Narrowly Mixed Dollar to Start the Big Week for Europe and North America

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Marc Chandler
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Overview: The dollar is narrowly mixed against the G10 currencies to begin the week that features a Bank of Canada and ECB meetings, US jobs data, Federal Reserve Chair Powell's two-day testimony before Congress, and US President Biden's State of the Union address. Most emerging market currencies are firmer. The Turkish lira is a notable exception. Higher than expected took a toll, knocking it down by around 0.5%. On the other hand, the Malaysian ringgit is up almost as much as the government appears to be persuading state-owned companies to repatriate foreign earnings. 

The Nikkei settled about 40k for a new record, while the Topix slipped fractionally. Most of the large bourses in the Asia Pacific region rose by Australia, New Zealand, and the mainland shares that trade in Hong Kong. Europe's Stoxx is firmer. It has a five-week rally in tow and has only fallen in two weeks since mid-November 2023. US index futures are nursing small losses. European benchmark 10-year yields are mostly 2-3 bp lower. S&P upgraded Portugal's rating to A- from BBB+ before the weekend and maintained a positive outlook. It recognized the country's improved external financing position. Its 10-year yield is off about 2.5 bp today, the same as Spain. Portugal holds a national election next Sunday. The 10-year US Treasury yield is near 4.20%. It is up about two basis points today after falling 11 basis points in last three sessions. Gold is extending its rally into the fourth session. It is up slightly today after a 1.9% surge ahead of the weekend. It is trading slightly below the high set late last December near $2088.50. April WTI traded above $80 a barrel ahead of the weekend for the first time since early last November. OPEC+ announced it would extend its output cuts through the middle of the year, though its production was still more than agreed. April WTI is trading quietly in about a 40-cent band on both sides of the $80 mark.

Asia Pacific

China's Caixin services and composite PMI will be reported tomorrow and are expected to tick up. More importantly, the market is anticipating more stimulative measures by Beijing and will be watching news from the "two sessions" (National People's Congress and Chinese People's Political Consultative Conference), which starts tomorrow. Among other things, a growth and budget deficit target for this year are expected to be announced. There is likely to be scope for modest fiscal stimulus. Numerous personnel changes are anticipated. News that Premier Li will not hold the traditional press briefing after the close of the NPC. As recently as 2018, the NPC endorsed the press briefing as evidence of China's "openness and transparency." 

Tokyo's February CPI will be reported the first thing tomorrow. Subsidies introduced in February 2023 dampened the measure a year ago and the base effect warns of a jump back above 2%. Recall in January, Tokyo's headline CPI fell to 1.6% before being revised to 1.8%, after finishing 2023 at 2.4%. Similarly, the core rate eased from 2.1% to 1.6% in January and was revised to 1.8%. Both are expected to have recovered to 2.5%. Still, with a little bit of luck, the measure that excludes both fresh food and energy may slip to 3.1% from 3.3% to extend the decline since peaking last July-August at 4.0%. The yen could strengthen on the rise in Tokyo CPI. The Bank of Japan meets March 19, and the results of the spring wage round will be known a few days earlier. Still, we think a move in April is more likely. Bloomberg economists do not see a move until July.

The softer US data extended the pullback in US yields ahead of the weekend, and this helped reinforce the recent cap near JPY150.85. The dollar posted its first weekly loss against the yen this year. Still, it settled above the 20-day moving average (~JPY149.90). As it did last month, the US jobs data may be the key to US rates and the exchange rate. The dollar recorded the session low near JPY149.85 near the middle of the Asia Pacific session before recovering to session highs around JPY150.45 in the European morning. With firmer US yields and constructive intraday momentum indicators a push to new highs in North America looks likely today. The Australian dollar carved out three-day shelf near $0.6490. It is trading in a quiet, fifth-of-a-cent range above $0.6515 today. A move above the $0.6550-$0.6575 area is needed to signify anything important for a technical perspective. And even then, the $0.6600-$0.6625 area may also offer resistance. The dollar's pullback against the yen ahead of the weekend seemed to help Chinese officials who seem to be resisting pressure for yuan depreciation. It is not trying to weaken the yuan for competitive purposes but trying to moderate the impact of the dollar's broad gains. The PBOC set the dollar's reference rate at CNY7.1020 (last week's fixings were between CNY7.1036 and CNY7.1080). The average projection in Bloomberg's survey was CNY7.1890 (CNY7.1978 on Friday). In the spot market, the dollar continues to be capped at CNY7.20. Against the offshore yuan, the dollar is hovering around CNH7.21.

Europe

There are two key events this week in Europe: the ECB meeting and the UK's Spring Budget. The ECB may update the progress on its review of its policy framework. The staff may revise growth and inflation forecast lower, which provide a backdrop for the rate cut likely in Q2. On the eve of the last ECB meeting (January 25), the euro settled near $1.0885 and the 20-day moving average was around $1.0940. The euro's highest close in February was on February 1 near $1.0870 and the 20-day moving average is near $1.0790. Brent crude oil settled near $80 a barrel on January 24 and the 20-day moving average was about $78.15. It is now clear to $83 a barrel and the 20-day moving average is around $82.15. The exchange rate and oil prices feed into the staff's forecast.

Businesses, households, and especially voters, have been primed for tax cuts from Chancellor Hunt's spring budget that will be delivered Wednesday We suspect it will not change the opinion polls much. Reduced spending to pay for tax cuts may not be persuasive, especially if personal allowances remain frozen. At the risk of oversimplifying, the Tories have led the UK government since 2010. The party is tired as are voters. Labour, meanwhile, appears to have shifted to the right. There are about 348 Tory MPs and roughly 45 have indicated that they will not run again in the next election, which is expected later this year. Local elections will be held in May. The Office for Budget Responsibility sees the budget deficit falling in FY24 to 3% of GDP from 5% in FY23. Monetary policy is restrictive. The policy mix contrasts with the US, where the OECD projects a 7% budget deficit after 6.5% last year and the Fed monetary policy is tight. The US policy mixed of accommodative fiscal policy and tight monetary policy is often associated with appreciating exchange rates. A politically sensitive issue in the Europe, including the UK, and the US is immigration. Many seem skeptical of the UK government's scheme to send migrants arriving in small boats to Rwanda. Although the government claims Rwanda is a "safe country", the Home Office reported last week that 20 Rwandans sought protection in the UK last year, mostly in Q4 23, and 15 were granted asylum. 

Euro dips below $1.08 were snapped up in the past three sessions. There are options for about 2.3 bln euros that expire there today and another set for 1.8 bln euros Wednesday. Last week's high was near $1.0865. The euro settled higher in back-to-back weeks for the first time this year. Today's range (~$1.0840-$1.0860) was set in one hour's activity in late Asia Pacific turnover. The pre-weekend higher was slightly shy of $1.0845. News that Switzerland's EU harmonized inflation slipped to 1.2% from 1.5% kept the pressure on the Swiss franc. The euro appears to be trying to solidify a foothold above the 200-day moving average (~CHF0.9565) for the first time since last April. Sterling set an eight-day low at $1.26 before the weekend and bounced smartly on the back of the broader US dollar pullback. It made new highs for the day in late dealings near $1.2665 (~GBP2.3 bln in options expire today between $1.2650-$1.2655). It has not been below $1.2650 so far today and it has tested $1.2680 several times. Last week, it struggled near $1.27 and has not closed above this, the middle of its old trading range since February 1, the day before the US job report.

America

The recent price of the action of the dollar still shows the sensitivity to US rate developments more than European or Japanese. That seemed to be clearly the case in Q4 23. Rates and rate expectations fell among the high-income countries and the dollar fell. The market corrected in January and February--rates backed up and the dollar rose. The dollar was threatening to break higher ahead of the weekend when the weaker-than-expected January construction spending (-0.2% instead of +0.2% as the median forecast in Bloomberg's survey had it), and especially the weakness in the ISM manufacturing survey (it remained below 50 at 47.8 vs. 49.1 in January), including a slump in new orders (49.2 vs. 52.5 in January). The market put more weight on the ISM than the upward revision in the manufacturing PMI (52.2 from the preliminary estimate of 51.6 and 50.7 in January). The Atlanta Fed now sees the economy tracking 2.1% growth in Q1.

After getting past the final PMI services and composite, the ISM services, and another look at durable goods orders, the there is one more key event as attention turns to the US labor market. Namely, Fed Chair Powell testified before the House Financial Services Committee on Wednesday and the Senate Banking Committee on Thursday. The prepared remarks are the same. The questions may differ, but the answers won't. Powell can be expected not to deviate much from what he said at the press conference following the last FOMC meeting. The economy and prices are evolving in the desired direction, and more is needed to boost confidence of meeting the inflation target. At the same time, he may refer to the Summary of Economic Projections showing that Fed officials do expect to be able to cut rates later this year.

The drop in US rates, the risk-on that saw the S&P 500 reach a new record high, and the broad dollar pullback ahead of the weekend failed to drive it below the previous day's range against the Canadian dollar (~CAD1.3540). Still, for the third consecutive session, US dollar sellers emerged around CAD1.3600. We have been looking for the greenback to peak in the CAD1.3600-CAD1.3625 area, but so far, the price action has not been convincing. The US dollar found support today near CAD1.3545. The Mexican peso, on the other hand, set a new high for the week before the weekend and has pushed higher today. At the end of last week, it traded for the first time outside of the range set on February 22 (~MXN17.0120-MXN17.1570). The downtrend line, we are tracking, comes in today slightly above MXN17.06 and by the end of the week is below MXN17.02. Today's low near MXN16.9960 is barely above last month's low set on February near MXN16.9950. The low for the year was recorded on January 8 around MXN16.7850.