23. The
issue is not whether the growth is sustained but about the pace and extent of
the economic moderation. In Bloomberg's survey with 71 respondents, only three
economists have Q1 24 at 2.5% or above. The Atlanta Fed GDP tracker will be
updated later today. It stood at 2.9% as of February 16. January durable goods
orders likely were dragged lower by the dramatic drop in Boeing orders.
Excluding aircraft and defense orders, durable goods orders may have risen by
0.1% in January, half of the Q4 23 average increase. Capex is expected to slow
around 1.1% in H1 24 (annualized pace from a little more than 12% in H2 23.
Meanwhile, 11 Fed officials are scheduled to speak this week. In general, there
seems to be a broad agreement 1) there is little sense of urgency regarding
rate cuts and 2) the median forecast among Fed officials in December was for
three rate cuts this year, and this is unlikely to changed significantly when
updated next month.
Mexico reports January trade figures
today. Mexico
recorded a $5.5 bln trade deficit last year. The shortfall was $26.5 bln in
2022. There have been numerous articles in the financial press playing up
China's exports to Mexico. If these exports are finished goods, then claims
that Chinese companies are using Mexico to avoid US tariffs on Chinese goods is
fair but there is still a domestic content requirement, which the USMCA
toughened compared with the earlier iteration under NAFTA. If Chinese goods
imported by Mexico are consumer goods, meant for domestic consumption, no harm
no foul. On the other hand, Mexico's imports from China could be semifinished
goods or capital equipment as plants are built to produce goods that will be
later exported may cause greater consternation among American observers and
policymakers who have argued that US production of goods in China, such a
General Motors, should not be counted alongside US exports to China to arrive
at a comprehensive measure of US penetration. We argue that for historical
reasons (overvalued dollar and foreign protectionism) encouraged US companies
to pursue a direct investment strategy as opposed to the more traditional
export-orientation to service foreign demand. Sales by majority owned affiliate
of US companies has consistently been greater than US exports for more than
half a century. The same is now true for Japan and for similar reasons. China's
movement in the same direction may be driven by real or threatened
protectionism.
The implied three-month
volatility of the Canadian dollar is slightly above 5%, a four-year low. As typically is the case, it is the lowest
volatility among the G10 currencies. Although the greenback has settled higher
in all but one week this year (first eight), for the better part of the past
seven weeks, it has traded between roughly CAD1.3350 and CAD1.36. Moreover, for
the tenth session today, the US dollar continues to trade in the
CAD1.3440-CAD1.3585 range established on February 13, the day the US reported
January CPI. There are $500 mln of options at CAD1.3550 that expire today.
There are options for another $600 mln that expire tomorrow at CAD1.3570. The
greenback slipped to almost $1.3490 in the European morning and found new
bids. Meanwhile, the US dollar continues to fray the five-week
downtrend line against the Mexican peso but has not settled above it. It
comes in today around MXN17.1170. The dollar is trading near a three-day low
against the peso near MXN17.05 in Europe. With intraday momentum indicators
stretched, we do not look for strong follow-through selling in North America
today. The US dollar also pulled back against the Brazilian real. After
approaching BRL5.0 before the weekend, the dollar slipped to almost BRL4.97.
Nearby support is seen in the BRL4.96 area. A small rise in Brazil's IPCA CPI
today (to ~4.55% from 4.47%) is unlikely to deter the central bank from cutting
the Selic rate again next month. At 11.25%, the real rate is punishing. That
same applies to Mexico which has similar inflation and overnight target rate,
but unlike Brazil (Colombia, Chile, and Peru), Banxico has not begun the easing
cycle.
Reviewed by Marc Chandler
on
February 27, 2024
Rating:
