Dollar's recent gains pared but firm undertone remains intact

Overview: After surging at the last week, the dollar consolidated yesterday and is continuing to do so today as slightly lower levels. The Swiss franc is the only G10 currency unable to gain traction against the greenback today. Still, the dollar's pullback has barely met the minimum retracement targets of the jump last Thursday and Friday. The PBOC lower the dollar's fix slightly, but the proverbial toothpaste is out of the tube and officials are struggling to reestablish order. Against the offshore yuan, the dollar remains outside of its 2% onshore band. The Hungarian forint is the strongest of the emerging market currencies ahead of the central bank's rate decision, where a 75 bp cut is expected after the base rate was slashed by 100 bp last month.

Asia Pacific equities rallied, led by the Hang Seng and mainland shares that trade in Hong Kong. Most of the other large bourses rose with the notable exception of Taiwan, Australia, and India. Europe's Stoxx 600 is treading water after eking out a minor gain yesterday. US index futures are enjoying modest gains. European 10-year yields are mostly 3-4 bp lower. The 10-year US Treasury yield is off one basis point to about 4.23%. Yesterday's $66 bln US two-year note sale generated a small tail, but underlying demand seems reasonably strong. Today, the Treasury comes back with $67 bln five-year notes and a $70 bln cash management bill. Gold is trading firmly above $2190. The highest close last week was around $2186.40. A new record high close is possible today. May WTI is trading quietly in around a 30-cent range around $82.

Asia Pacific

The currencies are the three largest Asia Pacific economies remain weak. The Bank of Japan's rate hike a week ago has failed to deter yen selling. MOF officials have ratcheted up their verbal defense and material intervention cannot be ruled out. The BOJ itself may have diluted the impact of the first hike in 17 years by suggesting it is not really an exit from easy monetary policy. Nor is the start of a tightening cycle. The swaps market is pricing in an overnight rate of around 21 bp by the end of the year from 10 bp now. The last time the BOJ intervened directly in the foreign exchange market was in 2022 as the dollar approached JPY152.00. That level held late last year, with the help of verbal intervention and a drop in US rates. Taking cues from the PBOC fix, the market took the greenback above CNY7.20 before the weekend. It reached almost CNY7.23. However, the reference rate yesterday appeared to have encouraged dollar sales, but except for a brief period around the open on Monday, the dollar has held above CNY7.20. The dollar spent most of yesterday trading above the onshore band against the offshore yuan, which is a rare occurrence, and remains above it today. This may spur officials to tighten the offshore liquidity conditions. Indian markets were closed yesterday, leaving the rupee at the record low reached before the weekend. The rupee recovered by about 0.15% today, or less than half of the pre-weekend loss. The greenback's surge and the weakness of the yuan appeared to be contributing factors. The risks of intervention have increased. The central bank's reserves have been lifted to record levels as the central bank appears to be absorbing much of the inflows related to inclusion of Indian bonds in JP Morgan's emerging market indices and foreign interest in Indian equities.

The IMF's Managing Director Georgieva repeated the traditional liberal cant about China boosting growth through market reforms. She also reiterated that strengthening China's pensions and improving social security would boost consumption, which would seem like boosting government support. There are good reasons to improve the basket of goods and services for Chinese citizens. In the past, we were more sympathetic to ideas that this could boost consumption. However, the counterfactuals continue to accumulate. Consider the United States. By various measures, it has among the weakest social welfare systems, and yet its consumption per capita is the highest. European countries have stronger social welfare and consumption is typically not as strong as in the US. When faced with Great Financial Crisis, the US and Europe did not take the medicine the IMF is recommending to Beijing, but rather enlarged the state and strengthened the regulatory framework.

The threat of material intervention by Japan may have injected a note of caution but the market seems undeterred. It rose to new session highs in North America near JPY151.55 yesterday. The market does not appear to have given up probing the JPY152 area. However, a few things seem clear. First, Japanese officials are surprised that the yen did not strengthen after the BOJ hike. Second, although the dollar did rise more than 3.5% in the week-and-a-half after March 11, it has gone sideways in the last four sessions, confined largely to the range on March 20 (~JPY150.75-JPY151.85). It is well within that range today. Third, in the week through March 19, speculators in the futures added to both gross long (+20%) and gross short (16%) holdings. The net short position (116k contracts or ~$9.6 bln) is slightly smaller than at the end of February, but still among the largest in a decade. The Australian dollar set the session high yesterday in North America at almost $0.6550 and edged up to $0.6555 today. Given the Aussie's 1 1/4-cent drop last Thursday and Friday, the upticks were not so convincing. It stalled near the five-day moving average. A band of resistance is in the $0.6560-$0.6575 area. There are options expiring today: A$1.25 bln at $0.6560 and the same amount at $0.6545. Important support is at $0.6500, and the Australian dollar has not settled below it this month. For the third consecutive session, the dollar is trading in a relatively wide range against the Chinese yuan. It as if the breakout at the end of last week has de-anchored the exchange rate. This has happened before, and it often takes officials a few days to re-establish order. The PBOC set the dollar's reference rate at CNY7.0943 (CNY7.0996 Monday). The average in Bloomberg's survey was CNY7.2019 (CNY7.2222 Monday). The dollar's 2% band today is CNY7.9524-CNY7.2362. As we noted, dollar has remained above its onshore band in the offshore market. The dollar has not traded below CNH7.2377. 

Europe

The Swedish krona rose by about 3.5% against the US dollar last year, ending a 25% two-year decline. The krona fell to a record low against the euro at the end of Q3 23 and recovered sharply (~8.2%). Last September, the Riksbank announced it would "hedge" about 25% of its currency reserves, which selling dollar and euros. The Swedish economy was stagnant last year and the median forecast in Bloomberg's survey is for a 0.1% expansion this year (down from 0.3% previously). The Riksbank meets tomorrow. It is too soon to expect a cut, but the next meeting in early May is a different story. The policy rate is at 4.0% and the inflation measure that the central bank targets (CPIF, uses fixed mortgage interest rates) stands at 2.5%. It peaked at 10.2% at the end of December 2022. The swaps market has about a 60% chance of cut discounted for May. The Riksbank could be the second G10 central bank to cut rates following last week's decision by the Swiss National Bank. The market has about 100 bp in cuts discounted over the next 12 months. 

Ireland's prime minister Varadkar unexpectedly resigned last week after seven-years at the helm. The Higher Education Minister Harris will become the next head of Fine Gael and prime minister. Ireland's parliament returns from Easter recess on April 9 and Harris approval is assured as the governing coalition (Fine Gael and Fianna Fail) enjoys a solid majority. The next election must be called by March 2025. The latest polls put Sinn Fein ahead of Fine Gael and Fianna Fail but not more than both together. Irish bonds did not respond to the political developments. The 10-year yield (~2.74%) trades inside France and a bit wider than the Netherlands. Ireland's two-year yield (~2.76%) is about a 10 bp discount to Germany. 

The euro fell by almost 1.5-cents in the last two sessions last week. It recovered 0.4 of a cent yesterday and is edging slightly higher today. To be impressive, the single currency needs to absorb the offers in the $1.0860-65 area, where 3.5 bln euros in options expire today, it must surmount this area to put pressure on the short-term momentum traders to cover. It is straddling the $1.0850 area in the European morning. Sterling slid nearly 2 1/3 cents last Thursday and Friday before it recovered about three-quarters of a cent to around $1.2650 yesterday. It has edged up to almost $1.2665 today. A move back above $1.2700 may be needed to stabilize the tone. In the CFTC reporting week that ended on March 19, the net long speculative sterling position was cut for the first time in four weeks. The decline to 53.2k contracts (~$4.2 bln) was driven by a 20.7k cut of longs, while almost 3.5k short contracts were covered. 

America

Today's US data is expected to show a small recovery in durable goods orders after the large 6.2% drop in January, a modest rise in house prices, which will lift the year-over-year increase to around 6.6%, the most since November 2022. We note that Boeing received 15 orders in February, up from three in January. It delivered 27 planes, unchanged from the previous month. Through January, durable orders have been flat over the past 12 months. Even when military orders and aircraft are excluded, orders have been unchanged in the past 12 months of data. The Conference Board's consumer confidence survey is due. Although we already know that the consumer sentiment softened in the preliminary University of Michigan survey, the median forecast in Bloomberg' survey looks for a small gain (107.0 vs. 106.7). The Richmond Fed manufacturing and the Philadelphia and Dallas Fed's non-manufacturing surveys are not market movers. That said, the Atlanta Fed's GDP tracker will be updated later today. Its estimate of Q1 GDP was shaved to 2.1% from 2.3% last week.

The greenback held below CAD1.3600 in North America yesterday as it consolidated its recent gains that carried it to a new high for the year at the end of last week (~CAD1.3615). The US dollar found support near CAD1.3570 yesterday but has slipped to about CAD1.3565 today. The risk may extend toward CAD1.3540-50. The rally in crude failed to do much for the Canadian dollar, while the risk-off mood characterized by the pullback in equities may have blunted stronger corrective forces. We continue to note the chart resistance in the CAD1.3620-25 area. Mexico's central bank is likely pleased that it managed to cut rates and not weaken the peso, whose strength still helps curb imported inflation. The dollar was trading around MXN16.74 when Banxico made its announcement last week and it fell below MXN16.67 yesterday. It probed the lows in the European morning before steadying. The Q1 24 low was set earlier this month near MXN16.6470. The peso longs may be vulnerable to BOJ intervention if it were to spur another unwind of the popular carry trade (like early last week).