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Overview
In the absence of news, the US dollar traded mostly within a narrow range against G10 currencies. Putting the NOK aside, other currencies are trading at +/- 0.15% against the USD today.We note the technical tone for the euro Sterling improved as the five-day moving average broke above the 20-day moving average. On the other hand, the dollar is approaching the year’s low of 150.90 yen set last week.
Emerging market currencies were mostly lower. Emerging market currencies have been mixed this week, but Central and European currencies have generally been the best performers. Still, the J.P. Morgan Emerging Markets Currency Index is likely to head lower this week. So far this year, it’s been declining every week.
Yesterday’s sharp gains in U.S. stocks helped lift most Asia-Pacific markets today.Chinese formal Informal measures have boosted mainland stocks this week, with the Shanghai Composite Index (The Shanghai Composite Index) rose nearly 4.9%, and the Shenzhen Component Index soared nearly 5.9%.
European stoke The 600 level edged higher today and capped off what is likely a fifth straight week of gains. U.S. stock index futures were trading slightly weaker. S&P 500 Index (SP500, SPX) and Nasdaq (Industrial product R&D center) is up about 1.6% so far this week. European benchmark 10-year bond yields are mostly 2-3 basis points higher. Today, U.S. 2-year (US2Y) and 10-year (US10Y) bond yields hit new highs for the year in Europe (Japanese markets were closed for a national holiday), approaching 4.75% and 4.35% respectively.
Yesterday, gold ended a five-day rally (around $34) with a slight increase in trading volume today. Yesterday, April WTI hit its highest level since November (around $78.60), but fell back today (around $77.70 in Europe). Prices were just under $78.50 last week.
Asia-Pacific
There are some developments worth noting this week.
First, despite the unexpected contraction of Japan’s GDP in the fourth quarter of 2023, and the fact that the country’s overall and core CPI are likely to follow Tokyo’s footsteps and fall below 2.0%, the Bank of Japan still seems determined to abandon its negative interest rate policy. April still seems to be a possible time frame. The results of the spring wage round will largely be announced, and government energy subsidies for households are about to expire (which will push overall inflation up by about 0.4%).
Second, Beijing has taken steps to restrict large investors from selling stocks at the opening and closing times and to limit short selling. The CSI 300 Index (SHSZ300) has risen for nine consecutive trading days, with an increase of nearly 10%. The mainland stock index traded in Hong Kong rose 3.7% this week, after rising about 6.4% in the previous two weeks. The offshore yuan ended six days of gains yesterday. The U.S. dollar strengthened slightly against the yuan in the first week after the Lunar New Year holiday. Still, the dollar remains below 7.20 yuan (since November), although the reference rate has allowed it to rise above 7.24 yuan.
Third, recent RBA meeting minutes show that officials were unwilling to rule out the possibility of another interest rate hike after the surplus adjustment in November last year. However, the market is moving in the opposite direction. The futures market has pushed the probability of a rate cut in June to around 88% from around 75% at the end of last week.
The U.S. dollar appears to be breaking out of a consolidation pattern that has formed over the past week and a half. It was trading near 150.80 yen in early European trade. We believe the consolidation may be a continuation pattern rather than a reversal. The breakout targets the 152 yen area, which marks the dollar’s highs in 2022 and 2023. Verbal intervention has gradually moved higher this week, but the market is in order as three-month implied volatility fell to its lowest level since mid-November (~8.05). %) illustrate. It was close to 10.8% in early February. On the other hand, if the dollar stabilizes above 150.20 yen, it will rise for the eighth consecutive week and certainly meet the definition of a one-sided market. Nonetheless, we suspect that the threshold for material intervention is higher. Since the beginning of this week, a pattern has emerged.
The Australian dollar tends to rise during the Asia-Pacific session before selling off in Europe and the United States. Net-net barely made any progress, moving just a few hundred cents around $0.6550. It closed last week near $0.6530, and a close above that level would be its third consecutive weekly gain.
The People’s Bank of China sets the US dollar reference exchange rate at RMB 7.1064 (yesterday it was RMB 7.1018). The average forecast in the Bloomberg survey was 7.1940 yuan (yesterday: 7.1863 yuan). The U.S. dollar continued to trade at 7.20 yuan against the yuan. While the 2% band around the reference rate allows for a rise above CNY 7.20 (~CNY 7.2485 is the upper end of the range today), we suspect that the CNY 7.20 area will be overcome if USD/JPY continues to rise.
Europe
The German and French governments have lowered their growth forecasts for this year, and the Bundesbank warned that the German economy may shrink this quarter. Several ECB officials have linked easy monetary policy to slower wage growth. The central bank’s chief economist Ryan said yesterday that there were some early signs that wage growth was slowing. At the same time, in addition to the United States’ willingness to endure a budget deficit of 6.0%-6.5%, the fact that average wages are growing faster than inflation also seems to help support consumption.
The preliminary PMI value for February shows that the manufacturing industry continues to be weak, while the service industry has stopped shrinking, but the positive growth momentum is weak. In the swaps market, the probability of a rate cut in April has been revised down to around 30% from around 45% at the end of last week. German and French 10-year government bond yields hit new highs for the year yesterday (about 2.51% and 2.88% respectively).
The European Union launched an investigation into China’s railway exports and announced a new package of sanctions against Russia. It is worth noting that the 13th round of sanctions has increased the penalties for third-country companies. Companies in at least nine countries have been sanctioned. These include three Chinese companies and one Indian company (although the EU is negotiating a trade agreement with India). Notably, no Taiwanese companies were mentioned despite Taiwan being Russia’s largest supplier of high-precision metal processing machinery needed to produce fuses and precision weapons. Some reports indicate that they are often shipped from Taiwan through third parties such as Turkey and China.Meanwhile, Russia uses North Korean missiles against Ukraine It is said Many parts are manufactured in the United States and Europe, underscoring the difficulty of establishing an effective embargo.
This week’s developments, including Bank of England Governor Bailey appearing to support low interest rate expectations, calling them “reasonable”, have not significantly changed the market’s outlook for UK interest rates. The probability of a rate cut in June is almost unchanged at just under 50%. It was already fully discounted at the beginning of the month. Markets remain confident that two rate cuts will be implemented this year and have been scrambling for the possibility of a third. It was slightly above 50% last weekend and is slightly lower now. Earlier this month, as the pendulum of market expectations swung back, four rate cuts were fully discounted, up from about six at the start of the year.
Yesterday, the euro peaked near $1.0890 late in the Asia-Pacific session, its highest level since the release of U.S. employment data on February 2. The euro sold off in Europe and fell further in the U.S., approaching $1.08, the session low. So far today, it has stayed below $1.0835. Today’s close below the $1.0790 area would weaken the near-term technical outlook, while a close above $1.0830 would be constructive.
Sterling outperformed the euro despite rejection after breaking above $1.2700 for the first time since February 2. Sterling hit its highest closing price since February 2. The pound has started today on a three-day winning streak and is within a little over 25 cents range above $1.2650. A close above $1.2600 would be technically favorable, but would also be the first weekly settlement higher in six weeks. The five-day moving average broke above the 20-day moving average for the first time since late January. The euro’s moving averages were crossed earlier this week.
USA
This week, the market continued to postpone the first interest rate cut by the Federal Reserve. Ahead of the employment data on February 2, Fed fund futures have fully priced in the impact of a May rate cut and are still holding on to lingering hopes for action in March. A week later, the probability of action in May fell to less than 75%, and at the end of last week it was below 40%. Now, that probability is just under 25%, the lowest in three months. Currently, the probability of a rate cut in June has dropped to about 70%. It was fully discounted a week ago. The later the easing cycle starts, the smaller the cuts will be this year. The market has converged with the Fed’s December dot plot. It has now ruled out three rate cuts, and about a one-in-seven chance of a fourth. As of last weekend, the market’s probability of a fourth rate hike was 60%.
Statistics Canada initially estimated that retail sales fell by 0.4% in January, which affected Canada’s higher-than-expected 0.9% retail sales growth in December and the upward revision of November’s data (from -0.2% to flat). On the margin, it should help GDP for December and Q4’23, due out next week. The market has postponed the Bank of Canada’s first interest rate cut to July.
Mexico’s IGAE December survey results were weak, even if not as soft as expected, and more importantly for the central bank, inflation continued to be moderate in the first half of February.title rate fall down It rose 0.1%, with the annual growth rate rising from 4.87% to 4.45%. The core rate rose by 0.24%, enough to drag the annual rate to 4.63% (from 4.75%). Pending the next batch of inflation data (March 7), we believe there may be a rate cut at the Bank of Mexico meeting on March 21.
The U.S. dollar fell to a seven-day low against the Canadian dollar in late Asian trading yesterday. Europeans snapped up cheap US dollars (the lowest price was about 1.3440 Canadian dollars), and as North America joined the competition, the US dollar price reached around 1.3510 Canadian dollars. The price is stable within the range of CAD 1.3480. Today’s price range is roughly CAD1.3470-CAD1.3505. The U.S. dollar held steady around 1.3485 Canadian dollars last week. So far this year, the index has risen every week except for a 0.02% decline in the week ended February 9.
USD/MXN had a bullish intraday session, trading below Wednesday’s lows before reversing to settle above Wednesday’s highs. Weakness in the biweekly consumer price index weighed on the peso. The U.S. dollar closed above its highest level since the U.S. CPI was announced on February 13. Today, a descending trend line from the late January high to this month’s high emerged near MXN17.1465. The dollar traded above this level yesterday but has since fallen back below it. It has fallen slightly today, but in early European trade it was trading around MXN17.1250. A convincing weekly breakout would strengthen the dollar’s technical outlook. It will be projected into the MXN17.75 region.
The USD/BRL also saw external gains on the day and hit a new high this week, near 4.9645 BRL. BRL 5.00 is the upper limit of the recent range. The dollar has not closed above 5.0 reais since late October last year.
Editor’s note: Summary highlights for this article were selected by Seeking Alpha editors.
