eurostoxx 600

March 07, 2022  $USD, China, Currency Movement, Oil, Russia, SNB, South Korea Overview:  The economic disruption seen since the US warning of an imminent Russian attack on February 11 continue to ripple through the capital and commodity markets.  Equities are being slammed.  Most Asia Pacific bourses were off 2-3% today. Europe's Stoxx 600 gapped lower ad has approached February 2021 levels, orr about 2.6% today.  US futures are around 1.5% lower. The reaction in the major bond markets is subdued.  The US 10-year yield is near 1.72%, off about 10 bp from a week ago.  European benchmark yields are mostly firmer after falling 15-20 bp last week.  In the foreign exchange market, the dollar-bloc currencies continue to show resilience, while the European complex remains under pressure.  The Swedish krona continues to underperform.  It is off more than 5% in the past week.  The euro slumped to almost $1.0810 in the European morning. The JP Morgan Emerging Market Currency Index is down 1.3% after last week's 4.6% drop.  Central European currencies, as one might expect, continue to be punished the most.  They appear to be being treated like high-beta euros.  Gold is flirting with $2000.  April WTI gapped higher and spiked to $130.50 before pulling back to around $123.  US natgas is up more than 1%.  It has risen by more than a quarter of the past three weeks.  Europe's natgas benchmark is surging by nearly a third today after jumping by almost 123% last week.  Iron ore rose about 5.5% today after 14.7% last week.  Copper initially rose by more than 1.5%, but is pulling back a bit. Still, it is up around 0.5% after gaining more than 10% last week.  May wheat is rising for the sixth consecutive session.  Today's 7% advance comes on top of last week's 40.6% jump.   Asia Pacific China and Russia's relationship is on two-tracks.  The strategic relationship is based on the antipathy to a US-centric world and the expansion of NATO, which Beijing says the US is trying to create a Pacific version.  The other track is tactical.  They avoid saying much about each other's neighborhoods, including Ukraine, Taiwan, or the fact that Russia sells weapons to India that ae used to fight and resist China.   China reports a larger than expected Jan Feb trade surplus of nearly $116 bln.  The median forecast in Bloomberg's survey was for a $95 bln surplus.  Exports rose 16.3%, more than anticipated, while imports rose 15.5%, a bit less than expected.  Separately, and also surprisingly, the value of China's reserves fell to $3.21 trillion from $3.22 trillion.  A small gain had been expected.  Still, it appears that valuation, weaker non-dollar reserve currencies and a sell-off in bonds, is the key consideration.    China's National People's Congress gave a 5.5% growth target this year.  It is on the upper end of expectations and is higher than a weighted average of the projections of the provinces, which typically over-deliver. Still, it is the lowest since 1990, excluding 2020.  China's economy is said to have grown 8.1% last year. Despite increased spending and slower growth, the NPC projected that the budget deficit would fall to 2.8% of GDP from 3.2% last year.  Here, Beijing seems to plant to draw from unspent funds from past year.  The targets seem ambitious and would seem to require more monetary and fiscal support.   South Korea votes on Wednesday for a new president, who serves one five-year term.  The contest will go down to the wire. Lee represents the governing Democrats, who enjoy a super-majority in parliament.  Of note, he has endorsed a universal basic income.  Yoon is the candidate of the major opposition People Power Party.  He enjoyed a slight lead in the last poll, and he may have enjoyed a slightly bump when a minor conservative candidate dropped out and endorsed him.  Both campaigns have been marred with gaffes and petty scandals.  Unlike Japan and China, South Korea is experiencing rising price pressures (3.7% February CPI and 3.2% core). The seven-day repo rate has been hiked three times beginning last August to 1.25%.  The won is off about 3.1% this year.   The yen is sidelined.  The dollar is trading in a narrow range between about JPY114.80 and JPY115.15.  Last week's range was roughly JPY114.65-JPY115.80.  Nevertheless, benchmark three-month implied volatility has risen above 8% to approach last November's spike to 8.2%, the highest since September 2020.  The put-call skew (risk-reversal) is the most extreme since October 2020.  Demand for dollar puts, perhaps has protection for dollar receivables appears to be a key factor.  The Australian dollar's rally continues, as its commodity exposures attracts participants.  It reached $0.7440 today, its best level since last November.  It rose 2% last week, its fifth consecutive weekly advance.  It is getting stretched.  The upper Bollinger Band (two standard deviations above the 20-day moving average) is around $0.7330, and the Aussie has closed above it the past two sessions.  The greenback gapped higher against the Chinese yuan.  It opened on the session high near CNY6.3265 but ground lower to CNY6.3170.  The PBOC set the dollar's reference rate at CNY6.3478.  The market (Bloomberg survey) looked for CNY6.3450.   Europe The economic noose on Russia continues to tighten.  Mastercard and Visa will no longer support Russian activity (as of March 10).  Euroclear and Clearstream will no longer settle rouble transactions.  Russia's ability to service its debt is at risk.  While some bonds allow for rouble settlement and coupon payments, some do not.  Some dollar bond coupons are due next week, which reportedly do not have the rouble payment clause, and this could be the default event that triggers credit-default swaps.  Of course, these is talk that China will help, but its assistance is likely limited.  It CIPS payment system works for yuan settlement only.  Meanwhile, Russia has begun rationing staples ostensibly to prevent hoarding.   The euro plummeted through the CHF1.0 level for the first time today since early 2015 when the Swiss National Bank lifted its cap (floor) on the franc (euro).  Under the threat of intervention by the SNB, the euro rebounded to CHF1.0050 in early European turnover but has begun coming off again.  The weekly sight deposit report suggests not intervention took place last week.  Overall sight deposits were little changed, while the domestic sight deposits fell by about CHF3 bln.  While the SNB may not have intervened, central banks in central Europe are thought to have intervened.  The proximity to Russia and the weakness of the euro are the proximate triggers.   The euro is unable to sustain even modest upticks.  It is off for the sixth consecutive session. Last week, it tumbled 3%.  It was the fourth consecutive weekly drop.  The euro has risen in only two weeks this year.  A break of $1.08 could spur a move to the March 2020 low near $1.06, but there is increasingly talk of a move to parity.   Sterling is trading near $1.3150, its lowest level since December 2020.  The $1.3165 area corresponds to the (38.2%) retracement of the big rally since March 2020 low close to $1.14.  A convincing break of this area suggests a move into $1.2830-$1.3000 band.  America While the US begins moving to ban Russian oil imports (500k-600k barrels a day), Europe does not appear ready to do the same.  April WTI futures gapped higher and pushed a little through $130 a barrel before pulling back.  It is hovering around $123.  The pre-weekend high was near $116.00.  There have been several developments over the weekend to note.  Iran will provide more data on its nuclear efforts, and this could lead renewing the accord the US pulled out of and allow for Iranian oil in Q3.  US officials reportedly met with senior members of Venezuela's Maduro government, apparently to discuss lifting sanctions.  The US cut diplomatic ties in 2019.   Before the sanctions and mismanagement, Venezuela's was producing around 3 million barrels a day.  Meanwhile, some Canadian capacity is being taken offline for maintenance, and Libya has lost 200k barrels a day over the past few days due to the political crisis.  Lastly, Saudi Arabia announced it will hike prices to Asia next month.  The economic highlight for the week in the US is the February CPI figures on Thursday.  The headline pace could approach 8% and the core near 6.5%.  Ahead of that report, on tap today is the January consumer credit.  Note that American household debt increased by $1.02 trillion last year, the most since 2007.  Total consumer debt is around $15.6 trillion, including cars and houses.  Tomorrow, the US see the January trade balance, where a large deficit is expected, and the wholesale inventories, which may be linked to stronger imports.   In some quarters, there is still talk about "artificially" low rates in the US. However, consider what would happen if next week, the Fed Chair Powell were to channel Volcker and hike the Fed funds target by 100 bp.  We suspect that medium and long-term US interest rates would fall sharply.  Many would likely assume that it would drive the world's largest economy into contraction.  Note that 2-10-year yield curve is slipping below 25 bp today. Canada reports tits January trade figures tomorrow and return to surplus is expected.  The highlight of the week will be the jobs report on Friday.  After losing 200k jobs in January, the Canadian jobs market is expected to have recovered smartly.  The unemployment rate is expected to fall to 6.3% from 6.5% even while the participation rate is projected to rise to 65.2% from 65.0%.  Mexico report February CPI figures on Wednesday.  A rise to nearly 7.25% is expected after 7.07% in January.  At the end of the week, January industrial production figures are due.  A small decline is expected.     Since late January, the US dollar has mostly been in a CAD1.2650-CAD1.2800 range.  It was briefly pushed below CAD1.26 in the middle of last week but quickly snapped back to the upper end of the range.  It is trading inside the pre-weekend range (~CAD1.2670-CAD1.2790).  The Canadian dollar appears pulled between its commodity exposure and its risk-off sensitivity.  The Mexican peso is less ambivalent.  The greenback jumped 1.5% before the weekend and is up another 1.2% today.  Near MXN21.20, the US dollar is at its best level since mid-December, when it poked above MXN21.36.  The dollar is rally has lifted it more than three standard deviations (~MXN21.21) from its 20-day moving average.    Disclaimer

March 16, 2022  $CNY, $USD, Brazil, China, Currency Movement, Federal Reserve, Iran, Russia, Saudi Arabia Overview: Chinese officials offered reassuring words and sparked a dramatic rally of equities and risk appetites more broadly. At the same time yields are surging as the markets anticipate the Fed to signal a more aggressive tightening course as it upgrades its inflation forecasts. China's CSI 300 rallied 4.3%, while the Hang Seng soared 9% and an index that tracks mainland shares listed in HK jumped 12.5%.  Most equity markets in the region rose 1-2%.  Europe's Stoxx 600 is around 2.2% better and US futures point to a strong opening.  The US 10-year yield is a little firmer at 2.15%. European benchmark yields are mostly 2-5 bp higher.  The 10-year JGB yield is a little near 0.20%, as it approaches the top of the Yield-Curve Control band (0.25%).  The dollar is on its heels.  The Scandis are leading the charge followed by the dollar bloc.  The dollar managed to extend its advance against the yen for the seventh consecutive session yesterday and is edging higher today.  Emerging market currencies are also gaining on the greenback, and the JP Morgan Emerging Market Currency Index is rising for the third consecutive day.  Rising yields seem to be tarnishing gold.  It is little changed, after falling for the past three sessions.  It is holding above yesterday's low near $1907.  April WTI is consolidating inside yesterday's range.  So far, it has held below $100 a barrel for the first time this month.  US natgas is jumping 3.0% to recoup most of what was lost in the past two sessions.  Europe's benchmark is up almost 1% after a nearly 2% advance yesterday.  Recall that it dropped 17.3% on Monday.  The supportive comments by Chinese officials arrested the six-day slide in iron ore prices with an 8.3% bounce today. Copper is rising for the first time in four sessions.  Nickel trading briefly re-opened and shut again, citing a technical issue with the new daily limit.  May wheat is about 3% weaker after rallying 5.3% yesterday.   Asia Pacific Chinese officials confirmed the shift from structural reforms to supporting the economy and growth.  A meeting chaired by Vice Premier Liu He promised to keep the stock market stable, support foreign listings, new policies for property developers, and signaled the end of its effort to "rectify" internet platform companies.  It could be that Chinese officials understood that the recent batch of economic data was not very convincing, such as the 12.2% jump in fixed-asset investment despite a sharp drop in cement and steel output (-17.8% and -10% respectively).   Reports suggest that Saudi Arabia is considering allowing China to pay for its oil in yuan. It is important to recognize that this is not the first time such a story has circulated.  China is Saudi Arabia’s single biggest customer, taking around a quarter of the Kingdom’s oil exports.  At $100 a barrel, it runs around $155 mln a day. What is Saudi Arabia going to do with the equivalent amount of yuan?  It is not like Saudi companies need yuan to service their RMB-debt or other obligations like they do with the dollar or euro.  The Saudi riyal is pegged to the dollar.  If Riyadh pushes too hard, will speculators test the commitment to the dollar peg? Will it be costly, like when it decided to grow wheat in the desert and cost it a quarter of its aquifer?  Riyadh could boost the allocation of its reserves to yuan, but to what end?  Given that the yuan shadows the dollar closely, the diversification argument is weak.  The yield premium over 10-year Treasuries has fallen below 70 bp for the first time in three years.  Saudi Arabia and US interests have diverged in several areas over the past year or two, including Yemen, Iran, and Afghanistan.  It has rejected the US and others’ entreaties to boost oil output, even though OPEC+ is not meeting the 400k barrel addition a month commitment.  The US used to buy 2 mln barrels of oil a day from Saudi Arabia.  At the end of last year, it was about 500k bpd and surpassed by Russia, Mexico, and Canada. Japan's February trade balance always improves from January, but this time the improvement was much smaller than expected.  Japan reported a JPY668 bln shortfall after a JPY2.19 trillion deficit in January.  Exports rose 19.1% year-over-year, which was a little less than expected.  On the other hand, imports soared by 34%, well above the 26.4% expected (median forecast in Bloomberg' survey).  The surge in the cost of energy drove the imports.  Japan reports February CPI figures Friday ahead of the outcome of the BOJ meeting. Excluding fresh food and energy, Japan is expected to show that deflationary forces persist.  The US dollar is about a quarter yen range as it holds above JPY118.15.  Provided the greenback closes above JPY118.30, it will be the eighth consecutive advance. Our JPY118.60 target has been approached.  Above there, the JPY120 area beckons.  Still, we caution chasing it higher.  The technical indicators are stretched, and the dollar closed above its upper Bollinger Band for the past three sessions and remains above it now (~JPY118.15).  The Australian dollar is extending its recovery that began yesterday.  It is approaching $0.7240, which is the (38.2%) retracement of the leg down that began at the end of last week from about $0.7365.  Note that the five and 20-day moving averages converge near $0.7255 today. The Chinese yuan rallied for the first time in five sessions today. The dollar had gapped higher on Monday and again on Tuesday.  It reversed lower yesterday, but the opening gain was not closed.  Today, the dollar closed Tuesday's gap and entered Monday's without closing it.  It extends to last Friday's high slightly below CNY6.34. The greenback's decline of a little more than a third of 1% would be the biggest drop of the year, if sustained.  Today the PBOC's dollar fix was a weaker than expected at CNY6.38 (vs. CNY6.3811, the median in Bloomberg's survey).   Europe Reports suggest that the US has promised that if the 2015 nuclear accord with Iran can be re-started, its sanctions would not impact Russia's atomic supply arrangements with Iran.  This had appeared to be a key issue behind the suspension of talks at the end of last week.  The revival of talks, which appeared to be moving in the right direction in recent weeks, would likely allow some phasing in of Iranian oil as adherence to the pact met certain benchmarks.   The Bank of England meeting concludes tomorrow.  The swaps market has about little more than a 25% chance of a 50 bp hike.  There had been a 60% chance discounted on February 10, the day before the US warned that a Russian attack on Ukraine could happen at any moment.  Recall that last month's 25 bp hike was delivered by a 5-4 majority, with the minority seeking a 50 bp hike.   The BOE's balance sheet begins shrinking this month as the large maturity will not be recycled into new purchases.  The euro is trading inside yesterday's range (~$1.0925-$1.1020).  There is a 1.23 bln euro option at $1.10 that expires today.  It looks likely to consolidate until the reaction to the FOMC meeting later today.  We note that the US two-year premium over Germany widened to almost 228 bp yesterday, the most since late 2019.  Despite the anticipation of the BOE's rate hike tomorrow, sterling remains pinned near the $1.30-trough seen on Monday and Tuesday.  Yesterday's high was about $1.3090, and today, it has been unable to sustain upticks abvoe $1.3070.  The $1.3100 area corresponds the (50%) retracement objective of the leg down since reversing lower from $1.3200 on March 10.  America Before the outcome of the FOMC meeting is announced, February retail sales will be reported.  It is unreasonable to expect a strong gain on top of the 3.8% surge in January (even without autos and gas). The dramatic gain was in reaction to the Covid-related 2.5% slump in December. The data is reported in nominal terms, reflecting volumes and prices.  We know that auto sales, as reported by the manufacturers, disappointed.  The median forecast in Bloomberg's survey is for a 0.4% increase in the headline pace month-over-month and slightly slower for the components that feed into GDP models (excludes autos, gasoline sales, building materials, and food services. Economists will scrutinize the data to see how much the increase in gasoline prices is compressing discretionary purchases.  It is Fed Day, and this is the main focus. There seems little doubt that the Fed will hike the target rate by 25 bp.  That is probably the element that there can be the most certainty about.  The market has about a 13% chance that it could be 50 bp after Chair Powell clearly endorsed a 25 bp hike in testimony before Congress earlier this month.  Still, there is greater uncertainty over the other two elements of the Fed's announcement.  The pace of the balance sheet unwind is anxiously awaited.  We penciled in $40-$50 bln a month of Treasury and $20-$25 bln a month in Agencies.  Talk has circulated for a few months, but it seemed to pick up recently that the Fed could avoid an inversion of the curve if it relied more on QT (quantitative tightening) than rates.  Powell has insisted that the interest rate target is its primary monetary policy tool. Is this cast in stone? The dot-plot is the third element.  In December, the median projection was for rates to rise about 75 bp this year, with a 0.75%-1.0% target at the end of the year.  The Fed funds futures market has about 175 bp in tightening discounted. The median Fed dot saw the longer-term equilibrium rate at 2.5%.  In December, only five Fed officials anticipated that the target rate would be above there at the end of 2024.  The swaps curve sees rates peaking between 2.25% and 2.50% in 2024.  Canada's February CPI is expected to have accelerated to 5.5% from 5.1%.  More important for the central bank may be the acceleration in the underlying core rates.  The average may rise to 3.4% from 3.2%.  The Bank of Canada meets next on April 13 and is widely expected to hike again and signal the roll-off its balance sheet.   Late in the session, Brazil's central bank will likely raise the Selic Rate by 100 bp to 11.75%.  The past three hikes have been in 150 bp increments.  The IPCA measure of inflation edged up to 10.54% last month from 10.38%.  The central bank may warn that inflation has not peaked.  The swaps market has the peak in rates near 13.75% later this year.   The US dollar reversed lower after testing CAD1.2870 yesterday.  It settled on its lows (~CAD1.2760) and follow-through selling has pushed to about CAD1.2720 in the European morning.  Initial support is seen at CAD1.27, where a $1.1 bln option expires today.  Last week's low was near CAD1.2685. The CAD1.2650-CAD1.2660 area had previously offered support.  The greenback is pushing lower against the Mexican peso for the fourth consecutive session.  It is fallen from MXN21.05 before last weekend to MXN20.7635 earlier today.  It had been finding bids near MXN20.81.  If the break can be sustained, the next target is the MXN20.60-MN20.66 band.   On the other hand, the dollar has risen for the past four sessions against the Brazilian real.  The risk-on mood coupled could help stem the tide.  Resistance is seen near BRL5.20.  A break of yesterday's low near BRL5.10 may signal a top may be in place.      Disclaimer

April 06, 2022  $USD, balance sheet, China, Currency Movement, Federal Reserve, Germany, Hungary, Japan, Poland Overview:  Federal Reserve Governor Brainard's suggestion of a rapid unwind of the Fed's balance sheet stoked a bond market sell-off that is continuing today, rippling through the capital markets.  The US 10-year yield is rising for the fourth consecutive session.  The six-basis point gain today puts the yield near 2.62%, which represents a little more than a 25 bp increase since the jobs data on April 1.  European benchmark yields are 3-6 bp higher.  Japan's 10-year yield is poking above 0.23% to again challenge the BOJ's Yield Curve Control.  Equity markets are taking it on the chin.  The major markets in the Asia Pacific region fell, led by a 2%+ sell-off in Hong Kong. China's markets re-opened after a two-day holiday, and although the Shanghai and Shenzhen markets posted minor gains, the CSI 300 slipped by 0.3%.  Europe's Stoxx 600 is off around 1.1% and US futures are about 0.75% weaker.  The dollar is mixed.  The Swiss franc, Norwegian krone, and Japanese yen are weaker.  The Swedish krona, sterling, and euro are posting small gains.  Among the emerging market complex, the South African rand leads the few currencies higher.  Poland, which is expected to lift rates 50-75 bp today has not prevented the zloty from softening.  The Hungarian forint and Indian rupee lead the decliners today.  Gold is edging higher within its consolidative range, after the $1915 area held.  May WTI is firm near $104, but within yesterday's range (~$99.90-$105.60).  US natgas is extending yesterday's 5.6% gain by another 2% today. It is up roughly 40% since mid-March.  Europe's benchmark is snapping a three-day 13% decline with a 2.75% gain today.  Iron ore is off around 1.3%, while copper is slipping lower for the first time this week.  May wheat is paring the two-day 6% rise.   Asia Pacific China's mainland markets re-opened after the two-day holiday.  The news was poor.  The Caixin service and composite PMI were weaker than expected.  The services PMI slumped to 42.0 from 50.2. The composite dropped to 43.9 from 50.1.  In some ways, the news confirms what the market already knew in broad strokes.  The world's second-largest economy is struggling mightily as the zero-Covid policy is disrupting activity.  The lockdown in Shanghai, for example, has been extended.  The economic disappointment will underscore expectations for additional policy support.   New Zealand is placing a 35% tariff on imports from Russia while extending its export prohibitions.  Australia reports February trade figures tomorrow.  Weaker exports and stronger imports are projected to translate into a smaller surplus.  The new pact between the US, UK, and Australia (AUKUS) is not just about the nuclear-powered submarines.  It was announced that they are also working on developing hypersonic weapons.  Meanwhile, a Quad (Australia, Japan, India, and the US) meeting slated for next month may be delayed until after the Australian election.  This also means that US President Biden's first trip to Japan will also be rescheduled.   Rising US yields have helped lift the greenback to JPY124.  The dollar's multiyear high set in late March was almost JPY125.10.  The market looks set to challenge it again and a marginal new high is possible.  Recent comments by the Minister of Finance and the BOJ Governor show continued sharp depreciation of the yen is not desirable.  A month ago, the dollar was near JPY115.  The Australian dollar surged yesterday as the central bank appeared to signal the likelihood of an earlier hike, but it is trading quietly today.  The Aussie is in around a 15-tick range on either side of $0.7575.  Although it reached $0.7660 yesterday, the $0.7600 area may offer a cap today.  China's mainland market re-opened today, and the dollar initially jumped to a five-session high near CNY6.3765.  It spent the local session drifting lower and is now near CNY6.3600, back within the April 1 range.  The PBOC set the dollar's reference rate at CNY6.3799.  The median projection (Bloomberg survey) was CNY6.3791.  Europe German factory orders slumped 2.2%. It was the first decline in four months.  The median forecast (Bloomberg) anticipated a 0.3% decline.  The January series was revised to 2.3% from 1.8%, offering a small consolation.  Domestic orders fell for the second consecutive month, while foreign orders slid 3.3%.  That said, foreign orders have been alternating between gains and losses since at least last August.  A group of economic advisers to the German Chancellor cut this year's growth forecast to 1.8% from 4.6%, while warning that a recession was possible.  Tomorrow, Germany is to report February industrial production figures.  The median forecast is for a 0.2% gain after the 2.7% surge in January.  The risks are on the downside.  Note that yesterday, France reported February industrial output fell by 0.9%, three-times the decline the median forecast anticipated.  The aggregate report is due next week.  Poland's central bank is expected to deliver its seventh consecutive rate hike today.  The reference rate stands at 3.5%.  The median forecast is for a 50 bp hike, while the average forecast leans toward a 75 bp move. Poland began the tightening cycle last October with a 40 bp move.  It was followed by 75 bp in November and then three 50 bp moves before a 75 bp hike last month.  Meanwhile, the EU has wasted no time since Hungary's Orban handily won the weekend election to begin pressing with the untested "conditionality mechanism" which can lead to the denial of EU assistance (~40 bln euros) for violating core values.   Since posting a key downside reversal last Thursday, the euro has been unable to sustain even modest upticks.  It had been turned back from around $1.1185 and tested $1.0875 today, its lowest level since March 8.  The low was recorded in Asia, and early European dealing squeezed it to about $1.0925 before it ran out of steam.  The single currency looks poised to re-test the $1.08 area seen on March 1.  Sterling posted an outside down day yesterday, trading on both sides of Monday's range and then settling below Monday's low.  Follow-through selling pushed it briefly below $1.3050 before it too bounced in the European morning to almost $1.3110.  There may be scope for additional minor gains, but we expect it to come off in the North American morning.   America Many observers seem confused.  They had the Fed's Brainard as a dove.  Yet her comments yesterday were as hawkish as they have come.  Reducing inflation was paramount.  She seems to be part of the growing consensus to hike 50 bp next month.  It was her comments about the balance sheet that may have done the most damage to stocks and bonds.  She referred to a "rapid" pace.  The previous exercise saw the unwind limited to $50 bln a month and it took several months to ramp up to the limit.  Brainard appeared to confirm a more aggressive unwind that could begin as early as next month.  The 2-10-year yield curve steepened back to a positive slope, but it is not because investors think that the balance sheet adjustment will take some pressure off the need to raise interest rates.   On the contrary, the implied yield on the December Fed funds futures contract rose to a new high and is now implying 220 bp of hikes this year.  Hawk and dove labels may be helpful for analytic purposes, but they are always contextual.  Bullard, the leading hawk now, may not have gotten what he wants, hence the dissent at the March meeting.  However, the rest of the FOMC is converging to his broad position.   Consider that in March, there were only two dots above 2.38% for the Fed funds target at year-end.  The December Fed funds futures contract implies a year-end rate of 2.54%.  Brainard did not steal all of the thunder from the FOMC minutes.  The market still wants to have a better idea of the pace of the unwind.  Anything more than around $100 bln would surprise.  The phase-in period likely begins next month and will quickly ramp-up toward the caps.     The US dollar rebounded off CAD1.24 yesterday and settled near the session high just below CAD1.25.  A bullish hammer candlestick pattern was left in its wake.  Follow-through buying today has been minimal and the greenback tested CAD1.2510.  It looks like the move in early March near CAD1.29 has been completed.  A consolidative/corrective phase looks likely from a technical perspective.  Initial resistance is seen near CAD1.2550, we suspect a move toward CAD1.2600 is likely.  The 200-day moving average is around CAD1.2620.  The greenback's slide against the Mexican peso appeared to have ended.  The move began on March 9 after peaking the day before near MXN21.4675.  At the start of this week, it fell to MXN19.7275.  That move ended with aplomb yesterday and the greenback raced above MXN20.00 for the first time since March 29. Momentum and trend-followers are caught leaning the wrong way.  A short-squeeze could lift the dollar toward MXN20.14 and then, possibly MXN20.35-MXN20.40.     Disclaimer

February 22, 2023  $USD, Canada, Currency Movement, FOMC, Italy, Japan, RBNZ, US Overview: The surge in US interest rates and sharp losses in US stocks sent the dollar broadly higher in North America yesterday. The $42 bln of two-year notes auctioned by the US Treasury saw the highest yield in more than a quarter-of-a-century (4.67%) and it still produced a small tail. Sterling, helped by its own surprisingly strong data, was the only G10 currency to have gained against the surging dollar. Still, no important technical levels were breached, though the greenback rose to nearly seven-week highs against the Canadian dollar. The US dollar also rose to new highs for the year against the Japanese yen before settling at about JPY135.00. Rising US rates and falling stocks are the main driver and the FOMC minutes later today are the focus. While the US economic calendar is light today, Fed speakers return tomorrow, and the data highlight is the PCE deflator on Friday. The major US equity indices lost at least 2% yesterday and are little changed today. However, global equities were dragged lower, with sharp losses in Japan, Korea, and India. Europe's Stoxx 600 is off about 0.85%, the third largest swoon this year. European bond yields are mostly 1-2 bp higher. The G10 currencies are mostly heavier, but the yen and Swiss franc are slightly firmer, while the New Zealand dollar is virtually flat despite the 50 bp hike. Among emerging market currencies, the Mexican peso continues to shine, but nearly the rest are softer. Gold is holding above yesterday's $1830 low but is not making much of a recovery. April WTI is extending its pullback for the sixth consecutive session to trade below $76. Asia Pacific The Reserve Bank of New Zealand slowed the pace of its tightening by hiking the overnight cash target rate by 50 bp to 4.75%. It continues to see a peak at 5.5%, but now it is seen in Q4 23 rather than Q3. While headline inflation is easing, the central bank argued the core rate is too high and employment is "beyond the maximum sustainable level." The RBNZ said it was too early to assess the impact from the cyclone and the fiscal response. It continues to see an economic contraction beginning in Q2 but expects it to be short and shallower. The next meeting is on April 5 and the swaps market sees about a 50% chance of another 50 bp move. The New Zealand dollar initially traded higher in response, reaching about $0.6250 from about $0.6215 but has given it back to trade little changed on the day. Japan's January services producer prices edged up to 1.6% year-over-year. They peaked last June at 2.1%, and had slowed to 1.5% pace, the lowest since Q1 22. They averaged about 2.1% in the few months before Covid struck. The inflation focus in Japan is not about service prices but goods prices, not about producer prices, but consumer prices. The national consumer prices will be released early Friday. The Tokyo CPI warns of another jump in the national figures and the median forecast (Bloomberg survey) is for a 4.3% year-over-year pace. This would be a new cyclical high and could very well prove to be the highwater mark. Next week Tokyo's February CPI will be released. It does a good job of anticipating the national figure. We look for government subsidies, the appreciation of the yen on a trade-weighted basis, and the decline in energy and wheat prices to ease price pressures. Read next: The AUD/USD Pair Remains Under Selling Pressure, The GBP/USD Pair Is Below 1.21 Again| FXMAG.COM The dollar reached nearly JPY135.25 yesterday, a new high since last December's BOJ surprise. While it has held today, the greenback found support around JPY134.55. With US rates little changed, the exchange rate is seen consolidating. For the second consecutive session, the 10-year JGB pushed above its 0.50% cap. The BOJ bought bonds and offered five-year low-cost loans to banks to buy government bonds. The Australian dollar edged closer to $0.6800, slipping fractionally through last week's low. The 200-day moving average is about $0.6805. The $0.6780 area marks the (38.2%) retracement of the rally from the middle of last October's low (~$0.6170) and is the next important chart area. The greenback rose to almost CNY6.90 today, its best level since January 4 and slightly through the 200-day moving average (~CNY6.8885). The reference rate was set at CNY6.8759, tightly against expectations (CNY6.8760). Europe In a process that is difficult to disentangle cause and effect, or perhaps as an example of reciprocal causality, the weakening euro, rising yields, and widening peripheral premiums within the eurozone go hand-in-hand. The euro has moved back toward $1.06, which it has not traded below since January 6. The 10-year German Bund yields more than 2.50% and is challenging the high from the end of last year (~2.57%), which has not been seen in a dozen years. It is a similar story with France's 10-year yield, but almost 50 bp higher. Italy's 10-year yield is approaching 4.50%. Last year's peak was near 5.00%. Spain's 10-year yield peaked at the end of last year slightly above 3.65%, an eight-year high. It moved above 3.50% yesterday. Italy's 10-year premium over Germany pushed above 190 bp yesterday for the first time in over a month. Its two-year premium widened to above 50 bp, which it had not seen since January 2. Spain and Portugal's premium over Germany has also widened, but not as much as Italy. Italy's debt burden makes it particularly vulnerable, yet there is another consideration too. Italy's 2021 and 2022 budget deficit is likely to be revised up next week when the stats office assesses the impact of the tax credits initially aimed to encourage green building renovations. The cost has been estimated to in excess of 110 bln euros. There were various elements and the one that was terminated was called "the super-bonus." It was not well-targeted and the use of tradeable (between financial institutions and businesses) helped create the environment for misuse. That said, the initiative did appear to bolster the construction sector in 2021 and helped set the stage for a broader economic recovery. It had been enacted by the coalition government led by Prime Minister Conte from the Five-Star Movement. Former Prime Minister Draghi intervened to curb some of the program's excesses, and last week the Meloni government stopped the program altogether. A key judgment call that the Eurostat may decide, is whether the tax credits are "payable" or "non-payable" which will determine how the cost will accounted; whether is front-loaded or amortized over several years. The euro peaked on Monday a little above $1.07 and has been sold to about $1.0625 today. Last week's low was slightly below $1.0615. A break of the $1.0600 opens the door to a potential move toward $1.0460-$1.0500. There are options for 1.3 bln euros at $1.0550 that expire today. The intraday momentum indicators are oversold but with the FOMC minutes later today, the North American market may show limited enthusiasm for the euro. Resistance may be seen in the $1.0640-50 area. Sterling posted an outside up day yesterday by trading on both sides of Monday's range and settling above its high. It reached almost $1.2150 and has been sold to about $1.2065 today. Initial support is seen near $1.2050. On the top side, the $1.2100-20 area may offer a nearby cap. America The string of constructive US economic data continued yesterday and drove interest rates higher. It seems US rates are being driven higher more by the data than Fed's rhetoric. The flash composite PMI rose above the 50 boom/bust level for the first time since last June. It stands at 50.2 and is due to the recovery in the service PMI to 50.5 from 46.8.  Separately, the Philadelphia Fed's non-manufacturing survey also improved in February to 3.2 from 6.5.  The manufacturing sector is doing less well, which was a clear pattern in the eurozone and UK flash reports. The US flash manufacturing PMI rose to 47.8 from 46.9.  It is the second consecutive month that the weakness moderated. The Empire State manufacturing survey and the Philadelphia Fed survey picked up similar contractionary impulses from the manufacturing sector. Elsewhere existing home sales disappointed. The median forecast in Bloomberg's survey called for a 2% increase in January, but instead they fell by 0.7% and the December decline was revised to -2.2% from -1.5%. Existing home sales have not increased since last January and 4.00 mln unit (SAAR) is the slowest since 2010. Today, there may be keen interest in the FOMC minutes from the meeting earlier this month that delivered a 25 bp hike. As seems rather common recently, the market had one reaction to the Fed's statement and decision and then reversed during Powell's press conference. The message from the Fed is that price pressures remain, and it will take more than moves to reach a level of restriction that it will be comfortable pausing. After a clear campaign to bring the target rate above is seen as the long-run appropriate level, officials believe the pace of tightening can return to a more normal pace of 25 bp. Some of the discussion, like easing of financial conditions may be less relevant. Also, the market has dramatically scaled back ideas of a Fed cut late this year. The last meeting of the year is on December 13. The January 2024 meeting concludes on the last day of the month. The market's bias toward a cut saw the implied yield of the January contract fall to more than 40 bp less than the September contract most recently on February 2. It stood at 18.5 at yesterday's settlement, the smallest discount since early last October. Weaker than expected Canadian retail sales, excluding autos in December, coupled with the more modest increase in price pressures may have lent support to the Bank of Canada's pause that was being questioned after the recent unexpectedly strong employment report. Headline inflation rose by 0.5% (0.7% was expected), allowing the year-over-year rate to fall below 6% for the first time since last February. The base effect suggests the rate is likely to fall sharply over the next couple of months. The US two-year yield shot up 11 bp to 4.73% as it approaches last year's high reached in early November near 4.80%. The two-year Canadian yield was dragged up by eight basis points. However, the more significant weight on the Canadian dollar was from the broad risk-off move. The correlation between changes in the S&P 500 and the Canadian dollar on a 60-day rolling basis is little changed since the start of the year around 0.75.   The US dollar is extending its gains against the Canadian dollar. It has reached CAD1.3560, its best level since January 6. Options for about $475 mln at CAD1.3550 expire today. The CAD1.3600 area offers the next chart area, but the year's high was set near CAD1.3685. The gains in Europe have stretched the intraday momentum indicators and initial support is seen at CAD1.3520-30. The Mexican peso is one of the few currencies gaining on the greenback today. The US dollar recovered yesterday to around MXN18.4830 after testing the five-year low near MXN18.3350 seen last Friday and Monday.  It held MXN18.48 today and slipped back to MXN18.4135. A consolidative session seems likely.    Disclaimer