Waiting for the Fed

Overview: The US dollar and Treasury yields firm ahead of the outcome of the FOMC meeting.  The failure of US stocks to hold on to early gains yesterday lends itself to the continued consolidative tone today.  Asia Pacific equity markets were mixed, but a downside bias was evident.  Europe’s Dow Jones Stoxx 600 is paring yesterday’s gains. The US equities indices are also looking at small losses.  The 10-year Treasury yield is hovering around 1.64%, while other benchmarks yields have edged 1-2 bp higher.  The UK 10-year Gilt yield is up four basis points, and sterling is firm.  The  Australian and Canadian dollars and Swiss franc are bringing up the rear, with around 0.2% losses.  Most emerging market currencies are lower, though the Chinese yuan and most central and eastern European currencies enjoy firmer tones.  Gold is a little higher even if not above $1740.  May WTI is softer for the fourth consecutive session and near $64.50 ahead of the US inventory report.  The IEA played down ideas that oil is in a supercycle and sees ample supplies.  The American Petroleum Institute estimated a small drawdown, but EIA is expected to report another build.   

Asia Pacific

Japan’s February trade surplus was smaller than expected on the back of a larger than anticipated 4.5% decline in exports.  Although some observers still complain that international investment by government pension funds is tantamount to intervention to covertly intervene for trade advantage, Japanese exports fell every month (on a year-over-year basis) from December 2018 through November 2020.  They rose in December 2020 and January 2021 before falling again last month.  Imports also fell consistently from May 2019 through January 2021 and rose by 11.8% in February.  Japan recorded a small trade surplus (~JPY563 bln) last year after running deficits of JPY1.2-JPY1.7 trillion in 2019 and 2018, respectively.  

The US tightened restrictions on sales to Huawei and announced sanctions on another 24 Chinese and Hong Kong officials over actions in Hong Kong ahead of the bilateral talks tomorrow.  Secretary of State Blinken and Defense Secretary Austin are visiting Quad members, Japan and South Korea.  The White House obviously has low expectations of the first formal talks with Chinese officials.  The US has signaled that there will not be a joint statement or major announcement.  

Australia reports February employment data tomorrow.  The central bank has linked the monetary policy to inflation and inflation to wages.  The Australian labor market is recovering.  From March through June last year, Australia lost about 378k full-time positions.   With January’s 59k gain, it has recouped 311k full-time posts.  The unemployment rate stood at 5.3% in January 2020 and was at 6.4% in January 2021.  It is forecast to slip to have slipped to 6.3% last month.  

The dollar continues to straddle the JPY109 area as it has done in the past two sessions.  The greenback is firm but does not appear to be going anywhere quickly.  A key driver, US yields, is also in a consolidative phase.  The week’s range so far ( ~JPY108.75-JPY109.35) may continue to confine prices until the FOMC meeting outcome.  The Australian dollar is also moving sideways.  It remains within Monday’s range (~$0.7705-$0.7775).  A break of the $0.7700 area could signal another cent decline to test this month’s low.  The US dollar may be in a new and slightly higher range against the Chinese yuan.  In January and February, the greenback was mostly confined to the range set in the first two sessions of the year (~CNY6.43-CNY6.5150).  However, now seems to be in a range set last week (~CNY6.4775-CNY6.5440).  Chinese banks have reportedly been buying dollars from exporters and other corporates and swapped them to circumvent monthly quotas on the foreign currencies they can buy.  The PBOC set the dollar’s reference rate at CNY6.4978, nearly spot on with the bank model projections.  


Voting in the Dutch election ends today.  Prime Minister Rutte is expected to secure a fourth term.  However, the political landscape is so fragmented that it took around 220 days after the last election to form a coalition.  That government resigned en masse earlier this year in the face of a racial profiling scandal that falsely accused some minority parents of defrauding the government through child benefits. Several EU members have seen the populist challenge weaken, and it is possible that this was the case in the Netherlands too.   

The dispute between AstraZeneca and Europe may come to a head tomorrow.  The European Medicine Agency is expected to hand down its judgment on the vaccine that many countries in Europe (and a few outside) have suspended.  The EMA has played down the statistical relevance of the blood clot concerns and is expected to do so tomorrow.  France and Italy have indicated that if so, they will resume AstraZeneca vaccines. Still, the episode underscores the sense among investors that Europe is lagging in the vaccine rollout and fiscal efforts.  

The euro held yesterday’s low a little above $1.1880 and has approached $1.1920 in early European turnover.  Yesterday’s high was around $1.1950.  It is the fourth consecutive session that the euro is making lower highs. The single currency has not been above $1.20 since March 4, and there is a 1.2 bln euro option struck there that expires today.  Another option for 1.7 bln euros at $1.19 also expires today, but given that it has been straddling that area, one must assume that it has been hedged out.   Sterling is firm, but it too does not appear to be going anywhere quickly.  For the better part of three weeks, it has been chopping between $1.38 and $1.40.  Violations have been short-lived and minor.  It is straddling the middle of the range.  Expiring options (~GBP615 mln) struck between $1.3885-$1.3890 have likely been neutralized.  Separately, note that Turkey’s central meets tomorrow.  It is widely expected to hike the one-week repo rate by 100 bp to 18%. The lira is off about 0.75% against the dollar year-to-date.  Over the past week, the dollar has been trading around TRY7.50 (the 200-day moving average ~TRY7.4355).


The US reports February housing starts.  No doubt, any weakness will likely be attributed to the poor weather, though it would be the second consecutive decline.  Rising wealth (via equities and house prices) and low interest rates have helped fuel strong residential investment during the pandemic. Housing starts reached their best level in December since 2006. The Jan-Feb pullback is likely minor.  

The FOMC meeting and Powell’s press conference is the event of the day.  The Fed’s statement can easily and quickly be digested.  It is fairly formulaic. The first paragraph offers the Fed’s high-level economic assessment.  It will likely be upgraded from the “moderated in recent months” to something reflecting the stronger growth impulses and the fiscal stimulus. After recognizing the significance of the virus, the Fed’s last two statements contained the identical description of the Fed’s policy, including the long-term asset purchases ($120 bln a month).  The Fed has indicated its asset purchases will continue until there is “substantial further progress” toward the targets.  While there has been progress, it probably does not count as “substantial” from the Fed’s vantage point.  However, that there will be substantial progress over the next several months seems like a reasonable assumption. By the time of the next FOMC meeting (April 28), the US could be rapidly approaching herd immunity with a little bit of luck.  

The survey of economic projections (the dot-plot), like the statement and minutes, is part of the Fed’s communication tools.  Near-term growth forecasts are likely to be adjusted higher.  Near-term inflation will make too.  Here, the Fed’s message is similar to the other major central banks:  rising rates are a sign of confidence in the recovery, and that the rise in prices is mostly technical and will likely prove transitory.  The market will also be sensitive to the likely shift in the anticipated timing of the first hike.  Yellen had suggested that it is possible to see the labor market regain pre-Covid levels of employment in 2022.  If true, then a rate hike sooner than the Fed currently anticipates.  In December, only one official saw a hike next year as appropriate. The loner may have some company now.  In December, five Fed officials saw a hike in 2023.  Given the fiscal stimulus and the vaccine rollout, the Fed’s confidence may grow, and more officials may push a hike into 2023.  

Canada reports February CPI figures, and a 0.7% increase will lift the year-over-year rate to around 1.3%. The underlying measures are firmer.  The Bank of Canada next meets on April 21, and an adjustment to its economic projections could persuade others that a tapering of its bond-buying is likely in the coming months.  It currently buys C$4 bln of bonds a week.  Mexico reports bi-weekly reserve figures.  Late in the day, Brazil’s COPOM is expected to lift the Selic rate by 50 bp to 2.5%. 

The greenback edged to a new low yesterday near CAD1.2435, and although it settled on its lows, there has been no follow-through dollar selling.  It has recovered to CAD1.2470 in Europe but appears toppish.  Similarly, the US dollar eased to a new low for the month against the Mexican peso yesterday (~MXN20.5235) but has returned bid today.  Initial resistance is seen near MXN20.70 and yesterday’s high closer to MXN20.73.  Meanwhile, the greenback has risen for three consecutive sessions against the Brazilian real. It has been a bit streaky lately.  The three-day advance follows a three-day decline, which itself came after a three-day advance.  Net-net this month, the real is off about 0.4% against the dollar, bringing the year-to-date decline to almost 7.6%.    



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