by Marc Chandler
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Overview: The US dollar is trading mostly quietly in narrow ranges against the G10 currencies ahead of the ECB's President Lagarde's press conference at the conclusion of the policy meeting and the first estimate of Q4 US GDP. With elevated price pressures, Norway's central bank left rates steady and reiterated its signal that rates will remain high for some time, and this has lifted the krone by about 0.5% to leader the major currencies. Most of the emerging market currencies are a little firmer, but not the Mexican peso or Chinese yuan, which are a little softer today. The Turkish lira is also slightly heavier ahead of its central bank's decision, which is expected to be a small rate hike.
Chinese equities extended yesterday's recovery as officials use formal and informal mechanisms to support the market. Most of the large regional markets rose, including Japan, South Korea, Taiwan, and Australia. India and most of the smaller markets moved lower. After rallying almost 1.2% yesterday, Europe's Stoxx 600 has off by around 0.25% in late European morning turnover. US index futures are narrowly mixed. The 10-year JGB edged higher, extending the post-BOJ increase to about 0.75%, a new high since mid-December. European benchmark 10-year yields are mostly 2-3 bp higher. The 10-year Treasury yield is a couple of basis points softer near 4.15%. The two-year yield is slightly lower around 4.37%. Gold is pinned in the lower end of yesterday's range. It is holding below $2020, but mostly above $2013. March WTI is extending yesterday's gain and has pushed marginally above $76.30 to reach its best level since early December.
Asia Pacific
The swaps market has almost a 75% chance of a 10 bp hike by the BOJ in April discounted. It was seen around a 20% chance two weeks ago. The prospect of higher rates in Japan propelled Japanese bank shares higher. The Topix bank index surged 4.2% yesterday, capping a six-day rally. It slipped by about 0.4% today. Tomorrow, Japan sees Tokyo's January CPI. Ironically, as rate hike speculation takes hold, Tokyo's core CPI is likely to have slipped below 2% for the first time since May 2022.
The dollar was sold to a six-day low near JPY146.65 in the North American morning. The jump in JGB yield amid a hawkish interpretation of the BOJ meeting helped underpin the yen. That is until the US January preliminary PMI surprised on the upside and the sell-off in US Treasuries. The greenback resurfaced above JPY147.60 in late dealings. On a closing basis, the dollar has held above the (61.8%) retracement (~JPY147.45) of the slide from last year's high set last November. After a broad range yesterday, the dollar is consolidating in a narrow range of roughly JPY147.40 to JPY147.90. The Australian dollar also recorded a six-day high (~$0.6620) but could not sustain the momentum. It sulked back toward $0.6575 but has steadied today in a $0.6565-$0.6590 range. On the upside, it may take a move above $0.6625-$0.6650 to lift the technical tone. Australia has a light economic diary until next week's retail sales and CPI, leaving the Aussie at the mercy of the external factors, include Chinese developments, and the general risk appetite. Meanwhile, the US dollar has come back firmer against the Chinese yuan and is poised to snap a three-day decline. It is trading quietly in a CNY7.1570-CNY7.1725 range. The PBOC set the dollar's reference rate slightly lower at CNY7.1044 (CNY7.1053 yesterday). The average in Bloomberg's survey was CNY7.1649 (CNY7.1788 yesterday). For more than two months, the greenback has largely been confined to a CNY7.10-CNY7.20 trading range.
Europe
As widely expected, Norway's central bank stood pay after surprising many with a quarter-point hike (to 4.50%) last month. Officials signaled rates will be on hold "for some time" and reiterated it today. The market suspects this means no rate cut until at least Q3. Norway's inflation is still elevated. In December, the headline rate was 4.8% year-over-year and the underlying rate (which excludes energy and adjusts for tax changes) was at 5.5%. After losing 3.6% last year, (the second weakest G10 currency last year after the Japanese yen, whose loss was twice as much) the krone is off another 2.3% so far this year. Today, it is the strongest of the G10 currencies, rising by about 0.5% against the dollar and around 0.4% against the euro.
The focus is on the ECB. It is not about what the ECB will do, which is nothing, but how it prepares the market for what lies ahead. The market has pushed out the first rate cut and reduced the magnitude of this year's rate reductions. Last month, the first cut was fully discounted in April, but since the middle of last week, the perceived probability has fallen and now is near 65%. There are about 45 bp of cuts discounted by mid-year. By the end of the year, the swaps market implies around 130 bp of cuts this year, down from nearly 165 at the end of last year. Separately, the eurozone's Q4 23 GDP will be reported next Tuesday and the risk is for the second consecutive quarter of a 0.1% contraction.
The euro was turned back yesterday from a six-day high near $1.0930, which corresponds to a (61.8%) retracement of the losses from the high for the year set on January 11 near $1.10. The 20-day moving average is also near $1.0930 today. The euro came off half a cent to test the $1.0880 area. Ahead of the ECB meeting outcome it is in a 15-tick range on either side of $1.0885. Sterling set an eight-day high as it approached the upper end of its $1.26-$1.28 range. It traded as high as $1.2675. Every time that range's extremes are approached and hold, it reinforces the tactics to assume the range remains intact. There are who try to be nimble and use a tight stop to play for a breakout. Eventually, it will work, and the wager is that the losses incurred while the range holds will be more than made up when the break finally materializes. Yet the longer the range holds the larger the breakout necessary to compensate (or increased position size). Moreover, it is also a set of decision-making rules that can be costly to quit until it is resolved. So far today, it is in trading quietly between about $1.2705 and $1.2740.
America
The US preliminary January PMI was well above expectations. Composite rose to 52.3, the highest since June. It has not been below the 50 boom/bust level since last January. It has not fallen since last August. At the same time, estimate for next week's January nonfarm payroll continue to creep up and the median in Bloomberg's survey is now 168k. This suggests the US economy has begun the year with some momentum. The first estimate of Q4 23 GDP today will likely show that the world's largest economy slowed (from a heady 4.9% in Q3) to 2.0%-2.4% (the median forecast from Bloomberg's survey is the lower end of that range, while the Atlanta Fed's GDP tracker is the upper end of the range). Yet, while the economy slowed, it is still growing above the pace (1.8%) that the Fed estimates is consistent with non-inflationary growth. There was never much speculation about a cut next week, but the futures market has downgraded the chances of a cut in March to about 43%. Late last year, it was seen as a done deal. The futures market has discount about 135 bp of rate cuts this year, down from nearly 170 bp in late December. This still seems aggressive. After the March meeting, there are six remaining meetings. The 135 bp is the equivalent of 5 cuts and about a 40% chance of a sixth quarter-point cut.
We do not think there are any policy implications to the Federal Reserve's announcement yesterday, confirming the end of new loans from the Bank Term Funding Program as of March 11, while lift the rate on new loans immediately. It lifted the rate from one-year overnight index swap rate plus 10 bp to no lower than the interest on reserves when the loan is made. This is aimed at closing the arbitrage window that allowed banks to borrow from the BTFP (cheaper than the discount window) and deposit the funds with the Fed and earn a modest risk-free mark-up. This seemed to have driven the BTFP borrowing to a new high near $162 bln last week.
Unsurprisingly, the Bank of Canada kept its policy rate at 5.0% and expressed caution about the "persistence" of core inflation. The market responded by shaving the odds of a cut in April to about 65% from 75%. But, more dramatically, it boosted the magnitude of this year’s cuts to 95 bp from 85 bp on Tuesday. Bank of Canada Governor Macklem explicitly refused to rule out another hike, but that seems patently unlikely. The central bank cut its forecast for Q4 23 GDP from 0.8% (quarter/quarter annualized) to flat and estimates the economy will expand by 0.5% in the current quarter. The Bank of Canada sees headline inflation (3.4%) in December, remaining around 3% in H1 24 before easing to 2.5% by the end of the year.
The US dollar had slipped to around CAD1.3430 before the outcome of the Bank of Canada meeting and the US PMI. It quickly recovered and reached CAD1.3525 in late turnover. The greenback posted its highest close of the year. The US dollar posted a bullish outside up day by trading on both sides of Tuesday's range and closing above Tuesday's high. It edged slightly closer to last week's high, near CAD1.3540 today before pulling back to about CAD1.3500 in the European morning. Still, we are not convinced that a high is in place. A break of CAD1.3540 would signal a move to CAD1.3600-20. Mexico's higher than expected CPI for the first half of January (even though the core rate continued its uninterrupted fall on a year-over-year basis since the end of January 2023) and the risk-on mood underpinned the peso. The greenback was sold from MXN17.3250 area through yesterday's lows to about MXN17.14. The dollar recovered to about MXN17.25. It is trading quietly so far today in the MXN17.21-MXN17.27 range. We suspect consolidative forces still grip the market and the dollar continues to chop in a higher trading range. Still, a break of Monday's low near MXN17.05 would be a bearish technical development and warn of risk back toward the MXN16.70-80.
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