Overview: The recovery attempt of risk appetites,
reflected in the recovery and strong close in US stocks yesterday was dealt a
blow by Russia's Foreign Minister's warning of a "serious" danger of
nuclear conflict. In Asia-Pacific, most of the large equity markets
advanced. China was an exception even though the currency snapped a
five-day slide following the hike in foreign currency reserve requirements
announced yesterday. Australia's resource companies led the ASX to its
largest loss (~2%) since Russia's invasion of Ukraine two months ago.
European shares are trying to stabilize after the Stoxx 600 fell by 3.6% over
the past two sessions. US futures are softer. The US 10-year yield is a few basis points lower around 2.79%. European benchmark yields are slightly softer. The dollar is mostly firmer, though the Antipodean and yen have
edged higher. The euro's loss has been extended deeper into the
$1.06-handle and sterling still struggles to sustain modest upticks.
Among emerging market currencies, several Asia Pacific currencies, in addition
to the yuan have traded better. European currencies are taking the brunt. Gold closed below $1900 yesterday for the
first time since late February and is straddling that area in quiet
turnover. June WTI stabilized after falling to around $95.30
yesterday. An attempt on the upside stalled in front of $100. US
natgas is up 3.5% after yesterday's 2% advance. Europe's benchmark is off
1.7% after falling nearly 8% over the past two sessions. Iron ore stabilized,
rising by about 1.6% earlier today after dropping almost 9.7% yesterday. Copper is also trying to steady. It fell by more than 5%
Friday-Monday. Poor planting news is helping July wheat rise 2.1% after falling
for the past five sessions.
Asia Pacific
The PBOC cut the reserve
requirement for foreign currency deposits in a clear sign of concern about the
yuan, which had fallen sharply and was trading near 17-month lows. The 1% cut was more symbolic than
substantive. It had lifted the reserve requirements twice last year for
the first time in a decade and each move was 200 bp. Ostensibly, the
reduced reserve requirements boost the local supply of dollars and other
currencies. The Politburo's quarterly meeting is expected to announce new
measures to support the economy and counter the effect of the lockdown.
Some industries are being allowed to re-open in Shanghai, while the lockdown
continues, including autos and semiconductor producers. Universal testing
is required in Beijing and some fear that the testing is a prelude to a
lockdown. Some districts have already restricted movement.
There are four developments
in Japan to note. First,
Finance Minister Suzuki denied reports that he discussed the possibility of
intervention with US Treasury Secretary Yellen. The initial press
reported from Tokyo said that such a discussion was "likely," but in
later reiterations in what seemed like an echo chamber, it become a
definite. Given the assessment by the IMF's regional head that the yen's
gains reflected fundamentals, and the US efforts to rein in prices, the bar to
intervention is high. Second, the Japanese labor market improved marginally
last month. The unemployment rate unexpectedly eased to 2.6% from 2.7%
and the job-to-application ratio ticked up to 1.22 from 1.21. Third, the
BOJ's defense of the 0.25% 10-year yield cap had it buy JPY921.5 bln today, its
largest purchase in nearly four years. Moreover, it extended its fix-rate
purchases for the next two days, which carries it through the BOJ
meeting. Fourth, the government's support measures for the economy are
taking shape. A JPY6.2 trillion (~$48.5 bln) package that will be funded
by an additional budget and tapping into the fiscal reserves will be
submitted. The economic objective is to help curb the rise in energy
prices, ensure stable food supplies, support small and medium-sized businesses,
and help struggling families. The current Diet session ends in mid-June
ahead of the upper house elections.
The dollar made a marginal
new five-day low against the Japanese yen near JPY127.35. Buyers stepped in the middle of the
Asia Pacific session and retested the session high around JPY128.20. It
is consolidating in the European morning. The nearly 20 bp pullback in
the US 10-year yield from last week's highs has helped to blunt the upside
pressure. A break of the JPY127.25 area could spur a move toward
JPY126.75 initially. On the upside, the greenback may be capped around
JPY128.40. The Australian dollar has stabilized after falling
from about $0.7560 four sessions ago to $0.7135 yesterday. It
needs to rise above $0.7260 now to signal a correction is at hand. And
even then, the $0.7300 area may prove to be formidable resistance. While
the Chinese yuan snapped its losing streak, it still looks fragile and the relative
wide range (~CNY6.5275-CNY6.5610) suggests the market remains unsettled. The
dollar traded inside yesterday's range. The PBOC set the dollar's
reference rate today at CNY6.5590, slightly below the median projection
(Bloomberg survey) of CNY6.5606.
Europe
The ECB's Lagarde seemed
clear when she appeared on US television over the weekend. She said that the bond purchases would end
in Q3 and there was a high probability of them ending early in the
quarter. With over half of the eurozone's inflation stemming from energy
prices (in March energy prices contributed around 4.4 percentage points to the
7.4% headline rate, Lagarde did not seem to be in a hurry to hike rates.
Lagarde also noted that the Covid response in EMU focused on protecting
jobs/employment, while in the US the government replaced lost income via
transfer payments. Hawks are pushing for an early rate hike (July), but it
does not seem that a consensus has formed yet. Others seem to want to
wait for September when the forecasts are updated. The swaps market has
priced in about a 20 bp hike in July and another 55 bp before the end of the
year. This seems to be aggressive.
While the Fed's balance
sheet was expanded primarily through asset purchases, the ECB's balance sheet
also grew by extending loans. The TLTROs amounted to around 2.2 trillion euros. The
last of the loans expire in March 2024, but banks are thought likely to repay
early. Some suggest a trillion euros could be repaid in later this year
and into early 2023.
Hungary is expected lift its
bank rate by 100 bp today for the second consecutive month. If delivered it would stand at
5.4%. The central bank appears to be trying to close the gap between the
bank rate and the one-week deposit rate, which become the key rate. It
stands at 6.15% and is expected to be raised later this week by 30
bp.
The euro dipped below $1.07
yesterday for the first time since March 2020 and today it fell deeper into the
$1.06 territory. The
low in late Asian/early European turnover was slightly below $1.0675. It
has caught a little bid in late European morning turnover, but the immediate
cap looks to be around $1.0725, where an 815 mln euro option expires
today. Recall that the low set in the early days of the pandemic was near
$1.0635. Sterling is also struggling to stabilize after
yesterday's plunge that took it briefly below $1.27 for the first time since
September 2020. The pound has risen in only one session of the
past nine counting today's losses. A convincing break of $1.27 targets
the $1.25 area.
America
There is a full slate of US
economic reports today. March durable goods orders and shipments may help economists
fine-tune Q1 GDP forecasts. The first official estimate will be released
at the end on Thursday. House prices (February) and new homes sales
(March) are also due. The Conference Board announces the results of its
consumer survey and the Richmond Fed's April manufacturing survey is
due.
However, barring some shock,
the data is unlikely to matter much to the Fed. It is convinced of the economic
resilience, the strength of the labor market, and that prices pressures are way
too high. The "expeditious" course, the language that several
Fed officials have used, signals a campaign to bring the target rate to
neutral. While the risk of a 75 bp move is not very strong, the Fed funds
market is pricing in 50 bp hikes at the next three meetings and leans strongly in that direction at the fourth meeting in September. Separately, note the
heavy Treasury issuance starting today (~$165 bln in coupons to be sold this
week), and what appears to be among the busiest weeks of the year for state and
local government issuance as well.
The Bank of Canada Governor
Macklem leaned against the speculation of a 75 bp hike in his testimony before
Parliament yesterday. The
central bank hiked by 50 bp earlier this month for the first time in 20
years. Macklem also seemed committed to bringing the target rate into the
neutral range, which is seen between 2% and 3%. The swaps market has the
year-end target rate around 2.9%.
Mexico reports February
retail sales. Economists
(median, Bloomberg survey) expected a 0.8% gain after a 0.6% rise in
January. The data is too old to have much impact. Mexican President
AMLO has promised to unveil new anti-inflation proposals next week. With
inflation still accelerating, and the Fed tightening set to accelerate, Banxico
is under pressure to hike rates more the 50 bp moves delivered at the last
three meetings. It meets again on May 12.
The US dollar pulled back to
around CAD1.2685 earlier today after peaking slightly above CAD1.2775
yesterday. However,
the risk-off mood has seen the greenback return bid and recorded the session
high in the European morning near CAD1.2750. This is just above the upper
Bollinger Band. The performance of the US stock market is arguably the
number one driver of the Canadian dollar today. The greenback has
forged a shelf around MXN20.16. If that is the lower end of the
range, then the MXN20.50 is at upper end. Chinese demand for commodities
is being undermined by the lockdowns and this has spurred profit-taking in the
Latam currencies broadly, for which the peso sometimes acts as a proxy.
The US dollar is rising for the third time in four sessions against the
peso. The Brazilian real, which had been the market's darling fell 3.75%
before the weekend and another 1.7% yesterday. The dollar tested resistance
yesterday near BRL4.95. The next target is the BRL5.00-BRL5.02
area.
Disclaimer
Reviewed by Marc Chandler
on
April 26, 2022
Rating:
