Overview: The dollar is trading quietly against the G10
currencies as European markets remain on holiday. Narrow ranges have prevailed.
The dollar-bloc currencies are leading with minor gains, perhaps helped on the
margins by better-than-expected Chinese PMI, but the Scandis, which also
typically do well amid a better global growth profile are the laggards. This
may speak to the light liquidity conditions. Japan may have missed a tactical
opportunity to intervene to knock the dollar back ahead of what may be a solid
US jobs report at the end of the week. Erdogan's AK Party lost the weekend
elections. The opposition CHP won 35 mayorships against 24 for the AKP. The
early signals are that Erdogan will stick with the turn toward economic
orthodoxy and in the current context that means tight monetary policy. The
Turkish lira is trade with a heavier bias today, as are most emerging market
currencies, and the dollar breached CNY7.23 for the first time since last
November.
Japanese shares sold off earlier today, with the Nikkei shedding 1.4%.
Chinese shares rallied and the CSI 300 rose nearly 1.65%, its third consecutive
advance and the largest rally in a little over a month. Hong Kong and
Australian markets were on holiday, while South Korean and Taiwanese shares
were narrowly mixed. European markets are closed too. US index futures are
0.25%-0.50% better. US yields are a little softer. The 10-year yield is off a
little more than a basis point 4.19% and the two-year yield is off almost three
basis points to 4.59%. Gold has extended its pre-weekend rally. It gapped
higher and rose to a new record high near $2265.75 before stabilizing around
$2250. The gap extended to the pre-weekend high slightly below $2232. May WTI
also extended its gains to reach $83.60, its highest level since last October. It
rose 3.15% last week, its third consecutive weekly advance.
Asia Pacific
Earlier today, Japan reported the uninspiring results of the Tankan
survey. Large manufacturing sentiment slipped slightly (11 vs. 12)
while the non-manufacturing sentiment ticked up (34 vs. 30). That is the best
reading for the large non-manufacturers' sentiment since the early 1990s. Capex
plans scaled back sharply (4.0% vs. 13.5%). At the end of last week, Japan
reported that Tokyo's March CPI stood at 2.6%, up from a revised 2.5% in February
(initially 2.6%), while the core measure eased to 2.4% from 2.5% as expected. The
measure that excludes fresh food and energy fell for the seventh consecutive month
and slipped below 3% (2.9%) for the first time since the end of 2022. Japan
also reported a sharp 1.5% rise in February retail sales, more than twice as
much as economists expected, and this points to a better household spending
report due at the end of week. Still, Japan will be fortunate to avoid a
contraction in Q1, as industrial output, which the median in Bloomberg's
forecast expected to have risen by 1.3% after the 6.7% collapse in January,
slipped by 0.1%. Activity should be stronger in Q2, and the income tax cuts in
June help extend the recovery in to Q3.
Over the weekend, China reported a better-than-expected improvement in
the March PMI. For the first time since last September, the manufacturing
PMI rose above 50, to 50.8. The non-manufacturing PMI rose to 53.0 from 51.4.
That is the strongest since last June. The composite reading edged up to 52.7
from 50.9 for the past two months, the best in 11 months. Last March, the
composite PMI was at 57.0, a multi-year high. Earlier today, the Caixin
manufacturing PMI was reported at 51.1, up from at 50.9. It was at 50 last
March. Caixin's services and composite PMI are due Wednesday.
Japanese officials did not intervene, and we suspect, that like leaking
the results of the BOJ meeting, another tactical mistake was made. They
know, as we do, the risk if for another healthy job creation report and for
sticky US CPI. Knocking the dollar down first ahead of what could be strong
buying pressure would be like the Swiss National Bank getting the jump on the
ECB for rate cuts. The verbal intervention may have held the greenback below
JPY152, but it has not been below JPY151 for the past six sessions and is
holding above it today. The greenback remains within the range set last
Thursday (~JPY151.15-JPY151.55). The Australian dollar eked out a small
gain against the dollar last week for the first time in three weeks. Since
falling below $0.6500 last Thursday, the Australian dollar has held below
$0.6540. The momentum indicators are weak, and a durable low does not seem to
be in place. A move above the $0.6560-80 area negates this bearish view. The
dollar pushed above CNY7.23, a new high since last November. Some observers had
suggested the PBOC had pegged the dollar at CNY7.20, and then said CNY7.23. They
confuse tactics with strategy and a fixed exchange rate with a dirty float. The
PBOC set the dollar's reference rate at CNY7.0938 (CNY7.0950 on Friday). The
average projection in Bloomberg's survey (seven responses) was CNY7.2196
(CNY7.2256 on Friday). The US dollar continued to trade above the onshore band
against the offshore yuan. The band is CNY6.9520-CNY7.2357. The dollar is
trading about CNH7.2480-CNH7.2593.
Europe
The eurozone will provide its initial estimate of March inflation and
February unemployment Wednesday morning and that is the highlight for the week.
With one exception in December, the eurozone's year-over-year CPI has not
risen since last April. It looks likely to have edged down to 2.5% from 2.6% in
February. That would be the lowest since July 2021. The core rate may have
slipped slightly to 3.0% from 3.1%. It peaked last March at 5.7%. The ECB
forecast this year CPI to be at 2.3% at the end of the year. Given the
stickiness of service inflation, stuck for the last few months at 4%, and the
lowest unemployment rate in EMU history (6.4%), allows officials to play for
more time. The swaps market prices in about a 1-in-10 chance of a cut at the
April 11 ECB meeting, but quarter-point cut is nearly fully discounted for June.
The euro slipped briefly below $1.0770 before the weekend to record a new
low for March. It settled little changed but below $1.08 for the
second consecutive session. The euro is in a narrow range in thin trading today
(~$1.0785-$1.0800). The combination of softer eurozone inflation and a
respectable US jobs report may make for a dangerous cocktail for the euro. Initial
resistance may extend toward $1.0820. Sterling traded in a $1.2575-$1.2675
trading range on Friday, March 22 and remained within that range all
last week. The decline from the Q1 high set before the last US jobs data
(almost $1.29) may be getting stretched. But a favorable US jobs report could
see sterling's losses extended. The low for the year was set near $1.2520 the
session after the US January employment report in early February. Sterling is
trading quietly in about a $1.2615-$1.2640 range.
America
The US reported February personal income, consumption, and the deflators
before the weekend. Without the benefit of the Social Security
cost-of-living adjustment and the jump in dividend payout, personal income rose
a more modest 0.4% after January's 1.0% gain. Spending, less hampered by poor
weather, rebounded 0.5% after a 0.2% rise in January. The deflators were in
line with expectations following the previously released CPI and PPI. The
headline pace crept up to 2.5% from 2.4%, while the core measure was steady at
2.8%.
Today's US highlights include construction spending, which is expected to
have rebounded from the weather-induced weakness in January and the ISM
manufacturing, where the slowdown activity and new orders may have moderated. The
highlight of the week is the monthly employment data on Friday. The median
forecast in Bloomberg's survey is for about 215k, which would be the fourth
consecutive month above 200k and around the six-month average. Recall that in
the two years before Covid, the US created slightly less than 180k jobs a month.
The unemployment rate may tick down to 3.8% from 3.9% in February. Average
hourly earnings look poised to drift closer to 4.1%- 4.0% year-over-year after
being stuck at 4.3%-4.4% for the last four months. They have not been below
4.3% since June 2021. Several Fed officials speak this week, including Fed
Chair Powell on Wednesday. Recall that at the March FOMC meeting, nine Fed
officials thought two cuts or less would be appropriate while 10 officials saw
three cuts or more.
Canada also reports March job data at the end of the week. Canada's
overall job creation this year and the number of full-time positions filled are
running slightly above last year's average in January-February, the
unemployment rate is elevated. After bottoming at 5% in late 2022 and the first
several months of 2023, it steadily rose to 5.8% in last November and December.
The median forecast is for it to tick up to 5.9% in March, a two year high.
Last month, the US dollar traded CAD1.3600 or above in nine sessions last
month and closed only once above it. The US dollar posted a bearish outside
down day last Thursday, March 28, by trading on both sides of the previous
day's range and settling below its low. There was no follow-through selling in
the holiday-thinned pre-weekend activity. Last week, the greenback did not
trade outside of the range established on Friday, March 22
(~CAD1.3520-CAD1.3615). Today, the US dollar has slipped to CAD1.3515. Nearby
support is seen near CAD1.3500, which is also around where the 200-day moving
average is found. The Mexican peso rose to new nine-year highs in the
middle of last week and consolidated in the last two sessions. The US
dollar reached almost MXN16.51 and settled last week slightly below MXN16.56. It
ended February near MXN17.05. A one standard deviation band around the June 1
forward (June 2 elections) creates a range of about MXN16.08-MXN17.35. This
give a sense of what is reasonable assuming constant volatility and a normal
distribution, which are rough approximations. Speculators in the futures market
continue to build the net long position. It has risen by 50% since the end of
last year.
Reviewed by Marc Chandler
on
April 01, 2024
Rating:
