The euro approaches $1.19 as corrective pressures persist and US 10-year yield slips below 1.65%

Overview:  The heavier tone for the dollar that emerged last week persists.  The euro is testing the 200-day moving average (~$1.1890) since breaking below it last month for the first time since May 2020.  The greenback has steadied after falling to an eight-day low against the yen near JPY109.60.  The dollar-bloc currencies are trading heavier. Emerging market currencies are mixed, leaving the JP Morgan Emerging Market Currency Index little changed after pushing higher for the past two sessions.  The big mover is the Indian rupee, which is off more than 1% on news of a formal bond-buying program.  The QE lifted Indian equities by more than 1%, and the benchmark 10-year yield fell by around four basis points.  Asia Pacific equities mostly advanced, though Chinese and Hong Kong shares fell.  Europe's Dow Jones Stoxx 600 is consolidating near record highs set yesterday.  US equities futures are a little firmer after unable to hold on to gains yesterday.  The US 10-year yield slipped below the 20-day moving average (~1.65%) for the first time since early February to trade at an eight-day low.   European bond yields are slightly softer.  Gold stalled yesterday near $1745 and has been unable to get closer to the important cap around $1750.  It has backed off but is holding above yesterday's low, near $1727.  May WTI remains inside the range set on Monday (~$57.65-$61.50), and it could be the first day since February 12 that remains below $60.  

Asia Pacific

China's reserves fell more than expected last month.  The official tally shows a decline to $3.170 trillion from $3.205 trillion.  The dollar rallied, and bonds sold off, suggesting valuation accounts for the bulk of the move.  It was the third consecutive month that the dollar value of its reserves fell, and the nearly $35 bln declines were the most since last March's $46.1 bln drops.  While many reports focus on the capital inflows into China, official data underscores the significance of capital outflows, which officials use to offset the inflows.  They lack the visibility of the inflows but are a key mechanism at work.  

The Reserve Bank of India left the key repo rate unchanged while specifying the amount of government bonds it will buy.  In the fiscal year through last month, it bought INR3.1 trillion. The lack of transparency frustrated investors, and the central bank announced today plans to buying INR1 trillion (~$14 bln) of government bonds this quarter.  Separately, note that the IMF's new forecasts anticipate the Indian economy expanding by 12.5%, a full percentage point better than it had projected three months ago. 

Australia's final service and composite PMI were revised lower from the flash estimates but were still above February readings.  The economy is rebounding, but a touch slower than expected.  The Australian dollar stalled after marginally extended its gains to a little above $0.7675. Recall that last week it bottomed near $0.7530.  The Aussie stalled at its 20-day moving average and in front of the $0.7690 retracement target.  Support is seen in the $0.7600-$0.7620 band.  The US dollar approached the 20-day moving average against the yen (~JPY109.50) and recovered through the second half of the local session and into the European morning.  It had not been above JPY110 since a break below it in North America yesterday.  Above there, resistance is seen in the JPY110.10-JPY110.20 area.  The greenback has steadied against the Chinese yuan after yesterday's 0.4% decline.  The PBOC set the dollar's reference rate at CNY6.5384, a tad lower than expected.  News that the US is considering boycotting the 2022 Winter Olympics in China is escalating the rhetoric.  

Europe

The final read of the EMU services and composite PMI was better than the flash reading.  The aggregate composite rose to 53.2 from 52.5 initially and 45.2 in February. It is the highest level since last July's 54.9, which was the peak.   Germany and France saw their service and composite PMI revised higher.  Of note, the French composite reached the 50 boom/bust level for the first time since last August.  Spain's composite edged above 50 (50.1), which it has not seen since last July.   Italy was a bit disappointing.  Its service PMI slipped to 48.6 from 48.8 in February.  The strength of the manufacturing sector, however, kept the composite on an improving path, rising to 51.9 from 51.4. Price pressures were evident, but investors seem to accept the ECB assessment that they are primarily technical in nature and will be temporary.  

The UK's PMI jumped back into expansion mode in March, but not quite as strong as the preliminary estimates suggested.  The services PMI stands at 56.3, not 56.8, after 49.5 in February.  The composite PMI is at 56.4, not 56.6.  It was at 49.6 in February.  The vaccine rollout, allowing a gradual re-opening of the economy, is the key driver of sterling's resilience.  

The euro is edging higher after rising around 1% in the first couple of sessions this week.  A technical bottoming pattern was recorded that we suspect projects to a little above $1.19, but we recognized resistance around the 200-day moving average (~$1.1890) and the (61.8%) retracement objective of the leg lower since the last test on $1.20 on March 18.  Sterling broke down yesterday after reaching a two-and-a-half-week high near $1.3920.  It was sold to $1.38 yesterday and fell a little below $1.3775 today, a four-day low, before finding a bid in late Asia/early Europe that took it back to $1.3840, where it met new sellers.  Some of the pressure on sterling continues to come from the cross.  The euro has recovered from the dip below GBP0.8500 on Monday and traded at a 10-session high today near GBP0.8625.  The high from the second half of March was set around GBP0.8650, which may prove a sufficient cap.  

America

There is no reason to expect much fresh color on the Fed's views or reaction function from the FOMC minutes.  Chair Powell has been very clear on where the Fed stands and its willingness to be patient, looking through the short-run pick-up in price pressures that have to do with the base effect and bottlenecks in re-opening will not be sustained.  It is focused on actual inflation, which it wants to run a bit above target, and the maximum inclusive employment.  The problem is not that the market does not understand what the Fed is saying, that a scrutiny of the minutes will resolve.  Simply put, the market does not accept it.  The December 2022 Eurodollar futures imply a three-month yield of nearly 50 bp.  This month's contract is at 18 bp.  The market is pricing in a rate hike more than a year ahead of where the median dot plot implied.  For at least the immediate term, until, say, the June FOMC meeting, officials seem to be singing from the same songbook.   Several officials speak today (Evans, Kaplan, Berkin, and Daly), but the message remains the same, and the market impact likely minor.  

One element of divergence is going to be on display today.  The US and Canada report February trade figures, and they are moving in opposite directions.  The widening growth deficits will translate into a record monthly trade deficit.  It cannot be blamed on China's gaming of the rules or German mercantilism as many are wont to do.  There is also the risk that many of the infrastructure projects' components, like copper and steel, for two quick examples, will have to be imported as well.  On the other hand, Canada has been running trade deficits, with some exceptions, since the Great Financial Crisis.  The shortfall has had been improving in Q4 20 and then turned to C$1.4 bln surplus in January, the largest in 6.5 years.  It was the first monthly surplus since May 2019.  Exports rose 8.1% in January, and non-energy export growth surpassed energy export growth (8.5%. vs. 5.9%).  The US buys around three-quarters of Canada's exports, and merchandise exports to the US rose 11.3%, but this likely overstates the case.  Exports were flattered by a Canadian airline retiring a large number of plans and shipping them to the US.  

The Canadian dollar is under modest pressure and is off about 0.25% today, which means it is faring better than the other dollar-bloc currencies.  The outside down day the US dollar recorded on Monday has gone for naught.  The test on CAD1.2500 marked the end of its pullback from the CAD1.2650 area approached in late March.  Today, the greenback is at a new five-day high as it straddles the CAD1.2600-level. Initial support is pegged around CAD1.2560-CAD1.2580. The US dollar has steadied against the Mexican peso after falling to its lowest level since mid-February yesterday (~MXN20.14).  We suspect the leg down from the MXN20.90 area in late March is nearly over, but it may require a move above MXN20.35 to confirm it.  Tomorrow, Mexico report the March CPI figures.  An acceleration of inflation to above Banxico's 2%-4% target is likely, and the market has given up on ideas of a rate cut this year.