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Summary

  • CNY is at new 11-month lows, but did not even move half of a new band.
  • Russian shares are up today and ruble is steady.
  • Euro area February CPI was revised down.

The Chinese yuan lost about 0.45% in the immediate aftermath of the decision to double the band it trades against the dollar to 2%. The PBOC's reference rate (FIX) was set at CNY6.1321 compared with CNY6.1346 before the weekend. The yuan proceeded to weaken by almost 0.8% from the fix and now is near eleven month lows.

Despite the widening of the band, the yuan did not even fully explore the previous band. In addition, implied volatility appears to have eased today, after an initial spike, though indicative spreads between bid and offer are wide.

China's shares advanced, with the Shanghai Composite Index rising 1%, recouping part of last week's 2.6% drop. Local press reports emphasized the urbanization reforms and related industries did well, such as building materials, property developers and automakers.

Separately, there is much talk about China's Alibaba (ABABA) choosing the US over Hong Kong to launch its IPO. It is expected to be one of the largest IPOs, rivaling Visa's (NYSE:V) $18 bln offering and Facebook's (NASDAQ:FB) $16 bln deal. At the same time, some investors are looking at Alibaba's outsider owners, such as Yahoo (NASDAQ:YHOO) and Softbank (OTCPK:SFTBY) as potential beneficiaries of a successful IPO. Before the weekend, China's Weibo also filed papers for an April offering in the US. Alibaba has an 18% stake in Weibo according to press reports.

The market also took the Crimean referendum in stride. The US and Europe will shortly announce sanctions. That seems certain. What is not clear is how Russia will respond. There are some who think that Putin is already offering a pretense to occupy east Ukraine. The Russian ruble is flat, and Russia's MICEX is up almost 2%. The Ukrainian hryvnia is off nearly 1.2%, making it apparently the weakest currency on the day.

Brent and West Texas Intermediate crude oil prices are lower. Gold initially rallied, but has since reversed and is off by about 0.25%. In the foreign exchange market, the yen and Swiss, which often are supported in intense periods, are trading with a heavier bias today.

Outside of the Russia/Ukraine story, there were two developments to note. First, the euro area February CPI was revised to 0.7% (year-over-year) from 0.8% of the preliminary estimate. The euro slipped slower on the news as it would appear to increase the chances of a change in the ECB's stance at the early April meeting.

ECB President Draghi did emphasize last week that the euro is becoming a more important factor in setting policy insofar as its strength adds to the deflation risks and slows growth. The euro's lows for the session were recorded in early European activity (late Asia) near $1.3880. It is trading comfortably within last Friday's range, which itself was within last Thursday's range, which marks the near-term range (~$1.3850-$1.3970).

Second, merger and acquisition activity in the telecom space continues. Reports indicate that Vodafone (NASDAQ:VOD) will purchase Spain's Ono for about 7 bln euros with cash and existing bank facilities. Vodafone's shares rose almost 1%. Overall the FTSE 100 advanced about 0.5% to try to end the six-day fall that saw it drop 2.8% last week, the most in nine months. Builders were among the strongest sectors following Rightmove's house price index rose 1.6% in March to a new all-time high (GBP256k).

The dollar-bloc is firm. The Australian dollar may have begun the move as a large domestic bank gave up its forecast for another rate cut. The minutes from this month's RBA meeting are due tomorrow and are seen to be reinforcing the steady course. Indicative prices from the OIS market suggest about 12 bp of tightening is priced in over the next 12 months, which is essentially the same as a 50% chance of a 25 bp hike. Last week's high was set just above $0.9100. The week before that the Aussie recorded a high a little above $0.9130. These are the immediate targets.

A soft Canadian CPI report at the end of the week, which we think will underscore that the Bank of Canada is the most dovish of the dollar-bloc central banks, and likely weigh on the Canadian dollar. Immediately though the Canadian dollar is bid. The US dollar is testing last week's low near CAD1.1040, which is just above the retracement objective (CAD1.1030). Additional support is pegged near CAD1.10.

The dollar has built a base near JPY101.20. In the becalmed markets, there is potential toward JPY102.20, but stronger dollar gains may be hard to achieve given the larger geopolitical climate. However, data from the US today could weigh on US Treasuries ahead of tomorrow's start of the FOMC meeting. The March Empire State manufacturing survey and the February industrial production are expected to show improvement from past readings, indicating that the weak economic start of the year was due to transitory developments.

The Empire State survey is expected to rise to 7.0 from 4.48. It is a volatile series, but such a reading would put it above its 3- and 6-month averages. Industrial production is expected to have recouped much of January's 0.3% decline. However, manufacturing itself is expected to recoup a little less than half of the 0.8% decline in January. Lastly, the US TIC data for January is expected to show an inflow of $30 bln of long-term flows after a $46 bln of net sales in December.

Source: CNY Weakens, Market Shrugs Off Crimean Referendum And Geopolitical Tensions