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Overview: The dollar is trading quietly after being sold yesterday. It is still soft against the dollar bloc and the Swiss franc but is firmer against the other G10 currencies. Narrow ranges have dominated. Emerging market currencies are mixed, with central European currencies and the Taiwan dollar trading softer. The offshore Chinese yuan is firmer for the sixth consecutive session. The highlights of today's North American session feature minutes from last month's FOMC meeting, a $16 bln sale of 20-year Treasuries, and Nvidia's earnings. 

Most large equity markets in the Asia Pacific region fell but Hong Kong and China. The CSI 300 rallied four consecutive sessions before the Lunar New Year holiday and is up in each of the three sessions since returning. Disappoint earnings are weighing on Europe's Stoxx 600. It is off for the second consecutive session. US index futures are also trading lower. European benchmark 10-year yields are slightly firmer today, mostly less than a basis point. The US 10-year yield is near 4.26%, off nearly two basis points. This year's high was set last week near 4.33%. Gold is edging higher for the fifth consecutive session, which if sustained, would match the longest advance since Sept-Oct 2022. It is trying to establish a foothold above $2030. This month's high was set on February 1 near $2065. April WTI was turned back from $78.55 yesterday, and follow-through selling today has pushed it to around $76.30.
 

Asia Pacific

The seasonal pattern held, and Japan's merchandise trade balance deteriorated in January from December. Yet, the same robust seasonal pattern points to improvement when this month's figures are reported in March. Japan reported a small trade surplus in December, only the third monthly trade surplus in 2023 after having none in 2022. In January, on a seasonally adjusted basis, Japan reported its first trade surplus since May 2021. Japan's goods exports were up 11.9% (9.7% in December) on a year-over-year basis in January, while goods imports were off 8.7% (-6.9% in December). Exports for led by autos and semiconductor-related products. Imports fell for the tenth month on falling coal and natgas. Recall that net exports contributed 0.2% to Japan's Q4 23 GDP after being flat in the previous quarter. Japan's current account surplus (~3.6% of GDP in 2023) is driven not by merchandise trade but by interest, dividends, royalties, and licensing fees earned abroad.

Although the Reserve Bank of Australia refuses to rule out another rate hike, the market does. The futures and swaps market shows a clear bias toward expecting the next move to be cut, even if not right away. The swaps market has a little more than a 50% chance of cut in the next six months. The futures market has slightly less than a 95% chance of a cut in August. It has one quarter-point cut and around 80% chance of a second cut discounted before the end of the year. Earlier today, Australia reported hourly wages rose 0.9% in Q4 23 after a 1.3% jump in Q3. The 4.2% year-over-year increase is the most since Q1 09. In Q1 09, Australia's quarterly CPI was 2.4% year-over-year, and it slowed to 1.4% in Q2 09 and 1.2% in Q3 09.

The dollar traded on both sides of Monday's range against the yen yesterday but settled well within it. The greenback continues to consolidate and is in about a 15-20-tick range around JPY150 so far today. The dollar's session high was recorded yesterday near JPY1.45 after Finance Minister Suzuki said he was watching the foreign exchange market with "a sense of urgency," code words, as it were for threatening material intervention. The MOF's international bureau chief Mimura indicated that Japan was in constant contact with other countries in case the need for intervention arises. We are skeptical of the allusions to coordinated intervention and suggest the danger is that official comments are diluting the word cues if they are not backed by action. Although the dollar has risen for seven consecutive weeks, ostensibly meeting the definition of a one-way market, implied volatility suggests an orderly market. Benchmark three-month volatility fell to 8.3% yesterday, the lowest in three months. Last year's low was closer to 8%.

The Australian dollar rose to almost $0.6580 yesterday, culminating a five-day rally that began from below $0.6445, the low since mid-November. It settled above its 20-day moving average (~$0.6540) for the first time since early January. The five-day moving average (~$0.6530) is crossing above the 20-day moving average for the first time since January 5. The daily momentum indicators have also turned up. It is in about a quarter-cent range today below $0.6575, and the $0.6600-25 area offers formidable resistance. The US dollar has stalled in the last three months near CNY7.20. We suspect that if the greenback were to strengthen above JPY151 it would also likely move above CNY7.20. The dollar settled below its 20-day moving average against the offshore yuan for the first time in nearly a month. It fell to a three-week low near CNH7.1810 today but has rebounded back toward CNH7.20. Still, the dollar is lower against the offshore yuan for the sixth consecutive session, the longest decline in more than six months. The dollar was sold to almost CNY7.1780 today, its lowest level since February 2. It recovered to almost CNY7.19 in late dealings. The PBOC set the dollar's reference rate at CNY7.1030 (CNY7.1068 yesterday). The average projection in Bloomberg's survey was CNY7.1890 (CNY7.1979 yesterday). 
 

Europe

Yesterday's rally in EMU bonds, which saw yields fall 3-4 bp, was attributed to news that Q4 23 negotiated pay moderated to 4.5% from the record high of 4.7% in Q3 23. Last week, ECB President Lagarde said that wages were "an increasingly important driver of inflation dynamics in the coming quarters."  Of course, it is not simply wages but wage growth in light of the weak productivity, which ECB board member Schnabel underscored at the end of last week. The Q1 24 negotiated wage settlement is due in May. Moreover, given the work showing the relationship between widening profit margins and inflation, it is a shame the ECB did not address the return to capital at the same time as drawing attention to the returns to labor. Still, leaving the substance of the argument aside, the purpose of drawing attention to wages is to push against speculation that the weak economy and falling inflation alone justify a rate cut. Even as recently as the end of last month, the swaps market had an April cut fully discounted. Now, it is a little less than half priced in. 

On the other hand, Bank of England Governor Bailey suggested that the market pricing of the trajectory of BOE policy was reasonable. The swaps market has about a 65% chance of a cut in June, virtually unchanged from a week ago. The market also has three cuts this year fully discounted and a small (less than 10%) chance of a fourth cut. Recall that at the of last month, the market had four cuts priced in and about a little more than a 50% chance of a fifth move. Bailey also sounded an optimistic note, suggesting that the UK's "very small recession" may be over, in reference to last week's news that the economy contracted in Q3 23 and Q4 23. The median forecast in Bloomberg's monthly survey is for the British economy to grow by 0.1% this quarter and 0.2% in the second quarter. 

The euro reached nearly $1.0840 in North America yesterday, its best level since the US employment data on February 2. It briefly pierced the 200-day moving average (~$1.0825) and met the (61.8%) retracement of the loss from the February 2 high that was slightly shy of $1.09. The daily momentum indicators have turned up and the technical tone is solidifying. The five-day moving average (~$1.0785) could cross above the 20-day moving average (~$1.0790) before the end of the week for the first time since January 4. That said, the euro is struggling today. It is has been capped near $1.0820 and was sold to session lows near $1.0790 in early European turnover. A move below $1.0780 warns of a false breakout. Sterling also advanced yesterday. It took out the 20-day moving average (~$1.2640) and rose to a five-day high near $1.2670. The close, below the 20-day moving average was less inspiring. It is consolidating in about a third-of-a-cent range above $1.2600 today--between roughly between the five-day moving average (~$1.2605) and the 20-day moving average (~$1.2635). Sterling's high from last week was about $1.2685, and that met the (61.8%) retracement of its decline the pre-US jobs. Nearby resistance is likely in the $1.2635-40 area. 
 

America

The minutes from last month's FOMC meeting will be released toward the end of the North American session today. The firmer-than-expected CPI and PPI reports since the FOMC meeting seem to lend credence to the caution that Chair Powell expressed at the press conference and other officials have echoed. The minutes will be read, looking for some insight it what would boost the Fed's confidence that inflation is on a durable path toward its target. To be sure, the Fed's Summary of Economic Projections has anticipated the first cut before inflation is at 2%. Powell seemed to suggest a low bar to achieve greater confidence. It did not require better data but a continuation of what has already been seen. The market will also be looking for insight into QT, especially as it appears that the increase in T-bill issuance has absorbed the flows out of the Fed's reverse repo facility. This means bank reserves are little changed from when QT began. Lastly, Powell previously acknowledged that as the quarter progresses, the Summary of Economic Projections, which are simply a snapshot of official expectations based on the data currently available, can become dated. However, so far, and that is ahead of the next jobs report and CPI, we suspect that the three rate cuts that the median expected would be appropriate this year is still the base case.

Canada's January CPI surprised on the downside. Canada's consumer prices have fallen, not just risen slowly, over the past five months; not by much (almost -0.5% at an annualized pace). January's CPI was flat, and the median forecast was for a 0.4% increase. The year-over-year rate eased to 2.9% from 3.4%. Given the base effect--Canada's CPI rose at an annualized rate of 6.4% in the February-April period last year--inflation will likely continue to moderate in the coming months. The underlying core measures fell to an average of 3.35% from 3.6% in December 2023. Mortgage and rents lift shelter costs, and excluding shelter, Canada's CPI was 1.5%. The market recognized that the inflation may begin forward the first rate cut. The odds of a cut in April increased to a little more than 40% from less than 30% at the end of last week and on Monday. The swaps market has slightly more than an 85% chance of a cut in June, up from about 58% in the previous two sessions. The market now has four cuts fully discounted this year and about a 40% chance of a fifth reduction. This is the most in a month. Canada's two-year note yield fell by 15 bp to 4.14%, and the discount to the US jumped nearly 10 bp to 44 bp, the most in two months. 

The Canadian dollar paid the price for the general risk-off, the drop in US equities, and the softer-than-expected CPI. The Canadian dollar lost about 0.25% against the greenback. The US dollar rose for the third consecutive session against the Canadian dollar and reached CAD1.3530. It is threatening to extend the advance into the fourth session, as it made a marginal new high already today near CAD1.3535. Initial resistance is seen around CAD1.3545 and then last week's high, closer to CAD1.3585. Less than half an hour before $545 mln in options expired, the dollar briefly traded below the MXN17.00 strike. It was back above there at expiry and greenback posted a potential key reversal against the peso by trading on both sides Monday's range and closing above its high. Initial resistance is seen in the MXN17.09-MXN17.12 area. It is in a narrow range so far today (~MXN17.0425-MXN17.0770). On the other hand, greenback fell for the fourth consecutive session against the Brazilian real. The dollar reached almost BRL4.9250, its lowest level since the US jobs data on February 2. The 200-day moving average is closer to BRL4.92 and the low since mid-January is around BRL4.90. There was talk of equity managers shifting from Mexico to Brazil, and as if on cue, yesterday the Bovespa rose about 0.5% and the Bolsa fell by about as much. 

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