While the Greenback has Tended to be Sold in Asia this Week, it has Recovered in North America

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Marc Chandler
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Overview: Amid a light news stream, the dollar is mostly in narrow ranges against the G10 currencies. Leaving aside the Norwegian krone, the others in a +/- 0.15% against the dollar today. We note that the technical tone of the euro and sterling have improved withe the five-day moving averages crossing above the 20-day moving averages. On the other hand, the dollar is approaching the year's low set last week near JPY150.90. Emerging market currencies are mostly lower, On the week, emerging market currencies are mixed, though central European currencies are generally fared best. Still, the JP Morgan Emerging Market Currency Index is likely to finish the week lower. It has fallen every week so far this year. 

The dramatic equity rally in the US yesterday helped lift most Asia Pacific markets today. Chinese formal and informal measures have lifted mainland stocks this week, with the Shanghai Composite up almost 4.9% and the Shenzhen Composite surging almost 5.9%. Europe's Stoxx 600 is edging higher today and putting its finishing touches on what will most likely be the fifth consecutive weekly gain. US index futures are trading slightly softer. The S&P 500 and Nasdaq are up about 1.6% this week coming into today. Benchmark 10-year bond yields are most 2-3 bp higher in Europe. US 2- and 10-year Treasury yields reached new highs for the year today in Europe (Japanese markets were closed for a national holiday) near 4.75% and 4.35%, respectively. Gold ended a five-day rally (~$34) yesterday and is trading slightly heavier today. April WTI settled its best level since last November yesterday (~$78.60) but has come back weaker today (~$77.70 in Europe). It settled last week slightly below $78.50.

Asia Pacific

There are a few developments to note this week. First, despite the unexpected contraction in Q4 23 Japanese GDP and the likelihood that the national headline and core CPI follow Tokyo's lead and slip below 2.0%, the Bank of Japan still seems determined to jettison its negative interest rate policy. April still seems to be the likely timeframe. The spring wage round results would largely be known and the government energy subsidies for household are set to expire (which will boost headline inflation by around 0.4%). Second, Beijing has moved to curb selling equity by large investors at the open and close, and restricting short sales. The CSI 300 has advanced for nine consecutive sessions and gained almost 10%. The index of mainland shares that trade in Hong Kong rally 3.7% this week and around 6.4% in the previous two weeks. The offshore yuan snapped a six-day advance yesterday. The dollar is slightly firmer against the yuan, the first week after the long Lunar New Year holiday. Still, the greenback has held below CNY7.20 (since last November) even though the reference rate allows the dollar to rise through CNY7.24. Third, the minutes from the recent RBA meeting indicated that officials were reluctant to rule out another hike after last November's surplus move. However, the market moved in the opposite direction. The futures market nudged up the odds of June cut to about 88% from around 75% at the end of last week. 

It appears that the dollar broke out the consolidative pattern it has forged over the past week and a half. It is trading near JPY150.80 in the European morning. We suggested that the consolidation was likely a continuation pattern rather than a reversal. The break targets the JPY152 area, which marked the dollar's high in 2022 and 2023. Verbal intervention ratcheted higher this week, but the market has been orderly as the decline in three-month implied volatility to its lowest level since mid-November (~8.05%) illustrates. It was near 10.8% at the start of February. On the other hand, provided the dollar settles above JPY150.20, it would have risen for the eighth consecutive week, surely meeting a definition of a one-way market. Still, we suspect the bar is higher for material intervention. A pattern has emerged since the early this week. The Australian dollar tends to rally in the Asia Pacific session and before being sold in Europe and the US. Net-net is has gone virtually nowhere, settling a few hundredths of a cent around $0.6550. It settled near $0.6530 last week and a close above there would be the third consecutive weekly gain. The PBOC set the dollar's reference rate at CNY7.1064 (CNY7.1018 yesterday). The average projection in Bloomberg's survey was CNY7.1940 (CNY7.1863 yesterday). The dollar continues to bump against CNY7.20. Although the 2% band around the reference rate allows for a move above CNY7.20 (~CNY7.2485 is the upper end of the band today), we suspect that if the dollar continues rising against the yen, the CNY7.20 area will be overcome.

Europe

The German and French government reduced this year's growth forecasts and the Bundesbank warned that the German economy may be contracting this quarter. Several ECB officials have linked easier monetary policy slower wage growth. The central bank's chief economist Lane indicated yesterday that there were some initial signs that wage growth has decelerated. At the same time, it seems in addition to the US willing to run a 6.0%-6.5% budget deficit, the fact that average wages have risen faster than inflation has also helped underpin consumption. The preliminary February PMI showed weakness in manufacturing continues while services have stopped contracting, but positive growth impulses were faint. In the swaps market, the odds of an April cut have been downgraded to about 30% from around 45% at the end of last week. German and French 10-year bond yields rose new highs for the year yesterday (~2.51% and 2.88%, respectively).

The EU launched an investigation into China's rail exports and announced a new package of sanctions against Russia. Notably in this the 13th round of sanctions are efforts to penalize third-country companies increased. Companies from at least nine countries were sanctioned. These included three Chinese companies and an Indian company (despite the EU negotiating a trade agreement with India). Of note, no companies from Taiwan were cited even though Taiwan is the top supplier to Russia of high-precision metal working machines, which are needed to produce fuses and precision weapons. Some reports indicate that they are often shipped from Taiwan through third parties, including Turkey and China. At the same time, North Korean missiles used by Russia against Ukraine reportedly had many components made in the US and Europe, underscoring the difficulty in establishing effective embargoes.

This week's developments, including BOE Governor Bailey seeming endorsement of expectations for low rates, calling them "reasonable," did not significantly change the market's outlook for UK rates. The odds of a June cut were little changed, slightly below 50%. It had been fully discounted at the start of the month. The market continues to be confident that two cuts will be delivered this year and has been jostling the odds of a third cut. It was a little more than 50% at the end of last week and a little less now. At the beginning of the month, four cuts were completely discounted, as the pendulum of market expectations were swinging back having around six cuts discounted at the start of the year. 

The euro peaked late in the Asia Pacific session yesterday, near $1.0890, its best level since the US jobs data on February 2. It was sold in Europe and further in the US to approach $1.08, the session. low. It has held below $1.0835 so far today. A close below the $1.0790 area today would weaken the near-term technical outlook, while a close above $1.0830 would be constructive. Although sterling was rejected after poking above $1.2700 for the first time since February 2, it held in better than the euro. Sterling posted its highest close since February 2. It has a three-day advance in tow coming into today and is in a little more than a quarter-cent range above $1.2650. A close above $1.2600 would be technically favorable but also would be the first higher weekly settlement in six weeks. The five-day moving average is crossing above the 20-day moving average for the first time since late January. The euro's moving averages crossed earlier this week.

America

This week, the market has continued to push back the first Fed cut. Before the February 2 jobs data, the Fed funds futures fully priced in a cut in May and still a lingering hope of move in March. The odds of a May move fell to less than 75% a week later and were less than 40% at the end of last week. Now, the odds are slightly below 25%, a three-month low. The odds of a June cut have fallen to about 70% now. It was completely discounted a week ago. A later start for easing cycle the less cuts there will be this year. The market has converged with the Fed's December dot plot. It is now discounting three rate cuts and about a 1-in-7 chance of a fourth cut. At the end of last week, the market had a 60% chance of a fourth hike discounted. 

The larger-than-expected 0.9% rise in Canada's retail sales in December and upward revision to the November series (to flat from -0.2%) was marred by StatsCan preliminary estimate that retail sales fell by 0.4% in January. On the margins, it should help December and Q4 23 GDP, which will be published next week. The market had already pushed out the first Bank of Canada rate cut into July. Mexico's IGAE December survey was weak, even if not as weak as expected and, more important for the central bank, inflation in the first of half of February continued to moderate. The headline rate fell by 0.1%, bringing the year-over-year rate to 4.45% (from 4.87%). The core rate rose by 0.24%, sufficient to drag the year-over-year rate to 4.63% (from 4.75%). Pending the next batch of inflation data (March 7), we think a rate cut at the March 21 Banxico meeting is likely. 

The US was sold to a seven-day low against the Canadian dollar yesterday in late Asian turnover. Europeans snapped up the cheap greenback (~CAD1.3440 low), and as North America entered the fray, it reached near CAD1.3510. It settled in a range that extended back to CAD1.3480. It is in a range of roughly CAD1.3470-CAD1.3505 today. The US dollar settled near CAD1.3485 last week. It has moved higher every week so far this year except for the week ending February 9 when it slipped by 0.02%. The US dollar posted a bullish outside up day against the Mexican peso by trading below Wednesday's low and then reversing to close above Wednesday's high. The soft biweekly CPI weighed on the peso. The dollar settled above its best level since February 13 when the US CPI was reported. A down trendline from the late January high through this month's highs comes in today near MXN17.1465. The dollar traded above it yesterday but settled back below it. It nicked it today, but it is trading around MXN17.1250 in late European morning activity. A convincing break, and on a weekly basis, would strengthen the dollar's technical outlook. It would project toward MXN17.75 area. The dollar also posted an outside up day against the Brazilian real and settled a new high for the week near BRL4.9645. The BRL5.00 is the upper end of the recent range. The greenback has not closed above BRL5.0 since the end of last October.