Overview: Often it is said that what the Fed does is more important than what it says. But this is not so today. There is little doubt that the Fed continues to remain on hold but it will updates its forecasts, and Chair Powell will likely reiterate his recent assessment that the economy is in a position that allows the central bank to be patient and wait for clearer signals of the impact of the administration's policies. The Summary of Economic projections may be the most important part of the forward guidance today. Ahead of the FOMC outcome, position-adjustment is the main theme today. This means a short-covering lift to the greenback, but it remains within recent ranges. The dollar is firmer against all the G10 currencies and most emerging market currencies. Of note, the strong dollar selling pressure emanating for Europe recently seems to have eased today.
Equities are mixed today. This is true within the Asia Pacific area. Europe's Stoxx 600 is off fractionally for the first time in four sessions, while the US index futures are slightly firmer. Benchmark 10-year yields are 2-3 bp softer in Europe. The 10-year US Treasury yield is steady around 4.28%. Gold reached a new record high near $3045 before it to has succumbed to profit-taking pressures that took it back to around $3022. It was snapped up in Europe and is now back above $3030. May WTI reversed lower yesterday. After reaching $68.50, its highest level since March 3, it was sold through and settled below Monday's low. Follow-through selling today has seen it test $66, around where it is languishing now.
USD: After a brief attempt at the upside in early North American trading yesterday, when the session high was recorded slightly north of 103.65, around where it met sellers on Monday, the Dollar Index made a marginal new low for the year near 103.20. It recovered to about 1033.70 in Asia Pacific turnover today but stalled in Europe. Europe appears to have led the recent dollar selling. The Federal Reserve meeting dominates today's events. It is one of those times where what it says is more important than what it does. It will do nothing, and while Fed Chair Powell may not add much to what he said recently about central bank's cautiousness given the policy uncertainty coming from the new administration, the updated Summary of Economic Projections may provide insight into what officials are thinking. Recall that the median Fed official forecast in December was 2.1% growth this year (down from 2.8% in 2024) and both the PCE headline and core rate converging at 2.5% this year (from 2.5% and 2.8%, respectively in 2024). There seems to be a bias in market expectations for the median projection to see somewhat slower growth and firm prices as a result of the administration's policies. The median dot was for two cuts this year. That still seem reasonable but a close call. Before the debt ceiling deal was reached, there was some speculation that the unwinding of the Fed's balance sheet would stop. This seems less likely now.
EURO: The euro's session low yesterday, slightly below $1.09 after the surge in US housing starts (11.2% in February vs. 1.4% median forecast in Bloomberg's survey) was met eager buyers that drove the euro back toward the session high (~$1.0955). Whether the "buy on dip" activity remains intact is being tested today. The euro pulled back to about $1.0875 today, holding slightly above Monday's low. It has resurfaced above $1.09 in early European turnover, around where it hovers ahead of the North American open. Meanwhile, the US two-year premium over Germany has rebounded by about 22 bp since the five-month low was set earlier this month near 166 bp. We find the exchange rate is often sensitive to the change in the premium, and this movement should begin lending the dollar some support, though today's move may be more about position-adjustment ahead of the FOMC outcome. Germany's Bundestag approved the new fiscal initiative yesterday, as widely expected. The Bundesrat is expected to vote in favor of the measure tomorrow. The economic calendar is light until next Monday's preliminary PMI.
CNY: The dollar remains pinned near the lowest it has been since the US election, set last week near CNH7.2155. It is trading firmer today to reach nearly CNH7.2415. The week's high was set Monday closer to CNH7.2450. Note that the CNH7.22 area corresponds to the (38.2%) retracement of the dollar's run-up from last September's low (~CNH6.9715). The PBOC set the dollar's reference rate at CNY7.1697 (CNY7.1733 yesterday). The changes to the fix so far this week have been minor, it has shown slightly greater movement than it has. This is something we will continue to monitor, given the importance of the reference rate in managing the exchange rate. Chinese banks will most likely set the loan prime rates tomorrow unchanged from last month at 3.10% and 3.60% for the one-year and five-year tenors, respectively. The PBOC does not appear to be in a hurry to ease monetary policy, even though the yuan is trading relatively firmly. It has emphasized fiscal efforts and may want to keep some powder dry if needed to offset the US tariffs.
JPY: Surprising no one, the BOJ left policy on hold and Governor Ueda added concerns about US trade policy. The BOJ meets next on May 1, and this gives officials time to see the US reciprocal and sector tariffs. According to some estimates about 0.75% of Japan's GDP is exposed to US auto tariffs and almost 1% of GDP if auto parts are also targeted. Still, we know that the Japanese economy is off to a weak start of the year and the 3.5% decline in January core machine tool orders (median forecast was for a 0.1% decline in Bloomberg's survey) is a reminder. The dollar's peak yesterday slightly shy of JPY150, where nearly $1.5 bln of options expired took place in the aftermath of the large rise in US housing starts. The greenback poked briefly above JPY150 today, but sellers quickly pushed it back to around JPY149.15 before strong bids emerged lifting it back toward JPY149.70 in Europe. Japan reported February trade figures today. True to its powerful seasonal pattern the balance improved in February from January. The JPY584.5 bln surplus compares with the JPY415 bln deficit in February 2024 and a JPY941 bln deficit in February 2023. Exports jumped 11.4% year-over-year, the strongest showing since last May. The threat of US tariffs may have helped flatter exports. Imports, which in January were 16.2% higher year-over-year unexpectedly fell by 0.7% in February.
GBP: Sterling was initially sold in North America after poking slightly above $1.30 in European turnover yesterday. Buyers stepped in ahead of $1.2950 and by early in the North American afternoon, sterling was again crowning through $1.30. We have suggested the band of resistance extends toward $1.3050. It is trading inside yesterday's range today and mostly in a $1.2960-$1.3005 range. The week's low was slightly below $1.2920. The quiet economic diary picks up tomorrow with the employment data and the Bank of England meeting. The labor market appears to be gradually slowing, but not sufficiently to spur a policy response. Indeed, while the market recognizes nearly no chance of a rate cut tomorrow, it has about a 75% chance of cut at the May 8 meeting, but a cut is not fully discounted until August.
CAD: The US dollar recorded a marginal new eight-day low yesterday (~CAD1.4270) around the US housing data and the larger than expected rise in Canada's CPI. The greenback recovered and set new session highs in the North American afternoon near CAD1.4320. The weakening of the US dollar's tone is evident in the five-day moving average slipping below the 20-day moving average today. Still the greenback is better bid today and traded to CAD1.4330. Nearby resistance is seen in the CAD1.4340-50 area. The end of the temporary sales tax holiday saw headline inflation pop. The 1.1% increase, nearly twice what the median forecast in Bloomberg's survey projected, matches the largest monthly increase since 1997. The underlying core rates were better behaved but were still firmer than expected at 2.9% (up from 2.7%). The odds of an April rate cut were pared to about 30%. As recently as March 11, the swaps market had about a 50% chance of a 50 bp cut discounted. Attention turns to January retail sales at the end of the week, which are unlikely to have maintained the December momentum when they surged by 2.5%. Meanwhile, anecdotal reports suggest a quiet but determined consumer boycott of US goods is taking place. Lastly, Prime Minister Carney is expected to call for a snap election before parliament returns on March 24.
AUD: The Australian dollar was turned back from its approach to $0.6400. It was pushed back to around $0.6345 yesterday. The losses were extended today to slightly below $0.6320 to test Monday's low. The failure to gain a foothold above $0.6400 may frustrate the new longs. A break of $0.6300 may see some forced out. Australia reports February employment data early tomorrow. The country created an average of 37.1k jobs a month in 2024 and an average of 31.1k jobs a month in 2023. Of those positions almost 25k a month were full-time positions last year and 8.6k in 2023. The challenge is that jobs growth has lagged the increase in the participation rate. This has lifted the unemployment rate to the upper end of its two-year range (4.1% in January).
MXN: Monday was the first session since October 24 that the greenback remained below MXN20.00. After the stronger than expected US data yesterday, the dollar ran up to MXN20.0960. As we saw with the other dollar pairs, the greenback was sold into the bounce. It made a new low in late dealings near MXN 19.91. It neared MXN19.90 earlier today bounced in late Asia/early European turnover to almost MXN20.03 where it was met be sellers who pushed it back to around MXN19.95. The next important Mexican data point is the CPI for the first half of March on Monday and barring a significant surprise the central bank will likely deliver another half-point cut a few days later (March 27). It would be the second consecutive half-point reduction and would bring the overnight rate to 9.0%. In the swaps, market sees the terminal rate near 7.75%. Meanwhile, ahead of the tipped 1.0% hike by the central bank of Brazil later today, the dollar fell to a new low since November 7 yesterday near BRL5.6560. Support is seen around BRL5.60-5.61.
Reviewed by Marc Chandler
on
March 19, 2025
Rating:
