Oil Slide Helps Lift Bonds while the Dollar Recovers

Overview:  The relative calm in the capital markets, outside of the dramatic reaction to the dismissal of Turkey's central bank governor over the weekend, has given way today to greater anxiety.  Nearly all the major bourses are lower.  In the Asia Pacific region, India and New Zealand are exceptions.  Europe's Dow Jones Stoxx 600 has surrendered yesterday's gains and more.  US futures indices are around 0.3% lower.  Bond yields are softer.  The US 10-year yield is about five basis points lower to 1.64%. The yield remains within the range set last Thursday when the low was around 1.62%.  European benchmarks are 1-3 bp lower.   The dollar is stronger against all the major currencies, though the yen is near a two-week high.  The New Zealand dollar is off 1.4%, which is linked to the new housing market curbs.  The Aussie is off around 1.0%.   Most of the liquid and accessible emerging market currencies have lost over 1.0% today.  The Turkish lira is off about 0.5, and the local currency 10-year bond yield is up over 70 bp, and stocks are off 4-5%.  The cost of insurance against default (credit default swap) is extending yesterday's rise.  Gold is consolidating between $1730 and $1742, but more importantly, it remains within the range set last Thursday (~$1719-$1755). The same is true of crude oil.  The May WTI contract has been sold in the European morning but is holding above the low seen last Thursday near $58.30.   

Asia Pacific

The US, UK, EU, and Canada announced sanctions against China yesterday for human right violation.  Although the different parties took their own course, for the first time since 1989, a common front was shown.  Beijing seemed to react angrily and struck out at the EU, announcing sanctions against ten people and a few entities.  This reinforces the sense of China's clumsiness on the international stage.  While a strong rhetorical defense was anticipated, the counter-sanctions seem ill-advised.  Targeting members of the European Parliament may be counter-productive if Beijing still needs to secure its approval for the investment pact reached at the end of last year following years of negotiation.  

Some in the media drew attention to the fact that Russia's Foreign Minister Lavrov visited Beijing yesterday, the first foreign diplomat since the Sino-American talks in Alaska.  It was cited as evidence of the alliance.  Lavrov issued the usual jeremiads about the need to decouple from the dollar and the "Western" payments system.  However, it also illustrates China's isolation.  If not for Russia, does it have another ally?  Iran?  Venezuela?  

Several central banks have recognized that the low-interest rates have begun impacting the housing market.  New Zealand's parliament added it to the central bank's mandate. Today the government took action aimed at deterring speculation in the real estate market.  It removed a tax incentive (phase-out the tax deduction for mortgage interest) that encouraged speculation and will make more land available to boost supply.  Assistance will continue to be provided for first-time buyers and low-income households.  The period of taxing sales of investment property doubled to 10 years. The central bank is considering curbs on interest-only mortgages and introducing debt-income ratios.

The dollar is in about a 20-tick range against the yen below JPY108.90 through the European morning.  It is consolidating inside yesterday's range.  The 10-basis point pullback in the US 10-year yield appears to help stall the dollar's advance against the yen.  The yen is off 2% against the dollar this month and a little more than 5% year-to-date.  Support is seen in the JPY108.30-JPY108.50 area.  The Australian dollar, which had approached $0.7850 last Thursday, is now trading near two-week lows around $0.7675.   The month's low is near $0.7620.  A retest on it seems more likely than a move above $0.7750, the session high.  The US dollar is firmer against the Chinese yuan, but the net movement for the sixth consecutive session is less than 0.1%.  Before last weekend, the dollar made a high near CNY6.5180.  Today's high, a fraction above yesterday's, was CNY6.5130.  The PBOC set the dollar's reference rate at CNY6.5036, slightly softer than expected.  


The UK employment report was weak, even if not as soft as expected, but the market seems to be looking past today's report with the vaccine rollout.  It showed the jobless claims rose by 86.6k, after an almost 21k decline in January.  The ILO measure of unemployment slipped to 5.0% fin January from 5.1%, while economists had expected it to rise to 5.2%.  Employment fell by 147k in the three months through January.   It was a little less than the market expected.  The Johnson government unveiled plans earlier this month that will lead to a full re-opening of the economy by the first day of summer.  Tomorrow, the UK reports February inflation figures.  A small tick-up in the year-over-year rate is expected.  

Scotland's drama over First Minister Sturgeon's handling of charges against her predecessor continues today.  A parliamentary committee found she misled parliament, while a separate investigation found she broke no rules.  Sturgeon is leading the push for another referendum on Scottish independence.  Assuming she survives a confidence vote, which the Tories are threatening, the next key date is the May 6 local UK elections, including Scotland.  Recent polls find a majority now favor independence from the UK. Sturgeon submitted draft legislation yesterday of a plan for the referendum that will eventually force a showdown with the UK over the right to hold another referendum.  

The ECB is making good on its promise to boost its bond-buying.  Figures out yesterday showed that the Eurosystem bought a net 21.1 bln euros of bonds, the most since December.  The net figure includes maturing issues, and today's report, due shortly, provides more detail about the gross purchases.  Note that today the EU sells collective bonds for SURE, the common unemployment fund.  The UK sells a five-year Shariah-compliant bond (Sukuk).

The euro traded on both sides of Friday's ranges yesterday, but the close failed to confirm a reversal.  There has been no follow-through buying today, and the euro has slipped back below $1.1900 in the European morning.  Although we had identified the $1.1880 area as important support and a break, we projected, could signal a move toward $1.1770.  However, the euro found support over the past two sessions near $1.1870. Sterling has broken through the lower end of its month-long range around $1.3800 and recorded a low so far near $1.3770, its lowest level since February 9. The next downside target we have suggested is near $1.3600.   Note that Israel is voting today in the fourth election in two years.  Aggressive intervention by the central bank has weighed on the shekel this year.  The dollar is trading firmly today near ILS3.30.  


The US reports new home sales and Q4 20 current account figures.  Existing home sales were reported yesterday, and the 6.6% decline was more than twice what was anticipated, and the January series was revised lower.  However, the level of activity remains elevated.  The 6.22 mln unit pace compares with the cyclical peak last October of 6.73 mln.  These are the highest figures since the Great Financial Crisis.  In broad strokes, the same may be true of today's new home sales.  They may be softer than January but still are at high levels.  The current account deficit likely deteriorated in Q4 20.  Moreover, with the fiscal stimulus and likely stark growth differentials, the current account deficit is set to worsen this year.  A shortfall of around $188 bln is expected for Q4, but the record of over $200 bln in 2006 and 2007 is likely to be challenged.  

However, today's headline risk is not so much from the data as it is from the six Fed officials speaking today, including Chair Powell (and Treasury Secretary Yellen) before a House panel to discuss the fiscal stimulus.   It seems a reasonable assumption that the Fed's governors and NY Fed President Williams, who speaks today, are among those members that do not see a hike until after 2023.  The regional presidents tend to be more activist, and they are the likely suspects to be more open to an earlier change of stance.  Tapering, for example, is likely to become a greater discussion point in the coming period.  Separately, following yesterday's sale of three and six-month bills, one-year bills, an cash management bill, and a $60 bln sale of two-year notes are on tap.  

The US dollar continues to recover against the Canadian dollar after falling to new three-year lows last week (~CAD1.2365).  It is has risen to CAD1.2585 in the European morning, a nine-day high.  There is a small option (~$90 mln) at CAD1.2610 that expires today.  That area also corresponds to a (61.8%) retracement objective of this month's decline.  Above there, resistance is seen near CAD1.2660 and then CAD1.2700.  The Mexican peso recovered yesterday from the initial markdown, mostly on the back of Turkey's developments, but the demand has fizzled. The US dollar is around 1% higher today to approach yesterday's best level (~MXN20.88).  A break of that area could spur a test on MXN20.96 and then the 200-day moving average (~MNX21.09).  


Oil Slide Helps Lift Bonds while the Dollar Recovers Oil Slide Helps Lift Bonds while the Dollar Recovers Reviewed by Marc Chandler on March 23, 2021 Rating: 5
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