Forex Becalmed with the Greenback Mostly Firmer in Narrow Ranges snbchf.com

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Marc Chandler
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Forex Becalmed with the Greenback Mostly Firmer in Narrow Ranges

(Business trip will interrupt the commentary over the next few days. Check out the March monthly here. Back with the Week Ahead on March 9. May have some comments on X @marcmakingsense.)

Overview: Outside of the Australian and New Zealand dollars, which are off by 0.20%-0.25%, the other G10 currencies are little changed and mostly softer in narrow ranges. A firm Tokyo CPI, mostly on base effects and softer rates helped keep the US dollar below the recent highs against the Japanese yen. Most emerging market currencies are lower, led by the Malaysian ringgit. Meanwhile, the Hungarian forint is stabilizing after extending losses to new record levels against the euro. The new news among US data today is the ISM services. It is expected to have softened, but disappointment could weigh on US rates.

The US 10-year yield is off about 2.5 bp to 4.19%. The 200-day moving average is near 4.17%. It has not closed below it since the January jobs report on February 2. European benchmark yields are 2-3 bp lower and the UK Gilt yield is off slightly more than four basis points ahead of tomorrow's Spring Budget. The US Commerce Department's decision to require AMD to get license to sell chips tailored for China because they are still too powerful may have contributed to the 2.6% slide in mainland shares that trade in Hong Kong, while the CSI 300 itself was up about 0.7%. Tokyo's equities were mixed, while Taiwan and New Zealand saw small gains, while the other larger bourses traded off. Europe's Stoxx 600 is down by 0.3% in late morning dealings. US index futures are also trading with a heavier bias. Meanwhile, gold's surge has continued. It is closing in on the high set last December near $2135.40. It is up $100 an ounce since last Monday. April WTI initially extended yesterday's pullback but found support ahead of $78 and has recovered back to session highs, just inside yesterday's range, of almost $78.90.

Asia Pacific

Tokyo's CPI jumped back in February after both the headline and core slipped below 2% in January to 1.8% (previously revised from 1.6% initially). The headline rose to 2.6% and the core is at 2.5%. The increase appears to be mostly the result of base effects and the subsidies introduced last year for utility prices. This warns of a rise in the national measure due March 22. The measure that excludes fresh food and energy did tick down to 3.1% (from 3.3%). Still, the firmer headline and core prints still point to the BOJ finally exiting the negative interest rate policy probably next month even though the economy is struggling after contracting in the second half of 2023. That said, Q4 23 capex was reported early yesterday that point to an upward revision in Q4 23 GDP. The initial GDP assumed that private investment contracted by 0.3%. That was the third consecutive quarterly decline. Japan's Q4 23 GDP will be revised on March 11. The capex figures were sufficiently strong that the contraction looks likely to be revised away.

In the seemingly ever-expanding definition of national security, the US Commerce Department announced last week it will investigate potential data and cybersecurity risks posted by Chinese EV and internet-connected vehicles. Is it too cynical to suspect the conclusion is already known? China imposes a 40% tariff on US auto imports (15% on vehicle imports from other countries). This encourages US producers to build autos inside China. That is the source of the some 2.1 mln vehicles sold by GM in China last year (that reflected an 8.7% decline and for the first time in more than a decade, reports indicate GM sold more cars in the US than China in 2023). The Trump administration boosted the tariff on Chinese auto imports to 27.5% and that has been maintained by the Biden administration. The EU is moving toward challenging China-made EVs too, but on economic grounds not national security. The Biden administration recognizes that China is using unfair trade practices. Isn't that the jurisdiction of the WTO? There is a sense among many Americans that the WTO has failed. Yet, the facts suggest something different. The US has challenged China before the WTO 20 times since 2004 and won 17 cases. The other three are still pending before the US sabotaged the conflict resolution mechanism by blocking the appointment of appellate judges (Trump and Biden).

The dollar traded firmly against the yen on Monday, assisted by the firmer US rates. However, the greenback held below the JPY150.70-JPY150.85 cap seen last week. The firm Tokyo CPI readings saw the dollar slip to JPY150.35. Nearby support is seen near JPY150.20. The firm Tokyo CPI reading with implications for the national report due next week and may reinforce speculation of a rate hike next month. Note that the final Japanese service and composite PMI were revised a little higher from the preliminary readings. Since session high was recorded in the Asia Pacific session yesterday near $0.6535, it trended gently lows and dipped below $0.6510 in quiet afternoon turnover in North America. Follow-through selling today pushed it below the shelf forged in the second half of last week in the $0.6485-90 area. It has found bids slightly below $0.6480. There is little technically standing in the way of a return to the mid-February lows around $0.6445. That said, the final service and composite PMI were a little higher than the flash estimate, confirming the return over the 50 boom/bust level. China's National People's Congress targeted 5% growth this year, which was largely expected. Although the general government deficit target is 3%, there will be CNY1 trillion in special bond issuance by the central government (on top of the CNY3.9 trillion) in special local government bonds. The PBOC set the dollar's reference rate at CNY7.1027 (CNY7.1020 yesterday). The average projection in Bloomberg's survey was CNY7.1985 (CNY7.1890 on Monday). The fix allows the dollar to trade between about CNY7.9605 and CNY7.244, 8but CNY7.20 has been a formidable cap. It has not been violated in three months.

Europe

There are two highlights from Europe this week. First, Tomorrow's is the UK Spring budget. Chancellor of the Exchequer Hunt is widely expected to deliver some tax relief. The scope looks limited unless there are also some revenue-enhancing measures. The Office for Budget Responsibility projects that the budget deficit for FY24 will narrow to 3% of GDP form 5.0% in FY23. We anticipate a sharp drop in UK inflation in the coming months as the surge in early 2023 drops out of the 12-month comparison. This will likely prove more important from the Bank of England's perspective that some modest net tax relief. The market has the first cut nearly fully discounted for August and almost 2 1/2 quarter-points moves this year. Second is the ECB's meeting Thursday. It is still too early to expect a rate cut. The swaps market has a cut nearly priced in for June (90%). However, a cut in growth and inflation forecasts helps set the stage. In December, the ECB's staff forecast 0.8% growth this year and 2.7% CPI. Growth might be half of that while inflation could be below 2.5%.

The final February PMIs were a slightly firmer than the preliminary estimates. There are three takeaways. First, the eurozone economy appears to be stabilizing but at weak levels. The 49.2 composite reading (unchanged from the flash reading) is the best since last June, even if still below the 50 boom/bust level. Second, while the manufacturing sector is still a drag, with the manufacturing PMI at 46.5 (It has not been above 50 since June 2022), the services PMI is rose above 50 (50.2), for the first time since last July. Third, Italy and Spain are showing greater strength then Germany and France. The February composite PMI were 51.q and 53.9, respectively. The conventional narrative is that before monetary union, the loss of peripheral (and French) competitiveness would be offset by an occasional devaluation. Under monetary union, the argument goes, real wages bear the burden of the adjustment. There is some merit to the argument but note that the competitiveness is also restored by the periphery having lower inflation than Germany. This was the case last year when Italy's harmonized CPI rose 0.5% in December year-over-year, while Germany's was 3.8%. Spain's CPI was 3.3% last December and Portugal's was stood at 1.9%.

Separately, while the British economy contracted in Q3 23 and Q4 23, the composite has been moving higher. It bottomed last September at 48.5. It has steadily recovered and moved above 50 last November and reached 53.0 (rather than 53.3 preliminary estimate) in February, the best since last May, up from 52.9 in January. In recent comments Bank of England Governor Bailey recognized the green shoots. The next key data point from the UK is the employment report on March 12.

Yesterday, the euro barely traded in the pre-weekend range, and remained firm through the North American session. According to Bloomberg's data, the euro traded 1/100 of a cent above last week's high, slightly north of $1.0865. The euro did not trade below $1.0840 in North America. The euro bottomed in mid-February slightly below $1.07. It appears to have taken much energy to lift it this far. It has gone nowhere today and has been trading inside a $1.0840-$1.0860 range today. The intraday momentum is getting overbought in the European morning. Ideas that the UK's Spring Budget will mean a longer delay before the BOE cuts rates appeared to help sterling yesterday. It briefly rose above $1.27, which it was unable to do last week. Recall that in the bigger picture, sterling was in a $1.26-$1.28 trade range from mid-December 2023 through early last month. It, too, is in a narrow range today, roughly $1.2670-$1.2695.

America

The final services and composite PMI and another look at January durable goods orders (alongside factory orders) may pose some headline risk but the market may be most sensitive to the ISM services. Recall that last week, the ISM manufacturing survey was weaker than expected and softer than the manufacturing PMI. This saw yields fall, which pulled the greenback lower. Recall that the January services PMI showed a large jump in prices (64.0 vs. 56.7 in December) and the market will watch this closely. Still, as the focus shifts to the US labor market the services ISM employment (January 50.5 and 43.8 in December) will also be a focus.

Around the time Powell begins to testify tomorrow, the JOLTS report on job openings and the ADP estimate of private sector employment developments will be published. The JOLTS report seems to have lost much of its previous market impact and the ADP is not a good guide to forecasting the government's assessment of the labor market. The BLS estimates the US created 867k jobs in the three months through January. This seems unreasonably strong. However, we note that the median forecast in Bloomberg's survey has edged higher in recent days and now stands at 200k. While it is lower than H2 23 average of 220k a month, it would still be seen as a resilient if not robust number. Note too that the poor weather that may have been responsible for the 0.2 of an hour decline in the average work week (to 34.1 hours) likely snapped back and the 0.6% rise in average hourly earnings is not going to be repeated, allowing the year-over-year rate to return to 4.3%, where it was steadily in Q4 23.

There is practically no chance of a change in interest rates by the Bank of Canada when it meets on Wednesday. The better growth profile (Q3 GDP's contraction was revised to -0.5% from -1.1% and Q4 growth was 1.0%) takes some pressure off the central bank. Canada's labor market is not proving as resilient as the US. The unemployment rate is likely to return to 5.8%, where it was at the end of last year before slipping to 5.7% in January. It was at 5% as recently as last April. Mexico reports February CPI tomorrow. The headline and core rates are expected to continue to moderate. While we favor a cut at the March 21 central bank meeting, our confidence is not strong. However, the next meeting (May 9) could be too close to the election to announce a shift in policy by the fiercely independent central bank.

For the fourth consecutive session, the US dollar is trading inside last Thursday's range (~CAD1.3525-CAD1.3605) against the Canadian dollar. The consolidative price action still looks constructive and even the late rally in the S&P 500 yesterday failed to lend the Canadian dollar much support. The CAD1.3600-25 area offers the nearby cap, and a break of could signal a move toward CAD1.37. The US dollar fell by nearly 0.35% against the Mexican peso yesterday, the most in about 2 1/2 weeks. The greenback settled near session lows, around MXN16.9560, its lowest level since mid-January. It eased to about MXN19.9525 in early Asia Pacific turnover before recovering to about MXN16.98. The low for the year was recorded on January 8 near MXN16.7850. In the futures market as of the reporting week ending February 27, the gross long speculative position slipped for the second consecutive week, but at 93.8k contracts, it is among the largest in nearly four years (MXN500k per contract or ~$29.500). The gross longs at 146k are the most since last March, while the gross shorts are up about 8k contracts since the end of last year to 52.3k. The downtrend line we are tracking comes in near MXN17.06 today.

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About 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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