Turkey Drags EM Lower while US Yields Soften Ahead of Supply

Overview:  Equities in the Asia Pacific region and Europe found little support from the lower bond yields.  Chinese, Taiwanese, and Australian equities managed to post modest gains.  A fire at a Renesas auto chip facility in Japan weighed on auto shares.  This yet another disruption in chip production which was already estimated to cut global auto production by more than a million vehicles this year. The Dow Jones Stoxx 600 is recouping initial losses.  Real estate and energy are laggards, while information technology and consumer discretionary sectors advance. Nasdaq futures are around 0.5% higher, while the S&P 500 futures are little changed.  The US 10-year yield is off around four basis points to 1.68%, and European yields are 1-3 bp lower, as the ECB's report of last week's buying is awaited, the first since the ECB committed to a "significant increase" in its purchases.   The dollar is mostly softer against the majors.  while the Swiss franc and Japanese yen are the strongest in late morning turnover in Europe with around a 0.2% gain. The euro and sterling are little changed.  The Turkish lira has stabilized and is currently off about 8%.  It had lost more than 15% as the markets initially responded to the dismissal of the central bank governor that hiked rates 200 bp last week.  Other liquid and accessible emerging market currencies, like the Mexican peso, South African rand, and Russian ruble, were dragged lower.  The JP Emerging Market Currency Index is off around 0.8%.  Gold had been flirting with the $1750 area last week and has come back offered today and is straddling the $1730 level in the European morning.  Last week's low was around $1719.30.  After snapping a five-day losing streak ahead of the weekend, May WTI is trading lower again today.  Unlike the past couple of sessions, though, the contract is holding above $60 and is gravitating around $61.

Asia Pacific

As widely expected, China left its loan prime rates unchanged for the 11th month.  The one-year rate remained at 3.85%, and the five-year stayed at 4.65%.  Over the weekend, China appointed two new economists to the central bank's monetary policy committee.  Terms are typically for three years, and this seemed to be the normal rotation.  The PBOC is not an independent central bank, and decisions by the MPC require approval by the State Council.

The dollar slipped to a six-day low against the Japanese yen near JPY108.50.  A band of support extends to around JPY108.35.  The dollar fell against the yen last week, the first decline in five weeks. Today could be the first session in six that the dollar does not trade above JPY109.00.  There is a $605 mln option at JPY109.05 that expires today.   The Australian dollar briefly traded below last week's lows (just below $0.7700) but found support closer to $0.7690.  It recovered but stalled in front of resistance at $0.7740.  Torrential floods in Australia are complicating the vaccine rollout and impacting economic activity.  The US dollar firmed slightly against the Chinese yuan for the third session.  It is the longest advance since January.  Still, the movement should not be exaggerated.  It has settled between CNY6.5040 and CNY6.5090 for the past four sessions and is just a little firmer now.  Net-net, it has not closed more than 0.1% in either direction for the fifth session.  The PBOC's reference rate for the dollar was spot on the projections of the banks Bloomberg surveyed at CNY6.5191.  


After a five-month return toward monetary orthodoxy that saw the key repo rate hiked 200 bp to culminate an 875 bp increase, Turkey's Prime Minister Erdogan has enough.  He fired the third head of the central bank in two years Agbal.  He has been replaced by Kavcioglu, an ally of the Albayrak, Erdogan's son-in-law, and previously served as finance minister.  As an academic and columnist, Kavciogly has been critical of the orthodoxy. The market reacted violently to the developments and marked the lira 15% lower in early trading. Turkey has limited reserves, and its ability to defend the currency is constrained outside of capital controls. Moreover, the lira's plunge is going feed through to inflation and compress domestic demand.  In addition to the possibility of capital controls,  which do not seem imminent, many expect the central bank to unwind some of the recent rate cuts beginning at the April 15 meeting.  Insurance against default (credit default swaps) jumped by more than 50%, the most since 2009.  

The EU is reportedly set to stop exporting vaccines to the UK.  European production facilities in the Netherlands and Belgium have been used to supply several other countries, including the UK. At the same time, the EU itself is denied vaccines so that other contracts can be fulfilled.  The UK has plants as well that produce vaccines but does not allow that production to be used to meet EU orders.  The UK argues that its contracts give it the first call on output from EU and UK facilities.  This dispute is separate from the ongoing tension over Brexit and the UK's unilateral decision to postpone customs checks in Northern Ireland. The EU has taken legal measures.  Separately, the EU is expected to announce sanctions against China later today for human rights violations.  

The euro slipped to a two-week low of almost $1.1870 today but has stabilized in the European morning to hover around $1.1900.  An option for about 380 mln euros at $1.1875 that is set to expire today has likely been hedged away.  There is a larger expiry, but it may be too far away.  The options for a billion euros are struck between $1.1840 and $1.1850.  The 200-day moving average is near $1.1855, and the euro has not traded below the moving average since last May.  We suspect there is potential toward the $1.1770 area if there is a convincing break and close below $1.1880.  Sterling found support at the lower end of its nearly month-long trading range found around $1.3800. After putting in the low in Asia, sterling's high near $1.3875 was set in the European morning.  Sellers were lurking, and a return to the lows in North America seems likely.  


The fact that after some headline-inspired volatility, the Treasury market calmed down ahead of the weekend was seen as confirmation to many that the end of the supplemental leverage ratio (SLR) exemption was not so important after all.  It seems a bit premature to reach any conclusion. The Federal Reserve's figures suggest that the large banks have ample capital (~$1 trillion) to meet the new ratio target (5% against all assets (~$800 bln).  On the one hand, Senators Brown and Warren said the SLR is one of the most important reforms to emerge from the Great Financial Crisis. On the other hand, others argue that the need to include Treasuries and excess reserves was never strong in the first place.  

The Fed says it will propose new changes in the design and calibration of the SLV.  The government is selling $200 bln of securities this week outside of the bill market.  Three and six-month bills are being sold today.  Corporations may sell $35 bln in investment-grade bonds this week too.  It is not just a question of balance sheet capacity but also a business decision if boosting Treasuries is the best use of it. Bank reserves grow as the Fed buys $80 bln of Treasuries and $40 Agency MBS a month.  Anything like a repeat of last month's miserable seven-year note auction this week could threaten to unhinge the market.  If the auctions go well, the implication of the judgment that markets are sufficiently stable and the capital cushion sufficiently robust will be thought through.  Removing the dividend cap?  Begin talking about tapering at the June FOMC meeting, which would reduce the growth of reserves.  

With the quiet period before the FOMC over, Fed-speak goes into overdrive this week.  There is an average of nearly 3 Fed speakers a day this week.  Chair Powell kicks things off at the BIS meeting today and will be followed by Lagarde and Bailey.  Tomorrow, Powell and Yellen are before Congress.  There is no reason to expect any change from Powell, while Yellen may be press on tax plans.  Barkin, Daly, Quarles, and Bowman are also on tap today.  The US also reports February new home sales.  Low inventory and poor weather may have depressed sales.  Bloomberg's survey median forecast calls for a nearly 3% decline in new home sales after a 0.6% gain in January.  Canada has a light calendar this week, but Canada Pacific Railway's $25 bln in stock and cash acquisition of Kansas City Southern is drawing much attention.  It is the first rail network to link Canada, the US, and Mexico.  On Thursday, Mexico reports January retail sales before the central bank meets.  Ideas of a rate cut have faded in recent weeks.  

The US dollar staged a key upside reversal last Thursday against the Canadian dollar and saw some modest follow-through buying ahead of the weekend that carried it to almost CAD1.2550.  It is trading quietly inside the pre-weekend range.  The intraday technicals suggest scope to retest the CAD1.2550 area.  A move above there would initially target CAD1.2600.  The events in Turkey spilled over and caused the dollar to gap higher against the Mexican peso.  The high set before the weekend was around MXN20.55.  Today's low has been a little below MXN20.61. It is trading around MXN20.72 in the European morning, having been up to MXN20.88.  The MXN20.96 area corresponds to the halfway mark of this month's range, and the 200-day moving average is near MXN21.10.  


Turkey Drags EM Lower while US Yields Soften Ahead of Supply Turkey Drags EM Lower while US Yields Soften Ahead of Supply Reviewed by Marc Chandler on March 22, 2021 Rating: 5
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