Overview: The Reserve Bank of Australia
hinted that it was getting closer to a rate hike. The Australian dollar
was bid to its best level since the middle of last year. Australian
stocks advanced in a mixed regional session while China and Hong Kong markets
were closed for the local holiday. BOJ Kuroda called the yen's recent
moves "rapid." The yen is sidelined today as the dollar weakens
against other major currencies, led by the Antipodeans. In addition to the
yen, the Swiss franc and euro are also among the laggards. European
equites have edged higher and the Stoxx 600 is at its best level since
mid-February. US futures have turned lower in the European morning. The US
10-year yield is around five basis points higher at 2.45%. European
yields are mostly 5-10 bp firmer. Gold is quiet in a $1925-$1934 range. May WTI is extending yesterday's 4% advance to add more than 1% to
probe the $105 a barrel level. It finished last week near $99.25.
US natgas is up almost 2.7% and is approaching the $6 level. It has only
fallen in one week since the Russian invasion of Ukraine. Europe's
benchmark is almost 3% lower (-0.3% yesterday) after jumping almost 12% last
week. Iron ore is higher for a third session, while copper is up almost 1% after yesterday's 2% advance to trade at new four-week highs. May
wheat is up 3.2% on top of yesterday's 2.6% gain. It fell near 10.7% last
week.
Asia Pacific
The Reserve Bank of Australia dropped its
reference to being patient and this was all the encouragement the market
needed. The Australian dollar rallied, and local rates
jumped. The cash rate futures now fully imply a hike in June. Yesterday,
there was only an 80% chance discounted. The upcoming inflation and next
month's wages are still important pieces of the policy puzzle. A move in
June would come after the election which must be held by late May.
Separately, the preliminary service and composite PMI were revised lower and
now show a decline from February. The service PMI was revised to 55.1
from 571 and 57.4 in February. The final composite PMI is at 55.6, down
from a 57.9 flash reading and 56.6 in February.
While the pandemic and earthquake hobbled the
Japanese economy in Q1, the groundwork for a recovery is becoming
clearer. Labor cash earnings were twice as strong as the median
forecast in Bloomberg's survey projected, rising 1.2% in February and the
January series was revised higher (1.1% from 0.9%). Rising inflation
meant that in real terms they were unchanged. The median forecast looked
for a 0.7% drop. The preliminary March service PMI was revised higher
from 48.7 to 49.4, while the final composite reading edged above the 50
boom/bust level (to 50.3 from 49.3 and 45.8 in February.
Last week, Japan's Minister of Finance
suggested that impact of the yen's weakness should be reviewed. We
suggested that it was a small first step on the intervention escalation ladder.
Earlier today, BOJ Governor Kuroda took another small step and characterized
the recent moves as "rapid." This reinforces our sense that the
JPY125 area marks the upper end of a new range for the dollar. Our first
stab at the lower end of the range is around JPY121.00 but it might extend into
the JPY119.50-JPY120 area.
The dollar is trading quietly against the yen
today, mostly within yesterday’s JPY122.25-JPY123.00 range. We
are more inclined to see the greenback trading lower in North America and
re-test the lows. The consolidative phase in the Australian dollar
has ended with the surge to almost $0.7640 today. It has surpassed
the $0.7610 area, which represented the (61.8%) retracement of the decline from the February 2021 high slightly above $0.8000 to the late January
low near $0.6980. The next important chart area is in the $0.7675-$0.7700
area. With China's mainland market still closed, the offshore
yuan continues to trade quietly. It was largely confined to
yesterday's range and is virtually unchanged since the weekend.
Europe
The final eurozone PMI readings were
mixed. There was something for everyone. The German
readings were revised higher. The March service PMI stands at 56.1, up
from the 55.0 flash reading, and an improvement for the 55.8 February
report. The composite is at 55.1 rather than 54.6, but still a little
softer than the 55.6 in the prior month. French readings were little
changed. Services were unchanged at 57.4, but the composite was revised
to 56.3 from 56.2 after 55.5 in February. Italy's service PMI was
stronger than expected at 52.1 compared with 52.8 in February. The
composite was spot on with expectations at 52.1 (down from 53.6). Spain
disappointed. The service PMI fell to 53.4 from 56.6 and the composite
stands at 53.1 vs. 56.5 previously. The net result was that the aggregate
service PMI stands at 55.6, up from the 54.8 flash reading and a touch better
than the 55.5 February report. The composite was revised to 54.9 from
54.5 but still a little softer than February's 55.5.
The UK PMI was revised higher from the
preliminary estimates. The service PMI stands at a lofty
62.6. The flash report has shown improvement to 61.0 from 60.5 in
February. The composite stands at 60.9 compared to the 59.7 preliminary
estimate and 59.9 in February. It is the strongest since last June.
The details were a little disconcerting. While output prices rose to a
new record high, business optimism is at a 17-month low. Next week, the UK
reports inflation and employment figures.
The euro posted a key reversal last Thursday,
turning back from a four-week high near $1.1185 and settled below the previous
day's low. Follow-through selling saw it test support near
$1.0960 yesterday. It is consolidating today in a narrow quarter-cent range
below $1.0990. It takes a move above $1.1015 to stabilize the tone but
regaining the $1.1050 area is important to lift the outlook. Sterling
appears to be going nowhere quickly. It continues to trade in
the range set last Wednesday (~$1.3085-$1.3185). It is trading with a
firmer bias today, but is holding below $1.3150, near where it peaked before
the weekend. Elsewhere, we note that the euro is consolidating at four-week lows against the Swiss franc. It needs to regain a foothold
above CHF1.02 to stabilize the tone. A double top may have been carved that
projects toward parity. The rise in sight deposits reported yesterday is
consistent with SNB intervention. Lastly, with Orban securing a fourth
term in Hungary, the confrontation with the EU will likely heat-up. Orban
has opposed EU sanctions on Russia but has not vetoed any of them. Still,
there are outstanding issues. The euro carved a base last week against
the forint and now appears set to appreciate against it. We suspect there
is scope of a 3%-5% advance.
America
The US took another step in weaponizing the
dollar to squeeze Moscow. Russian government accounts will no
longer be able to make dollar payments through US financial institutions. The chokehold gets tighter. Moscow is forced to draw down their dollar
holdings that the Russia central bank has, spend its income revenue, which is
estimated to be around $1 bln a day, or default on its obligations.
The US reports the February trade
balance. A small improvement from February should not hide the
significant deterioration that is taking place. The combined Jan-Feb
deficit last year was about $132.7 bln. If the median (Bloomberg survey) projection
of a $88.5 bln shortfall is accurate, the Jan-Feb shortfall this year would be
a little more than $178 bln, a 34% deterioration. Canada reports its
February goods trade balance. If the median (Bloomberg survey) is fairly
accurate, Canada's Jan-Feb surplus will be a little more than 50% greater than
the year ago period.
The final service and composite PMI and the
ISM services are also on tap. Recall that the flash reports
showed unexpected gains. The service PMI improved to 58.9 from 56.5 and
the composite rose to 58.5 from 55.9. The ISM services are expected to
have improved to 58.5 from 56.5. Fed Governor Brainard will speak about
inflation today (~10 am ET). San Francisco Fed President Daly (who seems to
favor a 50 bp hike) and NY Fed President Williams also speak later today.
Recall that the NY Fed President has a permanent vote on the FOMC, and
Williams seems inclined to hike by 50 bp too.
The US dollar is trading at a four-day low
against the Canadian dollar near CAD1.2460. Last week's low,
which was also the low since last November, was around CAD1.2430. A break
targets the CAD1.2380-CAD1.2400 area. That said, we look for a bounce in
early North American activity that could see the CAD1.2480-CAD1.2500
area. Mexico has reinstated gasoline subsidies at states
bordering the US after closing them because US drivers were taking advantage of
the cheap gas to fill-up. The peso needs consolidation.
Consider that coming into today, the dollar has fallen for six consecutive
sessions against the peso. Last Monday's greenback gain halted an 11-day
slide, the longest in half a century. The dollar has fallen in every
session but last Monday's, beginning on March 11. The momentum indicators are stretched,
and the greenback's downside momentum is slowing.
Disclaimer
Reviewed by Marc Chandler
on
April 05, 2022
Rating:
