The Greenback Continues to Trade Heavily

Overview:  US officials called for a pause in the J&J vaccine, and the company has delayed the roll out in Europe.  The market seems to be looking past what appears to be an abundance of caution that now looks to last a few days.  Risk-taking appetites have barely been impacted.  Most equity markets are firmer today.  In the Asia Pacific region, Japan was a notable exception, and a poor core machinery order reported did not help.  Europe's Dow Jones Stoxx 600 is firm.  US shares are mixed ahead of the earnings report of a few large banks and Coinbase IPO.  The US bond market has absorbed the week's heavy coupon without stress, and around 1.63%, the US 10-year yield is a couple basis points lower than last week's settlement and 10 bp lower than where it was at the end of Q1.  European benchmark yields are mostly softer, though a slightly higher than expected Swedish inflation appears to be weighing on its bonds.  The dollar remains heavy.  It is slipping against all the majors, but the Canadian dollar and Swiss franc. The Antipodeans, Scandis, and sterling are leading the move.  Most emerging market currencies are also higher, led by South Korea, Russia, and Turkey.  The JP Morgan Emerging Market Currency Index is appreciating for the second consecutive session.  Gold is a little softer and confined to a $10 range below $1750.  Iran's push for 60% enrichment threatens a new disruption in efforts to get it and the US back into the former agreement, which means the curbs on its oil will continue.  US API also estimated inventories fell (~3.6 mln barrels) for the third week.  June WTI is up $1 barrel to around $61.30, near two-week highs.  

Asia Pacific

Core machine orders in Japan unexpectedly fell by 8.5% in February.  Bloomberg's survey's median forecast called for a 2.5% gain after a 4.5% drop in January.  The weakness was purely a domestic event.  Foreign orders surged over 76% month-over-month and were the fifth consecutive month of increased foreign orders.  The foreign orders were twice the private domestic orders, where the service sector orders were particularly weak (-10.9%).  The virus restrictions squeezed the domestic economy, while the Capex cycle in other Asian countries, especially China, points to favorable exports.  The outlook is more favorable.  The Tankan survey showed Japanese companies plan on increasing Capex and preliminary March machine tool orders reported earlier this week rose.  

China's persistent harassment of Taiwan with increasingly more jet fighters and bombers runs parallel to Russia's build-up of forces near Ukraine.  Ukraine is not a member of NATO, though it wishes it were, and its overtures to that effect did not sit well in Moscow.  Taiwan's support is more ambiguous.  The US talks in terms of helping Taiwan defend itself or making sure it can.  This can be construed to mean selling advanced weapons.  There is no mutual defense treaty.  However, a bill submitted by a Senator (FL-R) would end the strategic ambiguity in favor of Taiwan.  The strategic ambiguity was initially designed not to leave Beijing guessing America's intent but to discourage Taiwan from acting unilaterally and declaring its independence.  So far, the Biden administration is pushing at what China considers a red-line and extend the direction that Trump had begun.  The State Department will be issuing new guidelines to allow more US officials to meet with Taiwanese officials.  Biden sent a small "unofficial" delegation to Taiwan and marks the 42nd anniversary of the Taiwan Relations Act. 

The Reserve Bank of New Zealand did not change its stance. The cash rate remains at 25 bp, and the Long-Term Asset Purchases of NZD$100 bln will continue.  The central bank warned that it is still prepared to lower rates if necessary.   The New Zealand dollar had been bumping against resistance around $0.7060 for nearly the past two weeks and jumped above $0.7100 for the first time since March 23.  Its gains today of about 0.85% (~$0.7115) is the most in nearly two months.  Separately, Singapore's Monetary Authority maintained its monetary settings but seemed to be a little less dovish with its guidance as it is more confident about a stronger recovery than it had previously expected.  At the same time, Singapore reported Q1 21 growth of 2% quarter-over-quarter, which means the economy is about 0.2% bigger than a year ago. 

The dollar has slipped below JPY109 for the first since March 25 to find bids near JPY108.75.  The greenback was testing the JPY109.75 area yesterday but has not been able to re-establish a foothold above JPY110 since early last week.  The five-day moving average crossed below the 20-day average yesterday for the first time since early January.  The JPY108.65 area corresponds to a (38.2%) retracement of the rally from the late February low near JPY105.00.  A break out would target the JPY108.00 area.  There is a $525 mln option at JPY108.50 that expires today.  After trading sideways for the better part of the past two weeks, the Australian dollar has jumped to a three-week high near $0.7700, where an option for A$700 mln expires today.   Tomorrow, another option expires for about A$545 mln, and another for A$620 mln at $0.7750.  The next level of chart resistance is seen near $0.7730.  The greenback extended its pullback against the Chinese yuan for a third consecutive session.  It has finished the mainland session below the 20-day moving average (~CNY6.54) for the first time since late February.  The PBOC set the dollar's reference rate at CNY6.5362, in line with expectations.  

Europe

After Germany, France, and Spain reported considerably poorer industrial production reports than economists expected, the aggregate figure held up better than feared.  The 1.0% decline in February's industrial output compared with the median forecast for a 1.3% decline.  In any event, it offset January's 0.8% rise.  GDP figures for Q1 are due at the end of the month, and some French and German officials have been hinting that it is possible that their economies may have (barely) escaped a contraction.  

Some observers attribute yesterday's underperformance of sterling to news that the most outspoken hawk at the BOE, the chief economist Haldane, is stepping down after the June MPC meeting.  While most central bankers seem to be emphasizing the transitory and technical nature of the coming pick-up in prices, Haldane was accusing them of being complacent.  Fiscal stimulus and the broader re-engagement of the economy mean strong growth, but most expect it to be short-lived.  Haldane dismissed this view as "Chicken Little."   However, we note that along with sterling, the other two top performers so far this year, the Canadian dollar and Norwegian krone, also underperformed.  It seems that pause in J&J vaccines offers a more likely explanation.  The developments with AstraZeneca and now J&J are not the kind of things that bolster confidence in what appears to be a significant minority of people.  

Sweden reported firmer than anticipated March inflation.  Headline CPI rose by 0.2%.  Economists had expected a flat report.  The year-over-year rate rose to 1.7% from 1.4%.  Riksbank officials prefer the underlying measure that uses fixed mortgage increase rate, CPIF.  It was also firmer than expected, increasing by 0.2% for a 1.9% year-over-year pace, the highest since May 2019.  The Riksbank meets on April 27.  

The euro rose to its best level in nearly four weeks today, near $1.1975.  It broke out of its narrow one-week range yesterday, and follow-through buying lifted it further today.  Today's high corresponds to a (50%) retracement of the decline since the late February high near $1.2245.  The next retracement (61.8%) is close to $1.2035.  It has lost some momentum as the European morning progressed.  Initial support is seen pegged in the $1.1920-$1.1940 area.  Sterling briefly poked above $1.38 for the first time in a week and triggered some mild selling pressure.  Trendline resistance is seen near $1.3850.  Support is likely in the $1.3740-$1.3750 area.  The euro rose above GBP0.8700 briefly yesterday, which it had not seen in over a month.  It has stalled and consolidating today around GBP0.8680.  A break of GBP0.8640 would be notable.  

America

The US CPI jumped more than expected, but the markets largely shrugged it off.  The dollar fell to new lows against several major currencies, including the euro, and the Dollar Index eased to its lowest level since March 23.  Half of the headline's 0.6% increase reflected an increase in the core rate, where the effect of economic and social re-opening was evident.  Recreational service prices increased by 0.8%.  Hotel room price rose by 4.4%.  Used car prices rose, and the cost of auto insurance increased by 3.3%.  Rents rose by 1.8%.   The half of the headline rate not accounted for by the core rate was largely a function of the 9.1% surge in gasoline prices.  

Although it remains an open possibility, the Federal Reserve did not alter its bond-buying allocation in yesterday's announcement, which runs through May 13. The Federal Reserve wants to buy Treasury bonds in proportion to their supply. Given the reintroduction of the 20-year bond and the increased size of other coupons, issuance suggests that they may still boost the purchases of the 7-20-year bucket. The possibility of yield curve control or shifting buying away from issuance and toward containing the rise in long-term yields has faded.  Officials are viewing the rise in yields to optimism about the future. The market is taking seriously the adoption of the average rate inflation target, even though the period the average covers has not been made explicit.  

The US diary today includes mortgage applications and import/export prices.  Late in the session, the Beige Book for the April 28 FOMC meeting will be released.  It is likely to be upbeat.  Several Fed officials speak as well, and the highlight is Chair Powell's talk to the Economic Club of Washington near midday.  He is unlikely to break new ground and probably repeat the interview's main points on 60-Minutes this past weekend.  Tomorrow, the US is expected to report strong retail sales and industrial output figures.  Neither Canada nor Mexico has economic reports today. 

The US dollar reversed lower against the Canadian dollar yesterday after approaching the upper end of its nearly three-week trading range.  After rising to about CAD1.2630 yesterday, the greenback was sold off and settled on its lows near CAD1.2535.  It is trading quietly now, around CAD1.2550.  There are roughly $1.5 bln in options struck between CAD1.2490 and CAD1.2500 that expire today.  Another for $840 mln expires tomorrow at CAD1.2480.  Similarly, the greenback tested the upper end of its recent range against the Mexican peso yesterday (above MXN20.24) and reversed low to almost MXN20.04.  It has not traded below MXN20.00 since mid-February.  Initial resistance now may be encountered around MXN20.12-MXN20.15.  

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