The Morning Update

Tuesday March 19th, 2024

Written by:
Paul Harrison

The USD strengthens, oil prices ease, equity markets are mixed, and US yields ease as markets tread water ahead of the FOMC. The USD extends gains, JPY tumbles, and equity markets are sidelined as investors remain focused on the Fed's projections for signs of how many rate cuts policymakers expect to deliver in 2024. "Financial markets were overconfident on the pace of cuts in December," said Faergemann, an MD at Pinebridge Investments Europe Ltd. "Now it feels like Powell has engineered a gradual move toward some type of rate normalization." Elsewhere, Japan's central bank, as expected, hiked its interest for the first in 17 years. The BoJ adopted a dovish tone at his news conference, which supported the domestic equity market, which traded to its highest level since 1990, while at the same time putting pressure on the JPY, which tumbled near 1% through 150 vs. USD. In Australia, its central bank kept interest rates on hold at a 12-year high, helping its equity markets to rise, while the AUD slipped for a fourth day. Today's focus is the BoC Consumer Price Index, US Housing Starts, & Building Permits. We expect currency markets to remain sidelined as investors remain sidelined heading into the Fed's interest rate decision.

In other news, Nvidia unveiled a powerful chip in a push to extend its dominance in the AI market. The Bank of Japan ended an era of negative interest rates. The EU will impose tariffs on Russian grain. Biden warns Netanyahu that assaulting Rafah would be' a mistake.' Rare protests break out in Cuba amid electricity and food shortages. Unilever will spin off the ice cream business and cut 7,500 jobs for cost savings. Mainland Chinese surge into Hong Kong property after stamp duties scrapped. The West decries Russian reelection to Putin; China and India vow closer ties.

In currency markets. The USD continues strengthening into the FOMC as investors feel the Fed won't ease in Q2/24. The pound remains under pressure due to a stronger USD and increasing optimism that the BoE is open to cutting rates sooner than initially expected. Asian currencies come under pressure ahead of the FOMC meeting. CNY holds flat, while Asian currencies weaken by 0.25% on average vs. USD. Trading currencies are under pressure, with JPY tumbling by 0.95%, AUD & NZD weakening by 0.75%, SEK falling 0.6%, NOK descending 0.5%, MXN dropping by 0,35%, CHF and ZAR are flat vs USD.

In commodity markets. Oil & Soybean prices slipped by 0.2%, Natural Gas prices strengthened by 0.8%, Gold prices eased by 0.35%, Silver & Wheat prices fell by 0.6%, and Copper prices tumbled by 1%.

CAD weakens towards a two-week low on a combination of weakening commodity prices and the trend towards a strengthening USD heading into tomorrow's FOMC meeting. Domestically, Canadian housing starts beat expectations on Monday, but analysts are still determining if the pickup in activity will be sustained. The Canadian inflation report is released today, and domestic inflation is expected to increase y/y Feb from 2.9% to 3.1%. If the CPI comes in as expected, we expect the CAD to remain on the back foot, possibly testing 1.3600 ahead of the Fed's interest rate decision and statement tomorrow.

EURCAD continues to hold within its tight March trading range as both currencies remain sidelined, heading into the Fed's interest rate decision.

EUR is under renewed selling pressure amid renewed fresh USD buying. The Euro comes under renewed selling pressure amid renewed fresh USD buying. Euro weakened through 1.0900 and then breached through 1.0850 in early trading despite improving domestic data, as investors appear solely focused on the direction of US interest rates. Domestically, the ZEW survey for Germany and the Eurozone showed a noticeable improvement in economic sentiment. Unless we see a print outside expectations for the US Housing Starts and Building Permits, we anticipate the Euro will remain under pressure heading into the FOMC tomorrow.

GBPEUR slips towards 1.1700, holding flat for the month as investors remain sidelined heading into this week's Fed and BoE interest rate decisions.

GBP slips below 1.2700 amid increasing USD demand heading into the US interest rate decision. The pound eases in early trading but remains the best-performing G10 currency vs. USD as markets speculate that the Bank of England will be the last major global central bank to reduce its interest rates. On Thursday, the BoE is expected to hold domestic interest rates at 5.25, a 16-year high. Morgan Stanley's chief UK economist commented that the softer-than-expected pay data published last week could justify a rate cut as soon as May. Economists polled by Reuters expect inflation to drop to 3.6% in February, "A print closer to 3.2% could lead the BoE to soften its guidance language a bit more," Barclays strategist said in a note to clients, which could liven up-market bets for a May cut.