Overview: Comments by Fed Governor Waller, urging
patience on rates and wanting more evidence that price pressures are moderating
has helped the greenback extend its recent gains. The yen is the notable
exception as the fear of intervention has restrained the dollar bulls. Poor
German data, including a sharp 1.9% drop in February retail sales, the fourth
consecutive monthly decline, underscored the euro's negative divergence, and the
single currency was sold to new lows for the month below $1.0780. The
Antipodeans and Scandis are leading the G10 currencies lower with 0.6%-0.8%
losses. Emerging market currencies are mostly lower. The South Korean won, and
Taiwanese dollar are exceptions with miniscule gains.
Equities in the Asia Pacific region are
mixed. Japan, South Korea, and Taiwan markets fell, while China, Australia, and
India are higher. Europe's Stoxx 600 is rising for its fourth consecutive
session, and if this is maintained, it would be the longest advance in two
months. US index futures are nursing small losses after yesterday's gains. European
bond yields are 2-5 bp higher, with peripheral premiums widening slightly. The
10-year US Treasury yield is up three basis points to 4.22%. The two-year US
yield is up almost six basis points to 4.63%. The Fed funds futures have shaved
the odds of a June cut and pared the extent of this year's reduction. Despite
higher yields and a firmer dollar, gold is firm, knocking on $2200. May WTI is
in a $81.50-$82.00 range. The week's high was set on Monday near $82.50.
Asia Pacific
American college basketball is in its
championship tournament, March Madness. It is clear that the violation of the rules, fouls, are
part of the game. The fouls do not threaten the integrity of the game in the
least. The lack of enforcement of the rules would, though, threaten the rules.
Similarly with world trade, there are rules of engagement. The violation of the
rules has become part of the game itself. The US has a strong successful record
of challenging China's action. The US also have been found in violation of the
rules in about a fifth of the cases China has brought. That China subsidies its
EV production, which is an investigation that the EU has initiated, is not a
legitimate defense for the challenge to the US subsidies under the Inflation
Reduction Act. Claims that China is trying to wreck the WTO is an exercise in
hyperbole. What has stalled the conflict resolution process at the WTO is the
Trump-Biden administrations obstructing the appointment of appellate judges.
That means that even if the WTO finds against the US, an appeal by Washington
essentially freezes the process.
Japanese officials are clearly signaling
its willingness to intervene in the foreign exchange market to strengthen the
yen. On one hand,
such intervention flies in the face of claims of a race to the bottom or that
all countries see a weaker currency. We know what boosts the chances of
successful intervention: surprise, size, and support (policy and
multilateral). Japanese officials have surrendered the element of surprise.
Indeed, the leaks in the Japanese press, even during last week's BOJ meeting
prevented officials from surprising the market with the first hike in 17 years.
The daily turnover in the foreign exchange market has been larger than central
bank intervention operations, but Japanese intervention has often tried to
muscle the market. In contrast, the US intervention is more finesse, typically
smaller size but well-timed. Support for intervention comes from signaling a
change in monetary policy, and this box Japan can check. However, the chances
of support from the ECB or the Fed seem de minimis. That said, intervention
could spur a pullback in the dollar more broadly. However, we suspect three
things. First, intervention to support the yen could lend support to the
Chinese yuan, which is trading at the lows since last November. Second, intervention
may initially weigh on Treasuries as the market assumes BOJ holdings will be
sold to buy yen, though officials are also believed to keep a liquid balance.
Third, a bounce in the yen will likely be sold.
Shifting risk-reward and the clear threat
of material intervention weighed on the dollar against the yen yesterday. The dollar pulled back from almost JPY152
to almost JPY151 in early North American turnover. It steadied but did not
resurface JPY151.40. Today's the greenback reached about JPY151.55. There is
set of options that expire today at JPY152.15 (~$1.25 bln). We continue to
suspect that the risks of intervention increase tomorrow when European and
North American markets are closed. The Australian dollar held above
support in the $0.6500-10 area in recent days but yielded today. It
could not get much above $0.6530 in North America yesterday. The break of
$0.6500 could spur a retest on the March low slightly below $0.6480. The Q1 low
was set in mid-February near $0.6445. The PBOC set the dollar's
reference rate at CNY7.0948 (CNY7.0946 yesterday). The average in the
Bloomberg survey was CNY7.2272 (CNY7.2222 yesterday). Many observers claim
Chinese officials have confused traders with its reference rate, with last
Friday's fix a little above CNY7.10, the anomaly. We think the timing of
allowing the dollar to rise and remain above CNY7.20 is a function of the
dollar's broad strength and the yen's exceptional weakness. The greenback has
been gradually allowed to rise against the yuan this year. The dollar has risen
in all but two week's this year. This week, it is on the cusp, having settled
at CNY7.2292 at the end of last week. Meanwhile, the dollar continues to trade
above its onshore band (~CNY6.9529-CNY7.2367) in the offshore market
(~CNH7.2440-CNH7.2630)
Europe
Japan and China are not the only countries
seeking to influence the foreign exchange market. Recall that Sweden's Riksbank hedged
(sold) a quarter of its foreign exchange reserves. Earlier today, the Swiss
National Bank confirmed it sold about CHF20.3 bln (~$23 bln) of its foreign
currency holdings in Q4 23 (down from CHF37.6 bln in Q3). This was consistent
with SNB's annual report published earlier this week. Last year, the SNB sold
nearly CHF133 bln (CHF22.3 bln in 2022). It bought CHF21.1 bln in 2021. Recall
in Q4 23, as the US dollar fell broadly, the Swiss franc rose faster than the
euro. Its 4% gain pushed it to levels last seen against the euro in the frantic
trading in early 2015 when the SNB lifted its cap on the franc. Earlier this
month, the OECD expressed concern about the SNB's large reserve holdings
(three-fold increase since 2010 to over 100% of GDP). The OECD, incidentally,
also advised that the SNB should maintain a tight monetary policy. Around 48
hours later, the SNB become the first G10 central bank to cut rates in this
cycle. This year, the euro has soared more than 6% against the Swiss franc,
recovering above CHF0.98 and returning to levels last since in the middle of
last year.
A combination of hawkish comments by the
Fed's Waller and poor German data has weighed on the euro, taking the single
currency to new lows for the month to about $1.0775. German retail sales collapse in February. The
median forecast in Bloomberg's survey was for a 0.4% increase, but instead,
retail sales plummeted by 1.9%. At the same time, German economic research
groups slashed their forecast for German growth this year to 0.1% from 1.3%
projection made in Q4 23. Nearby support may be seen near $1.0760 but the
February low near $1.07 beckons. Sterling has remained within last
Friday's range (~$1.2575-$1.2675). It looks vulnerable. A break of $1.2575
signals a test on last month's lows (~$1.2520-$1.2535). Sterling has not traded
below $1.2500 since last November. The intraday momentum indicators for both
the euro and sterling are overextended in the European morning but the US rate
adjustment suggests little incentive for bottom pickers in North America.
America
There are numerous US economic reports
today, but none will overshadow the Fed Governor Waller's comments, which
articulated the case by nine of the 19 Fed officials who earlier this month
favored two or few cuts this year. Revisions to Q4 GDP are not an issue for the market as Q1 winds
down. Next Friday's nonfarm payroll report is more in focus than weekly jobless
claims. The early call is for another solid 200k+ rise in jobs. The Chicago
PMI, KC Fed's manufacturing survey, pending home sales, and the final look at
University of Michigan's consumer confidence are not typically market movers
even in the best of times.
Tomorrow's data and events are more
important but most market in Europe and North America will be closed. The US reports personal income and
consumption. The former is expected to have slowed after the dividend and
Social Security cost-of-living adjustment boosted income by 1% in January. On
the other hand, the poor weather may have weighed on January's consumption, and
it is expected to have rebounded to around 0.5% in February (0.2% previously).
The Atlanta's Fed GDP tracker will be updated after the data (from 2.1% as of
earlier this week). The CPI (and PPI) steal the PCE deflators' thunder. The
headline deflator is seen rising to 2.5% from 2.4% and the core is expected to
be flat at 2.8%. Federal Reserve Chair Powell will speak in a moderated
discussion at the Macroeconomic and Monetary Policy Conference hosted by the
San Francisco Federal Reserve (11:30 AM ET). There is a risk that Powell, who
is often perceived as dovish even though he just led the Fed through one of its
most aggressive tightening cycles in the central bank's history, may offer a counterweight
to Waller. The futures market has pared the odds of a June cut to about 66%
from nearly 75% yesterday. There are about 73 bp of cuts priced into the Fed
funds futures curve, down from 79 bp yesterday and 84 at the end of last week.
The US dollar remained in the upper end of
its recent range against the Canadian dollar. After holding below CAD1.36 on Tuesday,
the dollar pushed through it but held below the recent high near CAD1.3615. The
consolidation is taking place in the upper end of last Friday's range
(~CAD1.3520-CAD1.3615). It still does not feel like a top is
in place. Nearby resistance is seen in the CAD1.3620-25 area, and a
break of could spur a move toward CAD1.3700 in the coming days. On the
other hand, the greenback continued to fall against the Mexican peso. It
reached almost MXN16.51 yesterday, the weakest since the end of 2015. The
peso's attractive carry seems like the most powerful force, but the
unexpectedly large drop in Mexico's February unemployment (2.45% vs. 2.85%) and
a half the trade deficit than expected may have underscored the hawkish part of
the hawkish cut the central bank delivered last week. Still, the greenback's
broad strength has steadied it against the peso. Mexican markets are closed
today and tomorrow. Initial resistance is seen in the MXN16.65-67 area.
Reviewed by Marc Chandler
on
March 28, 2024
Rating:
