Overview: After surging at the last week, the dollar
consolidated yesterday and is continuing to do so today as slightly lower
levels. The Swiss franc is the only G10 currency unable to gain traction
against the greenback today. Still, the dollar's pullback has barely met the
minimum retracement targets of the jump last Thursday and Friday. The PBOC
lower the dollar's fix slightly, but the proverbial toothpaste is out of the
tube and officials are struggling to reestablish order. Against the offshore
yuan, the dollar remains outside of its 2% onshore band. The Hungarian forint
is the strongest of the emerging market currencies ahead of the central bank's
rate decision, where a 75 bp cut is expected after the base rate was slashed by
100 bp last month.
Asia Pacific equities rallied, led by the
Hang Seng and mainland shares that trade in Hong Kong. Most of the other large
bourses rose with the notable exception of Taiwan, Australia, and India. Europe's
Stoxx 600 is treading water after eking out a minor gain yesterday. US index
futures are enjoying modest gains. European 10-year yields are mostly 3-4 bp
lower. The 10-year US Treasury yield is off one basis point to about 4.23%. Yesterday's
$66 bln US two-year note sale generated a small tail, but underlying demand
seems reasonably strong. Today, the Treasury comes back with $67 bln five-year
notes and a $70 bln cash management bill. Gold is trading firmly above $2190. The
highest close last week was around $2186.40. A new record high close is
possible today. May WTI is trading quietly in around a 30-cent range around $82.
Asia Pacific
The currencies are the three largest Asia
Pacific economies remain weak. The Bank of Japan's rate hike a week ago has failed to deter yen
selling. MOF officials have ratcheted up their verbal defense and material
intervention cannot be ruled out. The BOJ itself may have diluted the impact of
the first hike in 17 years by suggesting it is not really an
exit from easy monetary policy. Nor is the start of a tightening cycle. The
swaps market is pricing in an overnight rate of around 21 bp by the end of the
year from 10 bp now. The last time the BOJ intervened directly in the foreign
exchange market was in 2022 as the dollar approached JPY152.00. That level held
late last year, with the help of verbal intervention and a drop in US rates.
Taking cues from the PBOC fix, the market took the greenback above CNY7.20
before the weekend. It reached almost CNY7.23. However, the reference rate
yesterday appeared to have encouraged dollar sales, but except for a brief
period around the open on Monday, the dollar has held above CNY7.20. The dollar
spent most of yesterday trading above the onshore band against the offshore
yuan, which is a rare occurrence, and remains above it today. This may spur
officials to tighten the offshore liquidity conditions. Indian markets were
closed yesterday, leaving the rupee at the record low reached before the weekend.
The rupee recovered by about 0.15% today, or less than half of the pre-weekend
loss. The greenback's surge and the weakness of the yuan appeared to be
contributing factors. The risks of intervention have increased. The central
bank's reserves have been lifted to record levels as the central bank appears
to be absorbing much of the inflows related to inclusion of Indian bonds in JP
Morgan's emerging market indices and foreign interest in Indian equities.
The IMF's Managing Director Georgieva
repeated the traditional liberal cant about China boosting growth through
market reforms. She
also reiterated that strengthening China's pensions and improving social
security would boost consumption, which would seem like boosting government
support. There are good reasons to improve the basket of goods and services for
Chinese citizens. In the past, we were more sympathetic to ideas that this
could boost consumption. However, the counterfactuals continue to accumulate.
Consider the United States. By various measures, it has among the weakest
social welfare systems, and yet its consumption per capita is the highest.
European countries have stronger social welfare and consumption is typically
not as strong as in the US. When faced with Great Financial Crisis, the US and
Europe did not take the medicine the IMF is recommending to Beijing, but rather
enlarged the state and strengthened the regulatory framework.
The threat of material intervention by
Japan may have injected a note of caution but the market seems undeterred. It rose to new session highs in North
America near JPY151.55 yesterday. The market does not appear to have given up
probing the JPY152 area. However, a few things seem clear. First, Japanese
officials are surprised that the yen did not strengthen after the BOJ hike.
Second, although the dollar did rise more than 3.5% in the week-and-a-half
after March 11, it has gone sideways in the last four sessions, confined
largely to the range on March 20 (~JPY150.75-JPY151.85). It is well within that
range today. Third, in the week through March 19, speculators in the futures
added to both gross long (+20%) and gross short (16%) holdings. The net short
position (116k contracts or ~$9.6 bln) is slightly smaller than at the end of
February, but still among the largest in a decade. The Australian
dollar set the session high yesterday in North America at almost $0.6550 and
edged up to $0.6555 today. Given the Aussie's 1 1/4-cent drop last
Thursday and Friday, the upticks were not so convincing. It stalled near the
five-day moving average. A band of resistance is in the $0.6560-$0.6575 area.
There are options expiring today: A$1.25 bln at $0.6560 and the same amount at
$0.6545. Important support is at $0.6500, and the Australian dollar has not
settled below it this month. For the third consecutive session, the
dollar is trading in a relatively wide range against the Chinese yuan. It
as if the breakout at the end of last week has de-anchored the exchange rate. This
has happened before, and it often takes officials a few days to re-establish
order. The PBOC set the dollar's reference rate at CNY7.0943 (CNY7.0996
Monday). The average in Bloomberg's survey was CNY7.2019 (CNY7.2222 Monday).
The dollar's 2% band today is CNY7.9524-CNY7.2362. As we noted, dollar has remained above its onshore band in the offshore market. The dollar has not
traded below CNH7.2377.
Europe
The Swedish krona rose by about 3.5%
against the US dollar last year, ending a 25% two-year decline. The krona fell to a record low
against the euro at the end of Q3 23 and recovered sharply (~8.2%). Last
September, the Riksbank announced it would "hedge" about 25% of its
currency reserves, which selling dollar and euros. The Swedish economy was
stagnant last year and the median forecast in Bloomberg's survey is for a 0.1%
expansion this year (down from 0.3% previously). The Riksbank meets tomorrow.
It is too soon to expect a cut, but the next meeting in early May is a
different story. The policy rate is at 4.0% and the inflation measure that the
central bank targets (CPIF, uses fixed mortgage interest rates) stands at 2.5%.
It peaked at 10.2% at the end of December 2022. The swaps market has about a
60% chance of cut discounted for May. The Riksbank could be the second G10
central bank to cut rates following last week's decision by the Swiss National
Bank. The market has about 100 bp in cuts discounted over the next 12 months.
Ireland's prime minister Varadkar
unexpectedly resigned last week after seven-years at the helm. The Higher Education Minister Harris will
become the next head of Fine Gael and prime minister. Ireland's parliament
returns from Easter recess on April 9 and Harris approval is assured as the
governing coalition (Fine Gael and Fianna Fail) enjoys a solid majority. The
next election must be called by March 2025. The latest polls put Sinn Fein
ahead of Fine Gael and Fianna Fail but not more than both together. Irish bonds
did not respond to the political developments. The 10-year yield (~2.74%)
trades inside France and a bit wider than the Netherlands. Ireland's two-year
yield (~2.76%) is about a 10 bp discount to Germany.
The euro fell by almost 1.5-cents in the
last two sessions last week. It recovered 0.4 of a cent yesterday and is edging slightly higher
today. To be impressive, the single currency needs to absorb the offers in the
$1.0860-65 area, where 3.5 bln euros in options expire today, it must
surmount this area to put pressure on the short-term momentum traders to cover.
It is straddling the $1.0850 area in the European morning. Sterling
slid nearly 2 1/3 cents last Thursday and Friday before it recovered about
three-quarters of a cent to around $1.2650 yesterday. It has edged up
to almost $1.2665 today. A move back above $1.2700 may be needed to stabilize
the tone. In the CFTC reporting week that ended on March 19, the net long
speculative sterling position was cut for the first time in four weeks. The
decline to 53.2k contracts (~$4.2 bln) was driven by a 20.7k cut of longs,
while almost 3.5k short contracts were covered.
America
Today's US data is expected to show a
small recovery in durable goods orders after the large 6.2% drop in January, a
modest rise in house prices, which will lift the year-over-year increase to
around 6.6%, the most since November 2022. We note that Boeing received 15 orders in
February, up from three in January. It delivered 27 planes, unchanged from the
previous month. Through January, durable orders have been flat over the past 12
months. Even when military orders and aircraft are excluded, orders have been
unchanged in the past 12 months of data. The Conference Board's consumer
confidence survey is due. Although we already know that the consumer sentiment
softened in the preliminary University of Michigan survey, the median forecast
in Bloomberg' survey looks for a small gain (107.0 vs. 106.7). The Richmond Fed
manufacturing and the Philadelphia and Dallas Fed's non-manufacturing surveys
are not market movers. That said, the Atlanta Fed's GDP tracker will be updated
later today. Its estimate of Q1 GDP was shaved to 2.1% from 2.3% last week.
The greenback held below CAD1.3600 in
North America yesterday as it consolidated its recent gains that carried it to
a new high for the year at the end of last week (~CAD1.3615). The US dollar found support near
CAD1.3570 yesterday but has slipped to about CAD1.3565 today. The risk may extend
toward CAD1.3540-50. The rally in crude failed to do much for the
Canadian dollar, while the risk-off mood characterized by the pullback in equities
may have blunted stronger corrective forces. We continue to note the chart
resistance in the CAD1.3620-25 area. Mexico's central bank is likely
pleased that it managed to cut rates and not weaken the peso, whose strength
still helps curb imported inflation. The dollar was trading around
MXN16.74 when Banxico made its announcement last week and it fell below
MXN16.67 yesterday. It probed the lows in the European morning before steadying. The Q1 24
low was set earlier this month near MXN16.6470. The peso longs may be vulnerable
to BOJ intervention if it were to spur another unwind of the popular carry
trade (like early last week).
Reviewed by Marc Chandler
on
March 26, 2024
Rating:
