Yen Tries to Snap a Six-Day Drop, while the Euro Tests $1.10

Overview: China reported stronger than expected data, but it did not prevent a further slide in mainland and Hong Kong shares today.  The Hang Seng got tagged for nearly 6% and the China's CSI 300 slumped a little more than 4.5%.  Note that the Golden Dragon Index of Chinese companies that trade in the US has fallen by more than a third since Russia invaded Ukraine.  Nearly all the regional markets but Japan fell.  Europe's Stoxx 600 is giving back yesterday's 1.2% gain plus more, and US futures are slightly softer.  Falling equities appears to be helping the bond market stabilize after yesterday's sharp sell-off. US and European benchmark yields are 1-3 bp lower, while Asian yield played catch-up to yesterday's move in the US.  The 10-year US Treasury yield is near 2.10%. The dollar is snapping a six-day advance against the Japanese that had lifted it from about JPY114.80 to JPY118.20.  The greenback is softer against major currencies, but the Canadian dollar.  The euro is pacing the move.  After testing $1.09 yesterday, the single currencies are struggling to sustain a foothold above $1.10.  Central European currencies are leading the emerging market complex higher.  Gold and oil are extending their pullback.  Gold held the $1925 area, which is about the midpoint of the rally from below $1800 that began in late January.  A break could signal a move toward $1890.  April WTI has been sold below $100 and appears headed toward support near $90.  It fell about 5.8% yesterday and is off about another 6% today.  OPEC's monthly production report is expected later today.  US natgas is around 2.3% lower, while Europe's benchmark is up 8.6% after falling 17.3% yesterday. Iron ore fell for the sixth consecutive session, during which time it has fallen about 16.5%.  Copper is firm after falling 2.25% yesterday.  May wheat is up 2.5%.  It had fallen almost 1% yesterday.  

Asia Pacific

There is much pessimism surrounding the Chinese economic outlook, but today's data for last month were mostly better than expected.  Industrial output rose 7.5% year-to-date compared with a year ago.  The median forecast (Bloomberg survey) was for a 4% increase.  Retail sales rose 6.7%, more the twice the median forecast.  Fixed asset investment jumped 12.2%.  The market expected 5.0%.  Property investment was to have contracted by 7% but instead, increased by 3.7%.  One disappointment stands out.  Surveyed unemployment rose to 5.5% from 5.1%.  Separately, China's one-year Medium-Term Lending Facility was left unchanged at 2.85%. There had been speculation that it would be reduced.  

Japan reports February trade figures tomorrow.  Without fail for more than 25 years, Japan's February trade balance improves over January.  The January deficit was nearly JPY2.2 trillion.  The February shortfall is expected to be around JPY150 bln.  Still, higher food and energy prices poses a negative terms-of-trade shock on Japan.  This coupled with some administrative prices looks likely to boost Japan's inflation reading starting next month. 

The dollar approached resistance we identified near JPY118.60 but has backed off.  Initially, the greenback looked poised to extend its advance for the seventh consecutive session against the yen, but after reaching JPY118.45, it reversed to test JPY117.70.  The dollar was extremely over-extended as it moved more than three standard deviations above its 20-day moving average (Bollinger Band is set at two standard deviations).  We see support in the JPY117.35-JPY117.40 area.  The Australian dollar extended its losses to about $0.7165.  It finished last week near $0.7280.  The $0.7150 area corresponds to a (61.8%) retracement of that rally that began in late January around $0.6970 and peaked earlier this month by $0.7440.  A close above $0.7200 may help stabilize the technical tone.  The dollar gapped higher for the second day in a row against the Chinese yuan.  The greenback reached CNY6.3860, its highest level of the year.  The reference rate was set at CNY6.3760, well above projections for CNY6.3630.  

Europe

The UK's employment report was better than expected.  Unemployment for the three-months through January fell to 3.9% and is below the pre-pandemic level for the first time.  The number of employed jumped 275k in February, more than twice what the median forecast projected in Bloomberg's survey, even though the January gain was revised to 61k from 108k.  The claimant count fell by 48k in February and by a revised 67.3k in January (from -32k).  Average weekly earnings were also a bit firmer than expected. The BOE meeting concludes on Thursday and the swaps market is pricing in about a 1-in-4 chance of a 50 bp move.  

Germany’s March ZEW survey collapsed.  The assessment of the current situation dropped to -21.4 from -8.1.  It is the lowest since last May. The expectations component plummeted to -39.3 from 54.3.  The median forecast in the Bloomberg survey anticipated a 5.0 reading.  This may warn of a marked deterioration in the preliminary March PMI due next week. 

While Ukraine's capital is under fire, it is seeking missile defense systems.  Israel has turned own its request for the Iron Dome intercept system.  Each missile costs around $50 mln and Israel says it does not have sufficient supply.  There is some speculation that the US may offer its two Iron Dome systems.   Estimates suggest Ukraine has received more than 17k anti-tank missiles and thousands of anti-aircraft missiles.  The US has warned China against materially aiding Russia following claims that Russia sought Beijing's assistance in the early days of the invasion.  

The euro recovered from yesterday's brief foray below $1.09 to reach $1.1020 today.  A move above $1.1040 is needed to signal anything of importance technically.  The intraday momentum indicators suggest this is unlikely.  Indeed, the risk is that North America brings the single currency back to the $1.0940 area. Sterling held support at $1.30, but the bounce is less than impressive.  It stalled near $1.3050.  Yesterday's high was near $1.3080, and the five-day moving average is about $1.3065.  The (50%) retracement of sterling's rally from the March 2020 low is about $1.2830 and it is the next big target below $1.30.  

America

The US reports February producer prices today.  The headline is expected to have accelerated to 10%, while the core may approach 8.7% (from 8.3%).  The market looks for a gain in the March Empire State manufacturing survey (6.1 vs. 3.1), but would anyone really be surprised with a softer report?  The focus is squarely on the FOMC meeting that begins tomorrow.  A rate hike, an estimate of the pace of unwinding of the balance sheet, and new forecasts are anticipated. 

West Virginia Senator Manchin has rejected Biden's nominee for the Fed's Vice Chair of Supervision and all but scuttling Raskin's nomination.  Manchiin has emerged as a key vote for the administration's agenda.  Recall that in 2020, Trump beat Biden by 39 percentage points in West Virginia. 

Canada reports February housing starts, existing home sales, and January manufacturing sales.  There are not market-moving data points even in the best of times.  Tomorrow, Canada reports February CPI figures and an acceleration in the headline and underlying core measures will reinforce the expectations for at least another 25 bp rate hike next month (OIS has about a 62% chance of a 50 bp move) and for its balance sheet to begin shrinking in either April or May. 

Note that El Salvador's Bitcoin bond is expected to be brought to market later this week, though some suspect it could be delayed.  A 10-year bond issued by a thermal energy company is planned, and the government hopes it can raise $1 bln, which seem awfully optimistic.  Many seem skeptical and a report suggested than about 2% of the work remittances in January used digital wallets, despite the ostensibly lower costs.  Bitcoin has lost about 20% of its value since the day before it became legal tender in El Salvador. 

After testing support near CAD1.27 at the end of last week after Canada reported a much stronger than expected February jobs data, the greenback jumped above CAD1.28 yesterday and is approaching CAD1.29 today.  Last year's high was recorded in late December near CAD1.2965. The intraday momentum indicators are stretched, but the risk-off and falling oil prices weigh on sentiment.  Support is seen in the CAD1.2825 area.  The greenback is consolidating in a narrow range against the Mexican peso.  Support is seen in the MXN20.83 area.  It has not traded below there since March 4. Initial resistance is seen near MXN21.00, though last week it reached nearly MXN21.47.  

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