Dramatic Market Adjustment Continues

The dollar posted a big outside down day against the yen. It traded on both sides of the pre-weekend range and settled below last Friday's lows. Without Tokyo traders, follow-through selling was limited to almost JPY104.90.Resistance is seen around JPY105.40-JPY105.50.The dollar's recovery has stretched the intraday momentum indicators. Follow-through buying of the Australian dollar also proved limited. Yesterday's nearly half a cent advanced saw a few ticks more today for some profit-taking kicked in. Still, losses below $0.7900 were limited, and buyers were emerging in the European morning. The New Zealand dollar is in a narrow trading range just below yesterday's high. The central bank meets the first thing tomorrow in Wellington, and although no change in policy is expected, officials will likely feel more confident that the recovery is gaining traction. The PBOC set the dollar's reference rate at CNY6.4516, which was slightly weaker than the bank models Bloomberg surveyed. To ease the pressure on the currency, Beijing is considering to again relax the constraint (quota) on domestic investors to acquire foreign assets. Since re-opening from the New Year holiday, the dollar has traded in the range set last Thursday (~CNY6.4460-CNY6.4900).  


UK Prime Minister Johnson laid out a four-step process that could lead to the full reopening across England by the first day of summer. From March 8, all students can return to school, and late next month, outdoor gatherings of six people or two households will be allowed. Non-essential businesses, barbers and hair salons, gyms, and outdoor attractions and hospitality could open April 12, with May 17 the earliest target to re-open indoor hospitality, including hotels and cinemas. It is hoped then that June 21 could see the lifting of the final restrictions and reopening of the remaining businesses, including nightclubs.  

The UK employment report was weaker than expected and likely gives the Chancellor of the Exchequer Sunak little choice but to extend the furlough program in next week's budget. It is estimated the program covers about 20% of the UK's labor force, and it is currently planned to terminate at the end of April. Employment tumbled by 114k in the three months through December. The Bloomberg survey found a median forecast of -30k. The unemployment rate ticked up to 5.1% from 5.0%, which matches the high since October 2015.  

The backing up of European rates is jeopardizing the ECB's ability to preserve favorable financing conditions. The ECB appears to have stepped up its bond-buying last week to about 17.2 bln euros, the most in a month. European bonds staged an impressive recovery after ECB President Lagarde affirmed the commitment and indicated that yields were "closely monitored."Weak equities and the stabilization of the US 10-year yield after approached 1.40% may have helped European bonds recover. However, the problem is that the UK (due to the vaccine rollout) and the US (due to the fiscal stimulus) will be earlier in the recovery process than most of continental Europe. The optimism that lifts US and UK (and Australia and New Zealand) yields will likely push up European yields before the recovery takes hold. The ECB has around half of its Pandemic Emergency Purchase Program so-called envelop of 1.85 trillion euros left.

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Read more by Marc on his site Marc to Market.

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