Overview: The dollar neared JPY152, setting a new
34-year high. This appeared to spur a senior official meeting in Tokyo,
ostensibly to talk about the response. Previously, we suggested that Friday,
when most markets outside of Asia will be closed, could provide an interesting
opportunity for intervention. The implicit threat was enough to take the dollar
to JPY151.10 in the European morning. Most of the G10 currencies are softer
against the dollar but the yen. A dovish Riksbank had negligible impact on the
Swedish krona. It could be the second G10 central bank to cut rates, following
last week's Swiss decision. It may move in May. Most emerging market currencies
are softer today. The South African rand is the strongest, up by about 0.3%
before the central bank announcement, which is expected to standpat at 8.25%. The
Mexican peso is trading at new highs for the year. We suspect the Chinese yuan
would trade higher on the back of any BOJ intervention.
Chinese equities got thumped
today, with the CSI 300 off nearly 1.2% and the Hang Seng dropped almost 1.4%.
China efforts to seek WTO action against the US EV subsidies seems rich and
Beijing's track record at the WTO is weak. Of the 16 claims it has brought
against the US, it has won 5 and lost 1. There have been three split decisions,
and seven claims are still pending. The US has had more success. Some cases are
still pending, but it has challenged China 27 times since 2002 and won all the
cases that have been decided. Europe's Stoxx 600 is slightly softer after two
days of gains. US index futures are trading firmly. European 10-year yields are
most 1-2 bp lower, and the 10-year US Treasury yield is flat near 4.24%. Gold
is firm, recording a higher low for the third consecutive session as remains
near $2200. May WTI is slightly softer after being turned back from above $82
yesterday and a strong build was reported by API.
Asia Pacific
As is often the case this
time of year, analysts and the press recycle stories about the seasonality of
the yen as the fiscal year end is approached. Yet repetition does not make it so. Consider
that actual performance over the last 20 years. The yen has risen in 11 of the
last 20 years in March and fallen the other nine. The Ministry of Finance
reports the weekly portfolio flows tomorrow. Japanese investors sold JPY800 bln
of foreign bonds in the week through March 15 after buying more than JPY2
trillion in the previous two weeks. The weekly report shows that Japanese
investors bought nearly JPY4.8 trillion of foreign bonds in March 2023.
Tomorrow's data will cover last week when the BOJ hiked rates and apparently
leaked it ahead of time to the local media. Japanese investors sold about
JPY1.17 trillion of foreign equities in the two weeks through March 15. They
were small buyers last March.
Foreign investors have been
consistently buying Japanese equities this year. The JPY1.46 trillion of sales in the week
ending March 15 was only the second of net sales this year and is the most
since last September. If there is a seasonal pattern, it is the foreigners
typically are large sellers of Japanese equities for a week in March and
September. But the impact on the Topix and Nikkei seem minor. The Topix has
risen in 12 years and the Nikkei has risen in 11 of the past 20 years in March.
Foreign investors have been large buyers of Japanese bonds in recent weeks. The
nearly JPY2.2 trillion JGBs bought in the week ending March 15 was the most
since the middle of March 2023. Foreign investors bought almost JPY1.2 trillion
JGBs the previous week.
Australia's monthly CPI
gauge unchanged February at 3.4% for the third consecutive month. Most economists in Bloomberg survey
expected a small increase. Last February, Australia's CPI was at 6.8%. The
futures market has about a 34% chance of a rate cut discounted for June. This
is near the least of the year. A June cut weas last fully discounted in early
February. The market does not have the first cut completely priced in until
September and does not have two cuts totally priced in for the year. At the end
of last year, the futures market had two cuts and about a little more than a
70% chance of a third cut discounted.
Without clear directional
cues from US interest rates and stepped-up verbal warning from Japanese
officials, the market has been happy to job the dollar mostly between JPY151.20
and JPY151.60. The
dollar edged up a bit closer to JPY152 but was again greeted with an escalation
of official rhetoric. In recent sessions, the 24-hour dollar high has been
recorded in North America, where material intervention seems the least likely. We
have suggested a possible scenario for material intervention on Friday in
Tokyo, with most European and US markets closed for the Easter holiday. The
Australian dollar was turned lower from almost $0.6560, the (38.2%) retracement
of the sharp decline from last Thursday and Friday. It held $0.6530 on the
pullback in North America but the price action was poor. The Australian dollar
recorded a low near $0.6510. There are a little more than A$2.1 bln of options
that expire today between $0.6500 and $0.6510 (about 60% at the higher strike).
With the dollar firm and the yen weak, it is little wonder that the Chinese
yuan was sold. The PBOC set the dollar's reference rate slightly
higher, seeming to defy market talk that officials are anxious. The fix was set
at CNY7.0946 (CNY7.0943 yesterday). The average projection in Bloomberg's
survey was CNY7.2222 (CNY7.2019 yesterday). The dollar approached but held
below Monday's high slightly below CNY7.23. The 2% band around the fix gives a
range of CNY6.9527 to CNY7.2365. Against the offshore yuan, the greenback has
remained above the onshore band (CNH7.2464-CNH7.2584) and this may be the
source of stress and leaves the offshore market vulnerable to an officially
inspired squeeze. We suspect that if the BOJ were to intervene, the yuan would
likely be a beneficiary.
Europe
Some observers may point to
the small improvement in the EC's consumer confidence survey to -14.9, its best
reading since March 2022. It
is a diffusion indicator reflecting the percent balance. It was launched in
1985, nearly 40 years ago, and it has not been positive once. Over its history,
it has averaged -10.5. The record low was not set during the Great Financial
Crisis and Europe's sovereign debt crisis, but in August 2022, six-months after
Russia's most recent invasion of Ukraine. The weighted comprehensive economic
sentiment measure ticked up to 96.3 this month after slipping in both January
and February. It finished last year at 96.4.
Sweden's Riksbank left rates
on hold, as widely expected, but signaled a cut in Q2. The odds of a May cut have increased in
recent weeks, even before the softer than expected February CPI report on March
14. The swaps market had discounted about a 1-in-4 chance of a May cut at the
end of February. On the eve, of the CPI report, the odds had more than doubled
and as of yesterday, the probability was slightly more than 60%. Today, it is
near 80%. Its updated forward guidance sees the year end rate near 3.45% from
4.0% now and 4.10% in its previous forecast last November. The krona is
practically flat against the dollar and euro.
The euro peaked yesterday
near $1.0865 shortly before US trading began. It was sold down to $1.0825 as European
banks were closing shop. It has taken the euro almost 24-hours to rise from
$1.0825 to $1.0865 and it took seven hours to return. The euro met surpassed
the (38.2%) retracement objective of last Thursday-Friday drop near $1.0855 but
stopped short of the (50%) retracement slightly above $1.0870. The close was
weak and the euro slipped a little closer to $1.0820 today. The same
pattern was evident in sterling. It stalled shortly after retracing (38.2%)
of the decline from the end of last week. It settled on a soft note near
session lows and was sold to about $1.2610 today before finding a bid in Europe.
Yesterday, it reached almost $1.2670 in the European morning before falling by
nearly half-of-a-cent in North America.
America
The US economic calendar is
light today. The main
features include the sale of four-month bills, $28 bln two-year floating rate
notes, and $43 bln seven-year notes. After the North American markets close,
Fed Governor Waller speaks at the Economic Club in NY. This week's highlight
still lies ahead: Friday, while US markets are closed, the February
personal income and consumption data and deflators are due, and a few hours
later, Fed Chair Powell speaks at the San Francisco Federal Reserve's
Macroeconomics and Monetary Policy Conference in a moderated conversation. The
Atlanta Fed's GDP tracker was left unchanged at 2.1% for Q1 yesterday. It will
be updated after the Friday's income and consumption data. The median forecast
in Bloomberg's monthly survey is for 2.0% GDP, up from 1.8% last month. The
median in the survey currently has the economy slowing to 1.4% in Q2.
Mexico reports its February
trade balance today. Mexico's
trade balance almost always improves in February from January (seventeen years
in a row, and 18 of the past 20 years). This year is unlikely to be an
exception. The median forecast in Bloomberg's survey is for a $1.63 bln
shortfall after a $4.3 deficit in January. Mexico's exports have fallen for the
three months through January and are off about 20% during this period. We
already know that Mexico's vehicle exports rose by 11% in February after
falling nearly 10% in January. February vehicle exports were up about 22.5%
year-over-year. Imports rose by 2.8% in January but fell 14% in
November-December 2023.
The US dollar slipped for
its second consecutive session against the Canadian dollar. The setback, to CAD1.3555 met the (38.2%)
retracement of the greenback's gains at the end of last week. After not trading
above CAD1.3600 yesterday, the greenback poked above it in late Asia but is
pulling back in the European morning. Still, it is likely to find support near
CAD1.3580. The Mexican peso traded quieter but firmer. In a broadly
consolidative foreign exchange market, one is paid to be long pesos. There
are higher yields available, of course, but the peso's low volatility and
liquidity makes it attractive. The dollar ground lower, reaching almost
MXN16.64 in late North American turnover yesterday to set a marginal new
eight-month low. Today it has leaked closer to MXN16.63. The seven-year low
recorded last July near MXN16.6260 looks likely to give way. It is difficult to
talk about support as the dollar approaches levels not seen in 2015 but the
MXN16.25-MXN16.35 area looks reasonable. One market favorite, short Swiss francs
against the peso is at seven-year lows--a 4.5% spot move this month plus the
carry. Year-to-date the total return is slightly more than 10%.
Reviewed by Marc Chandler
on
March 27, 2024
Rating:
