Dollar Gains Initially Extended, but Now Awaits US Leadership

Overview: The preliminary PMI readings for March have been mostly stronger than expected, but setbacks with the virus, including new lockdowns in Germany, France, and Italy and rising cases in many US states, have hit sentiment.  Hong Kong has suspended the BioNTech vaccine.  A ship run around in the Suez Canal simply exacerbates supply bottlenecks.  Asia Pacific equities got hit the hardest, with 2%+ declines in Tokyo and Hong Kong.  Australia escaped the carnage and rose by about 0.5%.  It was the fourth consecutive drop in the MSCI Asia Pacific Index.  Europe's Dow Jones Stoxx 600 is off slightly but appears to be finding support near 420, last month's high.  US futures are firm.  Benchmark yields are softer.  The US 10-year yields hovering around 1.62% after falling for the past two sessions, and briefly trading below 1.60%.  European bond yields are 1-2 bp lower.  While Australia's 10-year yields fell 8 bp to about 1.65%, New Zealand's tumbled almost 16 bp to nearly 1.50%, as ideas of an early rate hike diminished.  The dollar remains firm against most of the major currencies.  The Canadian dollar and the Norwegian krone are the most resilient.  Sterling is off the most (~0.2%) following a softer than expected CPI report and is near its lowest level since early last month.  The euro closed below its 200-day moving average yesterday (~$1.1865) and dipped below $1.1815 today, its lowest since late November before steadying.  Among the emerging market currencies, the Turkish lira was the weakest but has recovered most of the initial losses that saw the dollar move back above TRY8.0.  The liquid-accessible emerging market currencies, like the Russian ruble, Mexican peso, and South African rand, are posting small advances.  Gold slipped to a fresh four-day low just below $1724 but has steadied and consolidated in yesterday's range in quiet turnover around $1730.  Oil prices have also stabilized after yesterday's nearly 6.2% slide in WTI for May delivery.  After falling to about $57.30, the lowest since February 12, it has rebounded to near $59.  A move above $60.20 would begin to repair the technical damage. 

Asia Pacific

A day after the Japanese government downgraded its assessment of exports for the first time in 10 months, the preliminary March PMI shows the manufacturing sector improving.  The manufacturing PMI rose to 52.0 from 51.4.  The service PMI edged up to 46.5 from 46.3.  However, given the formal emergency's end, it would not surprise if the final reading showed a little more improvement.  The composite stands at 48.3 compared with 48.2 last month.  The reading is consistent with expectations that the world's third-largest economy is contracting here in Q1.  

Australia's flash PMI showed a bigger improvement in services than manufacturing.  The manufacturing PMI ticked up to 57.0 from 56.9, while the service PMI jumped to 56.2 from 53.4.  This allowed the composite reading to improve to 56.2 from 53.7.  Separately, New Zealand reported the February trade balance swung into surplus (~NZD181 mln) after January saw the largest deficit (~NZD647 mln) since last September.  Exports rose, and imports fell.  

For the past five sessions, the dollar fell below the previous session's low against the Japanese yen. That pattern may be broken today as the greenback holds above yesterday's low (~JPY108.40).  However, for the fifth session, the dollar has not risen above the previous session's high.  Yesterday's high was a tad above JPY108.85. The Australian dollar slumped nearly 1.6% yesterday, its largest drop this month.  The losses were initially extended to around $0.7585 and matched the February 5 low, which is about a fifth of a cent above the year's low.  It has moved back into yesterday's range (low was a little above $0.7615).  It may take a move above the $0.7650 area to improve the technical tone.  The greenback rose to its best level against the Chinese yuan in about two and a half weeks near CNY6.5270.  The high for the year was set on March 9 near CNY6.5440.  The PBOC set the dollar's reference rate at CNY6.5228, a bit weaker than expected, and that may signal a small protest to continued yuan weakness.  The yield on China's 10-year benchmark bond eased by a couple of basis points, and at 3.18%, it is the lowest since February 3.  


Germany and France reported better than expected flash PMIs, but with new lockdowns amid a third wave of the virus, the impact was marginal.  The German manufacturing PMI rose to 66.6 from 60.7.  The Bloomberg survey anticipated a small decline.  France's manufacturing PMI rose more than expected.  It rose to 58.8 from 56.1.  However, while the French service PMI is still in contracting territory below (47.8 vs. 45.6), Germany's service PMI rebounded above 50 (to 50.8) for the first time since last September.  The net effect is that the German composite PMI stands at 56.8, a new cyclical high.  France's composite rose to 49.5, its best in Q1 and matches the December level.  The eurozone's preliminary composite jumped to 52.5 from 48.8.  It stands at its best level since last July's peak (54.9). 

The UK reported softer than expected CPI readings and a stronger than expected preliminary PMI.  Owing to a sharp decline in clothing and footwear, the UK's preferred measure of consumer prices, which includes owner-occupied housing costs, CPIH slowed to 0.7% from 0.9%.  Economists had anticipated an increase.  The CPI rose 0.1% in February, rather than that 0.5% projected, and follows a 0.2% decline in January.  Gasoline and diesel prices rose, leaving the core rate up 0.9% from a year ago.  It was at 1.4% in January.  Lower prices are probably more noise than signal in the UK, and the BOE has warned to expect an energy-led increase in prices this year.  The base effect also points to upward pressure over the next three months.  Producer output prices rose more than expected, and input prices were in line with forecasts.    The flash PMI manufacturing PMI rose to 57.9 (from 55.1).  This is above last year's high set in December at 57.5.  The service PMI jumped to 56.8 from 49.5.  Last year's high was set in August at 58.8.  The composite stands at 56.6, up from 49.6. 

The euro has steadied in the European morning after falling to almost $1.1810 in late Asian turnover.  Resistance is seen in the $1.1850-$1.1865 area.  The upper end corresponds to the 200-day moving average, which the euro closed below for the first time since last May.   We have suggested that the double top pattern (~$1.1990) projects toward $1.1770.  Sterling sold off hard yesterday (~0.8%), its biggest drop this month.  It is still heavy today, which would be the fifth consecutive losing session.  It fell to $1.3675 before finding a bid, perhaps with the help of the PMI figures.  Initial resistance is seen around $1.3750.  The $1.3800 area, which marked the lower end of this month's range, should be a formidable cap.  We had projected that a break of $1.38 would target the $1.36 area.  


The Deputy Governor of the Bank of Canada announced that the central bank would begin unwinding its emergency liquidity measures.  The short-term financing facility will end in May, while the commercial paper and the provincial and corporate bond programs will expire shortly and not be renewed. These moves raise the prospect that as early as the next meeting on April 21, the Bank of Canada may announce plans to taper its federal government bond-buying, now at C$4 bln a week.  It had reduced the bond purchases from C$5 bln last October.  It owns about 35% of the outstanding federal government bonds.  Governor Macklem warns about a threshold at 50%.  Making some conservative assumptions, the central bank could be approaching it by the end of the summer at the current pace.  Meanwhile, the Deputy Governor estimated that end of the emergency measures would reduce the central bank's balance sheet by around C$100 bln (~17%) by the end of next month.  The Canadian dollar initially rallied on the news, but the greenback's underlying strength proved too strong.  Losing about 0.05% yesterday, the Canadian dollar was modest compared to the other major currencies but the yen, which rose by around 0.2%.  

The US reports February durable goods orders, and a more moderate gain is expected after the 3.4% surge in January.  Core orders, which exclude aircraft and military orders, rose 0.4% in January and are forecast to have risen by 0.5% in February. If the expected decline in core shipments materializes, some Q1 GDP forecasts may be shaved.  Separately, the preliminary PMI is expected to have risen.  More Fed-speak today with Barkin, Williams, Daly, and Evans on tap.  Powell and Yellen are before the Senate Banking Panel today.  Their answers will be the same as yesterday, even if the questions change.   Canada's economic diary is light, while Mexico reports the bi-weekly CPI, which is expected to tick up to 3.9% from 3.68%.  If so, the market may be more confident that the central bank will not ease policy at tomorrow's meeting.  Mexico also reports February unemployment figures today.  It is expected to have slipped to 4.4% from 4.73%.  

The US dollar poked above CAD1.26 for the first time in nearly two weeks.  That met the (61.8%) retracement objective of this month's decline, and sellers were lurking that sent the greenback down toward CAD1.2565, where the selling abated.   It probably takes a move back below CAD1.2510-CAD1.2520 to improve the technical tone from here.  Meanwhile, the greenback has been capped from the third consecutive session in the MXN20.85-MXN20.88 area.  A push below the MXN20.68 area could see a return to the MXN20.53-MXN20.54 band that has offered support in recent days.  


Dollar Gains Initially Extended, but Now Awaits US Leadership Dollar Gains Initially Extended, but Now Awaits US Leadership Reviewed by Marc Chandler on March 24, 2021 Rating: 5
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