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Overview
The dollar’s post-FOMC sell-off has been completely reversed and the greenback has reached new highs for the week against most of the G10 currencies. Heightened intervention fears and softer US yields has helped steady the yen, which is near unchanged now, and is the best performer. The Scandis and Antipodeans are the heaviest, off 0.65%-0.90%. For the first time since last November, the US dollar has risen above CNY7.20 and continued to rise toward CNY7.23. The dollar’s 0.4% gain is the most since January 2. The South Korean won, Hungarian forint, and Russian ruble are all off more than 1% today.
Chinese and Hong Kong equities were hit hard today. The Hang Seng (HSI) fell nearly 2.2% and the mainland shares that trade there were off 2.5%. The mainland CSI 300 (SHSZ300) fell 1%. Japan’s equities were lifted but the other large bourses in the region were narrowly mixed. Europe’s STOXX 600 is firm and is holding on to a nearly 1% gain for the week. It is the ninth consecutive weekly advance.
US index futures are slightly higher. The S&P (SP500, SPX) and NASDAQ futures (NDX:IND) gapped higher yesterday and settled near their lows, with the gaps unfilled. European 10-year bond yields are 1-3 bp lower. The 10-year US Treasury (US10Y) yield is off three basis points to 4.24%. It had settled last week a little above 4.30%.
Gold reached almost $2221 yesterday and is trading near $2166 now. It settled around $2156 last week. May WTI is steady near $81. The week’s low was set yesterday’s around $80.30. It had finished last week close to $80.60.
Asia Pacific
On March 5, Japan reported that Tokyo’s CPI rose to 2.6% from 1.8%, reflected the base effect. The core rate rose to 2.5% from 1.8%. This was the signal, and today’s report of the national CPI reflected it. The headline rose to 2.8% from 2.2% and the core rose to 2.8% from 2.0%. The Tokyo measure that excludes both fresh food and energy slowed to 3.1% from 3.3%. The national measure also eased to 3.2% from 3.5%. There is little fresh information. In fact, at the end of next week, the Tokyo’s March CPI will be reported, and it is expected to ease slightly. Note that next month, the subsidies for household energy use will end and this will boost headline inflation by an estimated 0.4%-0.5%. At April’s Bank of Japan meeting, its economic forecast will be updated.
Japan’s Finance Minister Suzuki used code words that in the past signaled material intervention was close. He was quoted saying the government was watching the foreign exchange market with a “high sense of urgency.” However, as we noted last time, he said this without intervening that it dilutes the signal. The case for intervention, following the BOJ’s hike and the FOMC’s seemingly dovish tilt (median is still inclined for three cuts this year, even as the growth forecast was revised higher to 2.1% from 1.4%, and unemployment was revised lower to 4.0% from 4.1%) is somewhat stronger than it may have been previously.
Yet, we are skeptical that intervention is imminent. Tactically, this would risk giving the appearance of a line-in-the-sand at JPY152.00, which capped the dollar in 2022 and 2023 apparently without material intervention. The odds of successful intervention would be facilitated by coordinated intervention or at least supportive comments from Washington and Brussels/Frankfurt but that seems even less likely. That said, the first bout of intervention would likely produce a knee-jerk reaction and later challenged. Outside of the foreign exchange market, intervention could spur sales of Japanese stocks and could weigh on intermediate US Treasuries, which the BOJ may sell.
The dollar jumped from almost JPY150.25 to JPY151.75 yesterday, extending the advance for the eighth consecutive session. That matches the longest rally since October 2022. The dollar has risen in all but two weeks here in Q1 24. That could meet a definition of a one-way market from an official point of view. However, the market has been orderly and the implied three-month volatility is bouncing off the two-year low it approached earlier this week. The dollar reached about JPY151.85 today but is hovering near JPY151.50 in Europe. Since the greenback has not been above JPY152 in almost 34 years, it is difficult to project where it would go if that Rubicon were crossed. We suspect, initial potential may be around JPY152.50.
The Australian dollar’s rally from almost $0.6500 ran into a wall of sellers in front of last week’s high near $0.6640. It fell to nearly $0.6560 in North America yesterday. It has taken another leg lower today to almost $0.6510. The week’s low was set on Tuesday near $0.6505. A trendline from the mid-February and early March lows comes in near $0.6500 today. A convincing break could target the $0.6440 area next week.
The pressure finally proved too much. The dollar had been bumping against the CNY7.20 area and it finally gave way. For the first time since last November, the greenback pushed above CNY7.20 and like a dam bursting, the subsequent surge carried it to almost CNY7.23. Some press reports claim that state banks boosted their dollar sales after it rose above CNY7.22 but apparently not large dollar sellers at the open.
The PBOC set the dollar’s reference rate at CNY7.1004, the highest for the dollar since last November. The average in Bloomberg’s survey was CNY7.2102 (CNY7.1810 yesterday).
Europe
Following the BOE meeting, the swaps market upgraded the likelihood of rate cut in June. The odds increased to almost 85% from slightly less than 60%. For the entire year, the swaps market is pricing in about 80 bp of cuts. At the end of last week there were about 63 bp of cuts discounted. Today, the UK reported a small set back in retail sales that was mostly a function of drop in gasoline purchases. After a 3.2% increase in January, excluding gasoline, which was revised to a 3.4% increase, UK retail sales rose by 0.2% in February. The median forecast in Bloomberg’s survey was for a 0.1% decline. Including gasoline, British retail sales were flat after surging 3.6% in January (initially 3.4%).
The euro peaked in Asia Pacific yesterday slightly below $1.0945. The high in Europe was around $1.0925, but the single currency was unable to sustain even mild upticks in North America before falling to almost $1.0855. That area quickly gave way today and the euro tumbled to slightly below $1.0810. It is a new low since March 1. A break of $1.08 could signal a move to $1.0760, and possibly the low for the year set in mid-February near $1.07. The lower Bollinger Band is near $1.0795 today.
Sterling suffered nearly twice the loss of the euro and posted a bearish outside day by trading on both sides of Wednesday’s range and settling below the low. Indeed, the sterling close near $1.2655 was the lowest settlement this month. Follow-through selling today has seen $1.2585, its lowest level since mid-February and nicking the 200-day moving average (~$1.2595). It is pushing against the lower Bollinger Band (~$1.2585). Boosting the odds of a June BOE cut, in addition to the broad dollar recovery seemed like main drags. While the intraday momentum indicators are stretched, the next area of chart support may be around $1.2520-$1.2535. Meanwhile, the $1.2625 area may offer the nearby cap.
America
Nearly all the high-frequency US economic data reported yesterday were stronger than the market expected. The US Q4 current account deficit was smaller than expected and Q3’s shortfall was revised down. Weekly jobless claims and continuing claims were a little below expectations. Defying expectations, the index of Leading Economic Indicators posted the first increase (0.1%) since February 2022. The median forecast in Bloomberg’s survey of existing home sales was for a 1.3% decline. Instead, February sales jumped 9.5%, the largest rise in a year. The Philadelphia Fed’s survey did not decline as much as expected, slipping to 3.2 from 5.2. Many looked for a fall back into negative territory. The flash PMI was the exception to the rule yesterday. The composite eased to 52.2 from 52.5.
As the dust settled and the market digested the new Summary of Economic Projections and Fed Chair Powell’s comments, the market reassessed the trajectory of the Fed policy. The odds of a June cut eased back to around 78% from around 85% on Wednesday. Recall that a week ago it was near 61%. The median Fed forecast remained for three cuts this year, though the dots were nearly evenly divided between those who thought three or more cut and those that thought two or few cuts. The Fed funds implied about 70 bp in cuts on Monday and moved up to 83 bp after the FOMC meeting and pulled back to around 80 bp yesterday.
The US dollar took out by a few ticks last week’s low against the Canadian dollar near CAD1.3460 before reversing higher to poke above CAD1.3540. The greenback is firmer near CAD1.3575, but the key is the CAD1.3600 area. The Q1 high was set on Tuesday near CAD1.3610. The intraday momentum indicators are stretched, making a sustained break above CAD1.3600 more difficult.
The dollar recorded the session high against the Mexican peso a couple of hours before Banxico announced its first cut in the cycle. The quarter-point cut brought the overnight rate to 11.0%. The dollar peaked near MXN16.7880 and slipped to almost MXN16.7220 after the announcement. It recovered to around MXN16.80 today. Nearby resistance may be seen in the MXN16.85-MXN16.90 area.
Previously, the central bank had said it would consider cuts at future meetings. This was part of the word cue that helped anticipate yesterday’s move. The new statement says that it will make decisions based on available information. This seems prudent to maintain strategic flexibility. However, it did raise its inflation forecast for Q4 24 to 3.6% from 3.5%. Small beer but a signal underscoring the central bank’s assessment that risks to inflation are still on the upside.
Early in the session, Mexico reported January retail sales fell by 0.6% after a 1.0% decline in December. The median forecast in Bloomberg’s survey was for a 0.3% gain. It was the third consecutive monthly decline in retail sales and sixth decline in the past seven months. While today’s January IGAE survey is unlikely to move the central bank’s needle, today’s CPI for the first half of March may underscore its caution. The biweekly headline measure bottomed last October. The core rate has, however, continued to decline.
The dollar bounced off BRL4.95 yesterday and settled firmly a little below BRL4.9790. The focus today is on the government’s first fiscal report of the year and Finance Minister Haddad is likely to report that the primary budget deficit is near 0.25% of GDP.
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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
