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Greenback Losses Extended, but Look for Consolidation in North America

Greenback Losses Extended, but Look for Consolidation in North America

Overview: The softer-than-expected ISM services report caught the market leaning the wrong way. Although interest rates had a muted reaction, the dollar was sold. In fact, the Dollar Index saw its second-biggest loss of the year, falling by about 0.50%. ISM services prices paid increases moderated to their slowest since March 2020. Supplier deliveries improved to their best since 2009, suggesting a supply chain improvement. Still, the Fed funds futures shaved the odds of a June hike to about 61% from 66%, but the market feels more comfortable about a July cut, which once again is fully discounted. No fewer than seven Fed officials speak today, but the general message is the same. The official confidence is not yet sufficient for a near-term rate cut.  Still, the position adjusting continues today and the dollar is trading softer against the G10 currencies but the Japanese yen and Swiss franc.  Most emerging market currencies are also firm.  The momentum indicators are stretched and we think consolidation in North America today ahead of tomorrow's employment report is the most likely scenario. 

Equities are stronger today.  Among the large bourses, only Taiwan fell in the Asia Pacific region. South Korea's Kospi surged by more than 1.2% to lead the advancing markets.  Hong Kong and mainland markets were closed. Europe's Stoxx 600 had edged higher and US index futures 0.25%-0.50% better.  European benchmark 10-year yields are off 2-5 bp, with the periphery outperforming the core. In contrast, the two- and 10-year Treasury yields are slightly firmer.  Gold rose to a new high near $2304 before a bout of profit-taking was seen that pushed it back to around $2290. May WTI is consolidating quietly above $85. 

Asia Pacific

It is difficult to read much into Japanese portfolio flows in the last week of the fiscal year. Still, of note, foreign investors had sold JPY3.9 trillion (~$25.8 bln) of Japanese bonds in the week ending March 22 (BOJ hiked on March 19), nearly offsetting in full the previous three weeks of net purchases. Last week, they bought JPY842 bln back. Japanese investors sold JPY1.66 trillion of foreign bonds last week, the most since October 2022. Foreign investors sold Japanese equities for the third consecutive week.  Japanese investors sold foreign stocks for the fourth week in the past five. Tomorrow, Japan reports February household spending. It looks to have improved. It fell 2.1% in January, and the year-over-year rate was 6.3% lower, the largest slump since February 2021. Last week, Japan reported a 1.5% jump in February retail sales. The median forecast in Bloomberg's survey was for a 0.6% gain (though January was revised to 0.2% from 0.8%).

Australia's service PMI was below 50 from Oct 23-Jan 24 but rose to  54.4 in March (53.5 flash reading and 53.1 in February). It is a similar story with the composite PMI--below the 50 boom/bust level in the four months through January but recovered to 52.1 in February and 53.3 (52.4 flash) in March. That is the highest since April 2022. Separately, Australia reported that building approvals unexpectedly fell in February (-1.9% vs. +3.0% median forecast in Bloomberg's survey), the third consecutive decline.  For the first time since the middle of last December, the futures market is not fully discounting a cut by September.

The dollar could not get much closer to JPY152 than it did yesterday. Bloomberg shows the high of JPY151.95, set after the stronger-than-expected ADP private sector job estimate and before the disappointing ISM services. The greenback briefly traded below JPY151.60 before finding solid bids. It remains within the range set on March 27, essentially JPY151-JPY152. Today's range so far is about JPY151.55 to JPY151.75. Options at JPY151.50 for $1.1 bln expire today. The Australian dollar traded to $0.6570 yesterday after forging support Monday-Tuesday near $0.6480. The short squeeze has been extended today and the Aussie is trading near $0.6600 in Europe. This meets the (61.8%) retracement of the decline since the last US employment report.  The intraday momentum indicators are stretched.  We look for some consolidation in North America.  Chinese markets are closed today and tomorrow for a national holiday. The dollar's setback yesterday eased pressure on the offshore yuan, but it remains outside of the onshore band (CNY6.9530-CNH7.2368). Still, so far this week, the dollar has slipped by about 0.12% net against the offshore yuan. 


The final March PMI for the eurozone contains little new information but does underscore two observations. First, the manufacturing sector remains distressed, but service activity is gradually expanding. The services PMI was above 50 (51.5 vs. 51.1 flash and 50.2 in February) for the second consecutive month, and its best level since June. In the final estimate, the composite PMI rose above 50 for the first time since May 2023. Second, the periphery continues to outperform the core. The German and French composites remain below 50 (at 47.7 and 48.3, respectively), even though both were revised slightly higher from the preliminary estimates. Meanwhile, Italy and Spain's remain above 50 (53.5 and 55.3, respectively). Germany and France's composite PMI readings have not been above 50 since last May-June, while Italy and Spain's composite are at the highest level since then. The same pattern, broadly, will be reflected in tomorrow's report of February retail sales. We already know that rather than grow by 0.4% as the median forecast in Bloomberg's survey suggests, German retail sales collapsed by 1.9%. January's revision to a 0.3% decline rather than 0.4% means little. French consumer spending was flat. Economists expected a 0.2% gain, and January's 0.3% decline was doubled in the revision to a 0.6% fall. Spain reported a 0.5% gain in February retail sales, offsetting January's decline. Italy reports next week. 

The UK's final March services and composite PMI slipped slightly from the preliminary estimates, but continue providing support for ideas that after contracting in H2 23, the British economy is expanding again. After holding below 50 in August through October last year, the composite PMI has been above the boom/bust threshold since last November. This year it has steady 52.8-53.0. Recall that earlier this week the final manufacturing PMI rose above 50 for the first time since July 2022. The final reading confirmed, however, that the services PMI slipped for the second consecutive month and at 53.1 is a little lower from than last December. 

The euro rose slightly more than 0.50% against the US dollar. It was the euro's best day so far this year. Although the magnitude of the bounce was surprising, it lends credence to our sense that the developments in the US rather than Europe are driving the exchange rate.  Some of the buying may be related to the nearly 3 bln euros in options that expire today in the $1.0790-$1.0800 area. The euro's gains have been extended to nearly $1.0865 today as the recovery from $1.0725 on Tuesday, its lowest level since mid-February continues. The $1.0860 area houses retracement targets and the 20-day moving average. The next technical target may be near $1.0885, but  with the intraday momentum indicators stretched, the euro may consolidate in North America. Sterling rallied from the $1.2540 area seen Monday and Tuesday to $1.2655 yesterday and $1.2670 today. There is a band of resistance from around $1.2675 to about $1.2700, where the 20-day moving average is found. Yesterday's settlement was its highest in nine sessions. Recall that sterling was largely confined to a $1.26-$1.28 trading range from mid-December 2023 to early February this year. That range has been extended by about a cent in both directions. In early February, the US two-year yield was around a 12 bp discount to the UK 2-year yield, but is now almost a 50 bp premium, the most in a year.- Lastly, the softer than expected Swiss CPI (1.1% vs 1.4% expected after 1.2% in February has dragged the franc lower against the euro.  The euro is near CHF0.9850, its highest level since last May. 


The focus is on tomorrow's US employment report. And it overshadows today's weekly jobless claims. Weekly claims were practically flat in the week that the nonfarm payrolls and household surveys were conducted. The four-week moving average through March 22 was 211k compared with 227k for the same period a year ago and about 206k at the end of last year. The US February trade balance is also due. While the monthly trade report used to elicit dramatic market responses, those days are long over, and the preliminary goods trade estimate contains much of today's report. The adjusted goods deficit widened to $91.8 bln from $90.5 bln. The US exported $175 bln of goods in February. A full third of US goods exports were industrial supplies ($63.6 bln). Another 12% of US goods exports were consumer goods ($21.8 bln). Food and beverage exports were worth $15.4 bln, followed by automotive exports of $13.85 bln. Together these four categories account for about 2/3 of US goods exports. The US exported a little more than $2 trillion of goods in 2023, making it the second-largest goods exporter after China. 

Canada also reports its February merchandise trade balance today. Canada recorded a C$2.1 bln merchandise deficit last year after a C$19.7 bln surplus in 2022. It reported a C$500 mln surplus in January, and the median forecast in Bloomberg's survey is for a C$680 mln surplus in February. In Jan-Feb 2023, Canada recorded a C$1.33 bln surplus. According to the OECD's purchasing power parity model, the Canadian dollar is about 16.5% undervalued. Before Covid, it was not unusual for Canada's current account deficit to be 2%-3.5% of GDP. In the last two years, it has averaged about 0.5% of GDP. Still, the focus is on tomorrow's jobs report. The median forecast in Bloomberg's survey expects slower job creation (25k vs. 40.7k), a tick-up in the unemployment rate (5.8% vs. 5.7%), and a small acceleration in the hourly wage rate for permanent workers (5.0% vs. 4.9%).

The disappointing ISM helped deter the market from testing the CAD1.3600 area.  The greenback is testing a two-week low near CAD1.3500. A trendline off the March lows comes in close to CAD1.3490 today and the 200-day moving average is slightly above CAD1.3500. The next area of support is around CAD1.3450, and the greenback has not closed below it for two months. The US dollar traded with a heavier bias against the Mexican peso. It approached the multi-year low set in late March near MXN16.5120. Even though it did not make a new low, the dollar settlement was a new low. The June election is coming into focus and the first TV debate will be held this Sunday. Morena's Sheinbaum is well ahead of the united opposition (PRI, PAN, PRD) candidate Galvez. The Chilean peso surged by more than 2% yesterday as the market digested the 75 bp rate cut (as expected, though less than the 100 bp reduction delivered in January. The central bank raised this year's inflation forecast to 3.8% from 2.9% and suggested it was data-dependent. It reports March CPI next week, and the year-over-year rate is expected to ease toward 4.0% and unwinding most of February's increase to 4.5%. The CPI rose by 1.1% last March and may be replaced with a 0.6% increase last month.


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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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