US Dollar rally sparks broad market impact

Overview: A less hawkish Reserve Bank of New Zealand and a slightly softer than expected January CPI from Australia appears to have sparked a broad US dollar rally. The Dollar Index is up almost 0.25%, which, if sustained, would be its best day since the US CPI was reported on February 13. Most of the greenback's strength was seen in the Asia Pacific region, and it has steadied in the European morning. The dollar approached JPY150.80 and there are large options at JPY151 that expire today. The yen is the strongest of the G10 currencies, off less than 0.15%. The Antipodeans have been hit the hardest. The Australian dollar is off around 0.75% and the New Zealand dollar has been tagged for 1.2%. The euro briefly traded below $1.08 for the first time in a week. Emerging market currencies are also weaker, with the South African rand, Thai baht leading the drop with 0.65%-0.85% declines. With herculean efforts the dollar continues to hold slightly below CNY7.20.

Equities are under pressure. All the large markets in the Asia Pacific region but South Korea, sold off. That included a 2% slide in the Chinese shares that trade in Hong Kong and a 3.8% slump in the Shenzhen Composite. Europe's Stoxx 600 is giving back yesterday's nearly 0.2% gain. US index futures are modestly softer after a mixed performance yesterday. European 10-year yields are mostly softer, but UK Gilts are flat. The 10-year US Treasury yield is a basis point lower near 4.29%. The stronger dollar has weighed on gold. It had poked above $2039 yesterday but settled lower on the day and follow-through selling today has seen in slip below $2025 before finding support. April WTI rallied more than $3 a barrel from Monday's low to $79 yesterday. An 8 mln-barrel build in US stocks according to API estimates seemed to blunt the speculation that OPEC+ will extend its output cuts. April WTI is trading softer, around $78, but within yesterday's range.

Asia Pacific

Japan's slightly firmer than expected January CPI (core rate at 2.0% target instead of falling to 1.9% from 2.3% as economists expected) seemed to renew speculation of a BOJ rate hikes after the unexpected economic contraction in Q4 23 fanned doubts. Tomorrow, the pendulum may swing again on the back of what is likely to be dismal data, fanning fears of another quarterly contraction. The preliminary January industrial production is like to fall sharply (nearly 7%), disrupted by the earthquake at the start of the year. Also, Japanese housing starts, which rose 6.6% year-over-year last January may be 7.8% last month and will also be reported tomorrow. And even where there is an uptick in activity, like January retail sales (median forecast in Bloomberg's survey is for a 0.5% rise) seems lackluster after falling an average of 1.1% in Q4 23, the weakest since the early days of the pandemic.

Different institutional arrangements product different response to similar challenges. For more 35 years, people have been talking about a "Fed put." If the stocks market slide threatens the Fed's third mandate, financial stability, it will take action, such as lowering rates. Remember the attention drawn to the so-called Plunge Protection Team? As part of its qualitative and quantitative easing, the Bank of Japan has bought stocks as well as bonds. Its preferred vehicle has been ETFs, and the BOJ owns around 2/3 of the equity ETFs, which account for about a quarter of the central bank's assets. The Swiss National Bank bought foreign equities as a way to expand its balance sheet. How does China do it? Reports suggest that state-owned funds, apparently similar to sovereign wealth funds, have stepped into to support the market this year. One bank estimates these funds have bought a little more than CNY400 bln (~$57 bln) of equities this year. The bank estimates than around 3/4 of the inflows were for products that track the CSI 300.

The Reserve Bank of New Zealand kept rates steady as expected but were less hawkish than previously. The central bank said that inflation risks were more balanced, suggesting less of a risk of a rate hike this year. Yesterday, the swaps market was pricing in around a 50% chance of a May hike. That has been cut to near 10% today. The market had the implied target rate around 5.18% at the end of November and now it is slightly above 5.0%. Australia's January CPI was unchanged at 3.4%. The median forecast in Bloomberg's survey was for 3.6%. The swaps curve hardly changed. Yesterday, it was pricing 40 bp of cuts this year and now it is almost 42 bp. The first cut continues to be fully discounted for September, with a slightly higher chance (80%) of a cut in August. It was closed to 75% chance yesterday.

The dollar bottomed yesterday in early North American turnover near JPY150 but recovered to almost JPY150.60 as US 10-year yields traded higher, even though the seven-year auction saw solid even if not spectacular interest. It returned to JPY150.80 in late Asia Pacific turnover and found sellers in early Europe. For the past five sessions, the settlement has been gravitated around JPY150.50. There are options for $1.8 bln at JPY151 that expire today. The Australian dollar set a five-day low in the local session yesterday near $0.6525. It recovered but stalled near $.06560. It has been sold to $0.6490 today, so far, its lowest level since February 15. Nearby support is seen near $0.6470 and then the month's low near $0.6445. The break of $0.6500 weakens the technical tone. Retail sales tomorrow should show a recovered from the dreadful 2.7% drop in December. The New Zealand dollar is also trading much lower. It settled near $0.6170 and is pushing below $0.6100 in the European morning. Initial support now is seen near $0.6075 and then $0.6040-$0.6050. The broad US dollar gains today lifted it a bit closer to CNY7.20, which it continues to hover near but remains below. Press reports says state banks sold dollars and, of course, if the dollar meets resistance at CNY7.20, the largest market participants are involved. The PBOC set the dollar's reference rate at CNY7.1075 (CNY7.1057 yesterday). The average in Bloomberg's survey was CNY7.2004 (CNY7.1966 yesterday).

Europe

There are two metrics of stress in Europe. The first is Italy's premium over Germany. Italy's two-year yield was almost 95 bp above German yields at the 2023 peak (in late October). It fell below 50 bp last month and is slightly above there now. The 2022 and 2023 low was about 35 bp. Italy's 10-year premium peaked early last year near 215 bp. It narrowed by around 50 bp in H1 23 but widened back above 200 bp last October and is now a little below 145 bp, near two-year lows.

The second metric is the euro-Swiss franc cross. The euro has fallen for the past six years against the Swiss franc and in nine of the past ten years. However, the euro has traded higher against the franc this year and has risen for six of the past eight weeks. The euro rose almost 3.3% from the end of last year through yesterday's nearly three-month highs near CHF0.9560. Perhaps, speculation that the Swiss National Bank would cut rates ahead of the European Central Bank weighed on the franc. That said, the momentum indicators are stretched and the chart resistance near CHF0.9570 has been approached. The euro looks vulnerable to near-term setback.

The euro made a marginal new three-day high in Asia Pacific on Tuesday ($1.0865) and was sold in Europe and North American to slightly through $1.0835. It held barely above the five- and 200-day moving averages, which converge near $1.0830. Follow-through selling today saw if dip below $1.08 in early European turnover before finding bids, allowing it to recovery toward $1.0820. The technical tone looks more fragile, though the intraday momentum indicators are oversold. A break of the $1.0770-$1.0790 area would weaken the outlook. Sterling recorded its third consecutive inside day yesterday but broke down today. It saw nearly $1.2620 in early Europe. It has recovered to almost $1.2650. Still, it remains within last Thursday's range (~$1.2610-$1.2710). A move back above $1.2660 would help stabilize the tone.

America

GDP revisions tend not to move the markets, and the second look at Q4 23 US GDP is not expected to be revised by much. Investors and businesses are forward-looking and more interested in Q1 24 GDP. The Atlanta Fed's GDP tracker was updated yesterday, and it is now at 3.2% from 2.9% on February 16. The January trade and inventory data will be reported. The market is also looking ahead to tomorrow's personal; income, consumption and deflators and the Atlanta Fed's GDP tracker will be updated after the day. Income is expected to have risen more than consumption and this will be consistent with a moderation in consumption that is expected to unfold here in H1 24. A 0.3% rise in the headline deflator will translate into a three-month annualized rate of 1.6% and about 1.8% at a six-month annualized rate. The core rate is seen accelerating by around 0.4%. That would be the most since the 0.5% increase in January 2023. The three-month annualized pace would be about 2.5% and the six-month annualized pace would be near 2.6%. Three Fed officials speak today, Atlanta's Fed's Bostic, NY Fed's Williams, and the Boston Fed President Collins. The former two vote at the FOMC. So far, officials seem to be on the same page as Fed Chair Powell. They are encouraged by recent trends but need to see more to be sufficiently confident to cut rates.

Canada runs a small current account deficit. It was 2% of GDP in 2019 and 2020 but has been below 1% more recently. Canada's Q4 23 current account is due today and C$2 bln deficit is expected, which would be the smallest in six quarters. That should keep the deficit below 1% of GDP. It is not a market mover. Tomorrow, Canada reports December and Q4 23 GDP. Canada contracted by almost 1.1% in Q3 23 but looks to have returned to growth in Q4. It probably not enough to fully recoup the loss of output in Q3. True to form, Mexico's trade balance deteriorated in January. It was the 14th consecutive January that the seasonal pattern played out. Still, the shortfall was well above expectations as exports fell and imports rose. Still, the seasonal pattern points to a sharp improvement in February, which has been better than January for 17 consecutive Februarys. Mexico's central bank's inflation report will be released later today. It will help shape expectations for the March 21 central bank meeting. The statement after the last meeting suggested rate cuts in the coming months.

The US dollar had gone nowhere against the Canadian dollar and remained in the range set on February 13 when the US reported January CPI (~CAD1.3440-CAD1.3585). Yesterday, the greenback dollar closed at its best level in nearly two weeks and posted an outside up day. Follow-through buying today lifted it to almost CAD1.3590. Nearby resistance is in the CAD1.3600-CAD1.3620 area. The intraday momentum indicators are stretched. There is scope back toward CAD1.3540 initially. The larger than expected Mexican trade deficit did not prevent the peso for strengthening to its best level in three days. The US dollar fell to almost MXN17.04 but remains in the range set last Thursday (~MXN17.0120-MXN17.1570). The downtrend line from the January 23 high comes in near MXN17.10 today and is bumping against it. The trendline has frayed on an intraday basis but has held at settlement.