The Dollar Finds Better Footing

Summary

• The large markets in the Asia Pacific region but India and South Korea fell.
• Europe's Dow Jones Stoxx 600 steady, recovering from initial losses.
• The Reserve Bank of Australia took no fresh initiatives, and the 3-year yield targeted at 10 bp is closer to 15 bp.
• US index futures are off around 0.5%. Benchmark yields are firmer, with the US 10-year yield around 1.45%.
• The dollar is also firmer against most emerging market currencies.

Overview

A warning from China's top banking regulator about the frothiness of foreign markets appeared to blunt the knock-on effect of yesterday's largest rise in the S&P 500 since last June (~2.4%) and weighed on global equities. The large markets in the Asia Pacific region but India and South Korea fell. Europe's Dow Jones Stoxx 600 steady, recovering from initial losses. US index futures are off around 0.5%. Benchmark yields are firmer, with the US 10-year yield around 1.45%. The Reserve Bank of Australia took no fresh initiatives, and the 3-year yield targeted at 10 bp is closer to 15 bp. Its 10-year yield rose five basis points to 1.7%. European yields are mostly 2-5 bp higher. The dollar extended the recovery that began last week. The euro traded below $1.20 for the first time since February 5, and sterling, which peaked last week near $1.4240, tested $1.3860. The dollar is also firmer against most emerging market currencies. Gold traded below $1710 for the first time since last June before recovering to almost $1735. Last week's high was near $1816. Oil is lower for the third consecutive session, its longest losing streak in nearly three months ahead of the OPEC+ meeting later this week that is expected to confirm plans to bring more production back online.

Asia Pacific

Guo Shuqing, China's top banking regulator (chair of China Banking and Insurance Regulatory Commission), expressed concern about foreign equity markets' speculative heights and the rapid foreign capital inflows into China. He also cited concern about the domestic property market. At the start of the year, officials took action to cap bank lending to real estate, squeezed the shadow banking sector, and forced peer-to-peer lending to unwind. The MSCI Asia Pacific Index was higher before Guo's remarks. China and Hong Kong share indices fell the most in the region.

The Reserve Bank of Australia defied expectations. Given the pressures on the bond market and in particular that the three-year note yield was above the 10 bp target, many, including ourselves, expected the RBA to boost its bond-buying. Instead, led by Governor Lowe, the RBA did nothing but signaled that it would likely extend its asset purchases. Currently, the effort is slated for A$200 bln through September. This follows yesterday's A$4 bln of purchases, twice the usual amount. At the long end, the RBA says it is not targeting a yield but providing liquidity and ensuring a smooth functioning bond market. The RBA reiterated its pledge not to increase the cash rate target (10 bp) until actual inflation is on a sustainable path within the 2-3% range and does not expect this to happen until 2024. The market does not fully accept the RBA's guidance and appears to be pricing an earlier hike.

Japan reported an unexpected decline in the January unemployment rate to 2.9% but only because the December series was revised to 3.0% from 2.9%. On the other hand, the job-to-applicant ratio jumped to 1.10 from a revised 1.05. It is the highest since last June. Public investment in construction seemed to be partly responsible for the tick-up, but it appears likely that the emergency discouraged people from looking for jobs.

For the fifth consecutive session, the dollar rose above the previous session's high. It is in a narrow range above JPY106.70 and below JPY106.95. It has not been this high since last August. A move above JPY107 would target the JPY107.50 area, but we suspect the initial potential extends toward JPY108.00. It is notable that despite the greenback's gains, implied volatility is softer, and the benchmark three-month measure is lower for the second session and around 6.24% below last week's lows. The Australian dollar is quiet. It is inside yesterday's range, which itself was inside the pre-weekend range. The consolidative tone keeps the Aussie below $0.7780. A move above the $0.7820 area could signal the end of the consolidative phase. Alternatively, a break of $0.7700 would suggest a deeper correction has begun. The dollar's reference rate was set at CNY6.4625 today, a little firmer than expected. The broadly sideways price action that has persisted since the start of the year is now being attributed to the caution ahead of the National People's Congress that starts at the end of the week.

Europe

The preliminary eurozone February CPI was in line with expectations. It rose by 0.2% on the month for an unchanged 0.9% year-over-year pace. The core rate slipped to 1.1%, as projected, from 1.4%. Energy will likely have a greater impact as last spring's precipitous decline falls out of the year-over-year comparisons. The ECB meets next week (March 11), and the risk is that the near-term growth forecasts are reduced. The focus at the meeting will likely be on measuring financial conditions, which seems to be the key to the declaratory policy.

Yesterday's ECB figures indicated under the Pandemic Emergency Purchase Program, it settled only 12 bln euros of purchases. This was below the recent averages and got the chins wagging, but there are two important mitigating factors. First, the purchases are net of redemptions, and last week there was a large redemption (~31 bln euros in France). Second, the strong upward pressure on yields was seen last Thursday and Friday, after the settlement cut off. We suspect ECB President Lagarde will be questioned about its purchase pace at next week's ECB meeting. She will likely emphasize the official commitment to ensuring easy financial conditions and extremely flexible asset purchases. Recall the difference. The Fed is committed to buying $80 bln of Treasuries and $40 bln of Agency MBS a month. The ECB has what it calls an envelope - a sum it grants itself (1.85 trillion euros) that it can use as it sees fit. It can use less, and if more is needed, it can increase it again.

A few other data points garner attention today. First, German data disappointed. February unemployment unexpectedly rose by 9K. Bloomberg's survey found a median expectation for a 10K decline. Instead, the increase was the first since last June. The unemployment rate was unchanged at 6.0%. Separately, Germany reported another sharp decline in retail sales. The January slump of 4.5% contrasts the Bloomberg survey looking for a 0.3% gain after the more than 9% decline in December (revised to -9.1% from -9.6%). The aggregate figure for the eurozone's retail sales is due Thursday and was expected to have fallen by 1.4% after a 2.0% gain in December. It seems clear the risks are on the downside. The UK's Nationwide reported a stronger jump in house prices than expected. The 6.9% year-over-year increase was more than the 5.6% projected. It is the seventh increase in the year-over-year rate in the past eight months.

The euro was pushed below $1.20 as the European session began. The dip was greeted with fresh buying. Initial resistance is seen in the $1.2050 area, and there are expiring options struck at $1.2065. Last month's low was near $1.1950. Since 1 December 2020, the euro has closed below $1.20 once (February 4). Sterling extended its pullback and traded below its 20-day moving average (~$1.3890) for the first time since February 4. In the European morning, it is recovering from the test on $1.3860. Nearby resistance is around $1.3900 and then $1.3930.

America

The US has a light data schedule today. February auto sales are due, and the poor weather is likely to slow sales from the 16.63 mln seasonally-adjusted annual pace reported in January. However, while slowing auto sales dampen headline retail sales, the real takeaway from the US economy is its strength in Q1, helped by the $900 bln stimulus package approved last December. The US ISM figures were solid and stronger than expected. Output, orders, and employment rose. It appears that estimates for this Friday's employment report are also ticking up toward 200K. The increase in unfilled orders and longer delivery times (both measures are at multi-year highs) reflects the bottlenecks, which may spur short-term price increases but typically is not what makes for sustained inflation. Investors may be sensitive to headline risks emanating from the confirmation of hearings of the SEC head nominee Gensler and Chopra, nominated to head up the Consumer Financial Protection Bureau.

Canada reported December monthly GDP figures, but the interest will be in the Q4 20 figures. Canada was likely the fastest growing economy in the G7 in the last three months of 2020. Bloomberg's survey median forecast is for a 7.3% annualized pace in Q4. The US grew by 4.2%. Although it often reports its job figures the same day as the US, it does not do so this month. Canada's February employment report will be released on March 12. After yesterday's worker remittance figures (a little stronger than expected) and Markit manufacturing PMI (44.2 vs. 43.0 in January), Mexico's calendar is quieter today, with January leading economic indicator and its monthly budget balance. Neither report are typically market movers. Tomorrow's central bank's inflation report may garner more attention ahead of the policy meeting on March 25.

The US dollar is little changed against the Canadian dollar and remains within the pre-weekend range (~CAD1.2590-CAD1.2750). It met sellers in late Asia and early Europe near CAD1.2700. Initial support is seen near yesterday's lows (~CAD1.2640). The greenback remains within the February 25 range against the Mexican peso (~MXN20.37-MXN21.03). The first level of resistance today is near MXN20.80, but MXN21.00 may prove more formidable.

Original Post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

Comments

[Peter Peeters - old]

The increase of German unemployment did not come unexpectedly. Lay-offs are increasing.

[RAH311]

Interesting to read the take from your former colleagues at BBH, who see the dollar weakness as cyclical not structural and to have largely run its course. I think the market can digest much larger US twin deficits than the US is likely to produce under the Biden administration. I know that you don't put much stock into central bank balance sheet size as a driver of fx but it is notable that relative to most other G10 balance sheets in nominal terms the Feds balance sheet has decreased. That third dollar rally may have one final leg to it.

[Marc Chandler]

@RAH311 words like cyclical and structural are slippery here. I continue to believe that the dollar's third big rally since the end of Bretton Woods is over. Specifically, what that means is the euro is unlikely to fall below the 2017 low near $1.0340 or last year's low near $1.0640. It means that sterling's low seen last year near $1.14 will not be revisited. The same is true for the dollar against the yen. Last year's low was near JPY101.50. That said, I use the real broad weighted US dollar as calculated by the Federal Reserve to track the dollar's three rallies. It made a high near 113.70 last year. My argument is that we do not see it again and will likely break below 100 the 4-yr+ low made in 2018.

[RAH311]

@Marc Chandler In the big picture I think we are going to range for quite some time between 1.11-1.31, 1.25-1.50, and 100-125. Once a break of those ranges occurs I still feel it more likely to be on the downside than seeing the EUR sustain 1.31+

[Marc Chandler]

@RAH311 those ranges are wide enough to drive a truck through and is greater than implied vol would suggest and the euro and sterling are near the middle of their ranges.

[Ben Gee]

China worry about too much foreign money coming into China and the property market too hot.
The part of Canada I am in, Alberta, Edmonton, the real estate market is cold and no money is coming in.

[Ben Gee]

We worry about being like Japan, but Japan has an unemployment rate of 2.9%, high for Japan, and more job openings than applicants.
Only is we are as lucky as Japan.

[pdtor]

@Ben Gee

Hi from Ontario. They are lucky, no Trudope as leader. Bad omens, here in the east looks like a majority government. He shells out beer and cigarette money. Vaccines??????
But realestate BOOMING in Toronto. Lining up to buy houses

[Ben Gee]

@pdtor Real estate is booming in Toronto and Vancouver, but not Edmonton. Hopefully oil price is up and may influence Edmonton prices soon.

[Marc Chandler]

@Ben Gee i don't know who we is, Ben. Japan has a shrinking population and its definition of unemployment is not the same as the US, for example. See OECD harmonized measures for better intl comparisons.