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Markets Unsettled, Dollar Rides High

Summary:
Overview: The combination of OPEC+ decision not to boost output next month and Fed Chair Powell's seemingly lack of concern about the level of long-term rates pushed on a door that was already open.  Oil is higher, yields are higher, most equity markets are lower, and the dollar has surged.  The S&P 500 is practically flat for the year after yesterday's losses, and the NASDAQ is off nearly 10% from the record high set in the middle of last month.  Most Asia Pacific markets fell, though Japan's Topix was a notable exception. Malaysia and Thailand equities also escaped the carnage. Europe's Dow Jones Stoxx 600 is off around 0.4%.  It is the second day of losses, but it is still up a little more than 1% for the week.  US futures indices are paring earlier losses.  The US 10-year Treasury

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Markets Unsettled, Dollar Rides High

Overview: The combination of OPEC+ decision not to boost output next month and Fed Chair Powell's seemingly lack of concern about the level of long-term rates pushed on a door that was already open.  Oil is higher, yields are higher, most equity markets are lower, and the dollar has surged.  The S&P 500 is practically flat for the year after yesterday's losses, and the NASDAQ is off nearly 10% from the record high set in the middle of last month.  Most Asia Pacific markets fell, though Japan's Topix was a notable exception. Malaysia and Thailand equities also escaped the carnage. Europe's Dow Jones Stoxx 600 is off around 0.4%.  It is the second day of losses, but it is still up a little more than 1% for the week.  US futures indices are paring earlier losses.  The US 10-year Treasury yield is near 1.55%.  European benchmark yields are 1-3 bp higher, while Australian and New Zealand yields rose another 6-7 bp.  Australia's 3-year bond yield, targeted at 10 bp, will finish the week a little above 15 bp.  The dollar is riding higher.   The euro fell to new lows for the year near $1.1915, and the dollar pushed above JPY108.50.  The Antipodeans and sterling are leading the majors lower with 0.5%-0.7% declines. The JP Morgan Emerging Market Currency Index is falling for a third consecutive session and is at new lows for the year.  Gold was is trying to stabilize after being sold below $1690. The $1700 may now offer resistance.  April WTI jumped 4.2% yesterday on the back of OPEC+ surprise and is up another 2% today to push above $65 a barrel.  

Asia Pacific

Weekly portfolio flows from the Ministry of Finance showed that Japanese investors have sold what appears to be a record JPY3.6 trillion (~$33.5) of foreign bonds in the past two weeks.  Some accounts link it to the approaching fiscal year-end (March 31), but it seems early for such strong seasonal flows and maybe a reaction to market developments.  When Japanese institutional investors, especially the government-run pension funds, buy foreign assets, some observers want to call it intervention, but when they repatriate, as they apparently have been doing, not a peep.  Meanwhile, reports suggest that what they are selling are off-the-run issues and that their US counterparts are hedging by selling on-the-run issues.  Due to the negative general collateral repo rate, those giving cash for Treasury securities pay for the privilege. Separately, BOJ Governor Kuroda played down market talk that the central bank could widen the band that the 10-year bond is allowed to trade under the yield-curve control policy (+/- 20 bp around zero). 

China's National People's Congress has begun.  The initial highlights include a GDP target of above 6% this year and a 3.2% budget deficit.  No GDP target was set last year due to the pandemic and this year's target is lower than many expected. The world's second-largest economy is expected to expand by 8.0%-8.5% this year.  Indeed, given the base effect, a 6% expansion seems baked into the cake.  The central government deficit was 3.6% in 2020, and the 3.2% target this year may be a little higher than anticipated.  The government seeks the creation of 11 mln new jobs this year.   

The dollar's surge against the Japanese yen is continuing, and the greenback is flirting with the JPY108.50 level, which it had not seen since last June.  It has risen in eight of the past nine sessions.  Rising US rates are the critical driver that is overwhelming the yen's tendency to benefit from steep equity declines.  The dollar finished last week near JPY105.60.  It is the second consecutive week that the greenback has risen by more than 1%, for the first time since last March.  The next target is the JPY109 area, which also houses the 200-day moving average.  The Australian dollar, which poked above $0.8000 on February 25, fell to $0.7660 today, its lowest level in nearly a month.  Some congestion around $0.7600 may offer support, and the low for the year was set in early February near $0.7565.  The PBOC set the dollar's reference rate at CNY6.4904, which was closer than usual to what the bank models in the Bloomberg survey anticipated.  The relative stability (no accidental) of the yuan in the face of the decline of many other currencies means that the yuan has appreciated against its CFETS basket to its highest level in nearly three years. The dollar continues to be confined with a couple brief exceptions within the range set on the first two sessions of the year (~CNY6.43-CNY6.5150).  

 Europe

The US and UK are reportedly considering additional penalties on Russia for its use of chemical weapons.  There is some talk that the sanctions could target Russian sovereign bonds.   When this option was last discussed, Treasury Secretary Mnuchin successfully pushed against it, claiming that given the role of Russian bonds in global benchmarks, it could be broadly destabilizing.  However, several people in the Biden administration seem more sympathetic to the escalation. They are less fearful of collateral damage partly on ideas that international asset managers are less exposed now. That said, many emerging market analysts have recommended Russian bonds due to high yields, cheap currency, and rising oil prices.  

German factory orders were nearly three times stronger than the 0.5% gain than the median forecast in the Bloomberg survey anticipated.  The 1.4% increase follows a revised 2.2% decline in December (from -1,9%).  The domestic weakness (-2.6%) was offset by the 4.2% increase in foreign orders. Those foreign orders were split between a 3.9% increase by EMU members and a 4.4% increase from outside the monetary union.  Next week, Germany reports January industrial production and trade figures. The German economy is projected to contract by 1.0%-1.5%  this quarter. 

The euro was sold through $1.20 yesterday fell to about $1.1915 today in late Asia to record the lows for the year. There is an option for around 515 mln euros at $1.19 that expires today. With the US jobs data still ahead, the day's range may not be in place, but if it closes near current levels (~$1.1935), it would be the largest weekly loss since the end of last October.  A break below $1.1880 targets the $1.1800-$1.1820 area, which is where the 200-day moving average is found.  Resistance is now seen around $1.1980-$1.2000.  Sterling briefly poked above $1.40 yesterday and is now threatening $1.38. A break of $.13775 may signal a move toward $1.3600.  The $1.3900 area now looks like the cap.   

America

The market had been looking for OPEC+ to boost output next month.  The range of expectations seemed to be between 500k and 2 mln barrels a day.  Instead, they agreed to hold production steady, and Saudi Arabia indicated it would extend its unilateral one million barrel cut for another month. OPEC+ restraint is likely to encourage US shale producers.  Domestic rigs usage is at the highest level since last May, and a new report is due out later today.  Retail US gasoline is around $3 a gallon in some places, a six-year high.

In what may be his last public comments ahead of the March 17 FOMC meeting, Fed Chairman Powell did not reveal any heightened level of concern about market developments.  His remarks about the volatility (caught his attention) did not go beyond what Governor Brainard had already indicated.  Powell said he would be concerned if the disorderly conditions continued or if there was a persistent tightening of financial conditions.  By indicating no concern about the level of rates, he is tempting markets to fish for the official pain threshold.  Powell also did not address the regulatory issue about calculating the leverage ratio where Treasury holdings and excess reserves have been exempted since last April and due to expire at the end of this month.   It is an important, even if arcane, element to the plumbing that influences the bank balance sheet considerations. 

Although the US employment report is the single most important high-frequency data point, today's might be an exception.  The estimates have crept up to around 200k after January's disappointing 49k. The reason the employment report is significant is that it shed light on the overall economy and may have policy implications.  It seems less true now.  The economic performance is outstripping the labor market's improvement, and Powell showed no inclination to taper.  His assessment, which others echoed, is that the Fed's targets are still a long way from being achieved.  The US also reports the January trade balance.  Growth differentials alone warn of a widening shortfall.  January consumer credit is also on tap.  It rose by an average of $9.3 bln in Q4 20 and $14..2 bln in Q4 19. Bloomberg's survey found a median forecast of $12 bln in January.  

 The US dollar recorded an outside up day against the Canadian dollar yesterday by trading on both sides of Thursday's range and then settling above Thursday's high.  The Canadian dollar initially strengthened on the OPEC+ surprise but then sold-off in the face of the broad greenback strength as rates rose sharply.  The US dollar is bid, and a move above CAD1.2750 would bolster the outlook for next week.  A run at the year's high near CAD1.2880 seems reasonable.   Rising oil prices did the Mexican peso little good.  The dollar rallied above MXN21.00 yesterday and is now near MXN21.26, news highs since early last November and above the 200-day moving average (~MXN21.16) for the first time since last October.   The next important technical target is near MXN21.50 and then MXN22.00.  



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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