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

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

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.

 

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