Dollar comes back bid

Overview: The Federal Reserve's projections show a little more inflation and a little less growth this year and next, but the median projection showed, as it did in December, two rate cuts this year. This, coupled with the reduction of the balance sheet unwind of Treasury holdings (QT) gave a dovish cast to the FOMC outcome, though the dispersion of forecasts showed upside risks to inflation, and even the two rate cuts anticipated was a closer call than in December. The key take away is really a high degree of uncertainty. Still, the US dollar has returned today better bid. It is firmer against all the G10 currencies, with the Antipodean and Scandis leading the losses. Emerging market currencies are mostly lower, too, except for a handful of currencies in the Asia Pacific region. Despite yesterday's intervention estimated at around $8 bln, the Turkish lira remains under pressure today. The Swiss National Bank cuts its deposit rate to 0.25% and eclipses Japan for the lowest policy rate. Sweden left rates unchanged. The outcome of the Bank of England meeting is largely a foregone conclusion that it is on hold until later this year. 

Strong equity market gains of over 1% were seen in Taiwan, Australia, and India, but not Hong Kong or China. The Hang Seng tumbled (-2.25%), led by mainland companies and the CSI 300 lost almost 1%. The Stoxx 600 is snapping a four-day advance in Europe, while US index futures are slightly firmer. Benchmark 10-year yields are falling today. Australian and New Zealand yields were off 4-5 bp, and yields are mostly 2-3 bp lower in Europe, though UK and Swedish rates are off closer to 5 bp. Gold initially set a record high near $3057.50 but has seen some profit-taking, which has pushed it slightly lower on the day. May WTI is little changed a little above $67.  

USD: The Dollar Index recorded session highs near 103.90 about 30 minutes before the Fed's decision and fell to around 103.60 before Chair Powell's press conference. It is trading firmly and knocking on 104.00.  A foothold above it would help form a bottoming pattern instead of a consolidative phase in the trough. The FOMC did not surprise. It stood pat and the median projections were adjusted. In December, the median saw two cuts this year and that has not changed. Growth projections were cut to 1.7% this year from 2.1% and next year to 1.8% from 2.0%. Despite the slower growth, unemployment forecasts for this year were raised to 4.4% from 4.3%, and maintained 4.3% in 2026 and 2027. The median PCE forecast was lifted to 2.7% from 2.5% this year and 2.2% from 2.1% in 2026. The Fed decided to reduce the amount of Treasuries it allows to roll-off a month without replacing to $5 bln from $25 bln, while allowing the MBS assets continue to be reduced at a $35 bln a month pace. It seems less related to the debt ceiling, which had previously been the driver of the discussion. Governor Waller dissented not from the decision to taper QT. A key issue going forward is the divergence Powell noted between the soft data (surveys), while the hard data is holding up better. Many market participants seem less sanguine, and the heightened uncertainty weighs on activity. Today's attention turns the weekly jobless claims, which cover the week that the nonfarm payroll and establishment surveys are conducted. The Philadelphia Fed survey for March may draw some interest. The index of Leading Economic Indicators had seemed to be in recession territory, but the six-month average bottomed in April 2023 and is now back to Q2 22 levels. High prices, rates, and falling consumer confidence bodes poorly for February existing home sales. The 3.2% decline of the median forecast in Bloomberg's survey would bring the decline to over 8% since the start of the year. They rose about 10% in Q4 24. 

EURO: The euro recorded session lows yesterday near $1.0860 before the outcome of the FOMC meeting. Although it recovered, it stalled ahead of $1.09. European buying seen in recent days has not materialized today, and the euro is trading through yesterday's lows. The next area of support may be in the $1.0825-30 area. Germany's Bundesrat is expected to approve the new fiscal initiative tomorrow. Next Thursday, the EU summit will likely proceed with its own efforts to create more fiscal space for defense and infrastructure spending on the national level. There does not seem to be the will for a collective bond to fund defense expenditures. Reports suggest Germany and the Netherlands are resisting. Drawing from the collaborative experience with the Covid vaccines, there does seem to be interest in buying some armaments collectively. Elsewhere, as widely expected the Swiss National Bank cut its deposit rate in half to 0.25%. The swaps market sees this as the likely terminal rate with about a 1-in-3 chance that another cut will be delivered. The test will come if Swiss inflation continues to fall (EU harmonized CPI is 0.1% year-over-year in February) and if the franc begins to appreciate again against the euro. Also as widely expected, Sweden's Riksbank stood pat at 2.25%, which is also seen as the likely terminal rate. 

CNY: Booming stocks, a firm yuan, and 10-year yields around 30 bp above their recent lows may encourage Beijing to reconsider the prospects of a rate cut. But not today. The loan prime rates were left unchanged at 3.10% and 3.60% for the one-year and five-year benchmarks, respectively. That also means that is unlikely that the PBOC cuts the 2.0% rate of the one-year Medium-Term Lending Facility rate next week. The dollar continues to trade near its recent trough against the yuan. The PBOC set the dollar's reference rate at CNY7.1754 (CNY7.1697 yesterday). It is the fourth consecutive session that the fixing has been moved more than usual. Though the adjustments remain small in the grand scheme of things, a change in the most important tool of yuan-management could be a signal of greater flexibility. Let’s see. Against the offshore yuan, the dollar is trading toward the upper end of its near-term range of CNH7.2150-CNH7.2500. 

JPY: The dollar traded on both sides on Tuesday's range yesterday. It traded above JPY150 for the first time since March 5. Sellers took control and drove it through Tuesday's low and settled below it (~near JPY149.10). The dollar fell to nearly JPY148.75. The bearish outside down day has seen follow-through selling that briefly saw the greenback trade slightly below JPY148.20 to set a marginal new low for the week. The dollar is better bid in Europe and is little changed on the day. Japan will report February CPI first thing tomorrow, but the signal has already been received from the Tokyo CPI reported a few weeks ago. The inflation picture has been distorted by the government's subsides for household's energy consumption. After rising in the three-months through January, headline, and core (excludes fresh food) rates likely eased in February. 

GBP: For the past two sessions, sterling found support around $1.2950, and it is fraying it.  It made a marginal new high for the year today near $1.3015 before coming off. A break of $1.2940 could set up a test on $1.2900. We suggest the band of resistance extends toward $1.3050, the high set shortly after the US election. The UK reported new employment data ahead of the Bank of England's decision at 8 am ET. Average weekly earnings softened slightly (5.8% vs. 6.1%) including bonuses, and without them were steady at 5.9%. The ILO measure of unemployment was steady at 4.4%, the upper end of where it has been post-pandemic. Jobless claims rose for the second consecutive month in February after falling in every month in Q4 24. Payrolled employment rose 21k, which, ironically, compares with expectations of a 21k decline in Bloomberg's survey. Still regardless of the employment data, for all practical purposes, there is no chance of a rate cut today. Governor Bailey recognizes that the impact of the trade war on inflation may be ambiguous but the risks to the "UK economy, and indeed the world economy, are substantial." The swaps market is anticipating two more cuts this year.

CAD: The greenback reached session highs near CAD1.4350 before the outcome of the FOMC meeting and it was sold to nearly CAD1.4300, slightly above the session low recorded on Wednesday in the Asia-Pacific session. The US dollar is trading near a three-day high in Europe near CAD1.4375 to push above its 20-day moving average. Follow-through buying could target the CAD1.4450 area. On one hand, Canada reported that last month's jump in prices was nearly double expectations, rising 1.1% partly flattered by the end of the sales-tax holiday. On the other hand, the US tariffs threatened for April 2 (reciprocal tariffs, seemingly broadly calculated to include VAT, wage differential, and other non-tariff barriers to trades, and sectoral tariffs), will pose a substantial threat to the Canadian economy. The target rate currently is at 2.75%. The swaps market sees it near 2.25% at the end of the year. 

AUD: The Australian dollar recorded a marginal news session low near $0.6320 before the FOMC meeting outcome and it quickly recovered to trade above $0.6360. A disappointing jobs report sent the Aussie to a new low for the week today, below $0.6300 and lifted chances of a May rate cut. Instead of reporting an overall gain of 30k jobs in February as the median forecast in Bloomberg's survey projected, Australia lost nearly 53k jobs. It lost nearly 36k full-time positions, practically offsetting the January gain in fully. The unemployment rate was steady at 4.1% as the participation rate fell to 66.8% from 67.2%. The next area of chart support is seen around $0.6260-$0.6270. 

MXN: The dollar held a little below Tuesday's high (~MXN20.0960) in yesterday's run-up after approaching MXN19.90 earlier in the session (in Asia Pacific trading on Tuesday). The greenback settled above MXN20.00 for the first time in four sessions. It reached a marginally new five-day high near MXN20.1475 today. It seems that the greenback is carving out a near-term bottom, perhaps ahead of next week's Banxico meeting that is expected to result in a 50 bp cut. A move above MXN20.15 could target MXN20.20 and maybe signal an advance toward MXN20.30. Meanwhile, Brazil's central bank made good on its commitment and hiked the Selic rate by 100 bp to 14.25%. Ahead of it, the dollar slipped to a marginal new low since the middle of October (~BRL5.6320).