The ramifications of Russia's
invasion of Ukraine roiled the capital and commodity markets. Kyiv is nearly surrounded. Ukraine officials belated recognize that NATO is not coming to its rescue, and
the EU does not seem in a hurry for it to join either. Ukraine officials
have already conceded NATO membership. There is a small window to avoid a
slaughter in Kyiv, and the market was hopeful ahead of the weekend.
If geopolitical tensions
ease, the focus may shift back to monetary policy. The Federal Reserve, the Bank of
England, and the central bank of Brazil are expected to hike in the week
ahead. America's two-year interest rate premium over Germany has widened
by roughly 30 basis points in the four weeks since the US warning on February 11
that Russia was poised to attack Ukraine. The premium Canada and Australia previously paid over the US for two-year borrowings have swung into a discount. The dollar rose to new
five-year highs against the Japanese yen ahead of the weekend. As we discuss below, the yen is trading more like a carry-play and less like a risk-off haven. The common element here is one is being paid to be long the greenback.
Dollar Index: The Dollar Index jumped to about
99.40 to start the week, its best level since May 2020. It spent most of
last week trending a lower and reached almost 97.70 on March 10. That met
the (38.2%) retracement objective of the DXY rally from the US warning on
February 11. It needs to establish a foothold above 98.80 to signal a
retest of the highs and possibly a new high near 99.75. Recall that the
high from March 2020 was almost 103.00. The momentum indicators are
stretched. The Slow Stochastic has turned lower, and the MACD may be
poised to do the same in the coming days. A break of the 97.15-97.30 area would
sour the near-term technical tone.
Euro: The euro tested $1.08 at the start of last week and set the high for the week in the immediate reaction to news that the ECB was modifying its asset purchases near $1.1120. The gains were reversed as ECB President Lagarde spoke, and it settled below $1.10 and fell further ahead of the weekend. It pushed through the (61.8%) retracement of the week's gains near $1.0925. Below there, the $1.0880 may offer mild support, but the near-term risk extends back to $1.08. The MACD is flatlining but stretched. Slow Stochastic has turned up. Speculators in the futures market have amassed the largest net long euro position since the middle of last year. But the fog of war and the anticipated hike by the Fed on March 16 keeps the euro on the defensive.
Japanese Yen: With the US 10-year yield testing the 2.0% level and disappointing Japanese data underscored the risk of an economic contraction this quarter, the dollar rose above JPY117.00 for the first time in five years. The previous high seen in January and February was JPY116.35. The MACD has only recently turned higher, while the Slow Stochastic has been trending higher since late February. The greenback spent most of the pre-weekend European and US session JPY1116.80-JPY117.35. There is little chart-based resistance ahead of JPY118.00-JPY118.60. The yen's weakness despite the risk-off is notable. The 30-day correlation of changes in the exchange rate and changes in the S&P 500 has fallen to 0.04%. It peaked early this year, a little above 0.6%. On the other hand, the correlation between changes in the exchange rate and changes in the US 10-year yield has doubled from about 0.3% in early February to 0.67% at the end of last week.
British Pound: The outside down day on March 10 and the follow-through selling before the weekend cast bearish light on
sterling. The prospect of a BOE rate hike on March 17 did not deter the bears
from driving sterling to its lowest level since early November 2020, near
$1.3025 ahead of the weekend. The momentum indicators are stretched but
do not appear to have begun turning. A move above $1.3200 is needed
to signal anything important. A quarter-point hike is fully discounted,
and the swaps market recognizes a reasonable chance of a 50 bp hike at the next
meeting on May 5. Note that $1.3165 corresponds to a (38.2%) retracement
objective of sterling's rally from the March 2020 low near $1.14 and the high
set on June 1 last year of almost $1.4250. The next retracement (50%) is
$1.2830.
Canadian Dollar: The US dollar set the high for the
year near CAD1.29 on March 8. With the help of a very strong Canadian jobs
report, the greenback tested the CAD1.27 area ahead of the weekend. The
MACD appears to be curling over, but the Slow Stochastic is still rising. A convincing break of CAD1.2700 sets up a test on the CAD1.2650-CAD1.2660
area. Over the past 30-days, the correlation between the change in the
exchange rate and the S&P 500 is around -0.46%. The correlation
between the change in the exchange rate and oil (April WTI) is about
0.25. The positive correlation is rare. Partly this seems to
reflect the current dynamics where a rally in oil adds to the risk-off that
weighs on the Canadian dollar. Indeed, the correlation between oil and
the S&P 500 is mostly positive, but the rolling 30-day correlation has been negative since early February.
Australian Dollar: The Aussie has had a good ride, but
it is over. Since the end of January, when it briefly dipped below $0.7000
for the first time since July 2020, it rallied 6.8% to peak near $0.7440 on
March 7 before reversing lower. Follow-through selling saw it slide two
cents from the high before bouncing. The bounce, however, faltered near
$0.7365, the (61.8%) retracement of its slump before selling off again ahead of
the weekend. The momentum indicators have turned lower, and a retest of
$0.7240 looks likely, but we suspect the near-term risk extends toward
$0.7200. Australia's February employment data will be reported early on
March 17 in Canberra. Despite the pushback from the central bank, the
futures market has slightly more than 125 bp of tightening priced in with the
first hike fully discounted in July. The US two-year premium over
Australia rose to 44 bp last week, the most on a weekly closing basis since
February 2020.
Mexican Peso: The dollar has risen in eight of
the past ten sessions against the Mexican peso for about a 3.25% gain. Only eastern and central European currencies have done worse in the emerging
market space. Three other Latam currencies have led the emerging market
currencies over the past two weeks, Colombian peso (~2.5%), Brazilian real
(~2%), and Peruvian Sol (~0.9%). The JP Morgan Emerging Market Currency
Index fell for the third consecutive week and is now off 4.6% for the year. Recall that on the eve of Russia's attack, the dollar was at four-month lows
against the peso (March 23 low ~MXN20.1575). On March 8, it reached about
MXN21.4675, its highest level since last December. Then, it pulled back and
found support near MXN20.85, just above the (38.2%) retracement objective near
MXN20.8125. The MACD might be trying to turn over, and the Slow Stochastic is a
little ahead of it in making a turn. Mexico reported higher February
inflation (CPI 7.28% vs. 7.07% in January) and strong January industrial
production (1.0% vs. expectations for a 0.3% decline according to the median
forecast in Bloomberg's survey). The changes in the exchange rate have
become more correlated with the changes in the S&P 500, our proxy for risk
appetites. Consider that when Russia invaded Ukraine, the correlation was
flat. It was at -0.45% at the end of last week.
Chinese Yuan: The dollar bounced a little more than
0.25% against the yuan before the weekend and settled above the 20-day moving average
(~CNY6.3260) for the first time since February 14. It does not sound like
much, but it is the most the dollar has gained in a single day since last
January. Broad-based dollar strength was the main driver. However, Premier Li acknowledged what many assumed, that to reach the 5.5% GDP
target, more economic support is needed. The PBOC set the dollar's reference
rate below where the median in the Blomberg poll had projected ahead of the
weekend, but this may reflect the difficulty in valuing the Russian rouble. The 10-year Chinese bond yield reached new highs for the year last week near 2.87%
but fell sharply ahead of the weekend ~2.79%). It was the biggest decline since last July. While acknowledging that the yuan is a closely managed exchange
rate, making central bank intentions a vital consideration, we suspect
there may be more near-term dollar upside potential. The dollar bottomed on
February 28 near CNY6.3065. In terms of time and price, the patience of
the dollar bears/yuan bulls may be being tested. The spike high from
February 22 (~CNY6.3450) offers the initial resistance, while CNY6.35 is more
important.
Disclaimer
Reviewed by Marc Chandler
on
March 13, 2022
Rating:
