Overview: The dollar's post-FOMC sell-off has
been completely reversed and the greenback has reached new highs for the week
against most of the G10 currencies. Heightened intervention fears and softer US
yields has helped steady the yen, which near unchanged now, and is the best
performer. The Scandis and Antipodeans are the heaviest, off 0.65%-0.90%. For
the first time since last November, the US dollar has risen above CNY7.20 and
continued to rise toward CNY7.23. The dollar's 0.4% gain is the most since
January 2. The South Korean won, Hungarian forint, and Russian ruble are all
off more than 1% today.
Chinese and Hong Kong equities were hit
hard today. The Hang Seng fell nearly 2.2% and the mainland shares that trade
there were off 2.5%. The mainland CSI 300 fell 1%. Japan's equities were lifted
but the other large bourses in the region were narrowly mixed. Europe's Stoxx
600 is firm and is holding on to a nearly 1% gain for the week. It is the ninth
consecutive weekly advance. US index futures are slightly higher. The S&P
and NASDAQ futures gapped higher yesterday and settled near their lows, with
the gaps unfilled. European 10-year bond yields are 1-3 bp lower. The 10-year
US Treasury yield is off three basis points to 4.24%. It has settled last week
a little above 4.30%. Gold reached almost $2221 yesterday and is trading near
$2166 now. It settled around $2156 last week. May WTI is steady near $81. The
week's low was set yesterday's around $80.30. It had finished last week close
to $80.60.
Asia Pacific
On March 5, Japan reported that Tokyo's
CPI rose to 2.6% from 1.8%, reflected the base effect. The core rate rose to 2.5% from 1.8%. This
was the signal, and today's report of the national CPI reflected it. The
headline rose to 2.8% from 2.2% and the core rose to 2.8% from 2.0%. The Tokyo
measure that excludes both fresh food and energy slowed to 3.1% from 3.3%. The
national measure also eased to 3.2% from 3.5%. There is little fresh
information. In fact, at the end of next week the Tokyo's March CPI will be
report, and it is expected to ease slightly. Note that next month, the
subsidies for household energy use will end and this boost headline inflation
by an estimated 0.4%-0.5%. At April's Bank of Japan meeting, its economic
forecast will be updated.
Japan's Finance Minister Suzuki used code
words that in the past signaled material intervention was close. He was quoted saying the government was
watching the foreign exchange market with a "high sense of
urgency." However, as we noted that last time, he said this without
intervening that it dilutes the signal. The case for intervention, following
the BOJ's hike and the FOMC's seemingly dovish tilt (median is still inclined
for three cuts this year, even as the growth forecast was revised higher to
2.1% from 1.4%, and unemployment was revised lower to 4.0% from 4.1%) is
somewhat stronger than it may have been previously. Yet, we are skeptical that
intervention is imminent. Tactically, would risk giving the appearance of a
line-in-the-sand at JPY152.00, which capped the dollar in 2022 and 2023
apparently without material intervention. The odds of successful intervention
would be facilitated by coordinated intervention or at least supportive
comments from Washington and Brussels/Frankfurt but that seems even less
likely. That said, the first bout of intervention would likely produce a
knee-jerk reaction and later challenged. Outside of the foreign exchange
market, intervention could spur sales of Japanese stocks and could weigh on
intermediate US Treasuries, which the BOJ may sell.
The dollar jumped from almost JPY150.25 to
JPY151.75 yesterday, extending the advance for the eighth consecutive session. That matches the longest rally since
October 2022. The dollar has risen in all but two weeks here in Q1 24. That
could meet a definition of a one-way market from an official point of view.
However, the market has been orderly and implied three-month volatility is
bouncing off the two-year low it approached earlier this week. The dollar
reached about JPY151.85 today but is hovering near JPY151.50 in Europe. Since
the greenback has not been above JPY152 in almost 34 years, it is difficult
project where it would go if that Rubicon were crossed. We suspect, initial
potential may be around JPY152.50. The Australian dollar’s rally from
almost $0.6500 ran into a wall of sellers in front of last week's high near
$0.6640. It fell to nearly $0.6560 in North America yesterday. It has
taken another leg lower today to almost $0.6510. The week's low was set on
Tuesday near $0.6505. A trendline from the mid-February and early March lows
comes in near $0.6500 today. A convincing break could target the $0.6440 area
next week. The pressure finally proved too much. The dollar had
been bumping against the CNY7.20 area and it finally gave way. For the first
time since last November, the greenback pushed above CNY7.20 and like a dam
bursting, the subsequent surge carried it to almost CNY7.23. Some press reports
claim that state banks boosted their dollar sales after it rose above CNY7.22
but apparently not large dollar sellers at the open. The PBOC set the dollar's
reference rate at CNY7.1004, the highest for the dollar since last November.
The average in Bloomberg's survey was CNY7.2102 (CNY7.1810 yesterday).
Europe
Following the BOE meeting, the swaps
market upgraded the likelihood of rate cut in June. The odds increased to almost 85% from
slightly less than 60%. For the entire year, the swaps market is pricing in
about 80 bp of cuts. At the end of last week there were about 63 bp of cuts
discounted. Today, the UK reported a small set back in retail sales that was
most a function of a drop gasoline purchases. After a 3.2% increase, in
January, excluding gasoline, which was revised to a 3.4% increase, UK retail
sales rose by 0.2% in February. The median forecast in Bloomberg's survey was
for a 0.1% decline. Including gasoline, British retail sales were flat after
surging 3.6% in January (initially 3.4%).
The euro peaked in Asia Pacific yesterday
slightly below $1.0945. The high in Europe was around $1.0925, but the single currency was
unable to sustain even mild upticks in North America before falling to almost
$1.0855. That area quickly gave way today and the euro tumbled to slightly
below $1.0810. It is a new low since March 1. A break of $1.08 could signal a
move to $1.0760, and possibly the low for the year set in mid-February near
$1.07. The lower Bollinger Band is near $1.0795 today. Sterling
suffered nearly twice the loss of the euro and posted a bearish outside day by
trading on both sides of Wednesday's range and settling below the low. Indeed,
sterling close near $1.2655 was lowest settlement this month. Follow-through
selling today has seen $1.2585, its lowest level since mid-February and nicking
the 200-day moving average (~$1.2595). It is pushing against the lower
Bollinger Band (~$1.2585). Boosting the odds of June BOE cut, in addition
to the broad dollar recovery seemed like main drags. While the intraday
momentum indicators are stretched, the next area of chart support may be around
$1.2520-$1.2535. Meanwhile, the $1.2625 area may offer the nearby cap.
America
Nearly all the high-frequency US economic
data reported yesterday was stronger than the market expected. The US Q4 current account deficit was
smaller than expected and Q3's shortfall was revised down. Weekly jobless
claims and continuing claims were a little below expectations. Defying
expectations, the index of Leading Economic Indicators posted the first
increase (0.1%) since February 2022. The median forecast in Bloomberg's survey
of existing home sales was for a 1.3% decline. Instead, February sales jumped
9.5%, the largest rise in a year. The Philadelphia Fed's survey did not decline
as much as expected, slipping to 3.2 from 5.2. Many looked for a fall back into
negative territory. The flash PMI was the exception to the rule yesterday. The
composite eased to 52.2 from 52.5.
As the dust settled and the market
digested the new Summary of Economic Projections and Fed Chair Powell's
comments, the market reassessed the trajectory or Fed policy. The odds of a June cut eased back to
around 78% from around 85% on Wednesday. Recall that a week ago it was near
61%. The median Fed forecast remained for three cuts this year, though the dots
were nearly evenly divided between those who thought three or more cut and
those that thought two or few cuts. The Fed funds implied about 70 bp in cuts
on Monday and moved up to 83 bp after the FOMC meeting and pulled back to
around 80 bp yesterday.
The US dollar took out by a
few ticks last week's low against the Canadian dollar near CAD1.3460 before
reversing higher to poke above CAD1.3540. The greenback is firmer near CAD1.3575, but the
key is the CAD1.3600 area. The Q1 high was set on Tuesday near CAD1.3610. The
intraday momentum indicators are stretched, making a sustained break above
CAD1.3600 more difficult. The dollar recorded the session high against
the Mexican peso a couple of hours before Banxico announced its first cut in
the cycle. The quarter-point cut brought the overnight rate to 11.0%.
The dollar peaked near MXN16.7880 and slipped to almost MXN16.7220 after the
announcement. It recovered to around MXN16.80 today. Nearby resistance may be
seen in the MXN16.85-MXN16.90 area. Previously, the central bank has said it
would consider cuts at future meetings. This was part of the word cue that
helped anticipate yesterday's move. The new statement says that it will make
decisions based on available information. This seems prudent to maintain
strategic flexibility. However, it did raise its inflation forecast for Q4 24
to 3.6% from 3.5%. Small beer but a signal underscoring the central bank's
assessment that risks to inflation are still on the upside. Early in the
session, Mexico reported January retail sales fell by 0.6% after a 1.0% decline
in December. The median forecast in Bloomberg's survey was for a 0.3% gain. It
was the third consecutive monthly decline in retail sales and sixth decline in
the past seven months. While today's January IGAE survey is unlikely to move
the central bank's needle, the today's CPI for the first half of March may
underscore its caution. The biweekly headline measure bottomed last October.
The core rate has, however, continued to decline. The dollar bounced off
BRL4.95 yesterday and settled firmly a little below BRL4.9790. The focus today
is on the government's first fiscal report of the year and Finance Minister
Haddad is likely to report that the primary budget deficit is near 0.25% of GDP.
Reviewed by Marc Chandler
on
March 22, 2024
Rating:
