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Overview: The US dollar remains bid ahead of the outcome of today's FOMC meeting. No change in policy is expected, but the forward guidance, partly delivered in the updated projections, is the focus. In the last iteration (December), the Fed "dot" was for three rate cuts this year. Japanese markets were closed for a national holiday today but the dollar's gains against the yen have been extended and the greenback is nearing the peak seen in the last two years slightly ahead of JPY152. The dollar is broadly higher but is holding below yesterday's best levels against the other G10 currencies. Emerging market currencies are mostly lower. The South Korean won slightly firmer and may have been helped by flows in the South Korean stock market amid reports Nvidia is looking at buying Samsung's high-bandwidth memory chips, which gave the company's shares the biggest lift in six months. 

South Korea's Kospi rallied 1.3% to lead the markets in Asia Pacific. Europe's Stoxx 600 is giving back most of yesterday's 0.25% gain. US index futures are trading with a slightly heavier bias after yesterday's rally. Benchmark 10-year bonds yields are lower across the board, with the notable exception of China, where the 10-yield rose by nearly two basis points to snap a three-day decline. European yields are mostly 2-3 bp lower, while the 10-year Gilt yield is almost five basis points lower after a slightly softer CPI. The yield of the 10-year US Treasury is off a basis point to 4.28%. Gold is consolidating in a narrow range of around $3 on either side of $2157 and is inside yesterday's range. May WTI briefly traded above $83 yesterday, its best level since last October. It is holding above yesterday's low near $81.80.
 

Asia Pacific

The market continues to digest yesterday's BOJ move. One of the reasons that the market does not expect follow-up moves to tighten policy is that the economy is weak. This was underscored by final January industrial output estimate reported yesterday at 6.7% (initially -7.5%). The February trade deficit will be reported tomorrow. Exports likely slowed and imports are expected to have risen. The preliminary March PMI is also due tomorrow. The composite stood at 50.6 in February. Last March, it was at 52.9. 

Unsurprisingly, Chinese banks left the one- and five-year loan prime rates steady at 3.45% and 3.95% respectively. The immediate problem China faces does not appear to stem from a tight monetary policy. Property sales continue to implode. Earlier this week, China reported that residential property sales in January-February were about a third lower from the same period last year. Around 2.27%, China's 10-year yield at a 12-year lows. The 30-year bond yield is about 2.45%, near the lowest since 2005. 

The magnitude of the yen's slide after the rate hike was surprising. However, Japan's two- and 10-year yields also fell, suggesting a dovish message was taken away. And despite the outside move in the exchange rate, the three-month implied volatility fell to near the two-year low set in late February slightly below 7.6%. The dollar made new highs for the year yesterday near JPY151 and follow-through buying lifted it to almost JPY151.80 so far today, while Tokyo markets were closed today for the Vernal Equinox. The greenback was capped in 2022 and 2023 a little ahead of JPY152, and as it has been approached today, three-month implied volatility has bounced back to almost 8.1% (it finished last week around 8.4%). If the Fed were to signal two cuts this year instead of the three that the median forecast anticipated in December, the dollar could challenge the old high. Initial support may be near JPY150.80. The Australian dollar held support near $0.6500 in the European morning yesterday and recovered to almost $0.6540 in the North American afternoon. Yet, it was still not able to re-enter Monday's range, when the low was near $0.6550. It is in about a 30-tick range below $0.6540 today. The low set earlier in March was near $0.6480 and last month's low was slightly below $0.6445. Despite the US dollar's broad gains, the CNY7.20 level continue to hold. In a recent report, the US Treasury cited press reports about state-owned banks activity in the foreign exchange market. However, such reports in the press have been noticeably absent in recent days. Yet, it seems the defense has grown, which underscore our doubts about whether observers can really distinguish between the state-bank commercial operations and activity that is pursued at the direction of the PBOC. And as we have noted, the US itself has foreign assets that are not considered reserves, but no one calls the share of the Exchange Stabilization Fund which is owned by the US Treasury as "stealth reserves." The PBOC set the dollar's reference rate at CNY7.0968 (CNY7.0985 yesterday). The average from Bloomberg's survey was CNY7.1991 (CNY7.2020 yesterday). 
 

Europe

Ahead of tomorrow's Bank of England meeting, the UK reported consumer and producer price indices earlier today. The takeaway is that favorable base effects spurred a notable decline in the year-over-year rates. The headline pace fell to 3.4% from 4.0%, while the core moderated to 4.5% from 5.1%. These were both slightly lower than expected. Service inflation, on the other hand, was a little sticky. It slowed to 6.1%, down from 6.5%, but was slightly firmer than expected. This is likely to continue in the coming months, fueled, as it were, by a sharp fall in energy prices, The headline rate is expected to slip below the BOE's 2% target before summer. The 0.6% month-over-month increase in the headline follows a 0.6% fall in January. The three-month annualized pace is 1.6% and the six-month annualized pace is 1.4%. Because the economy is not collapsing, and Governor Bailey recently noted that the economy already appears to be recovering from the brief and shallow recession, there seems to be little sense of urgency among most MPC members. While many are discussing a wider dispersion of views today's FOMC meeting, this may be evident at tomorrow's BOE meeting. 

Norway's 0.4% growth in January, not counting the offshore oil and gas sector, was better than expected by the markets and the central bank itself. Norway's central bank hiked its deposit rate by 25 bp in December to 4.5%, even though the economy was contracting in December. The swaps market does not see the first cut being delivered before Q4. The Swiss National Bank may be more interesting. February's EU harmonized CPI was at 1.2% year-over-year and its core rate was at 1.1%. The manufacturing PMI has been below 50 since the end of 2022. In real terms, exports have fallen in the first two months of the year. The economy is expanding less than 1% year-over-year. The key policy rate is at 1.75%. The swaps market has about a 50% chance of a cut, while only four of 24 in Bloomberg's survey project a cut. Since the end of January, the euro has appreciated by almost 4% against the Swiss franc and returned to levels seen last November. It had stalled in late February but has extended the rally this month. In fact, it is trying to extend its seven-week advance. Despite this impressive euro recovery, around CHF0.9640, the euro is still weak, and the Swiss franc is still strong. The low late last year near CHF0.9255 was the extreme since the SNB's gave up its franc cap/euro floor in early 2015. 

The euro's low yesterday was set in Europe near $1.0835, the lowest level since March 1, and meeting the (50%) retracement of its gains from the February 14 low (~$1.0695). Unable to rise much above $.10870, the euro has returned toward yesterday's low in European turnover today. There are options for almost 1.15 bln euros at $1.08 that expire today, which is slightly below the next retracement (61.8%). Sterling's recovery yesterday was impressive. It had been pushing a little through $1.2670 in the European morning and recovered through early in the North American afternoon to reach new session highs near $1.2735. Despite a potential bullish hammer candle, there has been no follow-through sterling buying today. It has been capped near $1.2730 and slipped back below $1.2700 in the European morning to almost $1.2685. Still, with the intraday momentum indicators stretched, we suspect yesterday's lows are safe today.
 

America

It is Fed Day. Broadly speaking there are three moving pieces. The decision on rates itself is not one of them. It is a foregone conclusion that policy is on hold. The first moving piece is the FOMC statement. It does not need to deviate much from January, but the first paragraph the describes economic activity will likely be tone down to recognize less strong economic activity and the rise in unemployment. The second moving piece is the Summary of Economic Projections, the dot plot. The market will likely be most sensitive to the dot for Fed funds rate itself. The median dot in December was consistent with three quarter-point cuts this year, two more than in September. The range of views was 3.75%-5.5% in December (4.50%-6.25% in September). The futures market goes into the meeting with about a 62% chance of a June cut discounted and 71 bp of cuts discounted for this year.

Its macroeconomic forecasts are also subject to adjustments. We note that the dispersion of the 2024 forecast was wider in September than in December. The median unemployment forecast was 4.1% for this year and the next two years. This seems low. The median forecast for growth this year is 1.4%. The IMF's forecast is for 2.1%. The third moving piece is the Fed Chair Powell's press conference. Often the market has reacted one way to the statement and the opposite way during the press conference. The market wants some measure of the Fed's confidence that inflation is headed toward the target, especially given the slightly firmer than expected recent readings. The other important focus is what Powell shares about the balance sheet runoff. A decision seems unlikely, but the discussion likely began about tapering and if QT could/should continue when the rate cuts are delivered.

Softer-than-expected Canadian headline and underlying core measures of inflation weighed on the Loonie in what was a strong US dollar backdrop. The US dollar rose to a marginal new high for the year against the Canadian dollar near CAD1.3615. Resistance, we identified in the CAD1.3620-25 area, remained intact, and the greenback fell to near CAD1.3550 before finding solid bids. It is in a CAD1.3560-CAD1.3605 range today. The US dollar's surge against the Mexican peso extended to almost MXN16.95 yesterday. It traded above the 20-day moving average (~MXN16.92) for the first time this month, but saw its gains pared through early in the North American afternoon, falling to nearly MXN16.82. It extended the pullback to about MXN16.7780 today. The trendline we have been tracking off the January 23, mid- and late February highs come in around MXN16.97 today. Banxico meets tomorrow. In Bloomberg's survey of 25 economists, all but three anticipate a quarter-point cut. The greenback rose to BRL5.0550, its best level since the end of last October, but here too the gains were pared. In fact, the dollar settled lower on the day near session lows below BRL5.01. Brazil is expected to cut the Selic rate by 50 bp. It would be the sixth such cut. The central bank may signal that may reduce the of easing. 

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