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Dollar Soft but Stretched

Dollar Soft but Stretched

Overview: While bank stress seems to continue to ease, the dollar languishes against most of the major currencies. The Japanese yen is the notable exception. It is off about 1.5% this week. The Dollar Index has given back the gains scored at the end of last week but remains inside the range set last Thursday and Friday (~101.90-102.35). Perhaps the participants are waiting for Friday. In addition to month-, quarter, and fiscal-year ends, it is jammed with important data points: China's PMI, Tokyo's CPI, eurozone's CPI, and US PCE deflator.

Outside of Tokyo, the large equity markets in the Asia Pacific traded with a firmer bias earlier today, led by Australia's 1% gain. Europe's Stoxx 600 is up nearly 1% as well and bank index is up 2.3% to bring this week's recovery to about 7%. US futures are extending yesterday's gains. Europe's benchmark 10-year yields are mostly 2-3 bp lower, while the 10-year Treasury yield is flat near 3.56%. In the foreign exchange market, only the Scandis are struggling to rise against the greenback. However, the intraday momentum indicators are stretched for most of other G10 currencies. Emerging market currencies are higher (Turkey and Thailand are the exceptions), led by central and eastern European currencies today, ahead of the Latam session. Gold is firm but still consolidating inside Tuesday's range (~$1949-$1975). May WTI is trading a little higher but holding below yesterday's high near $74.35. The $74.65 area corresponds to the (61.8%) retracement of the slide since the March 7 high (~$81.05).

Asia Pacific

In terms of tomorrow's data, the market (median forecast in Bloomberg's survey) looks for some softening of China's PMI. Recall that the manufacturing PMI held below 50 in Q4 22 and has been above that threshold in Q1 23. A similar pattern in evident in the non-manufacturing PMI, but it has been stronger than the manufacturing. It has averaged about 55.3 in January and February, while the manufacturing PMI averaged about 50.8.  The composite (output) soared in January to 52.9 from 42.6 in December and rose to 56.4 in February. Of note, construction tends to pick-up in March. On the other hand, the expiration of tax breaks and subsidies for EV purchases weaken demand/consumption. 

Japan's Ministry of Finance reported last week's portfolio flow data. After buying a record amount of Japanese bonds in the week ending March 17 (~JPY4.1 trillion, or around $30 bln), foreign investors sold JPY1.7 trillion last week. Japanese investors continued to deploy assets abroad. They bought nearly 1.2 trillion of foreign bonds after buying the most in three years (JPY3.3 trillion) in the prior week. The large divestment by Japanese investors last year (selling around $180 bln of foreign bonds, and sales of US Treasuries holdings, which the US data suggest fell by about $124 bln and includes valuation changes) was the subject of much speculation and concerns that it was strategic rather than tactical. Yet, this year purchases are running at more than twice the pace than last year's sales. 

Separately, tomorrow Japan is expected to report a steady unemployment rate in February (2.4%) and maybe a slight rise in the job-to-applicant ratio. Tokyo's CPI is expected to have drifted a little lower this month (3.2% vs. 3.4%). However, the emerging challenge is with the ex-fresh food and energy measure, which have risen to a new cyclical high (3.2% from 3.1%). February retail sales are seen edging higher after the January gain of 1.9% was revised to a more modest but still strong 0.8%. Finally, industrial output, which crashed 5.3% in January is expected to have bounced back (~2.7%).

The US dollar recorded its high yesterday in late North American dealings near JPY132.90. This area corresponds to a (38.2%) retracement of the greenback's loss from the nearly JPY138 level approached on March 8 to last week's low, slightly below JPY130.00. In line with its broad movement today, the dollar pulled back to about JPY132.20 but is finding a better bid in the European morning and is pushing above JPY132.60. We suspect the JPY133.00 holds today. The Australian dollar has firmed to a new marginal high for the week (almost $0.6720). Recall that last week, it made a high near $0.6760, just in front of the 200-day moving average (now ~$0.6755). The intraday momentum indicators are overextended by the half-cent run-up from the Asia Pacific low near $0.6660. The US dollar made set a two-week high against the Chinese yuan near CNY6.9065 earlier today but has been sold through yesterday's low (~CNY6.8755). While the close is important for technical analysis for less closely management markets, the greenback looks heavy. The PBOC set the dollar's reference rate today tightly against expectations (CNY6.8886 vs. CNY6.8887).


Ahead of tomorrow's March eurozone preliminary inflation report, Germany and Spain have reported their figures. German states have reported their numbers and it looks consistent with a 0.8% month-over-month increase in the EU-harmonized measure. This will reduce the year-over-year rate to around 7.5% from 9.3%, when it is released shortly. Spain's EU harmonized measure rose a dramatic 1.1% in March, replacing the 3.9% increase March 2022 and allowing the year-over rate to fall to 3.1% from 6.0%. The Bloomberg median forecast was for 3.7%. Germany does not estimate its core rate today, but Spain did, and it slipped to 7.5% from 7.6%, the cyclical high in February. This is the same challenge seen in the aggregate figures tomorrow. 

The EC's consumer and business confidence surveys for March. There was some slippage, but it is not clear if it is related to the recent banking stress, and it may take next month's report to clarify. Consumer confidence was unchanged (-19.2), while economic confidence slipped to 99.3 from 99.6.  Services confidence eased to 9.4 from 9.5.  The biggest erosion was the industrial confidence, which eased to -0.2 from 0.4. 

The euro is trading firmly after setting a new high for the week near $1.0880. Recall that last week, it was turned back twice above rising above $1.09. The intraday momentum indicators were overbought in early European turnover and the session high may be in place. Still, a shelf appears to have been forged around $1.0820. Sterling was bought on the dip below $1.2300, yesterday's low and it traded briefly slightly above yesterday's high (~$1.2360). Here too the intraday momentum indicators are stretched and some backing and filling seems likely. Initial support may be seen in the $1.2320 area.


The US reports weekly jobless claims. The four-week moving average is slightly above 196k and has not been above 200k since mid-January. The March national employment report will be released on April 7, Good Friday. The early call is for around a 240k increase, after a 311k rise in February. Average earnings are seen slowing to a 4.3% pace (from 4.6%) and would match the least since June 2021. A 0.3% increase in March would mean that the annualized pace in Q1 was 3.2%. The US also reports another look at Q4 GDP. It is too historical to have much market influence. Still, the Fed's median forecast issued last week for the US economy to expand by 0.4% this year seems to be including a sharp contraction if the Atlanta Fed GDPNow tracker (3.2%) is close to the money. The median forecast in Bloomberg's survey calls for a 1% increase in Q1, which given its forecast for the year, looks for the economy to stagnate over the next three quarters. 

Colombia and Mexico are expected to raise overnight rates by 25 bp today. That would lift Colombia's rate to 13.0% and Mexico's to 11.25%. The swaps market shows expectations for this to be the last hikes. Colombia's CPI is nearly 13.3% and core rate is slightly below 11%. The March figures are due April 5, and the year-over-year rates are unlikely to change much. The Colombian peso is the world strongest currency this month, rising by about 5.4% this month (followed by the Chilean peso's 4.2% gain). Three of the top four currencies this year are in Latam. In addition to Colombia and Chile, the Mexican peso is edging out the Chilean peso to the top spot, gaining 7.95% (vs.7.2%). The Hungarian forint is also in the top four, appreciating by about 6.5% here in Q1. Mexico's CPI rose by about 7.6% from a year ago in February (and the core was about 8.3%). Inflation in the first half March slowed slightly. Banxico surprised investors by lifting the overnight target rate by 50 bp in February. Previously, many observers were concerned that President AMLO's appointments would erode central bank's independence. This has not proven to be the case. Given the risks of another Fed rate, Banxico is likely to maintain some flexibility. It is unlikely to confirm that today's hike is the final step.

The US dollar is falling against the Canadian dollar for the fourth consecutive session. At the end of last week, it toyed with the CAD1.38 level and now it is near CAD1.3530, a new low for the month. There is a $500 mln option at CAD1.3513 that expires today. The CAD1.3490 area is the (61.8%) retracement of the greenback's gains from the year's low set in early February (~CAD1.3260). The intraday momentum indicators are stretched but the daily indicators are not oversold. The greenback is edging lower against the Mexican peso and extending is downdraft for the sixth consecutive session. The dollar had peaked at the end of last week near MXN19.2320 and traded to MXN18.05 today. There are options for $650 mln at MXN18.00 that expire today. The low before the banking stress was about MXN17.8980.


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Marc Chandler
He has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.
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