Rate Adjustment Underpins Greenback

Overview: The adjustment to US interest rates continues and this helps underpin the US dollar. The 10-year yield rose to 4.40% yesterday, the highest it has been since last November. It is trading 4.34%-4.38% today. The two-year yield is firm though holding below the Q1 high set last month near 4.75%. This week, for the first time since last October, the Fed funds futures do not have at least a quarter point cut discounted for July. As recently as February 12, the market had two cuts discounted. The dollar is firmer against all the G10 currencies today. Emerging market currencies are mixed. A rise in Turkish inflation is spurring speculation of another rate hike and this is helping underpin the lira today. The Hungarian forint is firm. Including today, it has risen in seven of the last eight sessions against the euro.

A powerful earthquake off the coast of Taiwan shuttered factories, but the Taiwan dollar managed to eke out minor gains. After yesterday's sharp equity losses in the US, Asia Pacific markets tumbled today. Taiwan saw a 0.6% decline, which was among the least in the region. Hong Kong, South Korea, and Australian markets fell by more than 1%. After falling by 0.8% yesterday to snap a four-day rally, Europe's Stoxx 600 is steady to higher today, while US index futures are sporting softer profiles. European benchmark yields are mostly softer, and the core is outperforming the periphery. Gold rose to a new record high near $2288.50 before profit-taking saw it fall slightly below $2268 where it found fresh bids. May WTI extended its recent gains to trade near $85.65 today. OPEC+ extended its "voluntary" output cuts through Q2 and API reported US stockpiles fell by more than 2 mln barrels last week.

Asia Pacific

Japan saw its final March service and composite PMI readings. They were little changed from the flash estimates. Japan's industrial sector is still recovering from the earthquake on January 1, but the service sector continues to hum along. The 54.9 flash estimate of the service PMI was revised to 54.1 in the final reading but is still the highest since last August. The composite PMI stands at 51.7 (52.3 preliminary) and 50.6 in February. It is the best since last September. Economists project that a smaller drag from consumption and a recovery in government spending will help the Japanese economy expand slightly in Q1 but look for the economy to strengthen in Q2.

China's Caixin services and composite PMI were released earlier today, as well. The services PMI edged up to 52.7 from 52.5. Recall that it firmed every month in Q4 23 to finish the year at 52.9. It slipped in January and February. The "official" non-manufacturing PMI rose for the fourth consecutive month in March and the 53.0 reading was the best since June 2023. Caixin's composite PMI has been steady 52.5-52.6 since December. It rose to 52.7 in March, the highest since last May. The Chinese economy is off to a firm start of the year, but many are skeptical that the momentum can be sustained without additional stimulus.

Last Wednesday, the dollar traded in a nearly JPY151 to JPY152 range and remains within it. And within that range, the dollar has recorded higher lows until today, when it traded slightly below yesterday's low before recovering back to the JPY151.80 area. The US 10-year yield has risen by almost 20 bp since last Wednesday and that would likely have seen a higher dollar if it were not for the fear of intervention. From a technical point of view, the consolidative pattern looks more like a continuation pattern than a reversal. The Australian dollar reached almost $0.6525 in the North American session yesterday and in the local session today before slipping back to nearly $0.6500. It remains inside Monday's range in uninspiring activity. Yesterday, it settled below the five-day moving average (~$0.6515) for the eighth consecutive session. A move above the $0.6560 area is needed to lift the tone. The greenback crept higher against the Chinese yuan yesterday, reaching almost CNY7.2365. It held below CNY7.2360 today. Press reports noted that yesterday some short-dated yuan swaps were blocked as they implied an exchange rate outside of the band. And because of that, the main yuan swap platform could not execute the trades. Note that mainland markets are closed tomorrow and Friday. The PBOC set the dollar's reference rate at CNY7.0949 (CNY7.0957 yesterday). The fix has been between CNY7.0938 and CNY7.0996 since last Monday. The average projection in Bloomberg's survey was for CNY7.2299 (CNY7.2373 yesterday).

Europe

The eurozone estimated that consumer price inflation moderated to 2.4% from 2.6% in February. The three largest members all reported lower than expected EU harmonized measures of inflation. Germany's fell to 2.3% from 2.7% (2.4% expected). France's fell to 2.4% from 3.2% (2.8% expected). Italy's harmonized CPI rose to 1.3% (1.5% expected). Separately, the February EMU unemployment was unchanged at 6.5% after January was revised from the record low of 6.4% to 6.5%. The ECB, like the Federal Reserve, thinks patience is the better part of valor. With the 0.8% month-over-month in March CPI, the increase in Q1 at an annualized pace is about 4.0%. CPI rose 1.2% in Q4 23 at an annualized pace. Meanwhile, the core rate eased for the eighth consecutive month, and at 2.9% (down from 3.1%), it is the lowest since February 2022.

Since the end of February, the Swiss franc has fallen by around 2.8% against the Japanese yen. The Swiss National Bank cut rates last month while the Bank of Japan hiked. The SNB seemed to welcome a weaker franc. Japanese officials are threatening to intervene to support the yen. Speculators in the futures market have built the largest net short franc position since late 2019. The speculative short yen position peaked in late February at its largest since late 2017. Switzerland will report March CPI tomorrow. The EU harmonized measure stood at 1.2% in February, and the base effect (-0.01 in March 2023) warns of the risk of a slightly firmer year-over-year rate. The swaps market is pricing in a little less than a 70% chance of a cut at next SNB meeting in June.

The euro recovered from $1.0725, its lowest level since February 15 and rose to almost $1.0780 in North America, which has held today too. The five-day moving average came in slightly below $1.0785, and the euro has not closed above it since March 20. Today, the moving average is slightly above $1.0770. The bounce, though, did allow the euro to meet the (38.2%) retracement of the losses from last week's high (~$1.0865). The next retracement (50%) is a little shy of $1.08. There are around 1.6 bln euros in options at $1.0815-25 that expire today. Sterling held Monday's low (~$1.2540) yesterday, but the recovery was not particularly impressive. It topped out in front of $1.2580. Today, it has edged up a little more but remains below last week's low ($1.2585). Options for GBP620 mln at $1.2595 expire tomorrow. Stronger resistance is seen in the $1.2640-55. Since sterling peaked around the last US employment report on March 8 near $1.29, it has fallen in 12 of the 17 sessions through yesterday.

America

Of today's US economic data, the market seems to put the most stock in the ISM services report. The flash March services PMI slipped for the second consecutive month to stand at 51.7. However, ISM services are expected to tick up (to 52.8) from 52.6. As focus shifts to the US labor market, we note that both ISM surveys showed a contraction in employment. ISM manufacturing diffusion index for employment spent Q4 23 and Q1 24 below 50. The BLS data showed a net gain about 10k manufacturing jobs from October 2023 through February 2024. And to give it some context, the BLS shows the US having created 12k manufacturing jobs in H1 23 and 120k in H2 22. ISM services employment index stood at 48.0 in February. It had finished last year an anomalous 43.8, down from 50.3 and the lowest since July 2020) and bounced back to 50.5 in January (50.6 in November 2023).

The ADP private sector jobs estimate continues to draw attention but over the short run it remains unhelpful. Consider that its survey suggested 125.5k average private sector growth in the first two months of the year. Pending Friday's revisions, the BLS estimated the private sector created an average of 200k jobs a month. The median estimate in Bloomberg's survey was for an average of about 167k a month. Over the longer-term, ADP is fairly good. Last year, BLS estimates that the private sector created 2.3 mln jobs compared with ADP figures showed a 2.5 mln increase in private sector jobs.

The Canadian economy hit a soft patch and contracted in Q3 23 before recovering fully in Q4 23. The PMI has lagged, and the March services and composite PMI will be reported today. The manufacturing PMI has risen in the past three months but remains below 50 (49.8). It has not been above 50 since last April. The services PMI has improved for three months through February but at 46.6, it remains below last year's average (48.2). The composite PMI was last above 50 in May 2023. It was at 47.1 in February, a five-month high. The swaps market has slightly more than a 50% chance of a cut in June, but it is fully discounted in July. 

The Canadian dollar was sidelined yesterday. It was confined to the upper-end of Monday's range (~CAD1.3515-CAD1.3585). Today, it has firmed slightly more but held below CAD1.3590, though made a five-day high. There are about $315 mln in options at CAD1.3600 that expire today. The sell-off in US stocks had a muted impact on the exchange rate, perhaps helped by the pullback in the Dollar Index. The 120-day rolling correlation between changes in the exchange rate and the Dollar Index is near 0.70, the highest in about a year. The 30-day correlation is near 0.76. It has not been higher for more than a decade. The 30-day correlation between the changes in the exchange rate and the S&P 500 is near 0.45, by comparison and less than 0.15 with WTI. The Mexican peso was confined to Monday's range and remains in it today. The greenback held below MXN16.6550 and recorded session lows (~MXN16.55) after European markets closed yesterday. The dollar traded a touch through it today before recovering to MXN16.5920. The multi-year low set last week was almost MXN16.51. Separately, Chile's central bank delivered the expected 75 bp rate cut (overnight target now is at 6.50%). Recall, it began the easing cycle last July and cut 300 bp last year. It delivered a 100 bp cut in January before yesterday's 75 bp move. CPI, which will reported next Monday was at 4.5% in February. It was the first increase (from 3.8%) since November 2022. The swaps market has another 200 bp in cuts priced in over the next six months. The Chilean peso is the weakest among the emerging market currencies, off almost 10% this year. 

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