Overview: The 0.5% decline in US March producer
prices pushed on the door opened by the softer-than-expected CPI on Wednesday.
The Fed funds futures market sees the year end rate to a 4.33%, while still
pricing in a nearly 70% chance of a hike on May 3 to 5.25%. The dollar tumbled
to new lows for the year against the euro, sterling, and Swiss franc. The
Dollar Index made a new low for the year today, a few hundredths of an index
point below the low set in early February. US equities rallied strongly, with
the major indices up more than 1%, and this has carried over to Asia Pacific
and European trading today. The MSCI Asia Pacific Index is at its best level in
two months. Europe's Stoxx 600 is up for the fifth consecutive session and is
approaching the year's high set in February. US equity futures are softer.
Benchmark 10-year yields were mostly
higher in Asia Pacific and Europe, while the US 10-year Treasury yield is
slightly softer near 3.43%. The two-year yield is near 3.96%. It moved above
the 4% mark on an intrasession basis earlier this week but was unable to do so
yesterday. After extending its decline in the Asia Pacific session, the dollar
has turned slightly higher against several of the major currencies. Among
emerging market currencies, the Mexican peso, South African rand, Turkish lira,
and Polish zloty are sporting softer profiles. The JP Morgan Emerging Market
Currency Index is a little lower but still in the upper end of its two-month
trading range. Gold reached almost $2049 yesterday and is consolidating today
with a heavier bias. It found support slightly below $2032. June WTI set the
high for the year on Wednesday near $83.40. It consolidated yesterday and is
doing so again today. It is holdings above Wednesday's low (~$81.20).
Asia Pacific
Brazil's President Lula told his Chinese
hosts exactly what they wanted to hear, and it follows on the heels of French
President Macron bemoaning the "extraterritoriality" of the dollar. Lula asks who decided that the dollar was
The currency after the gold standard. He should ask a Brazilian company like
Vale or Bunge why they sell their products in dollar. He should ask his own
central bank why 80% of its reserves are kept in US dollars. He should ask his
Treasury why they issue dollar bonds instead of yuan bonds. The Financial Times
(here and here)
claim that the yuan's share on SWIFT has more than doubled to 4.5% since Russia
invaded Ukraine. This is simply factually not true. Even China's own newspaper
(China Daily) does not make such a claim. The share of yuan on SWIFT stood at
2.19% in February and March's data will be reported next week. In January 2022,
the yuan's share stood at 3.2% (which was the peak) and in February 2022 it was 2.23%.
The US dollar is trading in a narrow range
against the Japanese yen but holding above yesterday's low near JPY132.00. That roughly matched the (61.8%)
retracement of the rally from last week's low close to JPY130.65. Still, after
advancing in four consecutive sessions through Tuesday, the greenback is under
pressure for the third day in a row. That said, the dollar finished near
JPY132.15 last week and could close higher on the week. The Australian
dollar retested last week high near $0.6800 yesterday and held it today. There
are around A$400 mln in options struck there that expire today. There is
another set of options for A$965 mln that expire there next Tuesday. It is in
about a third of a cent range below there today. The Aussie has not traded
above $0.6800 since late February. A close below $0.6745 would weaken the
technical tone. After trading in exceptionally tight ranges, the yuan
jumped on the back of the broad-based US dollar weakness. The
greenback gapped lower and fell to CNY6.8320, its lowest level since late March.
It recovered back to nearly CNY6.8550 but still could not re-enter yesterday's
range (~CNY6.8675-CNY6.8785). The PBOC set the dollar's reference rate at
CNY6.8606. The median projection in Bloomberg's survey was for CNY6.8618.
Europe
Sweden's Riksbank meets on April 26. It is the next G10 central bank meeting.
The key policy rate stands at 3.0%. March CPI was reported earlier today. It
fell more than expected to 10.6% from 12.0% in February and a peak of 12.3%
last December. It has the highest inflation among the G10. The underlying
measure, which excludes energy and fixed interest rates made a new cyclical
high of 9.3% in February and eased to 8.9% in March. Inflation is more stubborn
that the Riksbank expected, and while a 50 bp hike seems to be base case, some
were looking for a 75 bp move. Today's softer than expected inflation report
may make the larger move somewhat less likely. The Riksbank forecasts that the
economy will contract by 1.1% this year, which is a bit more pessimistic than
the Bloomberg survey that found a median forecast for a 0.7% contraction. A
challenge for the Riksbank is the sharp drop in house prices. They are off 12%
from last year's peak, and although they stabilized in March, the risk is for
further declines. In comparison, Norway's house prices are off around 2% from
their peak last August. The Swedish krona is up about 1.7% against the dollar
this year and 1.6% weaker than the euro. Its 2.1% advance leads the G10 currencies
this week. The Norwegian krone is the weakest of the G10 currencies, off almost
5% this year against the dollar and 8.3% against the euro.
Hawkish comments from some ECB officials have
spurred a reaction in the swaps market. It now prices in about a 25% chance of a 50 bp move instead of 25
bp, when it meets on May 4. This has helped lift the euro to about $1.1075
today. It is the fourth consecutive advance. The euro settled slightly above
$1.09 last week. With this week's gain, the euro has rallied for seven weeks in
a row, the longest advance since July-August 2020. While the momentum
indicators are stretched and the euro is toying with the upper Bollinger Band
range, the next important chart area is $1.1185-$1.1275. Sterling initially
extended its gains to $1.2545 but was sold in early European turnover today.
It found new bids near $1.2500. Sterling has risen for the past three sessions.
It finished last week near $1.2420. Barring a significant surprise, this will
be the fifth consecutive weekly gain for sterling, its longest advance since
January-February 2021.
America
Given the stress on US banks that erupted
last month, today's earnings may receive more attention than usual. The market seems to be interest in two
aspects. The first are deposits. Analysts quoted in the press see around a $520
bln outflow over the past year with around $60 bln in the first quarter. This
is matched by a $600 bln increase into money market funds. Second, is the
forward guidance or outlook that is shared. Investors and businesses are
looking for insight into the extent to the tightening of lending. Separately,
the Fed reported yesterday that emergency borrowing slowed to $139.5 bln from
$148.7 bln previously. This was the sum of discount window borrowing ($67.6 bln,
slight lower than the $69.7 bln in the prior week) and the new repo facility,
Bank Term Funding Program ($71.8 bln vs. $79 bln). The week through April 12
was the fourth consecutive week that emergency borrowing was reduced. Foreign
central banks also reduced their use of the Fed's repo facility to $30 bln from
$40 bln.
The US also reports March retail sales and
industrial output. The
data is expected to be soft. Several factors flattered the increase, including
the cost-of-living increase in Social Security, unusually warm weather,
seasonal adjustments, and "payback" after a weak end of last year.
Recall that retail sales surged 3.2% in January after the nearly 2% decline in
November and December. It was practically inevitable that retail sales would
pullback. In fact, they fell by 0.4% in February and are expected to have
declined by the same magnitude in March. Moreover, the core measure, used in
some GDP models, which excludes autos, gasoline, food services and building
materials is forecast (median, Bloomberg survey) to fall by 0.5% offsetting the
February gain (January +2.3%). After declining for four of five months through
February, industrial production is expected to have risen by 0.2% even though
manufacturing is seen falling by 0.1%. Manufacturing rose by 0.1% in February
after surging 1.4% in January. Economists will use February business
inventories to also help fine tune Q1 GDP estimates and Atlanta Fed's GDP
tracker (now 2.2%) will be updated. The preliminary University of Michigan
consumer survey may pose headline risk but is unlikely to change market views.
The minutes from the last month's Bank of
Mexico meeting that hiked the overnight interest rate by 25 bp to 11.25%
underscored that the central bank is nearly done with its tightening cycle that
began in June 2021, nine months before the Federal Reserve. The next meeting is on May 18. The
issue is whether it matches a Fed hike that will be likely be delivered a
couple of weeks before Banxico meets. Economists favor it but the swaps market
has about a 1-in-3 chance discounted.
The Canadian dollar is trading at levels
not seen in about two months. The US dollar settled last week around CAD1.3510 and reached
nearly CAD1.3315 earlier today. The greenback is extending its slide for the
fifth consecutive session after rallying ibn the last four sessions of last
week to snap a six-day slide. The next important technical area are the year's
lows set in February (~CAD1.3260-CAD1.3275) and then last November's low near
CAD1.3225. The US dollar settled below the 200-day moving average (~CAD1.3400)
yesterday for the first time since last June. The lower Bollinger Band comes in
around CAD1.3295 today. The greenback briefly traded below MXN18.00 but
failed to close there and has come back better bid today. So far, it is
holding just below yesterday's high (~MXN18.1230). There are a set of options
for $520 mln at MXN18.00 that expire today, and the dollar has not settled
below MXN18.00 in a month. While the peso has been a market favorite, it
appears to have bene eclipsed by the Brazilian real. The real is up 2.6% for
the week coming into today, while the peso is nearly flat.
Disclaimer
Reviewed by Marc Chandler
on
April 14, 2023
Rating:
