Euro’s Slide Extends Into 7th Consecutive Session
Today’s Financial Markets Highlights
- • The US dollar is bid ahead of the weekend. The euro is falling for its seventh consecutive session and has not been able to resurface above $1.09 for the first time in two years. The greenback is straddling the JPY124 area, while the Australian dollar’s downside correction continues.
- • Japan’s February current account surplus was larger than expected, driven not by trade but by its primary income balance from overseas direct investment.
- • Shanghai’s extended lockdown is exacerbating the economic crunch, and this could lead to a cut in the benchmark 1-year medium-term lending facility next week. The yuan appears to be consolidating a new range.
- • The EU banned coal imports from Russia. It also blocked Russian trucks and ships. Calls for it to ban Russian gas is mostly coming from those who do not import much of it in the first place. Still, the EU sanctions against Russia are of historic proportions.
- • Canada’s employment report is the main feature of the North American session. The market may be getting a bit excessive as it prices in more than a 50 bp hike by the Bank of Canada next week.
- • Brazil’s inflation is likely to have accelerated last month and Q1 ascent of the real appears to have ended and a consolidative/corrective phase appears to have begun.
The recovery in US equities yesterday helped the MSCI Asia Pacific Index snap a three-day decline. Chinese tech stocks remained under pressure after Tencent announced it was closing its game streaming service and Beijing indicated efforts to crackdown on the improper use of algos by internet companies. Led by energy, financials, and industrials, the Stoxx 600 is up about 1.3% in late morning turnover in Europe. If sustained, it would be the second consecutive weekly advance and the fourth in the past five weeks. US futures are extending yesterday’s gains. Benchmark 10-year rates continue to rise. The US 10-year is firm at 2.67%. European yields are slipping after initially setting new highs for the move. The greenback is bid. The Antipodeans and sterling are bearing the brunt today, while only the Norwegian krone is proving resilient. The euro has not traded above $1.09 today for the first time since late March 2020. The dollar is straddling the JPY124 level. Among emerging market currencies, most Asian currencies except the Indian rupee are underperforming. In addition to the rupee, the South African rand and the Hungarian forint are posting minor gains. Gold is little changed around the middle of this week’s consolidative range (~$1915-$1945). May WTI is firm inside yesterday’s range (~$93.80-$98.80). US natgas is firm after yesterday’s 5.5% gain. It is the fourth consecutive weekly gain, during which time it has risen by around 30%. Europe’s benchmark natgas is up almost 4.3%, which leaves it down about 1.3% this week after last week’s nearly 12% advance. Concerns about China’s demand has seen iron ore prices fall for the fourth session and are off 3.5% for the week. Copper is up 1.1% today. Note that the stockpiles of six industrial metals at the LME are reportedly on historic lows, going back to at least 1997. It was almost flat for the week coming into today. Wheat is slightly higher ahead of the USDA domestic and global crop estimate. The corn and soy output may be cut while wheat is expected to be flat.
China’s lockdown of Shanghai appeared to intensify. The economic impact is growing. This has not stopped Beijing officials from completely giving up their reform efforts in the tech space. Next week, China is expected to report the fifth consecutive monthly decline in the producer prices, while CPI rises above 1%. The trade surplus is set to fall sharply (~$22.5 bln from $94.4 bln). The easing of monetary policy will likely continue with another cut in the benchmark 1-year medium term lending facility.
Without fail for more than 20 years, Japan’s current account balance improves in February from January. This year the pattern holds. Japan’s current account surplus rose to JPY1.65 trillion from a deficit of JPY1.20 trillion in January. This was more than expected. Although many observers still seem focus on the export benefits of a weaker yen, the fact of the matter is the Japan runs a current account surplus but a trade deficit. Over the past 12 months, Japan has recorded an average monthly trade deficit of JPY41 bln. February’s JPY177 bln trade deficit was a little smaller than expected. The key to the current account position was the primary income surplus of JPY2.27 trillion, about half of which comes from foreign direct investment.
US Speaker of the House Pelosi will reportedly visit Taiwan over the weekend. Of course, Beijing is annoyed. It seems to be protesting the visit more than it protested news that the US military has had boots on the ground for over a year on a training mission. Separately, Taiwan reported a larger than expected March trade surplus ($4.66 bln vs $3.92 bln median estimate from Bloomberg’s survey). While exports were weaker than expected at 21.3% year-over-year, imports also missed projections, rising 20.3% rather than 24.3%. Both were slower than in February. Taiwan also reported a stronger rise in CPI. Headline CPI rose to 3.27% in March from 2.34% in February. The core rate stands at 2.47%, up from 1.64% previously. Taiwan’s central bank does not meet until June. Its rate stands at 1.375% following the 25 bp increase last month.
The dollar is straddling the JPY124.00 level, where a $935 mln option expires today. A move above JPY124.30 re-targets the JPY125 area seen in late March. Rising US rates remains the key driver. However, while the fear of real material intervention is still low, the market does not appear ready to re-challenge JPY125. That said, this is the fifth consecutive week the dollar has risen against the yen. On Tuesday, in reaction to the RBA, the Australian dollar rose to $0.7660. It has fallen since and is near $0.7460 in European turnover. The 20-day moving average is near $0.7445, and a break signal a test on $0.7400. Note that a close below last week’s low (slightly below $0.7460) would set up a potential bearish key reversal on the weekly bar chats. The US dollar is trading near CNY6.3635 and a close there would be the highest of the week. The recent price action solidifies the new range around CNY6.34 to about CNY6.38. The PBOC set the dollar’s reference re at CNY6.3653. The median projection in Bloomberg’s survey was for CNY6.3658.
The EU has agreed to ban Russian coal imports and to forge the agreement, a four-month phase in period was adopted. Russian ships and trucks have also been banned. There are many calls for Europe to stop importing Russian gas and oil. Oil seems like a possible next step. Gas is more challenging. Most of those favoring such a ban typically import little or no Russian gas, making it easier to hold the moral high ground. Still, when everything is said and done, the breadth and depth of the EU sanctions against Russia are historic and the good should not be the enemy of the perfect. There is little doubt that the economic and financial sanctions are taking a toll on the Russian economy.
France holds the first round of its president election on Sunday. As is typically the case, no candidate looks to win on the first round. Macron and Le Pen are expected to face each other in a run-off on April 24. Polls have tightened but still show Macron ahead. No French president has been re-elected in 20 years. The key to the presidential mandate may not be found in the tightness of the outcome, but the parliamentary elections in June. A poor showing for Macron could weigh on the euro at the start of next week.
The euro is trading with a softer bias. It briefly dipped below $1.0850 for the first time in a month. The two-year low was set on March 7 just above $1.08. There is an option for 710 mln euros at $1.0825 that expires today. The euro settled slightly below $1.0880 yesterday. If it does not recover today, it will be the seventh consecutive decline. Sterling sulked to almost $1.3025, its lowest level since March 15 when it recorded a low at $1.30. A convincing break of the $1.30 area could see our $1.2830 target come into view. It represents the (50%) retracement of sterling’s recovery off the March 2020 low near $1.14. Still, it seems unlikely today. Nearby resistance is seen in the $1.3060-$1.3070 area.
The US has a light economic calendar ahead of the weekend. February wholesale sales and inventories are not the stuff that moves markets. No Fed officials are scheduled to speak. St. Louis Fed’s Bullard said he would like to see the Fed funds target at 3.00%-3.25% by the end of the year. The swaps market says it may not reach 3% until into 2023. The implied yield of the Fed funds futures does not rise to 3% until next May. The futures market is pricing in a peak in Fed funds near 3.20%.
With the help of a windfall from oil’s rally and a surtax on large banks and insurance companies (and a higher tax schedule going forward), Canada’s government was able to project a near zero deficit in five years while proposing around C$31 bln in new spending. The focus today is on the March jobs report. After growing an amazing 121.5k full-time positions in February, it will be difficult to match it in March. Still, a gain of almost 42k full-time positions is expected (median forecast in Bloomberg’s survey). The unemployment rate is expected to tick lower, while hourly wages of permanent workers is expected to have increased. The importance of today’s report is not just about Canada’s labor market, but the outlook for next week’s Bank of Canada meeting. The swaps market is pricing in about 59 bp of tightening. It seems a bit excessive. A 50 bp move seems reasonable, and it will be accompanied by plans to reduce the balance sheet.
The US dollar’s recovery on Tuesday after testing CAD1.24 left a bullish shooting star candlestick. Follow-through buying over the last two sessions brought the greenback above CAD1.26. It is in a tight 25-tick range below that ahead of the North American session. The next nearby target is the CAD1.2620, which is where the 200-day moving average is found, and CAD1.2635, the (50%) retracement of the greenback’s slide from the March 15 high near CAD1.2870. The US dollar may be supported on a pullback in the CAD1.2550-CAD1.2560 area. The US dollar bottomed against the Mexican peso on Monday around MXN19.7275. It reached MXN20.1950 on Wednesday and has been consolidating in a narrow range (above MXN20.14) since then. Neither the somewhat firmer than expected March CPI nor the ruling by Mexico’s top court that weakened AMLO’s electric reform law has generated new trading incentives for the peso. The consolidative pattern looks like a continuation pattern. The next important target is in the MXN20.40-MXN20.42 area. Note that Brazil’s IPCA inflation will be reported today (not yesterday as we mistakenly had it). It is expected to have accelerated to 11% from about 10.5%. The US dollar has also been correcting higher against the real. A move above BRL4.80 today would confirm a low and could spur gains toward BRL4.88-BRL4.95.
Bannockburn Global Forex