Markets
German Bunds outperformed US Treasuries yesterday. The front end lost up to 5 bps with longer maturities easing between 1.1 and 2.7 bps. Aside from catching up with post-Fed US markets, it also followed yesterday’s PMI readings. While slightly better on the account of services (51.1), easing price pressures (be it from elevated levels) in the sector combined with the ongoing manufacturing slump sets up the stage for a June ECB rate cut. US yields recovered from initial follow-up losses on solid and/or stronger-than-expected economic data. These included weekly jobless claims, the Philly Fed business outlook, US PMIs and existing home sales. Net daily changes ranged between -1.8 bps (30-y) and +3.4 bps (2-y). EUR/USD two-staged drop was inspired by euro weakness followed by dollar strength. The pair retreated from 1.094 to pre-Fed levels of 1.086. Sterling was hit by a shift in the voting behavior of members Mann and Haskel at yesterday’s Bank of England meeting. They dropped their longstanding calls for additional hikes. The internal debate is now squarely focused at the timing of a first cut. Markets frontloaded bets to June (80%) from August. EUR/GBP rose from an intraday low around 0.853 to 0.858.
The sudden weakening of the Chinese yuan stands out in Asian dealings this morning. USD/CNY 7.20 has been a red line since mid-January as Chinese authorities seek to balance easy monetary policy without triggering a capital flight. They defended this threshold through daily fixings and state banks being ordered to sell dollars when needed. They appear to have softened their stance today by lowering the daily reference rate by the most since early February. USD/CNY shot up to 7.226 in a first response, the highest since mid-November. And the pair staying there suggests state banks are sidelined. Japanese February inflation numbers came in close to expectations. The BoJ’s favourite gauge quickened from 2% to 2.8%. The Japanese yen trades with minor gains. Earlier JPY losses, though, pushed USD/JPY to the brink of a new multi-decade high, which stands at 151.95 (2022).
Except for some central bank speeches from ECB’s Nagel & Lane as well as Fed chair Powell (opening remarks at the Fed listens Event), the eco calendar is not very enticing. We may see some of the typical core bond gains ahead of the weekend, even if current circumstances offer an ideal opportunity for markets to reflect on the discrepancy between Powell’s words on Friday and the Fed’s dot plot. Dollar trading is likely going to be a derivative of equity markets. Current Asian/Chinese weakness gives the dollar an edge. EUR/USD drops to the lowest level since early March 1.0833). Support is located at 1.0793 (50% retracement on the Q4 2023 rally). UK retail sales were better than expected for February and an already strong January was revised upward a bit. EUR/GBP holds steady near yesterday’s closing levels in a first reaction.
News & Views
The Mexican central bank cut its policy rate for the first time since 2021 in a 4-1 split vote, from 11.25% to 11%. Forward guidance was unaltered, stressing data dependence and that monetary policy will remain tight over the 2-yr forecast horizon. In updated forecasts, headline inflation is still foreseen to converge to the target in Q2 2025. Upward risks remain dominant, including persistence of core inflation, FX depreciation, greater cost-related pressures, a greater-than-expected resilience of the economy and climate-related and geopolitical risks. The Mexican peso holds near strongest levels since end 2015 against the dollar at USD/MXN 16.75.
The Turkish central bank (CBRT) yesterday unexpectedly extended its tightening cycle after pausing in February. They did so in fashion, raising the policy rate by 500 bps to 50%. The CBRT also doubled its interest rate corridor from +- 150 bps to +- 300 bps, creating room to maneuver to tighten policy even more via liquidity rules. More rate hikes might be coming if necessary. A deterioration in the inflation outlook, led by sticky services inflation, warrants the rate hike. Apart from bringing down inflation, the CBRT also pursuits a real appreciation in the lira. The Turkish currency hit a new all-time low in the run-up to the meeting (EUR/TRY 35.60), before dipping to 34.85 in the aftermath.
