tag:blogger.com,1999:blog-12727796862523299932024-03-18T16:17:03.230-04:00Marc to MarketMaking Sense of Global Capital Marketsmagonomicshttp://www.blogger.com/profile/13268233913257509729noreply@blogger.comBlogger901312tag:blogger.com,1999:blog-1272779686252329993.post-22042433106345473702024-03-18T06:10:00.001-04:002024-03-18T06:10:00.141-04:00Heightened Speculation of a BOJ Move Tomorrow did not Stop the Nikkei from Rallying or Yen from Slipping<div class="separator" style="clear: both;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg4_tuytfzCtU75Xyp7fuxPXJF_OxLifeNoEqOHDctw6AnABJ4jRCcWm890njRvQrNKVkOjv2lRN5C6P8NothRKbZMmGRs9VSurhbVPAdG3XYQj_WezMtzl1cMirO4aJz_it1jTiKTsE66JLCuxTyGBERLqEWFuhQl7UR2QdwUd5BbcVfgTejcyAEUDunjR/s807/Monday.png" style="clear: left; display: block; float: left; padding: 1em 0px; text-align: center;"><img alt="" border="0" data-original-height="782" data-original-width="807" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg4_tuytfzCtU75Xyp7fuxPXJF_OxLifeNoEqOHDctw6AnABJ4jRCcWm890njRvQrNKVkOjv2lRN5C6P8NothRKbZMmGRs9VSurhbVPAdG3XYQj_WezMtzl1cMirO4aJz_it1jTiKTsE66JLCuxTyGBERLqEWFuhQl7UR2QdwUd5BbcVfgTejcyAEUDunjR/s400/Monday.png" width="400" /></a></div><p style="text-align: justify;"><b><span style="font-size: 13.5pt;">Overview: </span></b><span style="font-size: 13.5pt;">The US dollar is trading with a mostly
softer bias against the G10 currencies. The notable exceptions are the Japanese
yen and Swiss franc. Ironically, speculation of a Bank of Japan rate hike
appears to have increased, while there is a risk that the Swiss National Bank
cuts rates this week. The Norwegian krone is the strongest of the major
currencies. The central bank meets later this week but is widely expected to
stand pat. The continued rise in oil prices may be buoying it. Most emerging
market currencies are softer. <o:p></o:p></span></p><p style="text-align: justify;"><span style="font-size: 13.5pt;">The MSCI Asia Pacific Index
snapped a seven-week advance last week but rebounded today. The Nikkei rallied
nearly 2.2%, its biggest rally in a month. Better industrial production data
from China may have helped the CSI 300 rally nearly 1%. Taiwan's Taiex also
rose 1%. Europe's Stoxx 600 is little changed after falling for the last two sessions. The
US index futures point to a stronger open after faltering at the end of last
week. The 10-year US Treasury yield is virtually unchanged at 4.30%, while
European benchmark yields are mostly slightly firmer in quiet turnover. Gold
slipped to a seven-day low near $2146 but has recovered to return to $2156. Nearby
resistance is seen near $2158 and intraday momentum indicators are stretched.
After rallying nearly 4% last week, May WTI is extend its advance today. It has
reached nearly $81.55, its highest level since last October. Chart resistance
is seen in the $82-$84 area. <o:p></o:p></span></p><p style="text-align: justify;"><b><span style="font-size: 13.5pt;">Asia Pacific</span></b><span style="font-size: 13.5pt;"><o:p></o:p></span></p><p style="text-align: justify;"><b><span style="font-size: 13.5pt;">This week's Bank of Japan
meeting is live in a way it has not been for years. </span></b><span style="font-size: 13.5pt;">A decision will be announced the first
thing tomorrow.<b> </b>There have been several local press reports saying
that the BOJ will in fact hike rates tomorrow and some bank economists have
changed their calls to tomorrow from April. Despite the uncertainty, a few
things seem clearer. First, lifting the target rate from below zero is not the
start of an extended normalization process. The swaps market sees the year-end
target rate around 0.25%. The effective rate is currently less than -0.01%. The
two-year note rose to around 0.20% from zero in mid-January and settled
slightly below there last week. Second, the prospect of a rate hike in Japan
has not deterred Japanese investors from buying foreign bonds. They have bought
slightly more than JPY2 trillion (~$13.5 bln) of foreign bonds as the
speculation of a BOJ hike has increased over the past two weeks. Third, the
upward revision to Q4 capex meant that the world's third-largest economy grew
slightly in Q4 23 rather than contract slightly. However, the economy appears
to be contracting here in Q1. Fourth, Prime Minister Kishida and his cabinet
continue to see weak public support. Talk now is a national election could
follow the LDP leadership contest late this year. <o:p></o:p></span></p><p style="text-align: justify;"><b><span style="font-size: 13.5pt;">Like the eurozone, the
Chinese economy appears to be stabilizing. </span></b><span style="font-size: 13.5pt;">The February data popped, led by a 7% year-to-date,
year-over-year rise in industrial output, compared with the median forecast of
5.2% in Bloomberg's survey Meanwhile, retail sales continues to
rise much quicker than investment (fixed assets, excluding rural areas). Retail
sales rose 5.5%, slightly slower than anticipated while capex rose 4.2% (3.2%
expected). Separately, to argue that Beijing does not allow access to US
platforms such as Google, Facebook, Instagram, and X and therefore in the name
of reciprocity, the US will block access to Chinese platforms is one thing,
though few seem to understand that TikTok is banned in China. Instead, the US
wraps itself in an ever-expanding cloak of national security, and the former
Treasury Secretary who first sought to ban TikTok is now reportedly leading a
team of investors seeking to buy TikTok. The US House of Representatives, in
what may be a rare example of bipartisanship during the election year, passed
the bill handily 352-65 in the middle of last week. Beijing could block the
sale, but it is not clear that the US Senate is prepared to approve the
measure. <o:p></o:p></span></p><p style="text-align: justify;"><b><span style="font-size: 13.5pt;">The outcome of Reserve Bank
of Australia </span></b><span style="font-size: 13.5pt;">will be
known early Tuesday in Australia. That said, there is practically no chance of
a change. The futures market has an 80% chance of a cut in June and the first
cut is not fully discounted until September. For the entire year, the market
has one cut priced in and around an 85% chance of a second cut. Australia
reports the February employment data on Thursday. Poor jobs growth will likely
weigh on the exchange rate. Australia loss 67k full-time positions over the
past six months. The unemployment rate bottomed at 3.4% in 2022 and was at 3.5%
as recently as June 2023. It rose to 4.1% in January. <o:p></o:p></span></p><p style="text-align: justify;"><b><span style="font-size: 13.5pt;">Rising US rates trumped
speculation about the end of the Bank of Japan's negative-interest-rate policy.
</span></b><span style="font-size: 13.5pt;">Last week, the dollar
rose around 1.35% against the Japanese yen, its biggest weekly gain since mid-January.
It stalled ahead of the weekend near JPY149.20, the (61.8%) retracement of the
decline from the February 28 high near JPY150.85. It reached almost JPY149.35
today in Asia Pacific turnover and recorded the low there too near JPY148.90. Consolidation
appears to be the most likely scenario in the hours ahead of the BOJ's
announcement. <b>The Australian dollar fell to six-day lows before the
weekend. </b>It approached $0.6550 to meet the (61.8%) retracement objective of
the rally from the March 5 low near $0.6480. After the low was set, the Aussie
encountered sellers a little above $0.6570 but rose to almost $0.6775 today.
The 20- and 200-day moving averages converge around $0.6560. <b>The dollar rose
to a seven-day high against the Chinese yuan, slightly above CNY7.1980.</b> The
CNY7.20 cap remains intact, as it has since first being tested two months ago.
The PBOC fixed the dollar at CNY7.0943 (CNY7.0975 on Friday) compared the
average in the Bloomberg survey of CNY7.1993 (CNY7.2018 on Friday). Against the
offshore yuan, the dollar also rose to a seven-day high near CNH7.2080. The
high this quarter was in mid-February (~CNH7.2335). <o:p></o:p></span></p><p style="text-align: justify;"><b><span style="font-size: 13.5pt;">Europe</span></b><span style="font-size: 13.5pt;"><o:p></o:p></span></p><p style="text-align: justify;"><b><span style="font-size: 13.5pt;">Three G10 central banks in
Europe meet this week and they all meet on Thursday. </span></b><span style="font-size: 13.5pt;">Norway's Norges Bank and the Bank of
England are widely seen to be standing pat. We suspect that if there is a
surprise could come from the third, the Swiss National Bank. The economy has slowed,
and inflation is the envy of most other countries at 1.2% (EU harmonized
measure) and a 1.1% core rate. A cut would also be defensive on ideas that it
does not meet again until June 20, two weeks after the ECB meets and is not
expected to cut its key rates. If it waits and cuts after the ECB, the risk of
that the franc strengthens.<o:p></o:p></span></p><p style="text-align: justify;"><b><span style="font-size: 13.5pt;">Kissinger once quipped,
"Who do I call when I call Europe?" </span></b><span style="font-size: 13.5pt;"> Despite a European Commission, and
European Central Bank, and a European Parliament there is still more than
kernel of truth in the question. Given the numerous presidents and forums, it
is difficult to know which is key. Now that Sunak has ruled out national
elections with the local elections on May 2, the UK can set a date for the
European Political Community, which includes the EU and a few other countries,
including the UK and Turkey. Meanwhile, at the end of last week the Weimar
Triangle (Germany, France, and Poland) met to discuss Ukraine and show a solid
European front that seemed to be challenged recently by Macron's reluctance to
rule out French troops in Ukraine (in what seemed like a bid to preserve
strategic ambiguity). An agreement was reached for Germany and France to begin
producing weapons in Ukraine. <o:p></o:p></span></p><p style="text-align: justify;"><b><span style="font-size: 13.5pt;">The euro was confined to
about a quarter-of-a-cent below $1.09 before the weekend.</span></b><span style="font-size: 13.5pt;"> It is in a slightly tighter range so
far today. The euro's first weekly pullback in three weeks met the (38.2%)
retracement of its rally from mid-February low slightly below $1.07. It was
confined to a little more than a 15-tick range in North America last Friday. It
is within that range today and is knocking on $1.09 in the European morning. A
move above there may find fresh offers in the $1.0910-20 area. <b>Sterling was
also confined in a narrow range at the end of last week, in a little more than
a third-of-a-cent range above $1.2725. </b>That was a six-day low for sterling
too, and it was set in dull early afternoon dealings in North America. The
$1.2725 level held today but sterling is struggling ahead of $1.2750, and the
intraday momentum indicators have turned lower. Support near $1.2700 could be
tested in North America. <o:p></o:p></span></p><p style="text-align: justify;"><b><span style="font-size: 13.5pt;">America</span></b><span style="font-size: 13.5pt;"><o:p></o:p></span></p><p style="text-align: justify;"><b><span style="font-size: 13.5pt;">This week's FOMC meeting
illustrates a profound shift that has taken place under the Chair Powell's
watch. </span></b><span style="font-size: 13.5pt;">The dot plot has
been elevated from a simple calculation of the different officials' individual
views that was not emphasized by Bernanke or Yellen to a powerful communication
tool. In fact, with the acceptance that there will be not policy change, the
focus is almost exclusively on the dot plot. In particular, the issue is
whether the median dot changes from December when three cuts were thought to be
appropriate. It seems strange to hear the press and other observers talk about
a 0.1% miss on CPI and PPI to be called "hotter" but that reflects
current sentiment. For the first time since last October, the Fed funds futures
are no pricing in at least three rate cuts this year. We are concerned that the
pendulum of market sentiment swings too far in both directions. Pricing in
almost 170 bp of cuts this year, as the market did in mid-January was too much.
We do not think that the data has deviated much from what Fed officials
expected and therefore do not expect the median Fed forecast of 75 bp of cuts
this year to change. It seems clear that the labor market is gradually slowing.
The median dot in December was for the unemployment rate to be at 4.1% at the
end of this year. With a 3.9% rate in February, the median dot looks low. February
retail sales were weaker than expected and have fallen so far here in Q1. Retail
sales account for around half of personal consumption. <o:p></o:p></span></p><p style="text-align: justify;"><b><span style="font-size: 13.5pt;">This week's Canadian data is
likely to tell a similar story as we saw in the US last week. </span></b><span style="font-size: 13.5pt;">Inflation is sticky while demand is
softening. Canada reports February CPI tomorrow. The headline rate may rise
back above 3% from 2.9% in January. The underlying core measures look unchanged,
while January retail sales likely gave back around half of December's 0.9%, and
even more when autos are excluded. There are three Latam central banks that
meet this week. Brazil and Colombia are likely to continue their easing cycles
with another half-point cut. Mexico is a closer call, and the swaps market
looks split, which warns of the risk of sharp price action regardless of
Thursday's decision. We look for the first rate cut, a quarter-point move, to
be delivered. <o:p></o:p></span></p><p style="text-align: justify;">
</p><p style="text-align: justify;"><b><span style="font-size: 13.5pt;">The US dollar reached a new
seven-day high against the Canadian dollar before the weekend slightly above
CAD1.3550. </span></b><span style="font-size: 13.5pt;">It settled
firmly as the risk-off move associated with the second consecutive weekly
decline in the Nasdaq (first back-to-back weekly loss since October). Friday's
high has held so far today. A move above it signals a retest on the CAD1.3600
that provided a cap in late February and earlier this month. The greenback
would need to break below CAD1.3460, last week's low, to be of technical
importance. <b>The US dollar consolidated in its trough against the
Mexican peso. </b>It set the low for the year last Thursday near MXN16.6470. It
has not risen above MXN16.74 since then and tested it earlier today. The dollar
has not closed above its five-day moving average this month, though it has been
frayed on an intraday basis. It comes in now near MXN16.7190. Perhaps, a
settlement above it would be among the first signs of the steep downtrend
losing momentum. The dollar fell last week for the third consecutive week and
the sixth week of the past seven. Meanwhile, note in another fissure in the
BRICS, Brazil has official launched anti-dumping investigations against China,
focusing on industrial goods, including metal sheets, pre-painted steel,
chemicals, and tires. Last year, Brazil had a $51 bln trade surplus with China. <o:p></o:p></span></p><p><br /></p><p><br /></p><p><a href="http://www.marctomarket.com/p/disclaimer_28.html" style="font-family: "inherit", serif; outline: 0px; text-decoration-line: none; transition: all 0.3s ease 0s;" target="_blank"><span face=""Open Sans", sans-serif" style="background: rgb(250, 250, 250); font-size: xx-small; line-height: 10.7px;">Disclaimer</span></a> </p>Marc Chandlerhttp://www.blogger.com/profile/10122307721977050849noreply@blogger.comtag:blogger.com,1999:blog-1272779686252329993.post-23807973311849021862024-03-16T07:15:00.037-04:002024-03-18T09:12:36.454-04:00Week Ahead: Central Banks <div class="separator" style="clear: both;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEizyAGzR0t32P2mBIJ85i60feYngZgrQSe9ATOnjlMwv9OXG6ISBb9teSnBEeoG8aI19PYrVD2oc2XRwPx6Qn2bUEFYPlRIq1u63qf31_qOzBQmi-sO1H-K3mkrRJ1o-OD_2lae4kuu2nAx7_qJqJqiAsXmTQUUzzD9cznUrhK6Uk7Ijtk1nYkynSfvPJpw/s818/central%20banks.png" style="clear: left; display: block; float: left; padding: 1em 0px; text-align: center;"><img alt="" border="0" data-original-height="818" data-original-width="803" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEizyAGzR0t32P2mBIJ85i60feYngZgrQSe9ATOnjlMwv9OXG6ISBb9teSnBEeoG8aI19PYrVD2oc2XRwPx6Qn2bUEFYPlRIq1u63qf31_qOzBQmi-sO1H-K3mkrRJ1o-OD_2lae4kuu2nAx7_qJqJqiAsXmTQUUzzD9cznUrhK6Uk7Ijtk1nYkynSfvPJpw/s400/central%20banks.png" /></a></div><p style="text-align: justify;"><span style="font-family: "inherit", serif; font-size: 13.5pt;">There has been a dramatic adjustment to US rates. The
two-year yield was near 4.40% before the US employment report on March 8 and it
reached near 4.73% before the weekend. The 25 bp surge is the largest weekly increase
since last May. For the first time in four months, the Fed funds futures strip no longer has at least three rate cuts discounted. The interest rate
adjustment underpinned the dollar, which rose against all the G10 currencies
last week. Like
the US two-year yield, the 10-year yield also rose every day last week, and its 23 bp increase was the most since the last October. </span><span style="font-family: "inherit", serif; font-size: 18px;">The Dollar Index's 0.70% gain was the largest rise in eight weeks, and ended a three-week decline. Rising rates helped lift t</span><span style="font-family: "inherit", serif; font-size: 13.5pt;">he greenback almost 1.4% against the Japanese yen, despite heightened
speculation that the Bank of Japan (finally) will lift its policy rate out of
negative territory (-0.10%). </span></p>
<p style="text-align: justify;"><span style="font-family: "inherit", serif; font-size: 13.5pt;">The
week ahead is dominated by central bank meetings. Most central banks are not
expected to change policy. The Summary of Economic Projections by the Federal
Reserve may be the key, and while we do not expect significant changes, the
risk seems tilted toward reducing the number of cuts (3) it anticipated in
December rather than increasing them. We lean toward the Bank of Japan waiting
until April to adjust rates. The Bank of England, the Reserve Bank of
Australia, and Norway's central bank are likely to stand pat. We continue to
suspect that the risks of a cut by the Swiss National Bank are
under-appreciated. Inflation is low and growth has slowed. For exchange rate
purposes, the SNB may want to cut rates before the ECB. Among emerging market
central banks, Czech, Brazil, and Colombia may deliver 50 bp cuts. Mexico's
central bank is a closer call. We lean toward a cut as inflation continues to
moderate and growth has slowed. In addition, we assume that the central bank
wants to make policy less restrictive, and at the same time, given the
approaching national elections, it may want to avoid even the appearance of
politization. To that end, it may be better to change policy in March than at
the next meeting May 9, less than a month before the national election. </span><span style="font-size: 13.5pt;"><o:p></o:p></span></p>
<p style="text-align: justify;"><b><span style="font-family: "inherit", serif; font-size: 13.5pt;">United
States:</span></b><span style="font-family: "inherit", serif; font-size: 13.5pt;"> At the end of last year, the Fed funds futures had a 25 bp
cut fully discounted for this week's FOMC meeting. Even after the January jobs
report and until the day before the January CPI on February 13, the market had
more than an 80% chance of a cut. The market now recognizes the odds are negligible. Fed Chief Powell told Congress earlier this month it its confidence
was getting closer to the point that would allow it to cut, but the market
knows this does not mean this week or even the next meeting on May 1. Indeed,
in recent days, the market has downgraded the chances of a June cut to about 65%, the least since last October. It seems unreasonable to expect
Powell to change the substance of what he told Congress when speaking to the
press following the FOMC meeting. Some observers suggest that President
Biden, who recently said that the Fed would likely cut interest rates shortly
was revealing something new, but he was not. The president was simply echoing
what Powell already said.</span><span style="font-size: 13.5pt;"><o:p></o:p></span></p>
<p style="text-align: justify;"><span style="font-family: "inherit", serif; font-size: 13.5pt;">Another
point that confuses some observers is the idea that the Fed will cut rates
before inflation has reached 2%. This is not a new revelation. This has been
evident in the Summary of Economic Projections for over a year. It seems to
follow logically from the observation that changes in monetary policy impact
with lags. Federal Reserve officials will update the Summary of Economic
Projections. We do not expect major changes from December, even though Powell
has warned that these projections are a snapshot based on current data and
views. Still, quarter-to-quarter, the adjustments tend to be small. In
December, the median Fed forecast was for 1.4% growth this year, down from 1.5%
in September.</span><span style="font-size: 13.5pt;"><o:p></o:p></span></p>
<p style="text-align: justify;"><span style="font-family: "inherit", serif; font-size: 13.5pt;">The
latest monthly Bloomberg survey (from late February) was 2.1%. These economists
expected above 2.5% growth in H1 and about 1.5% growth in H2. The median
forecast from economists was for a 4% unemployment rate, while the median
projection from Fed officials was for 4.1%. The median Fed dot saw both the
headline and core PCE deflator at 2.4% this year. The median from the Bloomberg
survey was close at 2.2% and 2.4% respectively. </span><span style="font-size: 13.5pt;"><o:p></o:p></span></p>
<p style="text-align: justify;"><span style="font-family: "inherit", serif; font-size: 13.5pt;">The
most important dot is the one for the Fed funds rate. In December, the median
dot was consistent with 75 bp in rate cuts this year and 100 bp next year. Some
foreign critics have argued that the Federal Reserve is a slave to the markets,
but several times last year and already once this year, market expectations
have converged with the Fed's: Not the other way around.</span><span style="font-size: 13.5pt;"><o:p></o:p></span></p>
<p style="text-align: justify;"><span style="font-family: "inherit", serif; font-size: 13.5pt;">When
the FOMC meeting concluded in December, with the signal that three rate cuts
would likely be appropriate, the market was pricing in nearly twice as much.
The day before the December CPI was reported on January 13, the Fed funds
futures were pricing in almost 170 bp of cuts. A combination of data and
official comments saw the pendulum of sentiment swing dramatically, and by late
February, the Fed funds futures market had nearly returned to the Fed's
December dot plot indication. However, before the February jobs report on March
8, the underlying bias was reasserting itself. The market had almost 70% of a
fourth cut discounted. After the jobs data, the probability increased to
slightly above 80%. The odds were downgraded every day last week and for the
first time in four months, the market does not have at least three cuts
discounted. The risk is asymmetrical. It is more likely that the median dot is
reduced to two cuts rather than increased to four. </span><span style="font-size: 13.5pt;"><o:p></o:p></span></p>
<p style="text-align: justify;"><span style="font-family: "inherit", serif; font-size: 13.5pt;">The
market is also keen for some guidance on how the Fed is thinking about its
balance sheet. Under "quantitative tightening," the central bank is
not selling assets as some pundits suggest, but rather the Fed is simply not
replacing all the maturing Treasuries and agency bonds. The balance sheet is
shrinking. There seem to be two considerations that many are wrestling with.
First, how much can the balance sheet be reduced without jeopardizing ample
levels of reserves, which is what happened in 2019? Second, reducing the
balance sheet is thought to impart a tightening impulse, though we think the
communication channel may be more important than quantities. Does it make sense
for the Fed to continue to shrink the balance sheet when it begins cutting
rates (easing or making policy less restrictive)?</span><span style="font-size: 13.5pt;"></span><o:p></o:p></p>
<o:p>
<p style="text-align: justify;"><span style="font-family: "inherit", serif; font-size: 13.5pt;">There
are some operational issues that may also draw attention. Federal Reserve Chair
Powell and Governor Waller seem sympathetic to reducing the duration of the
Fed's portfolio. This would entail holding more short-term coupons than
longer-term bonds. Ostensibly, this would maximize flexibility. There is also
some indication that allow the Fed bought mortgage-backed bonds from Fannie Mae
and Freddie Mac, many would prefer a portfolio of only Treasuries. </span><span style="font-size: 13.5pt;"><o:p></o:p></span></p>
<p style="text-align: justify;"><span style="font-family: "inherit", serif; font-size: 13.5pt;">The
Dollar Index looks constructive. The momentum indicators have turned higher. The
trendline off the mid-February and March 1 high starts the new week near
103.70. That area also houses the (50%) retracement of the decline since the
mid-February high and the 200-day moving average. Above there, and the return
to the 104.00-30 area looks likely. </span><span style="font-size: 13.5pt;"><o:p></o:p></span></p>
<p style="text-align: justify;"><b><span style="font-family: "inherit", serif; font-size: 13.5pt;">Japan: </span></b><span style="font-family: "inherit", serif; font-size: 13.5pt;"> The Bank
of Japan meeting concludes on March 19, the day before the FOMC meeting ends.
The market perceives a greater risk of a BOJ hike. It has been encouraged by
comments from a couple of officials, stronger than expected wage growth, strong
wage demands, and firm CPI. We have favored an April move, though the results
of the spring range round would be in hand for the March meeting. It is the
start of the new fiscal year and the government's subsidies for household
energy consumption would end, which would push up measured inflation by
0.4%-0.5%. Also, the BOJ updates its economic forecasts at the April meeting. A
Japanese press report suggested that the BOJ may also end its yield-curve
control policy, which caps the 10-year yield (now 1.00%), but shift the focus to back to a fixed quantity of bonds to be purchased rather than the price (yield). We do not think that
revisions that showed that the Japanese economy growing in Q4 23 rather than
contracting as initially estimate, is not a decisive factor for the BOJ. Moreover, owing in no small measure to the earthquake that struck on January 1, the
Japanese economy is off to a weak start to the year with sharper than expected
declines in industrial production, housing starts, and household
consumption. </span><span style="font-size: 13.5pt;"><o:p></o:p></span></p>
<p style="text-align: justify;"><span style="font-family: "inherit", serif; font-size: 13.5pt;">The
dollar reached six-day highs ahead of the weekend near JPY149.15. This met the
(61.8%) retracement of the dollar's losses since the high in late February near
JPY150.85. The daily momentum indicators have turned up as the greenback rose
for the past four sessions, decisively ending a five-day slide. The exchange rate's
30-day correlation with changes in US 10-year yield near 0.70, the upper end of where it has
been since last June. The correlation of changes in the exchange rate and
Japan's two-year yield is around 0.2. We suspect that if the BOJ does hike the
target rate to zero, the dollar could extend its recovery on "sell the
rumor buy the fact" type of activity. If the BOJ does not move, the dollar
would likely tick higher initially on "disappointment". Yet, if the
BOJ does not move next week, many will see an April as even more likely. </span><span style="font-size: 13.5pt;"><o:p></o:p></span></p>
<p style="text-align: justify;"><b><span style="font-family: "inherit", serif; font-size: 13.5pt;">Eurozone: </span></b><span style="font-family: "inherit", serif; font-size: 13.5pt;"> Quietly
and without fanfare, on March 6, Germany reported a record 27.5 bln euro
January trade surplus. It suggests some upside risk for the aggregate trade
balance that will be reported on March 18. In Q4 23, the eurozone recorded an
average monthly trade surplus of about 13.1 bln euros. That is the highest
quarterly average since Q1 21. The flash March PMI (March 21) will draw
attention, but the market impact may be minimal given the central bank meetings.
Among the central banks that meet, the Swiss National Bank meets on March 21. We
suspect the risk is greater of a cut than the roughly 30% probability that is
priced into the swaps market. The economy is slowing, and the EU harmonized CPI
fell to 1.2% in February from 1.5% in January, and 3.2% in February 2023. At
the end of last year, the Swiss franc traded at eight-year highs against the
euro but has unwound those gains and returned to levels that prevailed last
November. Being the first (G10) to cut rates could weigh on the Swiss franc
more, giving it some cushion, as it were, for when Fed and ECB cut rates. </span><span style="font-size: 13.5pt;"><o:p></o:p></span></p>
<p style="text-align: justify;"><span style="font-family: "inherit", serif; font-size: 13.5pt;">The
euro set a two-month high near $1.0980 on March 8 and recorded a last week's low
slightly below $1.0875 ahead of the weekend. This nicked the uptrend line drawn
off the year's low on February 14 (~$1.0695) and the March 1 low (~$1.08). It
approached the (61.8%) retracement of the rally from the March 1 low seen a
touch below $1.0870, which is also around the (38.2%) of the rally off the
mid-February low. Resistance now is seen in the $1.0910-30 area. </span><span style="font-size: 13.5pt;"><o:p></o:p></span></p>
<p style="text-align: justify;"><b><span style="font-size: 13.5pt;">United Kingdom: </span></b><span style="font-size: 13.5pt;">The UK will report February CPI on March
20, the day before the Bank of England meets. The year-over-year rate is likely to be halved in the coming months from 4.0% in January. The BOE may be data dependent but
regardless of the CPI, or the preliminary March PMI, which will be reported a
few hours before the BOE meeting, it is on hold. The market anticipates the ECB to cut rates before the BOE. The question raised in recent days is whether the BOE will cut before the Fed. The swaps market has about 50% chance of a
June cut. It is fully discounted at the next meeting in August. BOE Governor
Bailey seemed to play down the contraction in H2 23, noting that it was shallow
and that a recovery already has begun. Apparently, the BOE is also
reconsidering its balance sheet strategy. Recently, Deputy Governor Ramsden
suggested that the all the assets bought under QE could be unwound. Meanwhile,
the BOE's staff are getting on average a 4% pay increase (central bank is
forecasting 2% inflation this spring before ending the year near 2.75%), plus a
1% salary top-up, despite the Bailey's previous counsel to British workers not
to ask for large pay increases. It has been the subject of much derision. <o:p></o:p></span></p>
<p style="text-align: justify;"><span style="font-size: 13.5pt;">After its best week of the year
with a 1.6% rally through March 8, sterling had its worst week for the year,
falling by nearly 0.95% last week. It pulled back from an eight-month high near
$1.29 and fell to about $1.2725. The $1.2710 area holds the 20-day moving
average and is the (61.8%) retracement of the rally from the March 1 low
(~$1.2600). The daily momentum indicators have turned lower. A break of $1.27
could spur on a test on $1.2650-60. <o:p></o:p></span></p>
<p style="text-align: justify;"><b><span style="font-size: 13.5pt;">Australia: </span></b><span style="font-size: 13.5pt;"> The Reserve Bank of Australia will
likely standpat at the conclusion of its policy meeting on March 19. The
economy has slowed, and inflation has moderated. However, the RBA has signaled
that it has not strong sense of urgency to reduce rates. The futures market has
almost a 35% chance of cut, but this seems too high. A quarter-point cut is not
fully discounted until September, which seems too long. Bullock, perceived as a
dove, took the helm of the central bank last September and delivered a
quarter-point hike in November. The economy was already slowing and on a per
capita basis, the economy contracted by 0.3% in Q423 and was 1% lower than a
year ago. On March 21, Australia reports February employment data. Job growth
has slowed. In the three-months through January, Australia created about 10k
jobs, the least since October 2021. It lost about 102k full-time position in H2
23. Australia's unemployment rate was 3.5% in February 2023 was at 4.1% in
January 2024. <o:p></o:p></span></p>
<p style="text-align: justify;"><span style="font-size: 13.5pt;">After peaking near $0.6670 on
March 8, the Australian dollar was sold to almost $0.6550 before the weekend. This
met the (61.8%) retracement target of the rally from the March 5 low (~$0.6480)
and the (50%) retracement of the rally from the year's low set on February 13
(~$0.6445). The Aussie could bounce if the central bank repeats it tightening
bias but resistance in the $0.6600-25 area may cap it ahead of the FOMC meeting.
<o:p></o:p></span></p>
<p style="text-align: justify;"><b><span style="font-size: 13.5pt;">Canada: </span></b><span style="font-size: 13.5pt;"> Barring a significant surprise,
high-frequency economic data from Canada will likely be <i>lost </i>amid
the central bank meetings. Still, Canada's CPI has fallen, not just moderated.
In the five months through January, Canada's headline CPI has fallen at an
annualized rate of about -0.05%. This overstates the case. The risk is of a small uptick in the headline rate from 2.9% in January. The underlying core measures that the central bank emphasizes may stagnated after edging lower. January retail sales will be
reported on March 22. Retail sales are likely to slow after jumping by 0.9% in
December (0.6% ex-auto). The Bank of Canada's preliminary data suggests a 0.4%
decline. The swaps market has the first cut nearly fully discounted now in July. <o:p></o:p></span></p>
<p style="text-align: justify;"><span style="font-size: 13.5pt;">In a week in which the US
dollar rose against all the G10 currencies, the Canadian dollar fared best,
losing only about 0.40%. Still, the US dollar has fallen in only two weeks in
the first 11 weeks of the year against the Canadian dollar. The greenback remains in the upper end of this
year's range (~CAD1.3230-CAD1.3605). It is not clear if the greenback's upside
correction to the roughly 5.20% sell-off last November and December is over.
Maybe, continued range trading between CAD1.3400 and CAD1.3600 is the most
likely scenario.<o:p></o:p></span></p>
<p style="text-align: justify;"><b><span style="font-size: 13.5pt;">Mexico:</span></b><span style="font-size: 13.5pt;"> Banxico meets on March 21, the day
after the FOMC meeting concludes. The outcome is a close call. On balance, the
strength of the Mexican peso and the central bank's downgrade of this year's
growth (2.8% vs. 3.0%) amid a continued moderation of price pressures give the
central bank latitude to join other Latam central banks in cutting rates. Also,
we have suggested a calendar consideration too. The next central bank meeting
is May 9. For a central bank that fiercely defends its independence, it might
be too close to the national election (June 2) to change policy. Brazil's
central bank meets on March 20. It began to cut rates last August and has
delivered five half-point cuts that brought the Selic Rate to 11.25% (the same
as Mexico's target rate). Colombia's central bank meets on March 22. It has
delivered two quarter-point cuts (to 12.75%) starting at the end of last year. Moderating
inflation and weak growth will allow the central bank to continue to cut rates.
<o:p></o:p></span></p>
<p style="text-align: justify;"><span style="font-size: 13.5pt;">The US dollar fell to new lows
for the year against the Mexican peso near MXN16.6470 last week. The eight-year low set
last July was near MXN16.6260. The low volatility in the foreign exchange
market in general favors carry trade strategies and the Mexican peso remains a
market darling. It is strongest currency in the world here in Q1 24 with about
a 1.6% gain against the US dollar. However, peso's upside momentum stalled in
the last couple of sessions. Prudence warns of the risk of a bout of position
adjustments ahead of the FOMC and Banxico meetings. Initial dollar resistance
may be in the MXN16.80-MXN16.85 area. <o:p></o:p></span></p>
<p style="text-align: justify;"><b><span style="font-size: 13.5pt;">China:</span></b><span style="font-size: 13.5pt;"> Beijing sent an important signal to
the market before the weekend. In a high-profile move, using an important
policy tool, the one-year Medium Term Lending facility, to drain liquidity from
the banking system, for the first time in around 18-months. It does not mean
that there will not be more stimulative measures to boost the chances of
reaching the 5% growth target. Rather, it appears aimed at driving home a point
to Chinese banks, which many observers think are simply agent of the government. The banks are ostensibly using the liquidity to buy government
bonds, driving yields to 20-year lows. To be sure, the drain was small (CNY94
bln or ~$13 bln), but the message could be that the banks better
enthusiastically support the government's stimulative efforts. The drain was
announced shortly before the February lending figures were published. Loan
growth slowed to less than 10% year-over-year for the first time in at least 20
years. Households on balance paid down its medium- and long-term debt (mostly
mortgages). Early Monday, China reports February retail sales, industrial
production, fixed asset investment, and surveyed joblessness. We note that
retail sales (which in the US, account for around half of consumption)
continues to grow faster than investment and industrial output). Often, it
seems that China moves in the direction many of its critics want, but at a
slower pace than they desire. <o:p></o:p></span></p>
<p style="text-align: justify;"><span style="font-size: 13.5pt;">The dollar set new highs for
the week against the Japanese yen in the North American afternoon before the
weekend. It warns that the dollar will continue to challenge the defense of the
CNY7.20-level. The dollar has come close but has not traded there since last
November. To the extent that this is officially encouraged (or facilitated), it
seems tactical rather than strategic. At the same time, officials would be
trying to stop the yuan from weakening. Many critics are more vocal when the
PBOC resists the yuan from strengthening. Our linkage of the yen and yuan is
partly causal, after all the yen is in the basket (CFETS) used by the PBOC.
They also share some common characteristics, like low yields. For example, this
means that the offshore yuan and yen have been attractive funding currencies. Also,
they share a common sensitive. The 30-day correlation between changes in the
offshore yuan and the 10-year US yield is near 0.60, near the highest it has
been in more than six years. <o:p></o:p></span></p>
</o:p><p style="text-align: justify;"><span style="text-align: left;"> </span><span style="font-size: large;"> </span></p><p><a href="http://www.marctomarket.com/p/disclaimer_28.html" style="font-family: "inherit", serif; outline: 0px; text-decoration-line: none; transition: all 0.3s ease 0s;" target="_blank"><span face=""Open Sans", sans-serif" style="background: rgb(250, 250, 250); font-size: xx-small; line-height: 10.7px;">Disclaimer</span></a> </p>Marc Chandlerhttp://www.blogger.com/profile/10122307721977050849noreply@blogger.com