Greenback consolidates last week's surge

Overview: After surging at the end of last week, the dollar is consolidating today. Stepped up verbal intervention by Japan's currency chief Kanda and a slightly weaker dollar fix by the PBOC seemed to take the wind from the dollar sails. Except for the Swiss franc and Swedish krona, the G10 currencies are showing a slightly firmer tone. Emerging market currencies are mixed, with central European currencies leading the advancers. The Taiwanese dollar drew support from last week's unexpected rate hike but most of the other Asia Pacific currencies traded with a heavier bias.

With the exception of Australia and India, the large bourses in Asia Pacific fell with the Nikkei losing almost 1.2%. Europe's Stoxx 600 is a little softer and has a nine-week rally in tow. It has only fallen in two weeks since mid-November 2023. US index futures are also sporting a softer profile. Benchmark 10-year yields are most 2-3 bp firmer in Europe. The 10-year US Treasury yield slipped for the past four sessions (~13 bp) and is coming back about two basis points firmer near 4.22%. The two-year yield is around 4.61%, which is about a dozen basis points lower than a week ago. Gold is consolidating in quiet turnover inside the pre-weekend range (~$2157-$2186). Similarly, May WTI is within last Friday's range, which was within last Thursday's range (~$80-$82).

Asia Pacific

There are arguably three potential drivers of the yen. First, Japanese officials have taken a couple of steps up the intervention ladder and risks of material intervention appear to be increasing. Second, the market is trying to assess the trajectory of BOJ policy. To that end, Tokyo's March CPI that will be reported on March 29 when most of Europe and US markets will be closed for Good Friday. After jumping in February, Tokyo's CPI may moderate slightly before rising again in April (as household energy subsidies expire). Third, the exchange rate often appears sensitive to US yields. The US 10-year yield may be rangebound near-term given the light economic calendar in a holiday-shortened week. 

How to think about the Chinese yuan? It is a closely managed exchange rate and with the dollar rising broadly, officials seemed to have given up the defense of the CNY7.20 level before the weekend. Some observers opined that it looked like Beijing had pegged it, but this is mistaken. The Swiss National Bank had imposed a cap for the franc against the euro. That was not a peg. China, we maintain, as a dirty float and we would emphasis both words, dirty, as it is highly managed, and float to recognize its flexibility. Last year, the dollar traded roughly between CNY6.90 and CNY7.35 (~6.5% range). In contrast, the US dollar traded between about HKD7.7860 and HKD7.8505 (less than 1% range). Our POV also differs from what may be conventional wisdom in that all reports of state-owned banks buying and selling dollars is not rightly attributed officials. That said, we cannot distinguish the two and, moreover, are suspicious of claims that say they can.

In addition, we recognize that the US and China are in some state of confrontation (cold war, proxy war, sustained cyber and mis-information campaigns) and this influences how the issues are framed. For example, does Beijing have foreign currency assets that are not included in its reserves? Yes, and this is often cited to claim deception, yet truth be told, so does the United States. The US institutional framework is different than China's to be sure, but this frequently confuses observers. The US eschews government ownership, unless in a crisis. So, the US nationalized the railroads during WWI and privatized them afterwards. It took equity stakes when the automakers and banks failed, and subsequently happy to sell the stakes later. The Chinese government struggles to get the state-owned banks to implement policy, such as lending to the property sector, or even lending in general, rather than simply buy government bonds. Local and regional governments do not always do what Beijing want either. By obscuring these tensions, we think many observers exaggerate the homogenous nature of China's political economy, miss opportunities to apply pressure at key times, and misconstrue the threat posed by Beijing. Lastly, many observers focus on China's surplus capacity, and it is indeed daunting. Our approach is anchored in the tradition that sees surplus capacity, which is an expression of surplus capital, as a generalized condition of modern capitalism and not peculiar to China. It is also consistent with the tradition that see sustaining aggregate demand a chronic challenge of capitalism, even state-capitalism. 

A combination of lower US yields, shifting risk-reward as the dollar approached the JPY152 cap, and the fear of intervention encouraged some profit-taking ahead of the weekend that pushed the greenback to almost JPY151.00. The dollar held above there today, despite what seems like an escalation of rhetoric. We suspect the market has not given up on challenging JPY152. A move above JPY152 would set sights on the JPY155 area. The Australian dollar fell by about 2/3 of a cent last week, unable to draw much benefit from the stronger than expected jobs report. It continues to hold above $0.6500, and a break could sign a re-test on the Q1 low from mid-February near $0.6445. Initial resistance may be near $0.6550 now. The dollar broke above CNY7.20 before the weekend and Chinese officials seem to be struggling to re-assert control. The PBOC set the dollar's reference rate at CNY7.0996 (CNY7.1004 on Friday). The average in Bloomberg's survey was CNY7.2222 (CNY7.2102 Friday). There are some reported that Chinese banks sold dollars early and the greenback fell to the session low near CNY7.1945 almost immediately. Subsequently, it has climbed back above CNY7.21. Note that trading in the offshore yuan often respects the onshore dollar band (2%+/- from the reference rate). Yet not on Friday and not today, despite reports of a liquidity squeeze in the offshore market. Today's band is roughly CNY7.9576-CNY7.2416. The dollar has traded between CNH7.2325 and CNH7.2820. We imagine that the PBOC recognized that if the cap broke that the dollar could rise back into the CNY7.25-CNY7.30 range that prevailed in most of H2 23. 

Europe

The ECB has disabused the market of ideas that it had embraced a few weeks ago that a cut next months was likely. The swaps market had it fully discounted at the end of January. By the end of February, it was about 20% chance and now it is negligible. This seems to be the work of official guidance rather than the economic data itself. However, the same guidance has bolstered the market's confidence of a June cut. The odds have not fallen below 80% this month. At the same time, the market has scaled back expectations for the magnitude of cuts this year. It is more than simply giving up on an April cut. At the end of January, the swaps market was pricing in 160 bp of cuts this year and by the end of February, it had fallen to 90 bp. It is hovering slightly above there over the last couple of sessions. 

The euro is weak and vulnerable to an extension of last week's 0.75% drop. It barely held above $1.08 before the weekend, and we have suggested potential toward $1.0760 initially. Initial resistance has been encountered today near $1.0825, and the 200-day moving average is closer to $1.0840. There are options for 1 bln euros that expire at $1.0850 today and another set for 3.5 bln euros tomorrow at $1.0860-65. Sterling dropped about 2 1/4 cents in the last two sessions. It posted its lowest close (~$1.2590) before the weekend since mid-February. Like the euro, sterling's five-day moving average fell below the 20-day moving average late last week, illustrating the downside momentum. Today, sterling is straddling the $1.26 in a narrow range. The nearby cap is seen around $1.2625 with initial support near $1.2575. 

America

The US sees February new home sales, and a couple surveys (Chicago Fed's national activity and the Dallas Fed's manufacturing survey). The data does not have the heft to typically move the markets. Still, it is notable that nearly every economic report since the FOMC meeting concluded have been stronger than expected. The highlight of the week is ironically Good Friday. The US reports the income, consumption, and the deflators, alongside Fed Chair Powell speak in a moderated discussion near midday. The Fed's Bostic and Cook speak today, while Waller addresses the economic outlook on Wednesday. Bostic has already indicated he is inclined to one cut this year, putting him among the more hawkish measures. Meanwhile, some speculate that Waller could be the next Chair. Daly also speaks on Friday.

The US dollar made a marginal new high for the year against the Canadian dollar ahead of the weekend. It rose to nearly CAD1.3615. We have been highlighting resistance in the CAD1.3620-25 but are no longer confident it holds. The greenback posted its highest close since last November. So far today, the tone is consolidative, and it has been confined to about 15 ticks on either side of CAD1.3600. A convincing break of CAD1.3625 targets CAD1.3700. The US dollar rose for the first time in four weeks against the Mexican peso, but the 0.3% weekly gain was modest. A consolidative tone dominated ahead of the weekend. The range set last Wednesday is key: ~MXN16.67-MXN16.85. Today's range through most of the European morning is about MXN16.72-MXN16.77. Despite confirmation that Brazil was on its way toward adhering to the fiscal rules that limit the primary budget deficit (excluding debt servicing costs) to 0.25% of GDP, the Brazilian real was not match for the resurging greenback. The dollar posted its first weekly close above BRL5.0 since the end of last October.