Overview: Benchmark 10-year bonds yields in the US
and Europe are at new highs for the year. The US yield is approaching
2.90%, while European rates are mostly 5-8 bp higher. The 10-year UK Gilt
yield is up nine basis points to push near 1.98%. The higher yields are
seeing the yen's losing streak extend, and the greenback has jumped 1% to
around JPY128.45 The dollar is trading lower against the other major currencies but the Swiss franc. The dollar-bloc currencies and Scandis lead the move. Emerging market
currencies are mixed. Of note central European currencies are mostly higher (the Polish zloty is the chief exception) and
Asia Pacific currencies and the South African rand are softer. Most of the
large Asia Pacific equity markets, but China and Hong Kong rose. Europe's
Stoxx 600 is off around 1.4%, giving back nearly twice the gains recorded in the last two
sessions. US futures have reversed their earlier gains. Gold was turned back
from $2000 yesterday and is consolidating around $1975. June WTI is
also consolidating (~$105-$108). US natgas is snapping a five-day advance,
while Europe's benchmark is up around 6.5% after falling 8.4% yesterday.
Iron ore is off 2.6% to extend yesterday's 2.2% fall. Copper is lower for
the first time in five sessions. July wheat has come back offered after rising five times in the past six.
Asia Pacific
The yen is falling for the
13th session today and has a six-week losing streak coming into this
week. Most
recognize that the driving force is the divergence of monetary policy and
interest rates. Indeed, the trend follower and momentum traders, as
captured in the non-commercial (speculative) futures traders have their largest
net short yen position in four years (Commitment of Traders report through
April 12). Some, like the historian Adam Tooze, wonder if the yen's weakness
will reduce Japan's demand for Treasuries. The dollar has been rising for
some time. Leaving aside the panic in 2020 as the pandemic broke, the
dollar bottomed against the yen on January 5, 2021, and bottomed against the
euro the following day.
The US Treasury's portfolio
flow report (TIC), released before the weekend shows Japanese investors were
net purchasers of US Treasuries for the past three years, boosting their
holdings by about $264 bln. They were net sellers in the previous four years
(2015-2018) of a little the more than $190 bln. The data that was
released last week showed that Japanese holdings increased by $3.2 bln in
February to $1.306 trillion, which is near the record highs set last
year. Yet, while they apparently were buying Treasuries in February,
according to Japan's Ministry of Finance weekly data, Japanese investors sold around
JPY2.3 trillion (~$19 bln) of foreign bonds. Note that Japanese life insurers,
with around $3 trillion of assets are expected to announce this fiscal year's
investment strategy later this month. US Treasuries are an important way
that the weakness of the yen can be avoided.
What about other
investors? Amid a
historic sell-off in bonds, foreign investors have bought a record amount of US
securities over the six months through February (average $126 bln a month),
according to the TIC data. Finally, consider that the Federal Reserve
acts as a custodian for foreign central banks. The Treasury and Agency
holdings in custody ended last year around $3.41 trillion. As of April 13, they
stood near $3.46 trillion, a $50 bln increase in 3 1/2 months, during which
time the US 10-year yield rose by about 130 bp and the 2-year yield rose
slightly more than 170 bp. Yes, someone has been selling US bonds, but it
does not look like it was Japan or central banks. Foreign investors have
been significant buyers of US assets through February.
Japanese Finance Minister Suzuki’s
rhetoric stepped up a little. He warned about the "rapidly weakening" yen and
noted that its weakness generated "strong demerits" for the
economy. Ahead of his trip to the G7 and G20 meetings, he confirmed being
in contact with the US. The market is unpersuaded. The dollar is
making new highs in Europe near JPY128.45. The 13th session advance means that dollar
has not fallen once this month against the yen. Today is the first
session since late March, though, the dollar is above its upper Bollinger
Band (two standard deviations above the 20-day moving average). It is
found near JPY127.90 today. The JPY130 level remains the next big
target. The Australian dollar held yesterday's low slightly above
$0.7340 and returned to $0.7400. It needs to move above yesterday's
highs (~$0.7415) to boost confidence a low is in place. The Aussie has
fallen in the last four sessions, and eight of the past nine. The
US dollar is trading around CNY6.38, the upper end of its range going back to
last December. The PBOC announced nearly two dozen measures
aimed at households and small businesses to ease some economic pressures,
mostly encouraging lending that may be worth around CNY1 trillion (~$155
bln). Note too that the PBOC's transfer of CNY600 bln profits to the
government (used for tax rebates and transfers to local governments) may be the
rough equivalent of another 25 bp cut in reserve requirements. Although Chinese
officials have been restrained on exchange rate, we suspect pressure
is building for a weaker yuan. That said, for the second consecutive
session, the PBOC set the dollar's reference rate slightly lower than expected
(CNY6.3720 vs. CNY6.3730).
Europe
Russia's offensive in Donbas
appears to have begun in earnest. This may signal a new phase in the war. Europe seems
to be moving toward embargoing Russian oil. It may first move to ban oil via
Russian ships on the Baltic and Black Sea. It may be phased in over a few
months. This will not satisfy some of the critics and will take some time
it to bite. However, Russia is thought to have little storage capacity
and already reports suggest refining capacity is limited.
UK Prime Minister Johnson is
expected to offer an apology to Parliament later today. It will be his first appearance in
Parliament since the London police fined him (and Chancellor Sunak) for his
birthday party during Covid restrictions in 2020. The war in
Ukraine seemed to offer the PM a new lifeline as he appeared to have been facing
a backbench rebellion before the invasion. The parliament session could
be brutal, and the opposition is pushing for a formal censure and parliamentary
investigation. The key to Johnson's political future may be the local
elections on May 5, the same day the BOE meets. The swaps market has
about a 33% chance that the central bank hikes by 50 bp.
The euro tested the $1.0760
area, holding a couple hundredth of a cent above last week's two-year low. Although the single currency has
frayed support at $1.08, it did not close below it until yesterday. It
has managed to resurface it to reach almost $1.0815 in early European trading,
where it met fresh sellers. There is a 1.2 bln euro option struck at
$1.08 that expires today. The euro has fallen for the past three
sessions. Meanwhile, the latest polls for this weekend's run-off election
in France shows a widening lead for Macron. An average of polls
(calculated by Bloomberg) shows a little more than an eight-percentage point
gap, after Macon had an almost 5 percentage point lead in the first round. Sterling
dipped below $1.30, but also held last week's low (~$1.2975) and is trying to
snap a three-day drop. Like the euro, sterling’s session
highs were recorded in early European turnover. It reached $1.3040, which
may be the peak. Yesterday's high was closer to $1.3065. There are
a set of options for GBP470 mln at $1.30 that expire today.
America
St. Louis Fed President
Bullard is using his version of the Taylor Rule to press his hawkish
arguments. The
Taylor Rule relates inflation and GDP relative to neutrality to a certain
target for the overnight rate. Bullard, the leading hawk, argues that the
Fed funds target ought to be around 3.5% by the end of the year. Even if
the Fed were to hike by 50 bp at each of the remaining six meetings the
effective rate will be just below there. He said yesterday that while it
is not his base case, a 75 bp hike may be needed at some point. The
December Fed funds futures implies a 2.50% yield at year end. The swaps
market see the Fed funds peaking around 3% next year.
The surge in US interest
rates warns that the interest-rate sectors should be among the first to feel
the sting. Many
see the housing market as a likely candidate. March housing starts and
permits will be reported today. A 1.6% decline in starts, the median
forecast in Bloomberg's survey would be the second in three months, and put
starts lower on the year. Still, around 1.74 mln, starts will remain at
historically high levels. The same is generally true of permits. A
decline in March permits would be the second consecutive decline but anything
above 1.8 mln must be considered strong. More pressure is likely to be
seen tomorrow with the weekly mortgage applications, which likely fell for the
sixth consecutive week (through April 15) and existing home sales.
Existing home sales are expected to have fallen for the third month in the past
four. They may have slipped below a 6 mln unit annual pace for the first
time since last August. Lastly, Chicago Fed President Evans speaks at the
Economic Club of New York at lunch today. He is often perceived to be a dove,
but even the doves at the Fed seem open to a 50 bp hike next month. Evans
does not have a vote on the FOMC this year.
Canada reports March housing
starts and existing home sales today. Both are expected to have held up better than in the
US. However, there is scope for disappointment. After declining by
slightly more than a quarter in December-January, Canadian housing start rose
by almost 8% in February. Existing home sales have risen since last September,
which followed a five-month slide. Canada also reports its February
portfolio flows. These are not the economic data points that typically
move the foreign exchange market. Tomorrow's March CPI report is a
different matter. Price pressures are accelerating, and the market has a
90% chance of a 50 bp hike discounted for the next central bank meeting on June
1.
The Canadian dollar is
consolidating. The
greenback remains within last Thursday's range (~CAD1.2520-CAD1.2640). It
is in a 20-30-tick range on either side of CAD1.2600 today. There is a $625 mln
option at CAD1.2625 that expires today. The Canadian dollar has weakened
for the past three sessions and five of the past six. It seems the best
directional cues are still coming from equities. Mexico's economic
calendar is light today and the US dollar is finding support this month in the
MXN19.72-MXN19.75 area. The greenback posted an outside down day
yesterday (trading on both sides of last Friday's range and settling below its
low. Follow-through selling today took it to MXN19.7625 before bouncing
back. It toyed with the MXN20.00 level last week but failed to close above
it.
Disclaimer
Reviewed by Marc Chandler
on
April 19, 2022
Rating:
