The Dollar Finds Some Traction, while Bank of Canada Highlights the North American Session

Overview:  The sell-off in US equities yesterday helped drag the Asia Pacific bourses lower today, with the Nikkei leading the way with a 2% drop.  Australia held up among the best among the large regional markets with a 0.5% loss.  The sell-off stopped in Europe, where the Dow Jones Stoxx 600 is up about 0.3% near midday, led by the information technology and health care sectors.  However, the US future indices are sporting small losses.  The US 10-year yield has stabilized near 1.57% after dropping more than four basis points yesterday.  The yield peaked 20 bp higher on March 30 and has fallen in back-to-back weeks for the first time since last September.   European bond yields are mixed, with the core slightly higher and the periphery a little lower.  The greenback is mostly firmer, though the Canadian dollar is resilient ahead of the Bank of Canada meeting outcome.   The euro held the $1.20 level on a test, and although the greenback slipped to its lowest level since early March against the yen (~JPY107.88), it has popped back above JPY108.00.  Emerging market currencies are mostly lower, but the Mexican peso, South African rand, and Chinese yuan resist.  The JP Morgan Emerging Market Currency Index is lower for the second consecutive session.  Gold is little changed near $1780, and oil is consolidating at the lower end of yesterday's wide range and outside down day.  June WTI reached a one-month high near $64.40 yesterday before reversing lower to about $61.50.  Today's high has been around $62.55, but it is struggling to hold above $62 in the European morning.  

Asia Pacific

Japanese shares fell as Tokyo, Osaka, and Hyogo prepare for new formal emergencies as the contagion grows.  In several countries in Europe, the vaccine rollout is accelerating.  The J&J vaccine is being re-introduced.  The Netherlands is looking to ease some restrictions soon.  Even though fatalities in Japan have been lower than in other high-income countries, cases are still rising, and the vaccine rollout is estimated at about 1%.  

Australia's preliminary estimate of last month's retail sales rose by 1.4%, above the 1% median forecast in the Bloomberg survey, and bounced back from the 0.8% decline in February.  The Australian economy is expected to have expanded by about 1% in Q1, driven by strong government spending.  Consumption appears to have been weak in Q1 but is expected to bounce back in Q2.  Separately, New Zealand's Q1 CPI rose by 0.8%, in line with forecasts, and is 1.5% higher year-over-year.  The year-over-year rate will likely accelerate this quarter due to the base effect as the 0.5% drop reported in Q2 20 drops out of comparison.  

South Korean exports for the first 20 days of April underscore the recovery underway.  The headline rate of 45.4% exaggerates the gain, but even when adjusted for the number of working days, the 36% rise year-over-year is impressive.  Autos, mobile communication devices, and petroleum product shipments rose by more than 50%.  Semiconductor exports rose by more than 38%.  Exports to China rose by almost 36%, and shipments to the US rose nearly 40%.  Exports to the EU jumped 63% and a little more than 20% to Japan.  Imports rose by 31.3%.  

The dollar spent more time today below JPY108 but did not test the JPY107.75 area, where an option for around $340 mln is set to expire today.  Solid bids emerged that lifted the dollar to almost JPY108.30 by late in the Asian session before consolidating in the European morning.  The JPY108.40 offers the nearby cap, while yesterday's high was closer to JPY108.55.  The dollar has not risen above the previous session's high since April 9.  The Australian dollar traded to $0.7815 yesterday, its best level in a month, but reversed lower and tumbled a cent.  It made a marginal new five-day low today at $0.7700.  It has stabilized in the European morning, and the $0.7740-area offers resistance.  The Chinese yuan is posting small gains today, but the direction is more notable than the size of the move.  It is the eighth consecutive advance, and it is at its best level since March 18.  It is the longest rally since November 2019.  The dollar fell to CNY6.4925 today.  News that Beijing is considering aiding the beleaguered Huarong bolstered sentiment.  The PBOC's reference rate setting continues to be fairly transparent, which means predictable.  Today, the dollar's reference rate was set at CNY6.5046.  


The March UK inflation report was in line with expectations, but consumer prices are likely to accelerate in a combination of base effect and re-opening bottleneck pressures.  The preferred measure of consumer prices that includes owner-occupied housing costs rose 1% from a year ago (0.7% in February), and the core rate rose to 1.1% (from 0.9%). The rise in clothing and footwear prices was partly blunted by a drop in food prices.  Producer output prices are accelerating and rose a bit faster than expected at 1.9% year-over-year.  However, input prices are rising even faster.  The 5.9% increase in March was well above expectations, and the February series was revised higher (3.3% vs. 2.6%). This gap is suggesting of a squeeze on margins.  Separately, we note that UK house prices are accelerating like in several other countries (Canada, Australia, New Zealand, and the US, e.g.).  The government's house price index rose 8.6% year-over-year in February,  more than anticipated, and the January series was revised to 8% from 7.5%.  

The CDU/CSU competition to find Merkel's successor has been resolved.  The CDU's Laschet edged past the CSU's Soeder.  However, it may prove to be a poisoned chalice.  The CDU/CSU, like its coalition partner, the SPD is no longer capturing the imagination (or hearts).  Both are seeing their public support continue to erode.  The Green's candidate Baerbock is more charismatic and, in the latest polls, is ahead of the CDU/CSU 28%-21%.  A Green-led government would represent a political shakeup in the heart of Europe, which given Germany's role, would likely send reverberation through the EU. 

The buying that lifted the euro for the past two weeks has evaporated ahead of tomorrow's ECB meeting.  Ironically, the ECB is expected to be a bit more optimistic given the vaccine rollout acceleration and the upbeat survey data.  The euro appears to have traced out a bearish shooting star candlestick yesterday, and follow-through selling has seen it test the $1.20 level in the European morning.  Initial support below there is seen near $1.1990.  Below there is the $1.1935 retracement target (38.2%) and the 200-day moving average near $1.1925.  Sterling also reversed yesterday after seeing its best level in over a month (~$1.4010).  It was sold to $1.3910 in Asia and has been confined to a narrow range in the European morning, capped near $1.3950.  The euro is holding support near GBP0.8600, but it looks vulnerable.  It is poised to retest the low seen Monday near GBP0.8590 and move toward our next target near GBP0.8565.


Norway's central bank has already opened the door to a possible hike at the end of this year.  The Bank of Canada is not prepared to hike rates, but it is expected to adjust its forward guidance to prepare the market for reducing its bond purchases.  The central bank has allowed the emergency liquidity provisions to expire, and tapering would be the next logical step.  It is currently buying C$4 bln a week of federal bonds.  It may reduce the buying by a quarter as early as next week.  The central bank can be more confident of stimulus from both the Canadian government, which unveiled plans on Monday for C$101 bln of next policy acts and a budget deficit of C$155 bln or around 6.4% of GDP.  That may be a bit on the high side as the growth is likely to exceed the Bank of Canada's 4% estimate.  The IMF projects 5% growth while the OECD forecasts 4.7% growth.  The BA futures imply Canada's first rate hike in Q3 22.  

Shortly before the Bank of Canada announcement, the March CPI figures will be reported.  Owing to the base effect and bottlenecks, the headline CPI is expected to rise 2.3% above year-ago levels, after a 1.1% rise in February.  A month-over-month increase of 0.5% would match the February increase and puts the Q1 annualized rate near 6.5%.  The central bank puts more stock in the underlying core measures, which are more stable and have been higher than the headline.  However, the median and trimmed core will remain near 2%, the common core is expected to tick up to 1.4% from 1.3%.  

The US and Mexico's economic calendars are light today.  In the US, the focus is on corporate earnings, the Republican alternative to President Biden's jobs program (infrastructure initiative), and next week's FOMC meeting.  The heavy demand for the Fed's reverse repo fans ideas that the rate may be tweaked (and the interest paid on all reserves) in order to alleviate pressure on the fed funds rate.  

Falling oil and equity prices saw the greenback squeeze higher yesterday against the Canadian dollar.  It settled above CAD1.26 for the first time in nearly two weeks.  The US dollar is in about a 15-tick range on either side of CAD1.26 today.   Support is seen near CAD1.2540.  On the top side, the greenback has not been above CAD1.2650 since the first half of March.  The US dollar posted a potential key reversal against the Mexican peso yesterday by making a new low for the move (~MXN19.7850) and then recovering to almost MXN19.9950 and closing well above Monday's high.  There has been no follow-through dollar buying yet today.  Still, initial support is seen around MXN19.90, while a move above MXN20.00 could begin to squeeze some of the late dollar shorts.  For the past three weeks, the dollar has fallen against the peso, the longest losing streak of the year.  


The Dollar Finds Some Traction, while Bank of Canada Highlights the North American Session The Dollar Finds Some Traction, while Bank of Canada Highlights the North American Session Reviewed by Marc Chandler on April 21, 2021 Rating: 5
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