Ueda’s Comments Knock the Yen Back, while the Euro Flirts with $1.08

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Marc Chandler
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Overview: The US dollar is mixed today. The dollar-bloc currencies and the Scandis are enjoying a slightly firmer tone, while the euro and sterling are edging higher in European turnover. The Swiss franc is softer, and the yen has given back most of yesterday's gains after BOJ Governor Ueda acknowledged that central bank seeks further confirmation that sustainable price goal is within reach. We see it as a further signal of an April move on rates rather than this month. Emerging market currencies are mostly lower but for a few Asian currencies. The Dollar index is up about 0.25% this week coming into the North American session. It fell by around 0.35% last week. 

Asia Pacific equities rallied today. South Korea and Taiwan were exceptions. Europe's Stoxx is up around 0.20% in the European morning. It must rise by another 0.25% or end a five-week rally. US index futures are trading with a softer bias. The Nasdaq is up 0.6% this week and the S&P 500 is up 0.15% before today's session. European 10-year bond yields are firmer, especially in the periphery, but the benchmarks are 1-3 bp lower on the week. The 10-year US Treasury yield is off two basis point to 4.23%. It finished last week near 4.28%. Gold is firmer as its advance extends into the third consecutive session. The yellow metal is trading above $2050. It has not closed above there since February 1, when it reached $2065. April WTI is firm above $79. The high for the year was set on Wednesday near $79.60. Near $79.20, April WTI is up 3.5% this week.

Asia Pacific

While some central banks, like the Federal Reserve, say they are data dependent, the Bank of Japan seems less so. The core CPI, which the BOJ targets fell to 2.0% last month and looks poised to fall below it this month. The economy has contracted for the past two quarters, and there is a real risk it is continuing to shrink this quarter. Yet, BOJ officials appear determined to finally exit is negative policy rate. It strikes us that officials view the negative interest rate policy as having reached a point where the costs outweigh the benefits. It is more of a technocratic decision than a view of the economic outlook. Comments by BOJ Governor Ueda at the G20 finance ministers meeting suggested a move in March, speculation of which helped the yen trade higher yesterday, was unlikely. The yen returned toward its recent lows after Ueda's comments were published. We continue to see April as a likely timeframe. The results of the spring wage round will be known (March 15), and the government's electricity and gas subsidies are scheduled to end, which will lift headline inflation.

China's February PMI were little changed from January. The manufacturing PMI stands at 49.1, down from 49.2 in January. The low reading last year was in May at 48.8. The non-manufacturing PMI rose to 51.4 from 50.7. It is the third month of improvement. It was last above there in September 2023 (51.7). The composite PMI stands was unchanged at 50.9. It was at 56.4 last February. The Caixin manufacturing PMI has fared better than the "official" one. It edged up to 50.9 from 50.8. Next week's meeting of the National People's Congress and the Chinese People's Political and Consultative Conference are important events. The official growth target (which seems like an input rather than an output) is expected to be announced (5%?). Personnel changes are expected and although some platitudes about the private sector may be announced, the Communist Party continues to broaden its presence and Xi know no rival. 

The yen had an outsized reaction to the BOJ board members comments about inflation and expectations reaching a critical point. Ueda's comments unwound most of the yen's gains, but the swaps market is a different story. Yesterday, the swaps market showed none of the drama of the spot fx market. The overnight index swap for the meeting later this month rose by half of a basis point to 2.6 bps. It rose by another half of a basis point today to 3.1 bp. The peak in January and February was 35 bp. The OIS for April rose 3/10 of a basis point to 8.4 bp yesterday, but slipped slightly to 7.8 bp today, where is also settled last week. Japan's two-year yield is the highest since 2011, but it only rose by about 8/10 of a basis point to almost 18 bp yesterday and another basis point today to finish the week at 19 bp. That is a3.5 bp increase on the week. The dollar found support in the North American morning near JPY149.20, the lowest since February 12, the day before the US CPI was reported. It recovered to closed slightly above the 20-day moving average (JPY149.20). The dollar reached almost JPY150.70 in the European morning. A close below JPY150.50 is needed to snap the dollar's eight-week advance against the yen. That matches the longest rally since November-December 2013. With rate expectations converging with the Fed’s Q4 23 views and our expectation of generally softer economic data, the 50 bp rise in the US 10-year yield, which the exchange rate appears to track, may have run its course. This may reinforce the cap in the JPY151-JPY152 area. 

The Australian dollar stabilized yesterday after Wednesday's drubbing, but it still looks vulnerable. The five- and 20-day moving averages have turned down and the Aussie failed to close aback above $0.6500, though it is straddling the area today, having reached almost $0.6515 in late Asia Pacific turnover. The daily momentum indicators are turning lower. A three-week rally is ending, and the Aussie has fallen more this week (~0.90%) than it had risen in the previous three weeks. The Chinese yuan continues to appear to track the yen. The yen's recovery yesterday saw the yuan trade at five-day highs, and its reversal today, has seen the greenback return to the CNY7.20 area that marks the cap. The PBOC set the dollar reference rate at CNY7.1059 (CNY7.1036 yesterday). The average of Bloomberg's survey was CNY7.1978 (CNY7.1935). The dollar settled last week near CNY7.1965. It has risen in all but one week here in 2024.

Europe

The eurozone's preliminary February CPI estimate stands at 2.6%, down from 2.8% in January. The core rate is at 3.1%, down from 3.3% in January and is the lowest in two years. The 0.6% monthly rise in the headline rate brings the three-month annualized rate to about 1.6% and the six-month annualized rate to almost 0.5% (no typo). The European Central Bank meets next week. It is still too early to look for a rate cut, but the economic forecasts will be updated. This year's CPI forecast of 2.7% seems high as does the growth projection (0.8%).

The week ahead continues to see a light calendar of market-moving high frequency British economic data. The highlight next week is the Spring Budget, which is widely expected to include some tax cuts as the Tories prepare for an election, seen later this year. There has been speculation of a cut in the tax for the National Health Services and a small cut in basic income tax rate. However, personal allowances have been frozen since 2021, an un-freezing them would have greater impact than a small tax cut. Some reports suggest the fuel tax duty that is scheduled to be increased next month could be canceled and paid for by extending the windfall tax on oil and gas companies (due to expire in March 2028). Separately, the final manufacturing PMI readings for Germany and France were slightly between the than initial estimates, but at 42.5 and 47.1 respectively, there is little encouraging news here. Spain is more promising with a 51.5 read, its best since June 2022. Italy's manufacturing PMI stands at 48.7 up from 48.5 in January. Note that the UK's manufacturing PMI final reading rose to 47.5 (from 47.1 preliminary reading and 47.0 in January). 

The euro made a marginal new six-day low but continues to hold above important technical support near $1.0790. The market does not appear done trying. The bounce after the low early in the North American afternoon yesterday stalled near $1.0810 and today's bounce fizzled slightly above $1.0820. It is difficult to imagine a euro-bullish message from the ECB next week. Although intermittent support may be seen around $1.0770, on a breakdown, there is little to stand in the way of the test on the February low slightly below $1.07. In recent days, sterling probed the middle of the old trading range near $1.27 but failed to close above it. Yesterday, it settled on its lows and below the 20-day moving average. It reached about $1.2640 today in late Asia Pacific turnover before being sold to session lows in early European activity a little below $1.2620. The trendline connecting the two February lows comes in near $1.2565 today, slightly below the 200-day moving average (~$1.2575). 

America

Economists do a good job interpolating the PCE deflators after the CPI and PPI are in hand. And indeed, they matched the median forecast in Bloomberg's survey. The surprise was the 1% jump in personal income. The median forecast was for a 0.4% gain and instead it came in at 1.0%. We often think of income being driven by wages and salaries. In January, dividends seemed to account for about a third of the increase in income, and the increase in Social Security payments (cost-of-living adjustment) was worth about 20% of the increase.

There are two type of US data that will be reported today. The first are surveys. They include in the final manufacturing PMI, the manufacturing ISM, the KC Fed's Services Activity, and the final February University of Michigan consumer survey. Second are the real sector reports. There two: January construction spending and auto sales. Construction spending rose by an average of 1.1% in 2023. As part of the general slowing of US growth, construction spending will also likely moderate. The median forecast in Bloomberg's survey is for a 0.2% gain after a 2.2% rise in January 2023. If the median forecast is accurate, it would be the weakest January reading since 2017 (when construction spending fell by 1.2%). Note that the data is sufficiently important as to prompt the Atlanta Fed to update its GDP tracker after doing so yesterday (3.0% vs. 3.2% previously for Q1 24). The Atlanta Fed will update its tracker before the vehicle sales are known. Vehicle sales fell 5.2% in January to a 15 mln unit seasonally adjusted annual pace. The median forecast in Bloomberg's survey calls for about a 2.5% increase to 15.4 mln vehicles. That would mean a 15.2 mln average in the first two months of the year compared with 15.3 mln for the Jan-Feb 2023 period. Next week, the market's attention turns back to the US labor market. On top are JOLTS, ADP, and most importantly, the nonfarm payroll report. The median forecast in Bloomberg's survey is for a 180k increase in nonfarm payrolls after 353k was estimated in January. 

Canada also reports its February jobs data at the end of next week. But, ahead of it, on Wednesday, March 6, the Bank of Canada meets. It is too early for the Bank of Canada to move. The swaps market has about an 80% chance of a cut in June, virtually unchanged on the week. The market is pricing in three rate cuts this year and a 40% chance of a fourth cut. A week ago, only three cuts were discounted. Mexico sees its manufacturing PMI and the IMEF surveys today. Mexico also reports January worker remittances. There is a strong seasonal pattern for remittances to decline from December (past 19 consecutive Januarys without fail). Next week's highlight for Mexico is the February CPI on March 7. A continued moderation is expected, and this may fan speculation of a rate cut at the March 21 Banxico meeting. Brazil reports Q4 23 GDP today and February vehicle sales. The economy eked out a 0.1% gain in Q3 23 and may be fortunate to repeat that in Q4.

The US dollar traded inside Wednesday's range yesterday and is inside yesterday's range so far today. Inside days are often seen as reversals. But it does not look like the greenback bulls have been satiated. The greenback held the five-day moving average, slightly below CAD1.3540 and settlement was little changed near CAD1.3580. The Canadian dollar has fallen every week this year so far but one (week ending Feb 9 when it rose by 0.02%). It was off 1% in February and almost 1.5% in January. The immediate cap can be found in the CAD1.3600-25 area. The Mexican peso was the strongest currency in the world in February, rising almost 1% against the US dollar. For the past five sessions, the dollar has traded in the range set on February 22 (~MXN17.0120-MXN17.1570). It may stay in that range today. The downtrend line we are monitoring comes in near MXN17.08 today and around MXN17.0250 at the end of next week. The dollar held barely below BRL5.0 yesterday and has not closed above there since the end of last October. The lower end of the recent range is BRL4.91-BRL4.92. The real slipped by about 0.35% in February after losing almost 2% in January.