Overview: The dollar is trading with
a softer bias in mostly narrow ranges against the G10 currencies. It did not
rally much ahead of the US jobs data, and it was not able to sustain the upside
momentum afterwards, despite the jump in US yields. Former St. Louis Fed President
Bullard, who still has a strong reputation in the market, told Bloomberg TV
yesterday that three cuts were his base case this year. The Scandis and
Antipodeans are the strongest today, up about 0.25%-0.33%. The dollar continues
to hold below JPY152 barely. Most emerging market currencies are also firmer
today. The dollar continues to trade just inside its band against the onshore
yuan.
Most of the large Asia Pacific equity markets rallied, led
by a 1.85% gain in Taiwan and a 1.1% advance by the Nikkei. South Korea was a
notable exception and the won traded lower too. Europe's Stoxx 600 is trading a
little heavier after gaining almost 0.5% yesterday. US index futures are
slightly firmer. Benchmark 10-year yield are 3-4 bp lower in Europe, and the
10-year US Treasury is off three basis points to about 4.39%. The year's high
was set yesterday closer to 4.46%. Gold continues to march higher. A new record
was reached today, a little more than $2365.35. In the last 11 sessions coming
into today, gold has fallen once. It is up more than 1% today, which if
sustained would be the fourth such gain in eight sessions. After recovering
strongly from around $84.70 yesterday to settle near $86.60, May WTI has
struggled to sustain the upside momentum and stalled near $87 today and is
consolidating ahead of the North American session.
Asia Pacific
The first state visit by a Japanese prime minister to the
US in nine years has begun. We suggest this makes for a
difficult backdrop for Japanese officials to intervene in the foreign exchange
market. It would be undiplomatic and could mar the meetings. With the Fed still
hesitant to cut rates, a strong dollar is part of the anti-inflation efforts.
If it has been the fear of intervention that has made the market cautious near
JPY152, the reduced chances of intervention could encourage the market to push
the greenback above this important psychological and technical cap. Separately,
Japan reported preliminary March machine jumped 18.8% in March, led by a 51%
surge in domestic orders and a nearly 6% rise in foreign orders. Orders
collapsed by 12.7% in January. Domestic and foreign orders fell for the first
time since last October (20% and 9.5%, respectively). The earthquake on January
1 was disruptive. There was a modest rebound (2.9%) in February. Domestic
orders rose by 6.3% and foreign orders by 1.6%. The recovery in capex should
help underpin the Japanese economy.
China's lending figures are due any day this week. The
March CPI and PPI are due first thing tomorrow. The February CPI may have been
flattered by the spending associated with the lunar new year celebration, and
this may partly unwind in March. The conventional narrative says that the weak
CPI is a function of weak demand. Yet, the CPI is heavily weighted toward food,
which and demand seem somewhat inelastic. A key driver remains pork prices and
this is more a function of supply efforts to rationalize the swine herd, which
includes reducing the retention target of breeding sows. In addition, the
overproduction that conventional narrative emphasizes, is a function,
ironically, of competition, which is driving down domestic prices, including
autos.
The Reserve Bank of New Zealand meets the first thing
tomorrow. There is practically no chance of a cut in the 5.5%
overnight target rate, even though the recent string of economic data has
disappointed. Recall that the New Zealand economy contracted in four of the
last five quarters through the end last year. The hindrance stems from firm
price pressures (Q1 24 CPI is due next week, April 17). New Zealand is the last
of the G10 countries that does not have a monthly inflation report. As of Q4
23, New Zealand's CPI was 4.7% year-over-year. The swaps market has about a 40%
chance of a cut in July and is nearly fully priced in for August. There are two
cuts discounted and about a 50% chance of a third. The New Zealand dollar has
lost about 4.6% against the US dollar so far this year, and about 1.5% against
the Australian dollar.
The dollar's high against the yen was set in early North
American turnover near JPY151.95. It pulled back to
almost JPY151.70 and was confined most of the remainder of the session in a
little more than five ticks on either side of JPY151.80. The dollar remains
firm in a roughly JPY151.75-JPY151.95 range today. The Australian dollar,
which had slipped to about $0.6550 before the weekend, recovered to approach
the two-and-a-half-week high set on April 3 near $0.6620. Yesterday,
it settled above the downtrend line off the March 8 high, found near $0.6590.
It is in an exceptionally narrow range so far today of about $0.6600-$0.6625.
There are options for A$980 mln at $0.6620 that expire today. Above there,
nearby resistance is seen in the $0.6635-40 area. The US dollar posted
its lowest settlement against the offshore Chinese yuan yesterday since March
21 (~CNH7.2430) and closed below its five-day moving average (~CNH7.2485) for
the fifth consecutive session. Yet, the dollar remains above the
onshore band in the offshore market. The 2% band today is
CNY6.9537-CNY7.2375. The PBOC set the dollar's reference rate at CNY7.0956
(CNY7.0947 yesterday) as it continues to resist the upward pull of the
greenback. The average in the Bloomberg survey slipped to CNY7.2262 (CNY7.2279
yesterday). It was the third consecutive decline.
Europe
The key events for Europe this week are in the second half
of the week: the ECB meeting (Thursday) and the UK's February monthly GDP print
(Friday). The market is fairly confident of a June cut (~90%
chance priced into the swaps market). However, the market is straddling the
fence about a cut at the following meeting (July 18). There are three cuts
discounted for this year and about a 40% chance of a fourth cut. Recall that in
the frenzy at the end of last year, there are at the peak 190 bp of cuts priced
in for this year The nearly 85 bp currently discounted is the lower end of
where it has traded this year (82.2 bp on February 22 was the least). The ECB's
bank lending survey, released today, confirmed a tightening of lending
standards and a decline in demand. There is also a modest easing in mortgage
lending for the first time since late 2021. The UK economy appears to be
continuing to recover from the contraction in H2 23. The economy grew by 0.2%
in January and is expected to have grown by about 0.1% in February. The risk
seems more biased to the downside (flat) rather than the upside (to match
January's pace).
The euro and sterling settled higher yesterday than they
did before the US jobs data last Friday. Given the strength
of the data and the rise in US yields, the resilience of the euro and sterling
is notable. Moreover, the economic divergence will likely underscore this week,
with an ECB maintaining its signal of a likely June cut and the UK's minor
growth that is expected, while neither the employment data nor tomorrow's CPI
are likely to boost the Fed's confidence in the trajectory of prices.
Ironically, yesterday, the euro posted its highest settlement ($1.0859) since
March 21, the day after the last FOMC meeting. Last week's high was set
slightly above $1.0875, just in front of the (61.8%) retracement (~$1.0880) of
the losses since the last jobs report in early March. It is in a
narrow range of about $1.0850-$1.0870 today. Sterling settled at its
best level (~$1.2955) since March 21 as well. It is also in a tight
range so far today: ~$1.2650-$1.2685. Nearby resistance is seen in this area, which houses last week's high, the (50%) retracement of the
losses since March 21, (38.2) of the losses since the year's high on March 8 (~$1.2895),
and the 20-day moving average. There are also options for about GBP755 mln
struck at $1.2675 that expire tomorrow. Above there, potential extends toward
$1.2700-50.
America
The highlight of the week, the US March CPI is due tomorrow. The
month-over-month change is supposed to tick down to 0.3% from 0.4% in February
(both headline and core). Given the base effect (0.1% headline increase in
March 2023 and 0.3% increase in the core rate), the year-over-year rate may
rise to 3.4% from 3.2%. The core rate, due to rounding, may slip to 3.7% from
3.8%. It would be the third month in the past four that the headline
year-over-year rate increased. A 0.3% increase would mean that at an annualized
rate, headline CPI rose by 4.0% in Q1 24, up from 2.0% in Q4 23. and matching
the increase of Q1 23. A 0.3% increase in the core rate translates into a 4.4%
annualized rate in Q1 24 up from 3.2% in Q4 23 and 4.8% in Q1 23.
The Bank of Canada meets tomorrow. None
of the 25 economists Bloomberg surveyed expected a cut and the swaps market has
slightly less than a 20% chance discounted. Headline inflation has surprised to
the downside in January and February, and underlying core inflation is also
subsiding. On the heels of another disappointing jobs report we look for
Governor Macklem indicate barring a new shock, that conditions are falling into
place for lower rates. The market has about an 80% chance of a June cut and has
nearly three cuts discounted for this year.
Mexico reports March CPI today. The
headline rate is expected to have edged up to 4.50% from 4.40%. This would be
the fourth increase in the past five months. Headline CPI bottomed last October
near 4.25%. The median forecast in Bloomberg's survey is for the core measure
to tick down to 4.63% from 4.64%. This would extend the uninterrupted decline
since last January when it stood at 8.45%. Banxico delivered a hawkish cut last
month. There were two elements that tilted the first cut in a hawkish
direction. It tweaked higher its year-end forecast for CPI, and it explicitly
did not commit to an easing sequence. The swaps market has about a 50% chance
discounted of a rate cut in the next three months. The next meeting is May 9.
The election is June 2, and Banxico’ s meeting following it is on June 27 and
August 8.
After rising to new highs for the year before the weekend,
the US dollar consolidated against the Canadian dollar. Although
it had traded above CAD1.36 in the Asia Pacific session, the US dollar remained
below it in North America. Instead, it recorded the session low near CAD1.3570.
It is trading a little softer today. A break, and ideally a close, below CAD1.3540
would suggest that last week's push high was exhaustion rather than a genuine
breakout. It could sour a move toward the CAD1.3460-80 area. The
greenback slumped to new lows against the Mexican peso. It has not
seen these levels since August 2015. It reached almost MXN16.31. The dollar has
taken another step lower today to nearly MXN16.26. With the carry persisting,
the first Mexican presidential debate throwing no surprises, leaving Sheinbaum with
a strong lead center-right alliance candidate Galvez and the third-party
candidate Maynez, the peso may have more room to run. While the MXN16.22 area
may be interesting, the next significant area is around MXN16.00. Meanwhile,
the market seems more concerned about the political developments in Brazil than
Mexico, and the immediate focus is on the governance of Petrobras. Brazil
reports March IPCA inflation tomorrow. It is expected to slow to around 4% from
4.5%. It would be the lowest since last July and the sixth consecutive
moderation. The dollar set a new high for the year in the middle of last week
near BRL5.0915. It settled slightly below BRL5.03 yesterday and a convincing
break of BRL5.00 would suggest a near-term top is place. Support is seen near
BRL4.95.
Reviewed by Marc Chandler
on
April 09, 2024
Rating:
