Overview: Higher than expected US CPI for the
third consecutive month drove US interest rates sharply higher and lifted the
greenback broadly. The market appears to be catching its proverbial breath today,
but the shallow consolidation suggests the moves are not over. The ECB meeting
is likely to highlight the new divergence that has opened. The dollar has
reached nearly JPY153.30, and although Japanese officials cautioned about the
fx moves, intervention while Prime Minister Kishida is on his state visit to
the US strikes us highly unlikely. In any event, the broad dollar gains were fundamentally driven. China's March CPI (-1.0% month-over-month and 0.1%
year-over-year) underscores the scope for the easier monetary policy, but the
PBOC continues to resist the downward pressure on the yuan.
The large Asia
Pacific equity markets were mixed. Of note, South Korea's Kospi eked out a
small gain amid a significant political setback for the pro-business president,
whose People's Power Party lost more seats in parliament, leaving Yoon Suk
Yeol's agenda at risk. Europe's Stoxx 600 is off about 0.3% in late morning
turnover. US index futures are slightly softer after yesterday's sharp losses. The
US two-year yield surged 23 bp yesterday to approached 5.0%. It is closer to
4.95% now. The US 10-year yield jumped 18 bp yesterday to about 4.55% and is
hovering near there now. European 10-year yields are 1-4 bp firmer today. The
market has downgraded the chances of a June ECB cut to around 80%, the lowest
since last October. Gold fell by about $18.75 an ounce yesterday, its largest
loss in about a month. It is trading softer today near $2332. The yellow
metal's record high was set on Tuesday a little above $2365. May WTI is little
changed, consolidating above $86 a barrel.
Asia Pacific
China's March CPI rose 0.1%
year-over-year, slower than the 0.7% pace seen in February, which seemed to
have been boosted by the lunar New Year holiday and lower than expected. On a month-over-month basis, CPI fell by
1% after rising by 0.3% in February. Food prices tumbled 2.7% year-over-year. Non-food
prices rose by 0.7%, down from 1.1% previously. The core rate rose by 0.6%,
half of February's pace. Producer prices deflation, which began in October 2022
continued, with the PPI off 2.8% over the past 12 months. China's PPI has been
between -2.5% and -3.0% since last July. The subdued price pressures give the
PBOC scope to cut rates or reserve requirements. But officials are believed to
be concerned about the weakness of the yuan, which continues to hover near the
lower end of its band against the dollar. The CSI 300 rallied a little more
than 16% off its early February lows but stalled three weeks ago. The 10-year
Chinese bond yield set a multiyear low near 2.75% in late March and continues
to trade near the trough. Separately, note that Beijing has ordered three-star
hotels and better, and major tourist attractions, to accept foreign bank credit
cards.
After bumping near JPY152 for three weeks,
the surge in US rates after the March CPI lifted the greenback to JPY153.25
yesterday has edged marginally higher today. The dollar has held above JPY152.75. While
we thought Japanese officials missed an opportunity to intervene over the
Easter holiday, we also argued that the risk of intervention this week, with
Japanese Prime Minister Kishida in the US, the first state visit in nine years,
was slim at best. The dollar is at its best level since 1990. It reached
slightly above JPY160.20 in Q2 90. We have suggested initial potential toward
JPY155. The Australian dollar slid more than 1.75% yesterday, its
biggest drop since March 2023. It has steadied today and held above
$0.6500. The next support may be near last week's low near $0.6485, while the
Q1 low set in mid-February closer to $0.6445. It has held below $0.6530 today.
The New Zealand dollar recorded a key reversal by setting new highs for the
move (~$0.6085) and then selling off and settling below Tuesday's low
(~$0.6030). Like the Aussie, it steadied today but has been unable to resurface
above $0.6000. There is little to prevent a test on this month's low near
$0.5940. The greenback's broad strength saw it rise to a six-session
high against the offshore yuan (~CNH7.2640). The year's high was set
on March 25 around CNH7.2820. Contrary to ideas that China wants a weak yuan to
boost exports, officials continue resist the downward pressure. The PBOC set
the dollar's reference rate at CNY7.0968 (CNY7.0959 yesterday). The average
projection in Bloomberg's survey was CNY7.2565 (CNY7.2314 yesterday). We
suspect that the dollar is headed back into the former range of
CNY7.25-CNY7.30. The press reported state banks were sellers of dollars today.
Europe
Perhaps it is the sell-off in the euro,
perhaps it is that Fed easing looks to start later and deliver less than had
been anticipated, but the market has downgraded the chances of an ECB cut in
June. To be sure it
is still the odds-on most likely scenario, but around 80%, it is at the lowest
since last October. The ECB does not target the exchange rate, but it does feed
into central bank's economic forecasts. And the risk seems squarely on the
downside. It is difficult to envision a hawkish ECB. However, ECB President
Lagarde may recognize that there are some economic green shoots. The periphery
appears to be doing better than the core and within the core. Retail sales
remain disappointing in Germany, but expectations have improved, and industrial
output is off to a strong start (rising 1.3% in January and 2.1% in February).
It took the euro six sessions to rise from
around $1.0725 to $1.0885. It practically unwound it all yesterday. The 1.1% loss was the
largest drop of the year. The low in Q1 was slightly below $1.07. Note that
there are substantial options struck at $1.07 that expire today (2.3 bln euros)
and tomorrow (2.6 bln euros). After the low was set in North America yesterday,
the euro was unable to trade above $1.0755. Today's high has been $1.0750. A
break of $1.07 would initially target the $1.0650 area, but we suspect the new
divergence could see $1.06. Sterling was slammed yesterday and spiraled
to $1.2520, taking out last week's low around $1.2540 and matching the Q1 low
recorded after the January US jobs data on February 8. A fragile
consolidative tone has emerged today, and sterling saw new sales near $1.2570.
There are GBP560 mln options at $1.2515 that expire today. Sterling has
not traded below $1.25 since last November. A break of the $1.2480 area could
spur another cent drop.
America
The third monthly US CPI reading above
expectations lifted US rates sharply and lifted the greenback. The measure that Fed Chair Powell has
referred to, which is core services excluding housing, rose by 0.65%. This
follows a 0.47% rise in February and a 0.85% increase in January. That is about
8% annualized pace. Auto insurance and medical costs were the key drivers. The
headline rare rose by 0.4%, and about half was driven by gasoline and shelter
costs. The year-over-year rate of 3.5% is the highest in six months. The
firm CPI comes on the heels of continued stronger than expected US job
creation. The market has all but given up on a June rate cut. There is less
than a 20% chance still being priced, the least since last September. After the
March employment report on April 5, the futures market still had about a 55%
chance of a June cut discounted, but it has not been fully priced in since
February 20. The odds of a July cut were nearly halved after yesterday's CPI
and is now near 45%. For the first time, the market does not have at least a
quarter-point cut discounted for September. More than two rate cuts were
completely discounted as recently as March 25.
The Bank of Canada took baby step toward a
rate cut. While
leaving policy on hold at 5.0%, the central bank boosted its GDP forecast while
shaving its CPI projections. In its statement, it dropped the reference to the
"persistence of core inflation." However, is also raised the middle
of its assessment of the neutral rate by 25 bp to 2.25%-3.25%. The market
downgraded the chances of a June cut to about 50% now from 78% on Tuesday. The
swaps market sees about 55 bp of cuts this year, which is two quarter-point
moves and a little less than a 20% chance of a third cut. Recall that as
recently as February 20, the market was favoring 100 bp of cuts this year. Last
Thursday, the swaps market had slightly more than three cuts fully discounted.
The US CPI triggered a sharp
sell-off in the Canadian dollar, and the reaction to outcome of the Bank of
Canada meeting hardly is seen in the tick chart. The US dollar jumped around 0.9%, the most
this year, and briefly traded above CAD1.37 for the first time since last
November. It has held slightly below it today. The next chart area is around
CAD1.3765-75. The Bollinger Band is set two standard-deviations around the
20-day moving average. Yesterday, the greenback traded beyond three standard
deviations (~CAD1.3685) from the moving average. The three-standard deviation
mark is slightly above CAD1.3705 today. The US dollar surge proved too
much for the high-flying Mexican peso. The greenback had recovered a
bit from Tuesday multiyear low near MXN16.16. It was trading near MXN16.30
before the US CPI and shot up to MXN16.52. This is the kind of setback for the
peso that we suspect will bring in new buyers. Barring a Fed hike, the
carry remains a key prop for the peso. The dollar is consolidating around
MXN16.4260-MXN16.4820. The 20-day moving average is slightly below MXN16.60,
and the dollar has not closed above it since late February.
Reviewed by Marc Chandler
on
April 11, 2024
Rating:
