Weekly Overview: Can the Greenback Strengthen Ahead of the CPI Release?

Last week concluded without any shift in market expectations, maintaining a strong belief, over 70%, in FED’s potential rate reduction in June. Chairman of FED, Powell, assured Congress that the central bank was close to being confident enough to lower rates. The market interpreted “close” as a timeline of about three months.

On the other hand, The United States witnessed a significant increase of 275,000 jobs in February’s nonfarm payroll report. Even after adjusting for the downward revisions of the previous two months, this market the third consecutive month of job creation exceeding 225,000 positions. The three-month average job gain stood at 265,000, the highest since the previous June, with the unemployment rate inching up to 3.9% from 3.7%.

USDJPY saw a 2% appreciation last week, fueled by anticipations that the BOJ might increase rates soon, coupled with a drop in United States rates. Despite a slow start to the year, Japan is expected to adjust its 2023 Q4 contraction figures positively, thanks to robust business investments.

European rates saw a sharper decline that those in the U.S., yet the market similarly anticipates a rate hike by the ECB in June. Despite this, the dollar weakened against all G10 currencies, with the Canadian dollar showing the least strength in this scenario, only rising about 0.55%. This situation reinforces the idea that exchange rates are currently influenced by U.S. interest rates and their expectations. Looking ahead, we foresee solid CPI figures and a notable improvement in retail sales, driven by auto and gasoline sales. This could provide a baseline support for U.S. rates and bolster the dollar. From a technical standpoint, the USD is reaching its limit, as evidenced by stretching beyond the Bollinger Bands (a measure of two standard deviations from the 20 day moving average). This suggests that dollar-supportive economic updates are likely to emerge following an extensive sell-off, indicating a quantitative extremity in the market’s movements.

United States

This week, the Consumer Price Index (CPI) for February emerges as the pivotal data point, highlighting the Federal Reserve’s capacity to pivot towards its inflation-targeting mandate amid a robust labor market. Since June 2023, the annual headline inflation rate has hovered around 3%, peaking at 3.7% in August and September, before moderating to 3.1% in January, with expectations it remained steady through February. Bloomberg’s consensus anticipates a 0.4% month-on-month increase in the headline CPI, potentially elevating the three-month annualized inflation rate to 3.6% from the prior quarter’s 2.8%. The forecast for the six-month annualized rate is a slight decrease to 3.2%, from the first half of 2023’s 3.4%. February’s core inflation is also expected to uptick by 0.3%, reducing the annual rate to 3.7% from 3.9%, marking the lowest point since May 2021. The market tends to overlook the Producer Price Index (PPI) report, set for release two days post-CPI, with only modest expectations for pipeline inflation. Components of this report, alongside the CPI, will assist economists in estimating the Personal Consumption Expenditures (PCE) deflator, directly aligned with the Federal Reserve’s inflation target.

Concurrently with the PPI, February’s retail sales data will be unveiled, potentially contradicting the perception of a decelerating economy suggested by January’s 0.8% sales drop. Anticipations lean towards an uptick in February’s sales, bolstered by an increase in auto sales to a seasonally adjusted annual rate of 15.81 million vehicles from January’s 15 million. Retail sales, accounting for approximately 40% of personal consumption expenditures, saw a stagnation in Q4 2023, though consumer spending escalated by 3%, as per the latest GDP revision. Moreover, a significant rise in January’s personal income suggests potential for increased consumption. Industrial production for January is expected to be reported alongside, likely echoing the modest downturn from the previous month. The Federal Reserve’s Bank Term-Funding Program, initiated last year to bolster liquidity among large banks, will cease issuing new loans starting March 11.

The Dollar Index, having reached its zenith mid-February post-January CPI announcement, dipped to around 102.35, recovering slightly but closing beneath the prior day’s low and the lower Bollinger Band, indicating a potential plateau in its downward trajectory. The technical analysis suggests a stretched valuation across several currency pairs. With the U.S. 2-year yield rebounding and a temporary alignment with the Federal Reserve’s December projections, upcoming data is likely to underpin Chairman Powell’s stance on the central bank’s cautious approach towards rate reductions.

Eurozone

The highlight of last week’s high-frequency economic updates was January’s industrial output, with several key reports from Europe. Germany saw a modest increase of 0.6%, while France experienced a decline of 1.1%, and Spain reported a slight rise of 0.4%. Notably, the Netherlands reported a 1.0% increase in manufacturing production for January, following a significant jump of 6.8% in December. This is in contrast to the Dutch manufacturing Purchasing Managers’ Index (PMI), which recorded a reading of 48.9 in January, up from 44.8 in December, yet remaining below the expansion threshold of 50 since July 2022.

The European Central Bank’s (ECB) meeting last week proceeded as expected, holding off on rate cuts but making slight downward revisions to this year’s growth (to 0.6% from the previously forecasted 0.8%) and inflation projections (to 2.3% from 2.7%). These adjustments reflect the market’s strong anticipation (around 90%) of a rate cut by June, mirroring sentiments from the previous week.

In the currency markets, the euro experienced a brief spike above $1.0980 shortly after the U.S. jobs data was released, momentarily surpassing the 61.8% retracement level of its recent losses at $1.0970. However, it subsequently receded by approximately half a cent, closing near $1.0940 and breaking a five-day rally. The euro’s session low was around $1.0920, just before the jobs report was announced, and it closed slightly within the upper Bollinger Band. Moving forward, initial support for the euro might be found in the range of $1.0890 to $1.0910.

United Kingdom

The UK is set to release job data for January and February, showcasing a labor market that, similar to those in the US and eurozone, remains robust despite the UK economy experiencing a downturn in the second half of 2023. A critical aspect for the Bank of England in this upcoming data will be the trend in weekly earnings. Since reaching a peak of 8.5% in July 2023, the three-month moving average for earnings growth has consistently declined, settling at 5.8% in December. Additionally, as the initial 2023 price spike phases out of the yearly calculation, it’s projected that the year-over-year Consumer Price Index (CPI) will drop below 2% in the second quarter. Meanwhile, while the contraction in the UK economy may have halted, signs of significant improvement in economic activity remain elusive. The release of the January monthly Gross Domestic Product (GDP) and its underlying details is scheduled for March 13.

The British pound experienced a stronger performance compared to the euro, retaining a greater portion of its gains following the US jobs announcement and notching up its sixth consecutive session of gains. This equalizes with the longest streak of advances since July 2020. Sterling almost hit $1.29 in the wake of the US employment report, marking its highest level since the previous July. It concluded the trading session (~$1.2860) significantly above the upper Bollinger Band (~$1.2805), even venturing slightly past three standard deviations from the 20-day moving average (~$1.2870). The peak for the previous year was around $1.3140. Looking ahead, initial support for the pound might be found at the former resistance level of $1.2800, followed by $1.2750.

China

Following the National People’s Congress and the Chinese People’s Political Consultative Conference, with China setting a growth target of 5%, there’s anticipation for more definitive support actions, possibly including a reduction in the one-year Medium-Term Lending Facility Rate by week’s end. Yet, Beijing’s strategy may lean towards adjusting the volume of loans rather than altering rates, potentially signaling an increase in the volume of one-year loans. Moreover, there’s a noticeable seasonal trend in China’s aggregate lending, typically seeing a dip in February from January, with a recovery observed in March.

Inflation data from China indicated a 0.7% increase year-over-year in February, boosted by Lunar New Year spending, marking the first rise since August and exceeding expectations. Despite an overall 0.9% drop in food prices in February (a sharp contrast to January’s 5.9% decline), prices for pork and fresh vegetables edged up by 0.2% and 2.9%, respectively, while fruit prices decreased by 4.1%. The inflationary trend, primarily attributed to supply factors rather than weak demand, is crucial considering food and tobacco nearly make up 30% of China’s CPI basket. The core inflation rate, excluding food and energy, surged to 1.2% from January’s 0.4%, reaching its highest since February 2022. Meanwhile, deflation in producer prices intensified, with a 0.2% drop over the month and a 2.7% decrease year-over-year, continuing the decline that started in October 2022.

The dollar’s general depreciation, particularly its significant retreat against the Japanese yen, has facilitated China’s efforts to maintain the dollar’s ceiling near CNY7.20. The dollar dipped to 2.5-week lows just before the weekend, approaching CNY7.1820, with potential chart support near CNY7.1750. Against the offshore yuan, the dollar fell to CNH7.1850 and later made a slight recovery, hitting a marginal new high around CNH7.2035 in the North American session before the weekend.

Japan

The preliminary assessment that Japan’s economy contracted in the final quarter of 2023 is now expected to be revised, thanks to a notable increase in capital expenditure. However, Japan faces challenges as it enters 2024, highlighted by a significant 7.5% drop in industrial production in January, largely due to the earthquake on New Year’s Day and disruptions in the auto sector. The forthcoming report on the January tertiary industry index will be crucial; a decline could indicate that the world’s third-largest economy might be shrinking in the first quarter of 2024. Furthermore, January saw a 14% year-over-year decrease in machine tool orders, following a 9.6% reduction in December, reflecting weaker domestic and foreign demand. The data for February is eagerly awaited on March 11.

Recent remarks from a Bank of Japan (BOJ) board member have bolstered expectations that Japan may soon move away from its negative interest rate policy, with the stronger wage growth data suggesting a possible rate hike in the BOJ’s March 19 meeting. However, there’s a cautious lean towards an April adjustment.

The anticipation of Japan ending its negative interest rate policy, combined with declining US interest rates, pressured the USD/JPY to a low of JPY146.50 following the US employment announcement. The dollar dipped close to four standard deviations below its 20-day moving average, significantly outside the double Bollinger Band range. After reaching its nadir shortly after the jobs data release, the dollar’s recovery halted near JPY147.25, aligning with the three-standard deviation mark. The recent crossover of the five-day moving average below the 20-day average signifies a shift in short-term trend and momentum, marking the first such occurrence since early January. While the revised GDP figures for Q4 2024 may offer a temporary uplift, a resurgence in US rates could bolster the dollar. Immediate resistance is seen around JPY147.50, with a further hurdle at JPY148.00-10.

Canada

Following the Bank of Canada’s recent meeting, where it decided to keep its policy rate and stance unchanged as anticipated, and after digesting the February employment data, the economic agenda for Canada looks relatively quiet for the next few days. A key focus will be the portfolio flow report for January. It’s noteworthy that in 2023, foreign investors net purchased almost CAD33 billion worth of Canadian stocks and bonds, a significant drop from the CAD138 billion acquired in 2022. Last year marked the lowest investment level since 2007, when there was a net divestment. By the end of last year, Canadians had set a record by buying CAD29.4 billion in foreign financial assets, predominantly US equities worth CAD23.2 billion. December 2023 saw foreign investors pulling approximately CAD530 million from Canadian stocks, following a CAD5 billion sell-off in November, but they invested CAD11 billion in debt instruments, mainly in central government bonds and money markets.

In February, Canada saw a notable increase in full-time employment, adding 70.6k jobs, surpassing the total jobs created from September 2023 through January 2024. However, the unemployment rate slightly increased to 5.8% from 5.7%, and the growth in hourly wages slowed to 4.9% year-over-year, down from 5.3%. Following this, the US dollar, which had previously struggled to break above CAD1.3600, declined to CAD1.3420. Yet, it managed a modest recovery against the Canadian dollar amid a broader comeback and a downturn in US equities, pausing around CAD1.3500. This movement underscores the technical importance of the CAD1.3400 level, with initial resistance likely situated in the CAD1.3500-35 zone, where retracement objectives and the five- and 20-day moving averages converge.

Australia

In the upcoming days, the economic calendar is notably quiet, with no government reports scheduled. The financial community’s attention is set to turn towards the Reserve Bank of Australia (RBA) meeting on March 19, closely followed by the release of February’s employment data on March 21. Current market sentiment suggests a minimal likelihood of a rate cut in the near term, though futures markets are pricing in about a 70% chance of a reduction by June—a slight decrease from last week’s 75% probability. The chance of a cut by August is seen at nearly 90%, up from around 75% at last week’s close.

Australia announced a 0.2% growth for Q4 2023 last week, aligning with forecasts. Yet, this marks the fourth consecutive quarter where, despite overall growth, per capita GDP has declined, primarily due to population increases. This is in contrast to many East Asian nations, including China, Japan, Taiwan, and South Korea, which are experiencing population declines, meaning any economic growth translates directly into per capita GDP gains.

The Australian dollar experienced its strongest week of the year, appreciating nearly 1.5% against the US dollar, albeit still trailing behind the yen and sterling among the G10 currencies. Following the US jobs report, the Aussie momentarily surged beyond three standard deviations from its 20-day moving average, nearing $0.6670 and surpassing the 61.8% retracement of this year’s downtrend. However, it retreated to session lows around $0.6615 by the North American afternoon, slightly within the bounds of the previous day’s trading range. The $0.6600 level may provide initial support, with a rebound towards $0.6650 plausible without significantly impacting the technical landscape.

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