The Dollar Finds Better Footing

Overview: A warning from China's top banking regulator about the frothiness of foreign markets appeared to blunt the knock-on effect of yesterday's largest rise in the S&P 500 since last June (~2.4%) and weighed on global equities. The large markets in the Asia Pacific region but India and South Korea fell. Europe's Dow Jones Stoxx 600 steady, recovering from initial losses. US index futures are off around 0.5%. Benchmark yields are firmer, with the US 10-year yield around 1.45%. The Reserve Bank of Australia took no fresh initiatives, and the 3-year yield targeted at 10 bp is closer to 15 bp. Its 10-year yield rose five basis points to 1.7%. European yields are mostly 2-5 bp higher. The dollar is extended the recovery that began last week. The euro traded below $1.20 for the first time since February 5, and sterling, which peaked last week near $1.4240, tested $1.3860. The dollar is also firmer against most emerging market currencies. Gold traded below $1710 for the first time since last June before recovering to almost $1735. Last week's high was near $1816. Oil is lower for the third consecutive session, its longest losing streak in nearly three months ahead of the OPEC+ meeting later this week that is expected to confirm plans to bring more production back online.  

Asia Pacific

Guo Shuqing, China's top banking regulator (chair of China Banking and Insurance Regulatory Commission), expressed concern about foreign equity markets' speculative heights and the rapid foreign capital inflows into China. He also cited concern about the domestic property market. At the start of the year, officials took action to cap bank lending to real estate, squeezed the shadow banking sector, and forced peer-to-peer lending to unwind. The MSCI Asia Pacific Index was higher before Guo's remarks. China and Hong Kong share indices fell the most in the region.  

The Reserve Bank of Australia defied expectations. Given the pressures on the bond market and in particular that the three-year note yield was above the 10 bp target, many, including ourselves, expected the RBA to boost its bond-buying. Instead, led by Governor Lowe, the RBA did nothing but signaled that it would likely extend its asset purchases. Currently, the effort is slated for A$200 bln through September. This follows yesterday's A$4 bln of purchases, twice the usual amount. At the long-end, the RBA says it is not targeting a yield but providing liquidity and ensuring a smooth functioning bond market. The RBA reiterated its pledge not to increase the cash rate target (10 bp) until actual inflation is on a sustainable path within the 2-3% range and does not expect this to happen until 2024. The market does not fully accept the RBA's guidance and appears to be pricing an earlier hike.  

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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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