Summary
- Canada bonds extend outperformance versus Treasuries after Bank of Canada (BoC) statement.
- Canadian dollar weakens as BoC’s Maklem says too early to talk about rate cuts.
- 10-Year Treasury yield steady at 4.14%.
- U.S. January Flash Composite Purchasing Managers Index (PMI) at 52.3 vs 50.9 – PMI Services and Manufacturing also beat forecasts.
- Big trades target Federal Reserve interest rate on hold through June.
- U.S. dollar extends drop U.K. pound sterling rises after British PMI data.
- After weakening Tuesday on Bank of Japan’s (BoJ) loose policy affirmation; Japanese yen strengthens as BoJ hike bets lift Japan yields.
- Japan 10-year yield jumps over 10 bps (most in seven weeks) on outlook for BoJ rate hike in near future.
- Dollar-Yuan arbitrage traders set for busy Wednesday.
Noteworthy
- Dollar Experiences Largest Decline in a Month, Following a 6-Week High on Tuesday
The U.S. dollar is generally trading lower, failing to build on yesterday’s gains. Major rivals witnessed it touching a six-week high versus its prime rival, the euro currency.
Market sentiment is positive on the day, with Asian currencies (exempting Japan) and European equity markets positive on the heels of the People Bank of China announcement of major stimulus on Monday this week. U.S. equities have seen 5 straight days of gains and are up again as of this writing.
In addition, China announced a cut in bank reserve requirements which will take place in February and suggest more support measures for equities may be coming, further helping risk sentiment.
U.S. bonds (Treasuries) are steady, but above expectation. U.K. purchasing managers index (PMI) data is pushing some relative underperformance in U.K. gilts.
The South African rand (ZAR) is the best performer thus far today, while the Japanese yen (JPY) and Swiss franc (CHF) are leading the major currency pairs. The Korean won (KRW) and Taiwanese dollar (TWD) are lacking today. The move in the Japanese yen came one day after the Bank of Japan (BoJ) surprised markets by retaining their loose monetary policy, which weakened the yen on Tuesday. Today, traders pushed Japanese interest rates higher as they adjusted their bets that the BoJ would hike rates sometime soon.
The moves in U.S. dollar over the past week or so have been rather limited thus far in 2024, but they may be significant. Particularly, the U.S. dollar’s failure to capitalize on the U.S. Dollar Index’s push through 103.50 yesterday. As such, for U.S. Federal Reserve interest rates cuts expected later in this year, the window may be closing a bit.
Seasonally, the first quarter is normally U.S. dollar positive but typically the best of that comes in January history suggests.
Today, European data reports are picking up a bit and further dousing hopes of European Central Bank (ECB) rate cut bets further leaving the dollar’s direction in limbo.
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