Fed Hike Ideas Give The Beleaguered Greenback Support

The yen was pulled in opposite directions by external market developments. The dramatic sell-off in equities is often associated with a stronger yen, while the jump in US yields is frequently linked to a weaker yen. The bond impulse won out, and the dollar reached JPY106.50, its highest level since last September. Nearby resistance is seen around JPY106.55 and then JPY107.00.A break of JPY105.85 would weaken the dollar's technical tone. The Australian dollar staged a key reversal yesterday by making new highs for the move (~$0.8005) and then selling-off to close below Wednesday's low (~$0.7895). Follow-through selling has pushed it to almost $0.7800 today. This corresponds to the (50%) retracement of the rally since the Aussie last dipped below $0.7600 on February 5. The next retracement level is near $0.7745.The 20-day moving average is a little higher (~$0.7760). China's yuan has been remarkably stable. The dollar has mostly has remained in the same range seen on the first two trading days of the year (~CNY6.43-CNY6.5150). The dollar rose by less than 0.1% against the yuan this week. The PBOC fixed the dollar at CNY6.4713 today, which was a little firmer than expected. The yuan's low volatility makes it attractive when constructing portfolios.  

Europe

The rise in European rates clearly is a new challenge for the ECB. Europe's recovery is lagging behind both Asia and the US. It is less equipped to cope with rising yields. The ECB may have to provide more support to the extent that rising yields weakens the recovery effort. One form that could take is a lower deposit rate (now at minus 50 bp). It is too early to argue this is needed, but it remains an option. The staff at next month's ECB meeting is likely to reduce its forecast for near-term growth. 

The economic highlight next week in the eurozone may not be so much the PMI, which the flash readings do an excellent job of anticipating but the February CPI.  Today, both France and Spain reported their harmonized figures. France's flat reading on the month translates to a 0.7% year-over-year increase, down from 0.8% in January. Both were a little stronger than expected. Spain's CPI was weaker than expected. Prices fell 0.6% on the month. The market anticipated a 0.2% decline. The year-over-year rate fell to -0.1% from 0.4%. The median forecast was for an increase to 0.5%. The early call had been for the aggregate CPI (due March 2) which would increase to 1.1% from 0.9%.  

The EU appears to be moving toward vaccine certificates. Officials seem rather lukewarm to the idea but fear that the likes of Apple and Google could move into the space. Meanwhile, a virtual G20 meeting will be held today. Italy has the presidency. Up for discussion is a new SDR allocation. Recall attempts to issue more SDRs last year were rebuffed. Italy is advocating a $500 bln issue. The last one during the Great Financial Crisis was for $250 bln.US Treasury Secretary Yellen is more supportive, but there is a catch. Without providing specifics, she suggested broad parameters are needed to boost transparency about how the reserves are used. The problem is that the SDRs are often used to service debt rather than domestic investment. China is the largest bilateral lender to many poor countries. A new SDR allotment would help China get repaid, but it also puts more yuan into central bank reserves, helping Beijing achieve another objective.SDRs are allocated on the basis of subscriptions to the IMF, which of course means that to ostensibly help poor countries, the rich countries get fed well too. The "parameters" that Yellen alluded to seem to violate the spirit if not the letter of the SDRs, which are to be unconditional and may appear to some as another attempt by the US to extend its control.  

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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