Euro Bid in Europe but Unlikely to Sustain Gains Through North America

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Marc Chandler
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Overview: The dollar is beginning the new week mixed. The dollar-bloc currencies and Japanese yen are softer while the European currencies enjoy a firmer today. Among emerging market currencies, central European currencies are trading with higher. The Turkish lira is the notable exception. It is the weakest currency today, off about 0.65%. The Chinese yuan is a little softer, but the dollar continues to be capped near CNY7.20. Last week, more often than not, the North American session saw the dollar trade higher, and we suspect that pattern may continue today. The euro is setting session highs as North American traders prepare to enter the fray and the intraday momentum indicators are extended. 

China's CSI 300 snapped a nine-day advance today, falling 1%. Japanese Taiwanese, and Australian equity markets rallied today but most of the other large regional bourses fell. Europe's Stoxx 600 is off by around 0.35% after rising 1.15% last week, its sixth consecutive weekly gain. US index futures are narrowly mixed. Recall that before weekend, the Dow and S&P 500 eked out minor gains will the NASDAQ slipped on profit-taking. Benchmark 10-year rates fell in the Asia Pacific region after the seven basis point slide in the 10-year Treasury yield before the weekend. European yields are mostly 1-2 basis points firmer today, while the US yield is little changed near 4.24%. Efforts to avoid a partial US government shutdown at the end of the week have not resolved the issue and will continue tomorrow. Gold posted an outside up day ahead of the weekend but there has been no follow-through buying today and the yellow metal is in a narrow range (~$2030-$2037). April WTI settled at the lowest level in a week last Friday near $76.50. It was sold to around $75.85 today. Support is seen in the $75.50 area. 

Asia Pacific

Although Chinese stocks extended the pre-holiday recovery last week with the help of the strong arm of government and investors' fear of missing out, stocks retreated today. Still the yuan fell last week and traded with a heavier bias today. On the other hand, the offshore yuan eked out its first back-to-back weekly gain in three months. China sees the February PMI and Caixin manufacturing PMI at the end of the week. Many observers are critical of the quality of Chinese data. They seem more inclined to read malintent into it, and sometimes, the data does seem self-serving. At the same time, we think that incompetence stemming from using archaic systems (left of from the Soviet Union) and a lack of urgency from Beijing is part of any robust explanation.

Japan reports January CPI tomorrow. The Tokyo figures, released a few weeks ago, warn that the headline and core (excludes fresh food) may dip below 2%. However, we do not think it, any more than the unexpected contraction in Q4 23, will deter the Bank of Japan from exiting its negative interest rate policy. We continue to suspect that this happens in April. Still, we recognize that, the economy is still struggling, and this week's real sector data will underscore that. After falling 2.6% in December, retail sales might have bounced by a mere 0.5% in January. Industrial output looks exceptionally weak. Recall that earthquake at the start of the year was disruptive. Still, the exchange rate seems more sensitive to changes in the US Treasury yields than the JGBs.

The dollar traded between about JPY150.30-JPY150.75 before the weekend and remains in that range today. That was a marginal new high for the week was set in Asia Pacific, but Tokyo was closed for the emperor’s birthday. The softer US yields saw the dollar record session lows shortly after Europe closed. Still, the dollar settled marginally higher for week, its eighth consecutive weekly advance. The mid-February high was closer to JPY151.00. The Australian dollar saw $0.6580 twice on Friday, once late in the Asia Pacific session and once in early North American turnover. The Aussie returned to but held above the session low near $0.6550. Today, it slipped to almost $0.6540. In the last three sessions, it has traded in about 2/3 of a cent range below $0.6600, and on a closing basis, it has been in about a five-tick range around $0.6550. A break of $0.6530 would weaken the technical tone. The PBOC set the dollar's reference rate at CNY7.1080 (CNY7.1064 on Friday). The average in Bloomberg's survey was CNY71966 (CNY7.1940 on Friday). The dollar continues to bump up near CNY7.20 but has not traded above it. The 2% band above the reference rate could allow the dollar to rise toward CNY7.25. We suspect that if the dollar rises above JPY152, it may take out the CNY7.20 area. The offshore yuan closed higher last week. It was the first back-to-back weekly gain since the second half of last November. It is little changed today, but the dollar has held above CNH7.20, as it did last Monday.

Europe

The eurozone's preliminary estimate of February CPI is due at the end of the week. We expect it to begin a sharp three-month decline that will push the year-over-year rate below 2% by the end of April. In February through May 2023, eurozone aggregate CPI rose by more than 0.7% a month on average. If we make a conservative estimate that is rise by an average of 0.3% a month, we can project the headline rate will fall below 2%. Moreover, a similar process will likely unfold in the UK as well. As this unfolds, rate expectations will be adjusted. However, the currency implications may not be as straightforward as it may seem. Recall that in Q4 23, as European interest rates fell, the euro strengthen. The driver was not Europe so much as it was the US.

The euro was confined to about a quarter-of-a-cent range before the weekend below $1.0840. The euro has quietly ticked higher for eight consecutive sessions before being stymied ahead of the weekend. The five-day moving average crossed above the 20-day last week for the first time since early January. The simple crossover is useful in its own right but it is also a proxy for trend followers and momentum traders. The euro was in a $1.07-$1.08 trading range and now looks to be moving into a slightly higher range. The closing high this month was set on February 1, around $1.0875, before the US January employment data. It traded above it on an intraday basis last Thursday but did not close above $1.082 last week. It is pushing toward $1.0850 in the European morning. $1.0900-20 must be overcome to suggest something more important from a technical perspective. That said, the North American session bought dollars consistently last week and this pattern could continue today as the intraday momentum indicators are overextended now. It took sterling almost three weeks to recover to the middle of the $1.26-$1.28 trading range that dominated from mid-December through early February. The larger-than-expected rise in US jobs data on February 2 triggered a sell-off that carried into the next session and drove sterling to the low for the year near $1.2525. It traded slightly above $1.27 in the last two sessions. The five- and 20-day moving averages crossed last week, but there were several bad signals when sterling was in the two-cent range for more than a month. Sterling has been confined to the pre-weekend range so far today, trading between about $1.2655 and $1.2690. The momentum indicators warn that the $1.2700 area hold in North American. A close below $1.2650 would weaken the technical tone. 

America

New home sales and the Dallas Fed survey are out today. They typically are not market movers. Tuesday, the US reports durable goods orders and a weak report should be expected. Boeing's orders collapsed from 371 in December to 3 in January. It is the least since October 2020. Deliveries fell to 27 from 67. This will drag down durable goods orders. Aircraft and military orders a helped drive durable goods orders. Without them, durable goods orders rose by an average of 0.1% last year while overall durable goods orders rose by an average of 0.4%. It is a volatile series and the median forecast in Bloomberg's survey is for a 4.5% decline. House prices and the Conference Board's consumer survey is also due. Richmond Fed surveys and the Dallas Fed's services survey ae out tomorrow as well.

Canada has a quiet start to the week. The highlight is Thursday's released of December and Q4 GDP. The Canadian economy contracted in Q3 23 by 1.1% annualized. It is expected to have grown by almost 1% in Q4 23. The economy was nearly stagnant for the year coming into Q4, so its growth will be approximately the growth for the year. The Bank of Canada projects the economy to slow to 0.8% this year before jumping 2.5% in 2025. The IMF forecasts 1.4% growth this year and 2.3% in 2025. The median forecast in Bloomberg's survey is for 0.5% growth in 2024 and 1.7% next year. For its part, Mexico has a report every day this week after today. The highlights will likely include the trade balance falling back into deficit in January, while worker remittances say strong and more than cover the trade shortfall. The central bank's inflation report will likely recognize the steady moderation allowing for a rate cut in the near-term horizon. It would not be surprising if recent economic weakness translates to a small increase in the unemployment (2.61% in December), while the surveys may be consistent with the slowing of activity.

The US dollar rose against the Canadian dollar for the seventh week of the first eight weeks of 2024. For nearly two weeks, the greenback has been confined to the range set on February 13, when the US CPI was released. That range was about CAD1.3440 to CAD1.3585. The choppy, largely range-bound exchange rate has sapped conviction and speculators in the futures have the smallest net short position (~865 contracts) in six months. Last week's high was set near CAD1.3535 and that area through CAD1.3550 offers initial resistance today. The US dollar consolidated ahead of the weekend against the Mexican peso after recording a bullish outside up day on Thursday. The dollar is trading inside the pre-weekend range today and remains within last Thursday's range (~MXN17.0120-MXN17.1565). Some pressure on the peso may have come from the stock market which sold off ahead of the weekend to nearly four-week lows. The down trendline we are monitoring comes in near MXN17.1170 today. It looks like a possible bottoming pattern that project toward MXN17.75. Lastly, we note that the US dollar gained 1.2% against the Brazilian real in the last three sessions to approach BRL5.0, which it has not closed above since the end of last October. Nearly all the Latam currencies weakened last week.