Overview: The market put more weight on the rise in
the US ISM manufacturing survey than the downward revision to the manufacturing
PMI and the unexpected back-to-back decline in construction spending. US rates
shot up and lifted the greenback. The Dollar Index made a new high for the
year, a little above 105, which had been anticipated by the new lows recorded
by the Bannockburn
World Currency Index (a GDP-weighted basket of the currencies of the
12 largest economies) last week. The two-year Treasury yield surged almost 9
basis points to settle above 4.7%, its highest in two weeks. It is slightly
lower now. 10-year yield jumped 11 basis points, the most since January CPI was
reported on February 13. It is slightly firmer today to approach the Q1 24 high
(on March 18) near 4.35%. The dollar bloc and Scandis have been joined by
sterling, posting minor gains against the dollar. With a soft manufacturing PMI
and soft CPI due Thursday, the Swiss franc has been sold the hardest and is off
around 0.5%. Most emerging market currencies are softer, but the Turkish lira
is extending yesterday's recovery and the South African rand, and the Mexican
peso are firmer.
The Hand Seng and mainland shares that
trade there rallied more than 2% today, even though the CSI 300 was off 0.4%. Taiwan's
Taiex rallied 1.2%, led by the semiconductor sector. European markets re-opened
from the extended holiday and the Stoxx 600 resumed where it had left off and
extended its advance for the fifth consecutive session. US index futures are
trading a little softer. The jump in US rates and the firmer European final
manufacturing PMI readings are pushing up European 10-year rates by 5-7 bp,
with UK Gilt yields jumping nearly 11 bp. The firm dollar and higher rates have
not deterred gold buying. It reached new record high slightly below $2267. May
WTI is also taking another leg higher, encouraged perhaps by the better PMIs
but also news that Mexico will be cutting Mayan crude exports to boost domestic
gasoline and diesel output. It is a sour crude and the cut in exports comes as
the US reimposes sanctions on Venezuela, which also is a source of sour crude. May
WTI is rising above $85, last year's high.
Asia Pacific
With the Bank of Japan exiting its
negative interest rate policy last month, speculation has turned to the next
move. A Bloomberg
survey conducted on March 21 found 25% of the 47 survey responses were for a
hike in June/July, while 37% saw a September/October timeframe for the next
high. Another 8% saw the next move in Q1 25 and 19% expected the follow-up move
after Q2 25. Former BOJ official, Watanabe, opined that the next move would be
in October at the earliest. Recall Watanabe was seen as a potential candidate
for BOJ governor last year. Watanabe noted that service prices remain
lackluster (2.2% in February, unchanged from January), and that the BOJ moved a
couple of days before new inflation figures, which seemed to weaken the
contention of data dependence. Japan's two-year yield peaked at 0.21% on March
22. It has been consolidating above 0.18% since then.
The minutes from last month's Reserve Bank
of Australia meeting contained no surprises. The central bank left the cash rate
unchanged at 4.35% but pulled back from the past hawkishness that saw the risk
of another hike. Amid the uncertainty over the economic outlook, the RBA noted
that the risks were more evenly balanced. The futures market has pared the
chances of a rate cut at the May and June RBA meetings but downgraded the
probability of an August cut from around an 80% chance to less than 70%.
The dollar reached a three-day high in the
North American session yesterday, slightly above JPY151.75 and extended it
marginally to JPY151.80 today. The multi-year high set last week was a nanometer below JPY152.00.
The dollar is virtually flat over the past seven sessions and volatility is
still subdued with the benchmark three-month implied volatility about 8.2%. The
high for the year was near 10.5%. The low in Q1 was set in late February near
7.6%. The actual volatility in Q1 was about 7.5%. The Australian dollar
recorded an outside down day, trading on both sides of the pre-weekend range
and settling below its low. Indeed, the Aussie posted its lowest close
since February 13 when the low for Q1 was recorded slightly below $0.6445.
However, the Aussie has held above yesterday's low and is setting session highs
in the European morning near $0.6510. But, with intraday momentum indicators
stretched, we suspect there may be little upside left for the North American
session. Nearby resistance is seen in the $0.6520 area. There is no
doubt that China has the tools and resources to resist the dollar's strength,
but why should it? Inflation is low, the economy's growth is fragile.
Yet, it cannot win. If it intervenes overtly, it gets harangued for
blocking market forces and if does not intervene overtly then it is criticized
for "making its exports cheaper." The yuan's 1.9% decline
against the dollar this year is less than any of the G10 currencies but
sterling. The yuan has also appreciated against most emerging market
currencies. The PBOC set the dollar's reference rate at CNY7.0957 (CNY7.0938
yesterday, lowest since March 13). The average in Bloomberg's survey was
CNY7.2373 (CNY7.2196 yesterday). There seems to be little to prevent a move
toward CNY7.25, the bottom of a previous range for the dollar.
Europe
Europe returned from its holiday weekend. The highlight this week is the preliminary
March CPI tomorrow. Last week, France and Italy reported their figures, and
both were softer than expected. France's harmonized measure fell to 2.4% from
3.2%. Italy's rose from 0.8% to 1.3%. The median forecast in Bloomberg's survey
was 1.5%. German states have reported earlier today, and the year-over-year
rates fell by 0.3%-0.7%. The national harmonized figure is due shortly. It is
seen slipping to 2.4% from 2.7%. Separately, the ECB reported that its February
survey found one-year inflation expectations slipped to 3.1% from 3.3%, while
three-year expectations was unchanged at 2.5%. The three-year expectation was
at 2.5% in February 2023. Lastly, the final March manufacturing PMI came it at
46.1, up from 45.7 preliminary estimate after 46.5 in February. German and
French estimates were tweaked higher. Italy's manufacturing PMI rose above 50
(50.4) for the first time since last March. Spain's held above 51.0 (51.4) for
the second consecutive month. Shifting to the UK, there the final manufacturing
PMI rose to 50.3 from 49.9 preliminary estimate and 47.5 in February. It was
the first reading above 50 since July 2022.
After falling for the past three weeks,
the euro took another step lower yesterday. Last week was the first week since
mid-February that the euro closed below $1.08. It was sold to almost $1.0730 in
the North American session yesterday as US rates surged. A marginal new low was
set earlier today near $1.0725. The euro has not been below there since
mid-February. The Q1 low was set slightly below $1.07 on February 14 (the day
after the US January CPI). The euro has steadied but faces resistance in the
$1.0750-60 area. Sterling traded miserably. It tumbled out of
the six-day sideways consolidation and fell to $1.2540, its lowest since
February 14. It has held today, and sterling has steadied, but is holding below
$1.2575. The intraday momentum indicators are stretched. The low for the year
was set on February 5 (the session after the US January employment report) near
$1.2520. Sterling has not traded below $1.25 in four months.
America
In the quarter before Covid struck, US job
openings averaged almost 7 mln. This measure of the labor market is gradually normalizing. It
peaked at near 12.2 mln in March 2022 and was near 8.86 mln in January. The
median forecast in Bloomberg's survey is for 8.77 mln, which if accurate, would
be the least since March 2021. February factory orders are also due, but we
already know that durable goods order bounced back after dropping 6.9% in
January. Below the surface, the challenge is that excluding aircraft and
military orders, durable goods orders have been flat over the past 18 months.
Lastly, March US vehicle sales are expected to have edged up to 15.9 mln
(seasonally, adjusted annual rate, which would be slightly below last year's
peak (April 2023, 15.91 mln). US vehicle sales were about 15.43 mln in 2023 and
13.73 mln in 2022. In 2019, they were slightly below 17 mln.
The manufacturing ISM rose above 50 for
the first time since 2022. The
odds of a June cut were scaled back to about 60% from almost 80% a week ago. It
is the least since the end of last October. In addition, the futures market
scaled back the amount the Fed will cut this year to about 68 bp. It was the
third consecutive session that the market was not pricing in at least 75 bp of
cuts. It had flirted with this idea for three days in mid-March before the
conclusion of the FOMC meeting.
The US dollar recorded a bullish outside
up day against the Canadian dollar. It had set a seven-day low Asia Pacific turnover yesterday
(~CAD1.3515) before rallying to CAD1.3585 in the North American session. After
the high was recorded, the greenback did not trade below CAD1.3570, though
today, it has pushed back to almost CAD1.3555. The market does not look as if
it finished with the CAD1.3600-15 that capped it in late February and all last
month. We have noted that a break of CAD1.3625 could see the US dollar rise
toward CAD1.37. With the intraday momentum indicators oversold, and the bullish
greenback mindset in North America, additional Canadian dollar gains seem
limited. The greenback also recorded an outside up day against Mexican
peso. However, the tone seemed more consolidative than corrective. It
stopped near MXN16.6730, a three-day high. The next hurdle is seen in the
MXN16.73-MXN16.78 area. Last week's low was set near MXN16.5120. The peso is
the only currency (G10 and EM) that has appreciated against the dollar this
year. Meanwhile, the dollar rose to new highs for the year against the
Brazilian real. It reached almost BRL5.07, and though it steadied in late
dealings, it still settled above the upper Bollinger Band (~BRL5.0425). The
next chart point of note is closer to BRL5.10.
Reviewed by Marc Chandler
on
April 02, 2024
Rating:
