Overview:  

The Federal Reserve triggered a dollar sell-off yesterday and follow-through selling was seen in Asia before profit-taking emerged. That created a new dollar selling opportunity in early European turnover.

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The FOMC revised up this year's growth forecast, shaved the unemployment projection, and while maintaining the PCE deflator forecast, and the median dot remained for three cuts this year. The soft-landing scenario was underscored and excited risk appetites. The G10 currencies are mixed ahead of the North American open. The Swiss franc is the weakest after the Swiss National Bank became the first G10 central bank to cut rates. A strong employment report lifted the Australian dollar, which is the best G10 performer today. Emerging market currencies are mixed with central European currencies the weakest. The South Korean won is extending is recover on developments in the chip sector and its nearly 1.2% gain today is the best in three months. 

Outside of China, the large equity markets in Asia Pacific rallied with the Nikkei, South Korea, and Taiwan advancing by more than 2%. Europe's Stoxx 600 is up a little more than 0.5%, while US index futures may gap higher. European benchmark 10-year yield are 4-6 bp lower, with the periphery outperforming the core. The 10-year US Treasury yield is off four basis points to almost 4.22%, a six-day low. The two-year yield is off nearly four basis points to 4.56%. It finished last week near 4.73%. Gold reached a new record high today, almost $2221. It was flirting with $2150 at the end of last week and earlier this week. May WTI is a little softer, consolidating the pullback from the five-month high set earlier this week slightly above $83.

Asia Pacific

Japan's trade balance always (without fail for the last 25 years) improved in February from January and this year was not an exception. The trade deficit narrowed to JPY3795 bln from JPY1.76 tln in January. The improvement was more than expected, helped by stronger than anticipated exports. Exports to the US (+18.4%) and Europe (+14.6%) are holding up better than exports to Asia (+2.5% China and 2.3% to ASEAN). Separately, the preliminary March PMI was also better than expected. The manufacturing PMI remains in contracting territory (48.2 vs. 47.2 in February), while services are faring better (54.9 vs. 52.9). It was the fourth consecutive month that the composite PMI was above 50 and at 52.3 it is the best last August. Forward looking new orders rose to 51.8 from 50.3. Note that Japan reports its national CPI figures for February tomorrow. The Tokyo CPI, reported a few weeks ago, signals rise due to the base effect. 

Australia's employment report was considerably stronger than expected. It created 116k news jobs last month, nearly three-times more than expected. And of these, 78.2k were full-time posts, the most since last March. The unemployment rate slumped back to 3.7% from 4.1%. The cyclical low saw in 2022 and 2023 was 3.5%. The participation rate ticked up to 66.7% from a revised 66.6%. Separately, Australia's preliminary PMI mixed. The manufacturing PMI slipped to 46.8 from 47.8. This is a new low. The services PMI rose to 53.5 from 53.1. The preliminary estimate of the composite 52.4 (from 52.1) and is the highest since last April.

The Federal Reserve did what the BOJ could not do and that is to stem the dollar's surge. The greenback was turned down from the JPY151.80 area and fell slightly through JPY150.75 in North America yesterday and the losses were extended to almost JPY150.25 today. Still, the dollar's momentum may slow, but it does not appear broken. It was steadily bought back through the second half of the Asia Pacific session and into the European morning to reach almost JPY151.50. The market has not given up on challenging the JPY152 cap. The Australian dollar rallied to new session highs in response to the Federal Reserve, reaching a three-day high $0.6585. The local session extended the Aussie's rally, encouraged by the strong jobs report, and tested the $0.6635 area. It pulled back to almost $0.6600 in Europe where it appeared to find new bids. This month's high was set slightly below $0.6670. The yen's recover and the US dollar's broad pullback did little to relieve the pressure on the CNY7.20 level that continues to cap the greenback. The PBOC set the dollar's reference rate at CNY7.0942 (CNY7.0968 yesterday). The average in Bloomberg's survey was CNY7.1810 (CNY7.1991 yesterday). The dollar remained confined to this week's range against the offshore yuan (CNH7.2035-CNH7.2170). A PBOC official confirmed market suspicions that another cut in reserve requirements is likely. 

Europe

Two European G10 central banks have already met, Norway and the Swiss National Bank. As widely expected, Norway's Norges Bank left its deposit rate unchanged at 4.5%. Its last hike was in December 2023, and it appears likely to be among the last of the G10 central banks to ease policy. On the other hand, we thought there was scope for a surprise from the Swiss National Bank, and it delivered, become the first G10 central bank to cut rates. It cut its deposit rate to 1.50% from 1.75%. The SNB projects inflation to now remain below 2% for the next few years. It was 1.2% in February. Comments from SNB officials encouraged expectations of another cut in June. The Bank of England decision is expected to be announced at 8 am ET but there is virtually no chance of a move.

Separately, the EMU flash PMI was reported. The takeaway is that manufacturing remains depressed, while the services are growing slowly. Growth impulses remain faint. The manufacturing PMI is at fell to 45.7 from 46.5, which is the low so far this year. Last year's low was 42.7. It has not been above the 50 boom/bust level since June 2022. The services PMI held above 50 for the second month (51.1 vs 50.2). It is the strongest since last June. The composite reading edged up to 49.9 from 49.2. It has weakened only once since last August, but it has not been above 50 since last May. The Germany's manufacturing sector remains in poor shape. The manufacturing PMI deteriorated in February for the first time since last July and fell further in March (41.6 v. 42.5). It was at still leaves 43.3 in December 2023. Germany's service PMI rose for the second consecutive month. At 49.8, it is a little above where it finished 2023 (49.3). The 47.4 composite reading (from 46.3) is the first gain since last November. It ended 2023 at 47.4 and was at 52.6 last March. France's manufacturing PMI snapped a two-month advance and fell to 45.8 from 47.1. It has not been above 50 since January 2023. The service PMI slipped to 47.8 from 48.4. It has not been above 50 since last May. France's composite PMI eased to 47.7 (from 48.1). It ended 2023 at 44.8, but it also has not been above 50 since May 2023.

Even though the UK economy contracted in H2 23, its PMI has fared better than the eurozone's. The manufacturing PMI rose for the third month and the 49.9, it is the strongest since July 2022, the last time it was above 50. Services have been stronger but did spend August-October below 50. It unexpectedly eased to 53.4 from 53.8 in February, leaving it net-net unchanged from the end of last year. The UK's composite PMI ended a five-month advance, slipping to 52.9 from 53.0. 

The euro rallied strongly in response to the Fed and reached almost $1.0925, a four-day high in North America yesterday, and follow-through buying lifted it to almost $1.0945 today. It was greeted with sales that sent it the session low near $1.0885 before finding new bids in the European morning. The euro has not traded above $1.10 since January 2. Good buying emerged for sterling below $1.2700. It was already recovering before the Fed gave it a boost. It approached $1.2790 late US dealings and briefly poked above $1.2800. In the retreat, it fell to almost $1.2760 where new buyers emerged. Nearby resistance is seen in the $1.2810-25 area ahead of the recent high closer to $1.29. 

America

The median dot in the updated Summary of Economic Projections showed this year's growth forecast was revised to 2.1% from 1.4%. Yet, the Fed signaled three rate cuts would be appropriate, as they did in December, though it pared the anticipated 2025 cuts to three from four. The median forecast for the PCE deflator was unchanged at 2.4%, but the core rate projection was raised to 2.6% from 2.4%. At the end of next week, the February PCE deflator will be reported. The headline rate was at 2.4% in January and the core rate stood at 2.8%. The unemployment rate in February rose by 0.2% to 3.9% and Fed says it will not go up much more. The median forecast was shaved to 4.0% from 4.1%. The pace of unwinding the balance sheet was maintained at a maximum of $95 bln a month ($60 bln Treasuries, $35 bln MBS). Fed Chair Powell indicated that although no decision was made, the general sense was that some tapering of the pace of the balance sheet run-off is likely soon (May announcement, June implementation H2 tapering?).

The central bank of Mexico meets today, and the announcement will come toward the end of the North American session (3 pm ET). Mexico is the only large Latam economy that has not begun an easing cycle. Inflation has trended lower, and the economic activity has slowed. The overnight target rate is at 11.25%. Headline inflation stood at 4.4% last month and the core was near 4.65%. We have also argued that a calendar consideration also favors a cut. Banxico fiercely protects its independence and is respected by market participants. The election is June 2. If the central bank does not change policy now, it would seem to reduce its flexibility at the next meeting May 9. That would seem too close to the election, arguably, to change policy without having the appearance of political considerations. To continue a policy already in place is a different story. Separately, Mexico reports January retail sales today and a minor recovery from the 0.9% decline in December is expected.

The US dollar set the Q1 24 high on Tuesday near CAD1.3615 and tumbled to almost CAD1.3480 yesterday. The CAD1.3600 has proven to be a formidable cap. The greenback's losses were extended to almost CAD1.3455 before bouncing back to a little above CAD1.3500 where it was sold again. The low this month has been about CAD1.3420 and the greenback has not traded below CAD1.3400 since early February. The Mexican peso extended its recovery that began on Tuesday. The greenback had jumped to almost MXN16.95 yesterday, perhaps aided by speculation that carry trades would unwind after the BOJ's move. It was sold hard and fell almost 1% before taking another leg down yesterday. The dollar fell to almost MXN16.67 and made a marginal new low today slightly below MXN16.6690. The eight-month low was set a week ago a little below MXN16.65. The US dollar fell even more against the Brazilian real before another 50 bp cut in the Selic rate was delivered. The central bank signaled another 50 bp cut before it will consider moderating the pace. The dollar had settled above BRL5.00 for the first time this year on Monday and Tuesday. It fell to almost BRL4.97 and settled near 4.9750 yesterday. 

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