BOJ "Clarifies", while the Greenback Remains Firm

Overview:  Oil, equities, and bonds are stabilizing after yesterday's sell-off.  Crude oil tumbled in the past five sessions, dropping 8-9% before recovering today.  The sharp sell-off in US indices yesterday dragged global markets lower today, but the US futures are trading higher.  Today's sell-off leaves the MSCI Asia Pacific Index little changed on the week.  The 0.4% loss in the Dow Jones Stoxx 600 halves the week's gains, but it still has extended the advance for the third week and six of the past seven.  The US 10-year yield that reached 1.75% yesterday is now closer to 1.68%.  European benchmark yields are off 4-5 bp.  The US yield is up about eight basis points this week, while most European 10-year rates have risen 3-5 bp this week.  The dollar is trading with a firmer bias against most of the majors.  On the week, the Japanese yen (~0.20%) and Swiss franc (0.15%) are the strongest, while the Scandis are the weakest (-0.6%-1.05).  Among emerging markets, the three strongest today, Turkey, Mexico, and South Africa, are also the strongest for the week.  The JP Morgan Emerging Market Currency Index has been alternating between gains and declines since March 11.  Today's 0.3% gain doubles the week's gain and is the second consecutive weekly advance.  Gold's recovery faltered near $1745, and at around $1736 now, it is up about 0.6% for the week.  

Asia Pacific

The Bank of Japan did two things today.  First, BOJ Governor Kuroda claimed to simply be clarifying the central bank's stance when it announced that the 10-year yield can move in a 25 bp band around the zero target.  Until now, the market perceived the range as 20 bp, but Kuroda was adamant that in 2018, he said the 10 bp range would be about doubled, and that has always been 25 bp.  Second, as widely expected, the BOJ adjusted its equity purchases.  The BOJ will only buy ETFs linked to the Topix, not the Nikkei 225.  The Nikkei fell by 1.4% today, while the Topix rose by 0.4%.   Many have been critical of the Nikkei ETF purchases because the price-weighted index, which means that the purchases favor the heavily weighted companies. In 2016 and 2018, the BOJ reduced its Nikkei ETF purchases.  The BOJ also abandoned the JPY6 trillion (~$55 bln) annual target of equity purchases but maintained the JPY12 trillion cap to preserve the capacity to act if needed.  

Japan also reported February CPI figures that were in line with expectations.  The headline rate stands at -0.4%, better than the -0.6% reading in January.  The core rate, which excludes fresh food, is also 0.4% lower than a year ago.  However, when fresh food and energy are excluded, the CPI rose by 0.2% year-over-year, the second consecutive advance.  

The dollar is trading at new lows for the week near JPY108.60.  A base had been carved last week closer to JPY108.35.  However, the intraday momentum indicators are stretched, and the pullback extended in early European turnover looks to provide a low-risk buying opportunity.  The dollar has risen for six of the past seven weeks against the yen and is snapping a four-week advance unless it resurfaces above around JPY109.05.  The Australian dollar has shrugged off a disappointing February retail sales report (-1.1% vs. median forecast in Bloomberg's survey for a 0.6% gain).  It initially extended yesterday's lows to about $0.7725 before rebounding half a cent.  The momentum, however, faded in the European morning.  The Aussie settled last week near $0.7765.  The first face-to-face meeting between Biden administration officials and Chinese officials seemed to deteriorate to an unproductive bickering match, making a Biden-Xi meeting next month (Earth Day?) less likely.  The dollar has been in a sawtooth pattern against the yuan since the middle of last week, alternating between small gains and losses.  The dollar is slightly softer today, but near CNY6.5055, it is less than 0.1% lower on the week.  The PBOC set the dollar's reference rate at 6.5098, nearly exactly what the bank models projected.  


Before meeting with his Chinese counterparts, US Secretary of State Blinken found an opportunity to warn against efforts to complete the Nord Stream 2 pipeline.  There is some harsh, tough talk at the highest levels, and for the first time, Blinken's remarks were ironically addressed to a domestic audience.  US Senator Cruz held up President Biden's nominee for CIA Director and a deputy secretary of state.  Shortly after Blinken's statement and commitment to carrying out the 2019-2020 sanction legislation, Cruz lifted his hold.  Burns and McKeon were confirmed.  Cruz is holding up other State Department nominations (including the number two position) until he says the Biden administration implements that legislation and sanctions more entities as the project enters its last phases. Reports suggest that an insurance company and some other companies providing support vessels and materials could be targets of the sanctions.  

There are good reasons to oppose the pipeline, which is estimated to double the existing capacity for Russian gas.  Every US administration has objected. US sanctions have slowed and likely raised the cost of constructing the pipeline.  The multilateralist, Atlantic-rooted American elite may again be in charge, and that may be the best Europe can hope for, but its efforts to project its power and influence press against Europe's own sense and desire for sovereignty.  The same is true for the Iranian sanctions, which provide powerful incentives for Europe to develop the financial infrastructure that is independent of the US dollar payment system.  

Denmark implemented an adjustment to its negative interest rate policy it announced last week, which has been in effect since 2012.  Previously only the overnight deposit rate was at -0.5%.  Now the key deposit rate will also stand at -0.5%, and its lending rate, which was at -0.05%, will not be at -0.35%.  Recall that the objective of Danish monetary policy is to maintain the peg with the euro.  

The euro appears to have put in a double top near $1.1990.  A break below the $1.1880 area would confirm it and project toward $1.1770.  That target is below the 200-day moving average (~$1.1855) that held earlier this month. There is an option for around 455 mln euros at $1.19 that expires today.  Sterling may have also put in a double top near $1.40. Still, the neckline is at $1.38, and sideways consolidation seems like a more likely near-term scenario.  Sterling has fallen in only three weeks so far this year and two of which were the last week of February and the first week of March.  It settled near $1.3925 last week and is a little above it now.  


A different dynamic may be unfolding.  May WTI dropped nearly 10% in the five-day slide, but the 10-year break-even that had been tracking it was virtually unchanged.  Moreover, as inflation expectation so measured stabilized, nominal US 10-year yields continued to rise.  We want to flag this development because it is worth following.  It could reflect a rise in real rates (r*) or another risk premia element besides inflation.  If this is true, the most likely candidate is supply.  That is what the stimulus means.  Next week the Treasury sells $183 bln in coupons (2-, 5-, and 7-year note) and will raise another $26 bln via a two-year floating-rate note.  It was the relatively poor reception of last month's 7-year auction that unhinged the market briefly.  

The US economic calendar is light today, though the quadruple witching of expirations may inject some additional uncertainty if not volatility into the action.   Canada reports January retail sales, which are expected to slump by around 3% after a 3.4% drop in December.  The report seemed too dated to have much impact. That said, next week's economic diary is nearly empty.   Today's calendar is also light for Mexico.  Next week features the central bank meeting, jobs report, retail sales, and trade figures.  

The US dollar recorded a key upside reversal against the Canadian dollar yesterday by first setting new multiyear lows (~CAD1.2365) and then turning higher and closing above the previous day's high (~CAD1.2495).  However, there has been no follow-through buying, leaving the greenback to consolidate. The US dollar has fallen in eight of the past ten sessions against the Canadian dollar, including today's slight slippage.  However, dollar support near CAD1.2460 held, and another run at the highs in North America still looks likely.   The greenback posted an outside down day against the Mexican peso in the middle of the week.  Follow-through dollar selling has also been limited, but it recording lower highs.  It peaked last week near MXN21.6350, and this week's high was set on Monday around MXN20.8265.  The MXN20.55-MXN20.60 area offers the nearby cap, while the MXN20.28-MXN20.30 area provides support.  The dollar closed by MXN20.6930 last week, and this would be the second consecutive week that it has fallen.  


BOJ "Clarifies", while the Greenback Remains Firm BOJ "Clarifies", while the Greenback Remains Firm Reviewed by Marc Chandler on March 19, 2021 Rating: 5
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