RBA Holds Fire, Sterling Reaches Best Level since last June, and the Dollar Struggles to Find Much Traction

Overview: The jump in oil prices is the newest shock and the May WTI contract is holding above $80 a barrel as it consolidates yesterday's surge. A week ago, it settled near $73.20. Australian and New Zealand bond yields moved lower, partly in catch-up and partly after the RBA stood pat. South Korean bonds also rallied on the back of softer inflation (4.2% vs. 4.8%). But European and US benchmark yields is 2-4 bp higher. The large equity markets in Asia Pacific advanced with the exception of Hong Kong. Europe's Stoxx 600 slipped fractionally yesterday to snap a three-day advance but has recouped it and more today. Its bank share index is up 1.3% today, its sixth gain in seven sessions. US equity futures are also trading with a firmer bias. 

The US dollar is mostly heavier today. Among the G10 currencies, the Australian dollar is the weakest following the RBA's decision, and the Japanese yen softer within yesterday's range. Sterling is the star performer, gaining about 0.8% to reach a new high since last June and is above $1.2500 in the European morning. The Canadian dollar is in the middle of the pack today, but it is extending its gains into the seventh consecutive session. Most emerging market currencies, but the Turkish lira and Russian rouble are also higher against the greenback. Gold is consolidating after recovering nearly $50 an ounce yesterday to $1990. It is trading between $1977 and $1986 today. 

Asia Pacific

The Reserve Bank of Australia joined the Bank of Canada in pausing its monetary tightening cycle. The market understands the pause to be most likely the end of the rate hikes. Some economists thought that with the target rate at 3.60%, the central bank would hike by 15 bp to get to return to the quarter-point increments, but this is more aesthetic judgment bordering on numerology than substance. In today's statement the RBA softened its language to indicate "some further tightening of monetary policy may well be needed."  "Some" and "may" are understood as softening the bias. RBA Governor Lowe speaks tomorrow, and he may sketch in greater detail the central bank's outlook and follow it up with lower growth and inflation forecasts next month. Meanwhile, the Reserve Bank of New Zealand is seen hiking its cash target rate by 25 bp tomorrow to 5.0%. The peak rate in New Zealand is seen at 5.25%.

Bank of Japan data released yesterday showed it bought a record of almost JPY136 trillion (~$1.02 bln) in the fiscal; year that just ended (March 31). This is nearly double its FY21 purchases of ~JPY72.9 trillion. The Bank of Japan's two-day meeting this month concludes on April 28. Given that the excluding fresh food and energy, Japan's CPI is accelerating, and the wage round saw 3.8% average monthly increase, and the spasms spurred by the backing stress appear to have steadied, there is some speculation that at Governor Ueda's first meeting may adjust the Yield-Curve Control. The focus seems to be on shortening the target to the five-year rate. After peaking mid-January near 0.35% it fell back to almost 0.05% in the March swoon. It is trading near 0.13% today. That said, we are still suspicious of a move at the Ueda's first meeting. It seems some preparatory work is needed first. The new economic forecasts on April 28 are part of it, and clear communication would suggest a discussion of sequencing is also important.

The dollar stalled yesterday near JPY133.80, the (50%) retracement of the losses since the March 8 (~JPY137.90) and reversed lower and closed below the pre-weekend low. The bearish outside down day did not see any follow-through selling. Instead, the greenback recovered to almost JPY133.00. A move above yesterday's high, which would likely coincide with higher US yields, would target the JPY135 area. The Australian dollar posted an outside up day yesterday and closed above the 200-day moving average (~$0.6750) for the first time since late February. Here too, though, there was no follow-through buying. The Aussie has been sold to back to $0.6735 after approaching $0.6800. The $0.6720 area is about the halfway mark of yesterday's rally. Still, the intraday momentum indicators are turning up in the European morning, suggesting some consolidation may be likely in North America. For its part, the New Zealand dollar is in a tight range at the upper end where it has traded since mid-February. It reached $0.6310 earlier today and has not closed above $0.6300 since February 14. The greenback is little changed against the Chinese yuan. It is near session lows below CNY6.8780 in quiet turnover. The PBOC set the dollar's reference rate a bit lower than expected at CNY6.8699. The median forecast in Bloomberg's survey was for CNY6.8720.

Europe

Producer prices in the eurozone fell by 0.5% in February. It is the fourth monthly decline in the five months beginning last October. The year-over-year rate has fallen from 43.5% last August to 13.2%, the lowest in 18-months. The jump in oil prices could jeopardize the trend. However, keep in mind that the June Brent largely recouped the losses since the banking stress spurred demand concerns. From the March 7 high near $86.15, June Brent fell to almost $70 on March 20. Note that settled last year around $84.75. It reached $85.75 today. On the other hand, note that the European benchmark for natural gas (one-month Dutch TFF), which peaked last August at 340 euros set a low a little below 39 euros on March 20 and is trading around 48.7 euros now around a third lower than at the end of 2022.

The German trade balance continues to normalize after the Covid-related distortions. The surplus bottomed last August (the euro coincidentally bottomed the following month) at less than one billion euros. It recorded a 16 bln euro surplus in February, reported earlier today. It matches the January surplus after a small revision, the largest since February 2021. The surplus in February 2022 was 10.7 bln euros. Exports to the US rose 19% in February from a year-ago to 13.1 bln euros. Exports to China were off nearly 12.5% to 7.9 bln euros. The UK is the third largest destination outside of the EU for German exports. They rose by about 6% to 6.2 bln euros. Exports to Turkey, India, Brazil, and Mexico rose sharply. Exports to Russia were about 800 mln euros, a 60% year-over-year drop. Overall, exports rose by 4% after a revised 2.5% gain in January. Imports rose by 4.6% after a revised 1.4% decline in January.

The euro recovered from a five-day low yesterday, slightly below $1.0790 and settled just shy of $1.09. It extended the gains to almost $1.0940 today to reach its best level since early February. Note that there are options for 1.06 bln euros at $1.0950 that expire today. The high for the year was set on February 2 near $1.1035. Initial support is likely around $1.09 now. Sterling closed above $1.2400 yesterday and has been bid to new highs today near $1.2510. This is sterling's best level since last June. The bulk of the gains came in late Asia Pacific turnover and early European activity. The intraday momentum indicators are stretched. We suspect initial support is around $1.2450. The market has all but shrugged off comment from the one of the leading doves at the Bank of England, Tenreyro, who suggested that the BOE may need to cut rates sooner than previously anticipated.

America

At the end of last week, investors learned that US bank commercial and industry loans fell by nearly $30 blin in the weekend ending March 22. It was the largest decline since mid-June 2021 and offsets the gain in the previous three weeks almost completely. This is important because the extent and duration of the tightening of lending will determine the extent it can substitute for Fed tightening, Fed Chair Powell intimated at his recent conference. Yesterday, investors learned that the US manufacturing sector remains challenged. The ISM manufacturing index fell to 46.3, the lowest since May 2020. The details were poor. Most disheartening was the continued weakness in new orders.   It stands at 44.3 compared with 54.3 in March 2022. It and export orders have been below 50 since last August. Employment fell to 46.9 from 49.1.  It was at 55.3 a year ago. Inventories fell to 47.5 from 50.1, the weakest in almost two years.

Today, the JOLTS and factory orders for February are the data highlights today. The number of job openings is expected to have softened but likely remained within the recent range. Investors already know from the preliminary release of durable goods orders that factory orders likely fell for the third month in the past four. Today's reports may pose some headline risk, but they might not add much to what we already know (or think we know). The Atlanta Fed GDPNOW tracker slowed to 1.7% in Q1 from 3.2% on March 24 and 2.5% on March 31.

Mexico's central bank published its foreign exchange survey yesterday. It found a median forecast of MXN19.40 for the end of this year and MXN20.02 for the end of 2024. A recent Bloomberg survey found a markedly different median, but still bullish the dollar, which briefly traded below MXN17.97 yesterday, of MXN19.00 and MXN19.35.

The Canadian dollar is higher for the seventh consecutive session. The greenback was testing the CAD1.38 level as recently as March 24 and now it is testing the CAD1.34 area. The 200-day moving average is near CAD1.3380 and the US dollar has not tested it since last August.  The greenback met resistance in the Asia Pacific session near CAD1.3445. The note of caution may be in order given that the US dollar is trading below its lower Bollinger Band, which is found by CAD1.3430 today. Still, the combination of the increased government spending, higher oil prices, firm S&P 500, and a US two-year yield struggling to sustain gains above the 4.0%-yield mark appear to be spurring a short-covering rally in the Canadian dollar. The US dollar recovered from MXN17.9660 yesterday to reach nearly MXN18.15, but the momentum stalled. It is approaching MXN18.00 in the European morning. The intraday momentum indicators are stretched, and the greenback could bounce again. Mexico reports March CPI figures tomorrow and the more neutral central bank statement after last week's high could prompt some profit-taking it comes in soft.

 

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