Overview: The US dollar remains bid ahead of the outcome of today's
FOMC meeting. No change in policy is expected, but the forward guidance, partly
delivered in the updated projections, is the focus. In the last iteration
(December), the Fed "dot" was for three rate cuts this year. Japanese
markets were closed for a national holiday today but dollar's gains against the
yen have been extended and the greenback is nearing the peak seen in the last
two years slightly ahead of JPY152. The dollar is broadly higher but is holding
below yesterday's best levels against the other G10 currencies. Emerging market
currencies are mostly lower. The South Korean won slightly firmer and may have
bene helped by flows in the South Korean stock market amid reports Nvidia is
looking at buying Samsung's high-bandwidth memory chips, which gave the
company's shares the biggest lift in six-months.
South Korea's Kospi rallied 1.3% to lead
the markets in Asia Pacific. Europe's Stoxx 600 is giving back most of
yesterday's 0.25% gain. US index futures are trading with a slightly heavier
bias after yesterday's rally. Benchmark 10-year bonds yields are lower across
the board, with the notable exception of China, where the 10-yield rose by
nearly two basis points to snap a three-day decline. European yields are mostly
2-3 bp lower, while the 10-year Gilt yield is almost five basis points lower
after a slightly softer CPI. The yield of the 10-year US Treasury is off a
basis point to 4.28%. Gold is consolidating in a narrow range of around $3 on
either side of $2157 and is inside yesterday's range. May WTI briefly traded
above $83 yesterday, its best level since last October. It is holding above
yesterday's low near $81.80.
Asia Pacific
The market continues to
digest yesterday's BOJ move. One of the reasons that the market does not expect follow-up moves
to tighten policy is that the economy is weak. This was underscored by final
January industrial output estimate reported yesterday at 6.7% (initially
-7.5%). The February trade deficit will be reported tomorrow. Exports likely
slowed and imports are expected to have risen. The preliminary March PMI is
also due tomorrow. The composite stood at 50.6 in February. Last March, it was
at 52.9.
Unsurprisingly, Chinese
banks left the one- and five-year loan prime rates steady at 3.45% and 3.95%
respectively. The
immediate problem China faces does not appear to stem from tight monetary
policy. Property sales continue to implode. Earlier this week, China reported
that residential property sales in January-February were about a third lower
from the same period last year. Around 2.27%, China's 10-year yield at a
12-year lows. The 30-year bond yield is about 2.45%, near the lowest since
2005.
The magnitude of the yen's
slide after the rate hike was surprising. However, Japan's two- and 10-year yields
also fell, suggesting a dovish message was taken away. And despite the outside
move in the exchange rate, the three-month implied volatility fell to near the
two-year low set in late February slightly below 7.6%. The dollar made new
highs for the year yesterday near JPY151 and follow-through buying lifted it to
almost JPY151.80 so far today, while Tokyo markets were closed today for the
Vernal Equinox. The greenback was capped in 2022 and 2023 a little ahead of
JPY152, and as it has been approached today, three-month implied volatility has
bounced back to almost 8.1% (it finished last week around 8.4%). If the Fed
were to signal two cuts this year instead of the three that the median forecast
anticipated in December, the dollar could challenge the old high. Initial
support may be near JPY150.80. The Australian dollar held support near
$0.6500 in the European morning yesterday and recovered to almost $0.6540 in
the North American afternoon. Yet, it was still not able to re-enter
Monday's range, when the low was near $0.6550. It is in about a 30-tick range
below $0.6540 today. The low set earlier in March was near $0.6480 and last
month's low was slightly below $0.6445. Despite the US dollar's broad
gains, the CNY7.20 level continue to hold. In a recent report, the US
Treasury cited press reports about state-owned banks activity in the foreign
exchange market. However, such reports in the press have been noticeably absent
in recent days. Yet, it seems the defense has grown, which underscore our
doubts about whether observers can really distinguish between the state-bank
commercial operations and activity that is pursued at the direction of the
PBOC. And as we have noted, the US itself has foreign assets that are not
considered reserves, but no one calls the share of the Exchange Stabilization
Fund which is owned by the US Treasury as "stealth reserves." The
PBOC set the dollar's reference rate at CNY7.0968 (CNY7.0985 yesterday). The
average from Bloomberg's survey was CNY7.1991 (CNY7.2020 yesterday).
Europe
Ahead of tomorrow's Bank of
England meeting, the UK reported consumer and producer price indices earlier
today. The takeaway
is that favorable base effects spurred a notable decline in the year-over-year
rates. The headline pace fell to 3.4% from 4.0%, while the core moderated to
4.5% from 5.1%. These were both slightly lower than expected. Service
inflation, on the other hand, was a little sticky. It slowed to 6.1%, down from
6.5%, but was slightly firmer than expected. This is likely to continue in the
coming months, fueled, as it were, by a sharp fall in energy prices, The
headline rate is expected to slip below the BOE's 2% target before summer. The
0.6% month-over-month increase in the headline follows a 0.6% fall in January.
The three-month annualized pace is 1.6% and the six-month annualized pace is
1.4%. Because the economy is not collapsing, and Governor Bailey recently noted
that the economy already appears to be recovering from the brief and shallow
recession, there seems to be little sense of urgency among most MPC members.
While many are discussing a wider dispersion of views today's FOMC meeting,
this may be evident at tomorrow's BOE meeting.
Norway's 0.4% growth in
January, not counting the offshore oil and gas sector, was better than expected
by the markets and the central bank itself. Norway's central bank hiked its deposit
rate by 25 bp in December to 4.5%, even though the economy was contracting in
December. The swaps market does not see the first cut being delivered before
Q4. The Swiss National Bank may be more interesting. February's EU harmonized
CPI was at 1.2% year-over-year and its core rate was at 1.1%. The manufacturing
PMI has been below 50 since the end of 2022. In real terms, exports have fallen
in the first two months of the year. The economy is expanding less than 1% year-over-year.
The key policy rate is at 1.75%. The swaps market has about a 50% chance of a
cut, while only four of 24 in Bloomberg's survey project a cut. Since the end
of January, the euro has appreciated by almost 4% against the Swiss franc and
returned to levels seen last November. It had stalled in late February but has
extended the rally this month. In fact, it is trying to extend its seven-week
advance. Despite this impressive euro recovery, around CHF0.9640, the euro is
still weak, and the Swiss franc is still strong. The low late last year near
CHF0.9255 was the extreme since the SNB's gave up its franc cap/euro floor in
early 2015.
The euro's low yesterday was
set in Europe near $1.0835, the lowest level since March 1, and meeting the
(50%) retracement of its gains from the February 14 low (~$1.0695). Unable to rise much above $.10870, the
euro has returned toward yesterday's low in European turnover today. There
are options for almost 1.15 bln euros at $1.08 that expire today, which is
slightly below the next retracement (61.8%). Sterling's recovery yesterday was impressive. It had been pushing a little through $1.2670 in
the European morning and recovered through early in the North American
afternoon to reach new session highs near $1.2735. Despite a potential bullish
hammer candle, there has been no follow-through sterling buying today. It has
been capped near $1.2730 and slipped back below $1.2700 in the European morning to almost $1.2685. Still, with the intraday momentum indicators stretched, we suspect yesterday's
lows are safe today.
America
It is Fed day. Broadly speaking there are three moving
pieces. The decision on rates itself is not one of them. It is a foregone
conclusion that policy is on hold. The first moving piece is the FOMC
statement. It does not need to deviate much from January, but the first
paragraph the describes economic activity will likely be tone down to recognize
less strong economic activity and the rise in unemployment. The second moving
piece is the Summary of Economic Projections, the dot plot. The market will
likely be most sensitive to the dot for Fed funds rate itself. The median dot
in December was consistent with three quarter-point cuts this year, two more
than in September. The range of views was 3.75%-5.5% in December (4.50%-6.25%
in September). The futures market goes into the meeting about a 62% chance of a
June cut discounted and 71 bp of cuts discounted for this year.
Its macroeconomic forecasts
are also subject to adjustments. We note that the dispersion of 2024 forecast were wider in
September than in December. The median unemployment forecast was 4.1% for this
year and the next two years. This seems low. The median forecast for growth
this year is 1.4%. The IMF's forecast is for 2.1%. The third moving piece is
the Fed Chair Powell's press conference. Often the market has reacted one way
to the statement and the opposite way during the press conference. The market
wants some measure of the Fed's confidence that inflation is headed toward the
target especially given the slightly firmer than expected recent readings. The
other important focus is what Powell shares about the balance sheet runoff. A
decision seems unlikely, but the discussion likely began about tapering and if
QT could/should continue when the rate cuts are delivered.
Softer than expected
Canadian headline and underlying core measures of inflation weighed on the
Loonie in what was a strong US dollar backdrop. The US dollar rose to a marginal new high
for the year against the Canadian dollar near CAD1.3615. Resistance, we
identified in the CAD1.3620-25 area, remained intact, and the greenback fell to
near CAD1.3550 before finding solid bids. It is in a CAD1.3560-CAD1.3605 range
today. The US dollar's surge against the Mexican peso extended to
almost MXN16.95 yesterday. It traded above the 20-day moving average
(~MXN16.92) for the first time this month, but saw its gains pared through
early in the North American afternoon, falling to nearly MXN16.82. It extended
the pullback to about MXN16.7780 today. The trendline we have been tracking off
the January 23, mid- and late February highs come in around MXN16.97 today.
Banxico meets tomorrow. In Bloomberg's survey of 25 economists, all but three
anticipate a quarter-point cut. The greenback rose to BRL5.0550, its best level
since the end of last October, but here too the gains were pared. In fact, the
dollar settled lower on the day near session lows below BRL5.01. Brazil is
expected to cut the Selic rate by 50 bp. It would be the sixth such cut. The
central bank may signal that it may reduce the pace of easing.
Reviewed by Marc Chandler
on
March 20, 2024
Rating:
