Waller Pushes on Open Door: Push for Patience Lifts the Dollar, Complicating Japanese Efforts

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Marc Chandler
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Overview: Comments by Fed Governor Waller, urging patience on rates and wanting more evidence that price pressures are moderating has helped the greenback extend its recent gains. The yen is the notable exception as the fear of intervention has restrained the dollar bulls. Poor German data, including a sharp 1.9% drop in February retail sales, the fourth consecutive monthly decline, underscored the euro's negative divergence, and the single currency was sold to new lows for the month below $1.0780. The Antipodeans and Scandis are leading the G10 currencies lower with 0.6%-0.8% losses. Emerging market currencies are mostly lower. The South Korean won, and Taiwanese dollar are exceptions with miniscule gains.

Equities in the Asia Pacific region are mixed. Japan, South Korea, and Taiwan markets fell, while China, Australia, and India are higher. Europe's Stoxx 600 is rising for its fourth consecutive session, and if this is maintained, it would be the longest advance in two months. US index futures are nursing small losses after yesterday's gains. European bond yields are 2-5 bp higher, with peripheral premiums widening slightly. The 10-year US Treasury yield is up three basis points to 4.22%. The two-year US yield is up almost six basis points to 4.63%. The Fed funds futures have shaved the odds of a June cut and pared the extent of this year's reduction. Despite higher yields and a firmer dollar, gold is firm, knocking on $2200. May WTI is in a $81.50-$82.00 range. The week's high was set on Monday near $82.50.

Asia Pacific 

American college basketball is in its championship tournament, March Madness. It is clear that the violation of the rules, fouls, are part of the game. The fouls do not threaten the integrity of the game in the least. The lack of enforcement of the rules would, though, threaten the rules. Similarly with world trade, there are rules of engagement. The violation of the rules has become part of the game itself. The US has a strong successful record of challenging China's action. The US also have been found in violation of the rules in about a fifth of the cases China has brought. That China subsidies its EV production, which is an investigation that the EU has initiated, is not a legitimate defense for the challenge to the US subsidies under the Inflation Reduction Act. Claims that China is trying to wreck the WTO is an exercise in hyperbole. What has stalled the conflict resolution process at the WTO is the Trump-Biden administrations obstructing the appointment of appellate judges. That means that even if the WTO finds against the US, an appeal by Washington essentially freezes the process.

Japanese officials are clearly signaling its willingness to intervene in the foreign exchange market to strengthen the yen. On one hand, such intervention flies in the face of claims of a race to the bottom or that all countries see a weaker currency. We know what boosts the chances of successful intervention:  surprise, size, and support (policy and multilateral). Japanese officials have surrendered the element of surprise. Indeed, the leaks in the Japanese press, even during last week's BOJ meeting prevented officials from surprising the market with the first hike in 17 years. The daily turnover in the foreign exchange market has been larger than central bank intervention operations, but Japanese intervention has often tried to muscle the market. In contrast, the US intervention is more finesse, typically smaller size but well-timed. Support for intervention comes from signaling a change in monetary policy, and this box Japan can check. However, the chances of support from the ECB or the Fed seem de minimis. That said, intervention could spur a pullback in the dollar more broadly. However, we suspect three things. First, intervention to support the yen could lend support to the Chinese yuan, which is trading at the lows since last November. Second, intervention may initially weigh on Treasuries as the market assumes BOJ holdings will be sold to buy yen, though officials are also believed to keep a liquid balance. Third, a bounce in the yen will likely be sold. 

Shifting risk-reward and the clear threat of material intervention weighed on the dollar against the yen yesterday. The dollar pulled back from almost JPY152 to almost JPY151 in early North American turnover. It steadied but did not resurface JPY151.40. Today's the greenback reached about JPY151.55. There is set of options that expire today at JPY152.15 (~$1.25 bln). We continue to suspect that the risks of intervention increase tomorrow when European and North American markets are closed. The Australian dollar held above support in the $0.6500-10 area in recent days but yielded today. It could not get much above $0.6530 in North America yesterday. The break of $0.6500 could spur a retest on the March low slightly below $0.6480. The Q1 low was set in mid-February near $0.6445. The PBOC set the dollar's reference rate at CNY7.0948 (CNY7.0946 yesterday). The average in the Bloomberg survey was CNY7.2272 (CNY7.2222 yesterday). Many observers claim Chinese officials have confused traders with its reference rate, with last Friday's fix a little above CNY7.10, the anomaly. We think the timing of allowing the dollar to rise and remain above CNY7.20 is a function of the dollar's broad strength and the yen's exceptional weakness. The greenback has been gradually allowed to rise against the yuan this year. The dollar has risen in all but two week's this year. This week, it is on the cusp, having settled at CNY7.2292 at the end of last week. Meanwhile, the dollar continues to trade above its onshore band (~CNY6.9529-CNY7.2367) in the offshore market (~CNH7.2440-CNH7.2630)

Europe

Japan and China are not the only countries seeking to influence the foreign exchange market. Recall that Sweden's Riksbank hedged (sold) a quarter of its foreign exchange reserves. Earlier today, the Swiss National Bank confirmed it sold about CHF20.3 bln (~$23 bln) of its foreign currency holdings in Q4 23 (down from CHF37.6 bln in Q3). This was consistent with SNB's annual report published earlier this week. Last year, the SNB sold nearly CHF133 bln (CHF22.3 bln in 2022). It bought CHF21.1 bln in 2021. Recall in Q4 23, as the US dollar fell broadly, the Swiss franc rose faster than the euro. Its 4% gain pushed it to levels last seen against the euro in the frantic trading in early 2015 when the SNB lifted its cap on the franc. Earlier this month, the OECD expressed concern about the SNB's large reserve holdings (three-fold increase since 2010 to over 100% of GDP). The OECD, incidentally, also advised that the SNB should maintain a tight monetary policy. Around 48 hours later, the SNB become the first G10 central bank to cut rates in this cycle. This year, the euro has soared more than 6% against the Swiss franc, recovering above CHF0.98 and returning to levels last since in the middle of last year. 

A combination of hawkish comments by the Fed's Waller and poor German data has weighed on the euro, taking the single currency to new lows for the month to about $1.0775. German retail sales collapse in February. The median forecast in Bloomberg's survey was for a 0.4% increase, but instead, retail sales plummeted by 1.9%. At the same time, German economic research groups slashed their forecast for German growth this year to 0.1% from 1.3% projection made in Q4 23. Nearby support may be seen near $1.0760 but the February low near $1.07 beckons. Sterling has remained within last Friday's range (~$1.2575-$1.2675). It looks vulnerable. A break of $1.2575 signals a test on last month's lows (~$1.2520-$1.2535). Sterling has not traded below $1.2500 since last November. The intraday momentum indicators for both the euro and sterling are overextended in the European morning but the US rate adjustment suggests little incentive for bottom pickers in North America.

America

There are numerous US economic reports today, but none will overshadow the Fed Governor Waller's comments, which articulated the case by nine of the 19 Fed officials who earlier this month favored two or few cuts this year. Revisions to Q4 GDP are not an issue for the market as Q1 winds down. Next Friday's nonfarm payroll report is more in focus than weekly jobless claims. The early call is for another solid 200k+ rise in jobs. The Chicago PMI, KC Fed's manufacturing survey, pending home sales, and the final look at University of Michigan's consumer confidence are not typically market movers even in the best of times. 

Tomorrow's data and events are more important but most market in Europe and North America will be closed. The US reports personal income and consumption. The former is expected to have slowed after the dividend and Social Security cost-of-living adjustment boosted income by 1% in January. On the other hand, the poor weather may have weighed on January's consumption, and it is expected to have rebounded to around 0.5% in February (0.2% previously). The Atlanta's Fed GDP tracker will be updated after the data (from 2.1% as of earlier this week). The CPI (and PPI) steal the PCE deflators' thunder. The headline deflator is seen rising to 2.5% from 2.4% and the core is expected to be flat at 2.8%. Federal Reserve Chair Powell will speak in a moderated discussion at the Macroeconomic and Monetary Policy Conference hosted by the San Francisco Federal Reserve (11:30 AM ET). There is a risk that Powell, who is often perceived as dovish even though he just led the Fed through one of its most aggressive tightening cycles in the central bank's history, may offer a counterweight to Waller. The futures market has pared the odds of a June cut to about 66% from nearly 75% yesterday. There are about 73 bp of cuts priced into the Fed funds futures curve, down from 79 bp yesterday and 84 at the end of last week. 

The US dollar remained in the upper end of its recent range against the Canadian dollar. After holding below CAD1.36 on Tuesday, the dollar pushed through it but held below the recent high near CAD1.3615. The consolidation is taking place in the upper end of last Friday's range (~CAD1.3520-CAD1.3615). It still does not feel like a top is in place. Nearby resistance is seen in the CAD1.3620-25 area, and a break of could spur a move toward CAD1.3700 in the coming days. On the other hand, the greenback continued to fall against the Mexican peso. It reached almost MXN16.51 yesterday, the weakest since the end of 2015. The peso's attractive carry seems like the most powerful force, but the unexpectedly large drop in Mexico's February unemployment (2.45% vs. 2.85%) and a half the trade deficit than expected may have underscored the hawkish part of the hawkish cut the central bank delivered last week. Still, the greenback's broad strength has steadied it against the peso. Mexican markets are closed today and tomorrow. Initial resistance is seen in the MXN16.65-67 area.