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The US Dollar Finds Footing (Again)

Summary:
Overview:  Equities have more stable footing today, despite yesterday's losses in the US, as the relative stability in the bond markets bolster risk-appetites. Led by a 2.7% rally in Hong Kong, which matches its largest advance of the year, Asia Pacific markets all advanced.   Europe's Dow Jones Stoxx 600 is up for the third consecutive session, and US shares enjoy a firmer tone.  Bond yields are firm (2-3 bp) in Europe after some slippage in Australia, New Zealand, and Japan.  Australia's 3-year note yield remains above the 10 bp target. The US 10-year is up five basis points at 1.44%.  The dollar is finding better traction in Europe as even the Antipodean currencies are struggling to maintain the upside momentum.  Sterling is a bit stronger ahead of the budget.  Emerging market

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The US Dollar Finds Footing (Again)

Overview:  Equities have more stable footing today, despite yesterday's losses in the US, as the relative stability in the bond markets bolster risk-appetites. Led by a 2.7% rally in Hong Kong, which matches its largest advance of the year, Asia Pacific markets all advanced.   Europe's Dow Jones Stoxx 600 is up for the third consecutive session, and US shares enjoy a firmer tone.  Bond yields are firm (2-3 bp) in Europe after some slippage in Australia, New Zealand, and Japan.  Australia's 3-year note yield remains above the 10 bp target. The US 10-year is up five basis points at 1.44%.  The dollar is finding better traction in Europe as even the Antipodean currencies are struggling to maintain the upside momentum.  Sterling is a bit stronger ahead of the budget.  Emerging market currencies are mostly higher, and the JP Morgan Emerging Market Currency Index is higher for the third consecutive session. However, the cumulative gains are modest and put the benchmark only slightly above last week's settlement.  Gold recovered from yesterday's test near $1700 (~$1707), but the upside momentum stalled near $1740 and is back below $1725. Oil is ended a three-day slide.  April WTI peaked last week near $63.80 fell to $59.25 today before finding a good bid that has lifted it back above $60.  

Asia Pacific

China's calculation of its PMI remains strange.  The composite of both the official and Caixin versions is above the manufacturing and service readings.  The official report was at 50.6 and 51.4 for manufacturing and services, and the composite was at 51.6.  The Caixin version had reported manufacturing at 50.9, and today the services PMI was reported at 51.5.  The composite stands at 51.7.  Leaving aside this counterintuitive result that has not triggered much of a response, the takeaway is the world's second-largest economy may have lost some momentum at the start of the year. Still, the Lunar holiday in February likely exaggerates the extent of it.  

Japan's preliminary service and composite PMI were revised up from the initial readings, but the sub-50 reading still warns that the world's third-largest economy appears to be contracting here in Q1.  The service PMI was revised to 46.3 from the preliminary 45.8 and the January 46.1.  The composite was revised to 48.2 from 47.6 and January's 47.1.  Recall that the manufacturing PMI stands at 51.4.  Initially, it was reported at 50.6 after 49.8 in January.  Meanwhile, Tokyo seems prepared to extend its formal declaration of emergency, though other prefectures are lifting theirs. 

Australia's services and composite PMI were revised lower from their preliminary estimates.  The composite stands at 53.7, down from the initial estimate of 54.4, and January's 55.9.  It is the second monthly decline but still points to an economy that is expanding.  Australia reported Q4 GDP expanded by 3.1% quarter-over-quarter in Q4 20.  Bloomberg's survey median forecast was for a 2.5% expansion after a 3.4% pace in Q3 20 (revised from 3.3%).  It leaves the Australian economy about 1.1% smaller than at the end of 2019.   

The dollar remains in a narrow range against the Japanese yen and is holding just below JPY107.00. Like yesterday, support was seen a little below JPY106.70, while the buying slows above JPY106.90.  Remarkably, the range of one of the most actively traded currency pairs can trade in such a narrow range. Beijing must be envious.  It would also like to see such stability, which it achieves awkwardly and with greater official controls.  The PBOC set the dollar's reference rate at CNY6.4565, a little firmer than anticipated.  The greenback slipped to a four-day low near the fix but rebounded to around CNY6.4675.  The benchmark seven-day repo rate fell for the third day, the longest streak in nearly two months. It fell by 24 bp today to 1.84%.  The PBOC injected CNY10 bln through its open market operations, offsetting the maturing amounts.  The Australian dollar fell three cents in the last two sessions of last week to briefly trade below $0.7700.  After rising for the third session today, it has come back off after stalling near $0.7840.   

Europe

Ahead of the UK's budget, the Chancellor of the Exchequer has made some preliminary announcements.  These include the extension of the furlough program.  The government will continue to pick up 80% of the wages through June and at a lower rate through September.  Other measures expected to be announced include an extension of the VAT holiday for the hospitality sector and GBP20 a week add-on for social security payments.  Many are also looking for Sunak to suggest fiscal policy will be brought back under control as soon as possible and is expected to announce plans to phase-in corporate tax increases.   Separately, the UK preliminary PMI for services and composite was revised lower from the preliminary readings, but at 49.5 and 49.6, respectively, showed improvement from January (39.5 for services and 41.2 for the composite).  

Although Germany's service PMI was shaved from the preliminary reading, which was also already lower than January, the manufacturing sector's strength lifted the composite to 51,1 from 50.8 in January. France's service PMI was revised up, but slide to 45.6 from 47.3 in January proved too great a weight, and the composite stands 47.0 from 47.7 previously.   It has not been above 50 since last August.  Italy was the most surprising.  The service PMI at 48.8 was well above expectations and the previous reading of 44.7.  The composite moved above 50 (51.4) for the first time since last September.  Spain saw modest improvement, but the composite of 45.1 points to an economy in contraction.  For the euro area, as a while, the service PMI rose to 45.7 from 44.7 of the preliminary reading and 45.4 in January.  The composite, which has not been above 50 since last October, is at 48.8 compared with 47.8 previously.  

Bloomberg reported that unnamed officials "familiar with internal discussions" said the ECB sees no need for "drastic action" to offset rising yields.  The current tools, verbal intervention, and the flexibility buying program will be sufficient.  The most important consideration about such stories is that there is a range of opinions at the ECB. The motive to "reveal" such internal debate to the media must be questioned.  It is not just to share information.  In this case, it seems from the hawkish camp that does not want to take fresh action.  It is an example of affirmation through negation.  It means that there is a discussion taking place, and some want the ECB to step up its efforts.   Note that one official said that the central bank would react against "unwarranted increases" earlier this week. Next week's ECB report (before the ECB meeting) will shed more light on whether the ECB did, in fact, step up its buying in the face of the drama at the end of last week.  

The euro staged an impressive recovery yesterday after briefly slipping below $1.20 for the first time in nearly a month.  It reinforces the sense that it is the bottom end of the range.  It stalled in front of $1.2095, but the gains were extended to almost $1.2115 in late Asia/early European turnover.  A break of $1.2080 would confirm a consolidative tone and warn of downside risks toward $1.2040.  Sterling is holding up better.  It recovered a cent after slipping to near a two-week low yesterday around $1.3860 and briefly pushed above $1.40 at the end of a quiet Asia session.   Support is now seen near $1.3940.  

America

Today's US economic data is non-government sources.  The ADP private-sector job estimate (Bloomberg median 200k after 174k in January) may be the most important of today's releases. However, its month-to-month predictive value of the national report is less than ideal.  The current estimate (Bloomberg median) has crept up as forecasts are revised to now stand at 195k after the disappointing 49k increase in January.  The final PMI readings and the ISM services will be reported as well.  The high-frequency reports often have a high noise-to-signal ratio, and regardless of today's reports, a strong Q1 GDP is widely expected.  That said, yesterday's auto sales report, apparently dampened by the poor weather, came in at 15.67 mln-unit seasonally-adjusted annual pace.  This was below expectations and compares with 16. 83 mln vehicles sold last February.  Late in the session, the Beige Book will be released as part of the preparation for the FOMC meeting on March 17. 

Canada's Q4 GDP reported yesterday at 9.6% at an annualized pace exceeded expectations for a 7.3% increase (Bloomberg median).  It leaves the economy about 3% smaller than at the end of 2019.  It is expected to regain that by the middle of the year.  Today's calendar features only January building permits, which are expected to have recovered from the weakness at the end of last year.  Houses prices in the UK,  Australia, New Zealand, and Canada show strong upside pressure that is gradually moving onto the central banks' radar screens. House prices are rising in the US, and the latest Case-Shiller report (February 23) showed that house prices rose by almost 10.4% year-over-year in December, the most in nearly seven years.  Fed officials have not spoken much about it.  

Mexico reports domestic auto sales, and the central bank releases its inflation report.  The peso's weakness (-2.3% over the past month) has given the market pause.  It had been leaning toward a rate cut at the March 25 Banxico meeting, though our leanings had been for an April move.  Late yesterday, the Senate passed a controversial bill that favors the state electricity company over private-sector renewable companies. It has already been approved by the lower chamber.  It is part of President AMLO's efforts to unwind the reforms that had opened Mexico's energy sector to foreign investors.

The US dollar remains in the range it recorded last Friday against the Canadian dollar (~CAD1.2590-CAD1.2750).  Its third day of decline has brought it to the lower end of that range.  A break of CAD1.2575 is needed to signal the likely return to last week's low near CAD1.2465.  On the other hand, a move above CAD1.2650 could spur a test on the CAD1.2700, and a break of it would lend credence to ideas that the greenback's losses this week have been corrective in nature.  Similarly, the US dollar remains confined to last Thursday's range against the Mexican peso (~MXN20.37-MXN21.03).  It has found support around MXN20.55. Initial resistance is cited in the MXN20.70-MXN20.75 area today.      


Disclaimer



Marc Chandler
He has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.

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