War, What's It Good For?

Overview: There is much talk about how the sanctions being imposed on Russia will hasten the demise of the dollar's role in the world economy, but today the dollar rides high.  There is no sign of its abandonment as its safe haven appeal shines.  The dollar-bloc currencies, helped perhaps by the commodity exposure are faring best.  The Canadian dollar is the most resilient and that may be a function of expectations of a rate hike and guidance on the balance sheet later today.  Of note, the euro has been sold to about $1.1060.  Among emerging market currencies, eastern and central European currencies are the weakest. The JP Morgan Emerging Market Currency Index is off for a third day, and the cumulative loss is around 3.5%.  Equities in the Asia Pacific region were lower, snapping a three-day advance.  South Korea and Australia were the exceptions.  Europe's Stoxx 600 is recovering from early losses. US futures are firmer. The US 10-year yield is slightly firmer at 1.74%, while European benchmark yields are mostly 3-5 bp higher.  Italy is an exception, and the bonds are under greater pressure.  The 10-year yield is up almost 14 bp.  Gold stalled near $1950 and is offered in Europe below $1930.  April WTI rose to $111.50 before stabilizing.  It finished last week near $91.60.  US natgas is up about 3% after a nearly 4% advance yesterday.  The same can be said for Europe's natgas benchmark. It is matching and repeating yesterday's gains, except there, we are talking about something closer to 26%-28%. Iron ore is up around 1.5%, its third advance this week, while copper is edging higher after yesterday's 3.2% gain.  May wheat is up over 7.0% today to bring this week's gain to over 20% after last week's nearly 7% gain.  

Asia Pacific

Chinese banks are treading carefully and do not appear to be the escape-valve for Russia that was feared.  Chinese business is concerned about payments, and this impacts not only Russia's seaborne oil but also commodity shipments, including coal.  China's criticism of Russia has been ratcheted up.  Foreign Minister Wang said China "deplores the outbreak of conflict between Ukraine and Russia, and yesterday for the first time officials seemed to refer to it as a war.  Russia has been calling it a "special military operation." 

Economic data in the region was not the focus, but for the record, Japan's Q4 capex was stronger than expected rising 4.3% year-over-year, up from 1.2% in Q3.  The median forecast in Bloomberg's survey was for a 2.9% gain.  Corporate profits were also strong, rising 24.7% year-over-year on a 5.7% increase in sales.  In Q3 profits rose by 35.1% on an 8.4% increase in sales.  Australia's Q4 GDP rose 3.4% after the virus-induced 1.9% contraction in Q3. South Korea's January industrial output edged 0.2% higher.  The market had expected a decline in output, though December's 4.3% increase was shaved to a still impressive 3.7% pace. 

The dollar is trading just inside yesterday's JPY114.70-JPY115.30 range against the Japanese yen. The greenback highs were recorded in the European morning, but the intraday momentum indicators are stretched, suggesting additional gains may be hard pressed to secure. Resistance is seen in the JPY115.40-JPY115.50 area.  The Australian dollar is also trading inside yesterday's $0.7240-$0.7290 range.  The positive terms of trade shock appear to have helped make it more resilient in the face of the risk-off moves that have often weighed on it.  With the exception of January 13 on an intraday basis, it has not traded above $0.7300 since mid-November.  The greenback is slightly firmer against the Chinese yuan for the second consecutive session, but it remains a little lower for the week.  It settled near CNY6.3175 last week.  The dollar's reference rate was set at CNY6.3351 compared with median projections (Bloomberg survey) of CNY6.3341. Many suspect that the PBOC is quietly resisting a push below CNY6.30.  


The four large economies in the euro area reported higher February CPI than expected.  It is little wonder that the aggregate surprised on the upside as well.  The month-over-month increase of 0.9% lifted the year-over-year pace to 5.8%.  It was 5.1% in January and the median forecast (Bloomberg survey) was for a 5.6% rate in February.  While food and energy were important culprits, the core rate, at 2.7% was also a little stronger than expected, and follows a 2.3% year-over-year rise in January.  Separately, the Bundesbank, in its annual report, warned that German inflation could average 5% this year.   The ECB meets next week (March 10) and will provide a new economic forecast and is expected to adjust its forward guidance on asset purchases to secure the flexibility to raise rates later this year, if necessary.  

OPEC+ meet today to decide next month's output.  Most observers expect it to maintain its declaratory strategy of boosting output by 400k barrels a day.  However, operationally, it is well appreciated that the actual increase is considerably less.  Moreover, even though some Russian oil is still being bought, it seems to be less than before.  With the energy shock sending oil well above $100 a barrel, and Russia increasingly isolated, a break of the pact, would have significant ramifications.  Separately, there are efforts in the US and UK to ban Russian oil and gas imports completely.  The IEA has coordinated a 60 mln barrel release of strategic reserves.  The US will account for half of it, which is about five days’ worth of Russian imports.  Note that Canada has formally announced a ban, but it has not bought Russian oil for a couple of years, according to reports. 

The euro has been sold to about $1.1060 today.  That represents about a two-cent loss from last week's close.  We have suggested a $1.1000-$1.1050 target but did not imagine this is how it was going to happen.  The buying that had offered a shelf near $1.1100 has been absorbed and that area now offers resistance.  Note that the lower Bollinger Band (two standard deviations below the 20-day moving average) is around $1.1125 today.  The euro closed below it yesterday and remains below it through most of today's session (high is about $1.1135).  Sterling briefly slipped through last week's low (~$1.3280) to make a marginal new low on the year (slightly above $1.3270).  However, it caught a bid in early European turnover and is trying to establish a foothold back above $1.3300. The market continues to price in a 25 bp hike later this month by the Bank of England.   The Bank of England's balance sheet is also expected to shrink by around GBP23 bln this month as it refrains from recycling maturing holdings.  


The Fed funds market has gone from an 80% chance of a 50 bp hike on February 10 to slightly less than a 100% chance of a 25 bp increase.  The market had been divided between 150 bp and 175 bp in hikes this year.  Now the market is pricing in almost 125 bp.   Despite some recent US data and favorable optics, including yesterday's stronger than expected gain in the ISM and new orders, the US economy appears to be slowing sharply.  The Atlanta Fed's GDPNow tracker puts growth at zero this quarter, down from 0.6% in late February.  Our own guesstimate was closer to 1% annualized after the 7% expansion in Q4 21.  

The ADP private sector jobs estimate is the data highlight.  The median forecast (Bloomberg survey) looks for a 375k increase.  Recall that it has seen payrolls fall by 301k in January even though the official report showed a 467k gain.  While ADP estimates diverge in the short run, in the medium and longer-term, they are fairly good.  That warns against using it to forecast the jobs report at the end of the week.  Still, the Federal Reserve is front and center today.  Evans and Bullard get the ball rolling, but Powell's testimony in the House of Representatives is the main event.  His comments are expected to shed some light on the Fed's disposition and balance sheet strategy ahead of the March 16 statement and press conference.  After Powell's testimony, the Fed's Beige Book in preparation for the FOMC meeting will be released.  And then, after the markets close, the Fed's Logan will discuss the Fed's asset purchases. 

The Bank of Canada is widely expected to join the ranks of central banks hiking rates.  A week ago, the swaps market was pricing in almost a 70% chance of a 50 bp hike.  Now the odds of a 25 bp hike are slightly less than 100%.   In addition, the central bank was expected to announce its balance sheet roll-off strategy could begin as soon as next month.  It may seek to preserve some flexibility given the elevated uncertainty.  The market has about a little more than 100 bp of tightening priced in over the next six months.  That is about 25 bp less than was expected before Russia's invasion.  

After briefly trading above the top of its range against the Canadian dollar on Monday (above CAD1.28), the greenback tested the lower-end yesterday in the CAD1.2650-CAD1.2660 area.  It held and the US dollar recovered to around CAD1.2750.  Ahead of the central bank meeting outcome, it is in a CAD1.2700-CAD1.2750 range.  We suspect that the risk-off mood will offset the impact of the rate hike and higher oil and commodity prices.  Look for a retest on the CAD1.2750-CAD1.2800 area.  The greenback is bid against the Mexican peso.  It is approaching last week's high near MXN20.7850. A move above there targets the year's high by MXN20.9150.  We note that with falling output, Mexico is not able to take advantage of the higher oil prices.  The central bank's quarterly inflation report is released today.   The risk is for another 50 bp hike later this month when Banxico meets.  


War, What's It Good For? War, What's It Good For? Reviewed by Marc Chandler on March 02, 2022 Rating: 5
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