Overview: The dollar is beginning the new week mixed. The
dollar-bloc currencies and Japanese yen are softer while the European
currencies enjoy a firmer today. Among emerging market currencies, central
European currencies are trading with higher. The Turkish lira is the notable
exception. It is the weakest currency today, off about 0.65%. The Chinese yuan
is a little softer, but the dollar continues to be capped near CNY7.20. Last
week, more often than not, the North American session saw the dollar trade higher,
and we suspect that pattern may continue today. The euro is setting session
highs as North American traders prepare to enter the fray and the intraday
momentum indicators are extended.
China's CSI 300 snapped a nine-day advance today, falling 1%. Japanese
Taiwanese, and Australian equity markets rallied today but most of the other
large regional bourses fell. Europe's Stoxx 600 is off by around 0.35% after
rising 1.15% last week, its sixth consecutive weekly gain. US index futures are
narrowly mixed. Recall that before weekend, the Dow and S&P 500 eked out
minor gains will the NASDAQ slipped on profit-taking. Benchmark 10-year rates
fell in the Asia Pacific region after the seven basis point slide in the
10-year Treasury yield before the weekend. European yields are mostly 1-2 basis
points firmer today, while the US yield is little changed near 4.24%. Efforts
to avoid a partial US government shutdown at the end of the week have not
resolved the issue and will continue tomorrow. Gold posted an outside up day
ahead of the weekend but there has been no follow-through buying today and the
yellow metal is in a narrow range (~$2030-$2037). April WTI settled at the
lowest level in a week last Friday near $76.50. It was sold to around $75.85
today. Support is seen in the $75.50 area.
Asia Pacific
Although Chinese stocks extended the pre-holiday recovery last week with
the help of the strong arm of government and investors' fear of missing out,
stocks retreated today. Still the yuan fell last week and traded with
a heavier bias today. On the other hand, the offshore yuan eked out
its first back-to-back weekly gain in three months. China sees the February PMI
and Caixin manufacturing PMI at the end of the week. Many observers are
critical of the quality of Chinese data. They seem more inclined to read
malintent into it, and sometimes, the data does seem self-serving. At the same
time, we think that incompetence stemming from using archaic systems (left of
from the Soviet Union) and a lack of urgency from Beijing is part of any robust
explanation.
Japan reports January CPI tomorrow. The Tokyo figures, released a few
weeks ago, warn that the headline and core (excludes fresh food) may dip below
2%. However, we do not think it, any more than the unexpected contraction in Q4
23, will deter the Bank of Japan from exiting its negative interest rate policy.
We continue to suspect that this happens in April. Still, we recognize that,
the economy is still struggling, and this week's real sector data will
underscore that. After falling 2.6% in December, retail sales might have
bounced by a mere 0.5% in January. Industrial output looks exceptionally weak. Recall
that earthquake at the start of the year was disruptive. Still, the exchange
rate seems more sensitive to changes in the US Treasury yields than the JGBs.
The dollar traded between about JPY150.30-JPY150.75 before the weekend
and remains in that range today. That was a marginal new high for the week
was set in Asia Pacific, but Tokyo was closed for the emperor’s birthday. The
softer US yields saw the dollar record session lows shortly after Europe closed.
Still, the dollar settled marginally higher for week, its eighth consecutive
weekly advance. The mid-February high was closer to JPY151.00. The
Australian dollar saw $0.6580 twice on Friday, once late in the Asia Pacific
session and once in early North American turnover. The Aussie returned to
but held above the session low near $0.6550. Today, it slipped to almost
$0.6540. In the last three sessions, it has traded in about 2/3 of a cent range
below $0.6600, and on a closing basis, it has been in about a five-tick range
around $0.6550. A break of $0.6530 would weaken the technical tone. The
PBOC set the dollar's reference rate at CNY7.1080 (CNY7.1064 on Friday). The
average in Bloomberg's survey was CNY71966 (CNY7.1940 on Friday). The dollar
continues to bump up near CNY7.20 but has not traded above it. The 2% band
above the reference rate could allow the dollar to rise toward CNY7.25. We
suspect that if the dollar rises above JPY152, it may take out the CNY7.20 area.
The offshore yuan closed higher last week. It was the first back-to-back weekly
gain since the second half of last November. It is little changed today, but
the dollar has held above CNH7.20, as it did last Monday.
Europe
The eurozone's preliminary estimate of February CPI is due at the end of
the week. We expect it to begin a sharp three-month decline that will push
the year-over-year rate below 2% by the end of April. In February through May
2023, eurozone aggregate CPI rose by more than 0.7% a month on average. If we
make a conservative estimate that is rise by an average of 0.3% a month, we can
project the headline rate will fall below 2%. Moreover, a similar process will
likely unfold in the UK as well. As this unfolds, rate expectations will be
adjusted. However, the currency implications may not be as straightforward as
it may seem. Recall that in Q4 23, as European interest rates fell, the euro
strengthen. The driver was not Europe so much as it was the US.
The euro was confined to about a quarter-of-a-cent range before the
weekend below $1.0840. The euro has quietly ticked higher for eight
consecutive sessions before being stymied ahead of the weekend. The five-day
moving average crossed above the 20-day last week for the first time since
early January. The simple crossover is useful in its own right but it is also a
proxy for trend followers and momentum traders. The euro was in a $1.07-$1.08
trading range and now looks to be moving into a slightly higher range. The
closing high this month was set on February 1, around $1.0875, before the US
January employment data. It traded above it on an intraday basis last Thursday
but did not close above $1.082 last week. It is pushing toward $1.0850 in the
European morning. $1.0900-20 must be overcome to suggest something more
important from a technical perspective. That said, the North American session
bought dollars consistently last week and this pattern could continue today as
the intraday momentum indicators are overextended now. It took
sterling almost three weeks to recover to the middle of the $1.26-$1.28 trading
range that dominated from mid-December through early February. The
larger-than-expected rise in US jobs data on February 2 triggered a sell-off
that carried into the next session and drove sterling to the low for the year
near $1.2525. It traded slightly above $1.27 in the last two sessions. The
five- and 20-day moving averages crossed last week, but there were several bad
signals when sterling was in the two-cent range for more than a month. Sterling
has been confined to the pre-weekend range so far today, trading between about
$1.2655 and $1.2690. The momentum indicators warn that the $1.2700 area hold in
North American. A close below $1.2650 would weaken the technical tone.
America
New home sales and the Dallas Fed survey are out today. They
typically are not market movers. Tuesday, the US reports durable goods orders
and a weak report should be expected. Boeing's orders collapsed from 371 in
December to 3 in January. It is the least since October 2020. Deliveries fell
to 27 from 67. This will drag down durable goods orders. Aircraft and military
orders a helped drive durable goods orders. Without them, durable goods orders
rose by an average of 0.1% last year while overall durable goods orders rose by
an average of 0.4%. It is a volatile series and the median forecast in
Bloomberg's survey is for a 4.5% decline. House prices and the Conference
Board's consumer survey is also due. Richmond Fed surveys and the Dallas Fed's
services survey ae out tomorrow as well.
Canada has a quiet start to the week. The highlight is Thursday's
released of December and Q4 GDP. The Canadian economy contracted in Q3 23 by
1.1% annualized. It is expected to have grown by almost 1% in Q4 23. The
economy was nearly stagnant for the year coming into Q4, so its growth will be
approximately the growth for the year. The Bank of Canada projects the economy
to slow to 0.8% this year before jumping 2.5% in 2025. The IMF forecasts 1.4%
growth this year and 2.3% in 2025. The median forecast in Bloomberg's survey is
for 0.5% growth in 2024 and 1.7% next year. For its part, Mexico has a report
every day this week after today. The highlights will likely include the trade
balance falling back into deficit in January, while worker remittances say
strong and more than cover the trade shortfall. The central bank's inflation
report will likely recognize the steady moderation allowing for a rate cut in
the near-term horizon. It would not be surprising if recent economic weakness
translates to a small increase in the unemployment (2.61% in December), while
the surveys may be consistent with the slowing of activity.
The US dollar rose against the Canadian dollar for the seventh week of
the first eight weeks of 2024. For nearly two weeks, the greenback has been
confined to the range set on February 13, when the US CPI was released. That
range was about CAD1.3440 to CAD1.3585. The choppy, largely range-bound
exchange rate has sapped conviction and speculators in the futures have the
smallest net short position (~865 contracts) in six months. Last week's high
was set near CAD1.3535 and that area through CAD1.3550 offers initial
resistance today. The US dollar consolidated ahead of the weekend
against the Mexican peso after recording a bullish outside up day on Thursday. The
dollar is trading inside the pre-weekend range today and remains within last
Thursday's range (~MXN17.0120-MXN17.1565). Some pressure on the peso may have
come from the stock market which sold off ahead of the weekend to nearly
four-week lows. The down trendline we are monitoring comes in near MXN17.1170
today. It looks like a possible bottoming pattern that project toward MXN17.75.
Lastly, we note that the US dollar gained 1.2% against the Brazilian real in
the last three sessions to approach BRL5.0, which it has not closed above since
the end of last October. Nearly all the Latam currencies weakened last week.
Reviewed by Marc Chandler
on
February 26, 2024
Rating:
