HKMA’s FX Interventions Increase in Size

USD Set To Trade Lower — Market Talk 2217 GMT [Dow Jones] USD will trade close to the lower end of its two-month range this week, says CBA. Measures of U.S. inflation expectations have been mixed and do not justify a significant upward revision of U.S. interest rate expectations, it adds. A positive U.S. March retail sales report later today might offer the greenback some temporary support. (james.glynn)

Data Flows Will Support AUD This Week —— Market Talk 2209 GMT [Dow Jones] AUD/USD is trading firmly around 0.7770 and faces upside risks this week. Encouraging Chinese economic activity and constructive Australian March employment conditions will underpin a firmer AUD over the week, says CBA. Leading indicators suggest China’s economy will likely grow at an annual pace of 6.8% in 1Q (Tuesday) driven by steady consumption and investment. This will support commodity prices and Australia’s terms of trade. In Australia, CBA anticipates the economy to add 25,000 jobs in March (Thursday) making it seventeen consecutive months of jobs increase. (james.glynn)

Rock and a Hard Place Forex-Wise for Korea, India — Market Talk 0328 GMT — As India joined South Korea on Treasury’s currency-manipulation watch list, in part on steps taken to cool their units’ gains versus the dollar, fueling those gains were high levels of money going to those countries. Net foreign direct investment for India and Korea last year was $28.7 billion and $22.9 billion, respectively. Noruma says countries’ central banks «would likely have to consider the tradeoff between supporting their external sector and being singled out» as a possible currency manipulator in an environment of increasing sensitivity to trade-related issues. (kenan.machado)

Factors May Help S Korea Fall Off US Watch List — Market Talk 0320 GMT — Trade has been key in South Korea being on a US list of countries to watch regarding currency manipulation. Last year, exports rose strongly, helping send the country’s stock benchmark up 22% and to record highs while the won rose 13% versus the widely weaker dollar. But rising US interest rates are liable to cap foreign interest in in emerging-market assets, and exports should cool this year as well. Shipments last year were boosted by strong chip orders for new smartphones. Meanwhile, the Bank of Korea’s reluctance to raise rates amid uncertainties related to US-China trade tensions may also dim the attractiveness of Korean assets. (kenan.machado)

Rupee Under Pressure Despite US Report — Market Talk 0304 GMT — India landing on Treasury’s currency-manipulation watch list isn’t liable to stop the country’s currency from pulling back this year, says Nomura. It sees the rupee fetching INR66.50/dollar by year-end, versus the current INR65.25, on impacts from 2019’s looming election and fresh oil-price gains. The rupee rose 6.4% this year against the dollar, and Nomura’s call would mean a 4.2% drop for 2018. It says capital flows may not be as strong as in 2017 given developments in the Middle East and still-tightening US monetary policy. (kenan.machado)

HKMA’s FX Interventions Increase in Size — Market Talk 0254 GMT — The Hong Kong dollar this morning continues to hover at the weak end of its permitted trading range against the greenback after hitting it last week. The HKMA was forced sell US dollars twice on Friday during New York trading— US$397 million and US$429 million in separate operations to prop up the Hong Kong dollar. That means the magnitude of its intervention has continued to increase since first taking action Thursday. The HKMA has sold a total of US$1.23 billion, resulting in purchases of HK$9.66 billion, so far this month to defend the currency peg. (saumya.vaishampayan)

Asian Dollar-Bond Market Springs Into Action — Market Talk 0245 GMT — Asia’s dollar-bond market has opened with a bang today, poised to see more than $10 billion of deals that almost totals all of last week’s action. Chinese companies are rushing to refinance; Central China Real Estate, Sunac, Yanlord, Jingrui and Hanwha Life are among those marketing bonds. Meanwhile, Singapore’s United Overseas Bank is out with a 3-year deal. Chinese property firms Guangzhou and Yuexiu REIT have announced bond mandates, along with China Hongqiao, China Overseas Finance, Philippine National Bank and Indonesia’s Alam Sutera Realty. (manju.dalal)

Asian Stocks Surrender Some Early Gains

NZ 1Q Inflation Could be Lowest Since 2016 — Market Talk 0237 GMT — New Zealand’s 1Q CPI data this week is likely to be underwhelming. The government announced free first-year college education, which will pull inflation lower. But higher tobacco taxes could somewhat offset. There is still little evidence of a sustained pickup in inflation. Tradables prices are no longer consistently falling, but there has been no real lift in non-tradables inflation in recent years either. Westpac expects CPI of +0.5% on quarter and +1.1% on-year, the lowest since September 2016. (james.glynn)

A Quarter-Century of RBA Inflation Targeting — Market Talk 0233 GMT — Australia’s central bank setting a 2-3% inflation target 25 years ago was largely on faith, notes deputy RBA Gov. Guy Debelle. «There was very little in the way of academic analysis to provide guidance about a general design and operational principles.» But now, the «proof of the pudding has been in the eating,» he says, with the framework helping to deliver sustained GDP growth. Still, Debelle believes it remains important to question the target and whether enhancements are needed. (james.glynn)

USD/JPY Rebounds Further, USD/CHF Shows Bullish Channel — Charting Forex

U.S. Dollar Firm After Trump Says ‘Mission Accomplished’ on Joint Action Against Syria — Asia Daily Forex Outlook

Yuan Fix Slightly Stronger After Friday Gains — Market Talk 0125 GMT — China guides the yuan slightly stronger against the dollar, setting today’s trading midpoint at CNY6.2884, versus CNY6.2898 on Friday. The dollar ended onshore trading then at CNY6.2825. Late Friday, Treasury stayed away from naming China a currency manipulator. The onshore yuan has appreciated 3.6% this year, a bit more than currencies in general have so far in 2018. (kenan.machado)

Treasury Concerned About Recent SK Intervention — Market Talk 0105 GMT — South Korea remains on Treasury’s currency-manipulation watch list despite the won’s 13% jump versus the dollar last year, thanks to the country’s trade and current-account surplus. But the agency also flagged forex concerns. «The won is not notably strong compared to levels it has been over the last couple decades.» Meanwhile, «there was a notable and concerning pickup in intervention» in November and January «that appears to have been for the purpose of slowing won appreciation against the dollar.» The greenback this year has been around levels last seen in late 2014 versus the won. «Treasury will continue to monitor closely Korea’s currency practices and urges the authorities to report its exchange-rate intervention in a transparent and timely manner.» The pair is steady this morning, like most in the currency market. (kevin.kingsbury)

Dollar/Yuan Central Parity 6.2884 Vs Friday Parity 6.2898

Speaking of Dividends: Rate Rises Begin to Bite, With More Pain to Come

Fed Officials Dispel Specter of Deflation — When Federal Reserve officials gathered last month for Jerome Powell’s first meeting as central bank chairman, not a single official among 15 saw a downside risk to inflation. It marked a milestone. The Fed’s mind-set has been shaped during the entire post-financial crisis era by a fear of Japan-like deflation, a downward drift in consumer prices that brings with it debilitating economic anemia. Deflation fears led to giant Fed bond-purchase programs and near-zero interest rates, then glacial interest-rate increases when the expansion became entrenched. The inflation risk assessment, released last week in the minutes of the Fed’s March meeting, showed deflation fear at the Fed is now effectively gone. A Fed less fearful of deflation is also one more prone to raise short-term interest rates more aggressively than planned, and that is the debate that is likely to dominate Fed discussions in the months ahead—whether three planned interest-rate increases in 2018 are enough. Most officials see inflation not only returning to the central bank’s 2% target but also exceeding it, using the less volatile measure of so-called core inflation that excludes food and energy items. The Fed seeks to keep inflation at 2% because it views that level as consistent with an economy with healthy demand for goods and services. Last year, inflation pressures softened, bolstering arguments in favor of slowing the pace of rate rises. Inflation pressures have firmed in recent months. Economists at JPMorgan Chase & Co. estimate the Fed’s preferred inflation gauge, produced by the Commerce Department, will show annual core inflation of 1.9% in March when it is released this month. In February, it was 1.6%. Investors, too, appear to be anticipating higher inflation. The yield on the benchmark 10-year U.S. Treasury note has moved above 2.8% since February, up from near 1.5% a couple of years ago. The 10-year break-even inflation rate, derived from Treasury inflation-protected securities, has climbed since late November to four-year highs. In many of the past few years, Fed officials projected inflation returning to 2% only to find some unexpected development to upend those forecasts. This year looks different. Tax cuts and government spending increases are likely to boost consumer and business spending. The people at the Fed most worried about deflation over the last year are less so today. Even before the changes in fiscal policy, recent data showed “there probably are inflationary pressures that are building,” Minneapolis Fed President Neel Kashkari told The Wall Street Journal in an interview. He voted against all three of the Fed’s rate increases last year because of concerns they would hobble the economic expansion in the face of subdued inflation. Officials last year were trying to balance worries at two extremes. On one hand, some officials feared a sudden acceleration in inflation once the unemployment rate dropped to historically low levels. “But at the same time, you couldn’t completely dismiss the notion that we were following a path of Japan, of perpetually low inflation,” says Mr. Kashkari. He says “the Japan risk has probably relieved itself a little bit,” though he isn’t ready to “completely declare victory.” Fed governor Lael Brainard, one of the Fed’s leading voices for raising rates slowly last year, also shifted her tone. “Although last year we faced a disconnect between the continued strengthening in the labor market and the step-down in inflation, mounting tailwinds at a time of full employment and above-trend growth tip the balance of considerations in my view,” she said in a speech last month. Deflation fears are receding around the globe, too. In Europe, consumer prices were last lower on the year in May 2016. Annual inflation was 1.4% in March. Though still below the ECB’s target of just below 2%, European Central Bank President Mario Draghi said at a December news conference, “We can safely say that deflation risks have disappeared.” In Japan consumer prices excluding food rose 1% in February for the first time in 3½ years. Half the gains came from higher energy prices. Should energy prices fall again, as they did four years ago, the deflation risk would return. BOJ Governor Haruhiko Kuroda says it is too soon to talk about tapering his radical monetary easing program for that reason. The BOJ’s lingering worries might be an apt warning to the rest of the world. There have been moments in the past quarter-century when Japanese officials thought they had beaten the deflation boogeyman, only to find themselves right back in an old fight to defeat it. Typically that happened when the economy faced a shock, hitting demand and knocking down consumer prices. What could send the U.S. back into a deflationary mind-set? Simple: Another recession. Interest rates are still very low, meaning the Fed doesn’t have room to cut them much to counteract another downturn. There’s also little space for Congress to cut taxes or boost spending because budget deficits are already rapidly heading toward $1 trillion annually. “The country risks not having sufficient fiscal capacity in the future when it might be needed,” Boston Fed President Eric Rosengren said in a speech Friday. Another recession, in short, could sap demand from the economy, knocking inflation back down and reviving a deflation risk the Fed has spent a decade trying to extinguish. This time, however, the government might not have much ability to do anything about it. Write to Nick Timiraos

Sharp Drops in Currencies Hint at Spreading Volatility — Volatility is returning to a corner of the foreign-exchange market that has largely been resilient to recent stock and bond tumult, with currencies from Russia to Hong Kong posting outsize moves amid worries over global trade and interest rates. Hong Kong’s dollar last week hit the lowest level allowed under a more than three-decade-old U.S. dollar-peg agreement, forcing the de facto central bank to step in to defend the Hong Kong currency. Other currencies, from Russia’s ruble to Kazakhstan’s tenge, fell last week as investors confronted rising geopolitical tensions. Those moves came alongside a relatively calm week elsewhere, in which the Dow Jones Industrial Average gained nearly 2% and the U.S. dollar was little changed against a basket of currencies. The gyrations are an alarming sign for some investors, who have been looking for indications that the recent volatility in stocks is seeping into other markets. Currency markets have been calm this year, and some worry investors aren’t prepared for major global shifts, including tightening monetary policy in the world’s biggest economies, that could threaten a yearslong emerging-markets rally. In the week ahead, investors will also confront news that the U.S., U.K. and France launched missile strikes on Syria as retaliation for a suspected chemical-weapons attack. While officials have indicated there aren’t currently plans for more strikes, it is likely to add to tensions between the U.S. and Russia — which has supported the Syrian regime — and could inject more volatility into emerging-market assets and oil markets, where prices have been rising on concerns that the conflict will disrupt production in the Middle East. «Rising hostilities in the Middle East tend to push oil prices higher and bond yields lower,» said Jack Ablin, chief investment officer at Cresset Wealth Advisors. Others are concerned that foreign exchange could become the next arena in a burgeoning trade conflict between the U.S. and China. A decline in China’s yuan spurred by the tensions, analysts say, could send a broad range of Asian and developing-market currencies lower. «People are starting to think about the prospect of devaluation as a tool to support growth and trade,» said Paresh Upadhyaya, a portfolio manager at Amundi Pioneer Asset Management. «U.S. trade policy, geopolitical risk, global growth…if all these start to turn, it could lead to an ugly meltdown.» A JPMorgan Chase & Co. index that tracks expected volatility in emerging-market currencies last week rose to its highest level since February’s market rout. Another JPMorgan metric for major currencies — such as the dollar and euro — continued to fall, suggesting that volatility remains confined to the more sensitive currencies of developing and emerging-market nations. Investors say one major threat to currency-market stability is the growing trade spat between the U.S. and China. Although tensions have eased since earlier this month, when the world’s two largest economies threatened to impose tariffs on billions of dollars of each others’ goods, few expect the calm to last. Some investors fear that China could retaliate against U.S. protectionist policies by devaluing its currency, which has risen about 10% against the dollar over the past year. «If China were perceived to be signaling it wanted a weaker yuan…that’s a pretty effective way of offsetting any trade gain the U.S. might try to achieve through tariffs,» said Brad Setser, a senior fellow at the Council on Foreign Relations. Vulnerable currencies include the South Korean won, Singapore dollar and Thai baht, as well as those of other export-dependent Asian nations, analysts said. Eswar Prasad, a professor in trade policy at Cornell University, said any effort to devalue the yuan could quickly backfire on China. Its devaluation of the yuan in 2015 sparked a global market selloff and set off a wave of capital outflows that China spent around $1 trillion in reserves trying to halt. Devaluation «would be a tool that could actually hurt the Chinese a lot more than it would hurt the U.S.,» said Mr. Prasad. «It would really set the Chinese back in terms of what they’re trying to accomplish with financial-market opening.» The rise in global policy and trade tensions has roiled other emerging-market currencies. The Russian ruble tumbled 6.8% against the dollar last week after the Trump administration announced new sanctions against government officials and business magnates in Russia. Kazakhstan’s tenge dropped 2.3% against the dollar, highlighting fears that the ruble’s decline will upend trade between the neighboring countries. The Turkish lira fell 1.3% as the emerging-market volatility sharpened investor concerns over the health of its economy. The declines mark a reversal from a monthslong rally that took emerging currencies and stocks to multiyear highs, as investors brushed off uncertainties surrounding global trade and politics to focus on strong economic growth in those economies. An MSCI index of emerging-market currencies has gained around 2% this year, while its benchmark emerging-market stock index has risen 1%. That compares to the S&P 500’s 0.7% decline and the Stoxx Europe’s 2.6% fall. A jump in volatility could also pressure countries whose currencies remain tied to the dollar, such as Saudi Arabia and Qatar. Pegged currencies are often only allowed to trade at a specific rate or within a tight band, and volatility can make upholding those levels more difficult as other factors — such as investor flows in and out of the country — buffet the currency. Many developing nations linked their currencies to the dollar decades ago in a bid to insulate their economies from volatility. But the dollar’s surge from 2011 to 2016 and a multiyear commodity-price rout forced many countries to cut those ties as they became too expensive to maintain. In 2014, Russia’s central bank began taking steps to allow the ruble to float freely as the country’s economy came under stress. Countries including Nigeria, Egypt and Kazakhstan have abandoned or loosened their ties to the dollar recently. «Pegs don’t fare very well in a market that’s volatile,» said Mark McCormick, North American head of FX strategy at TD Securities. As markets become less stable, «the pegs will be challenged,» he said. Saumya Vaishampayan contributed to this article. Write to Chelsey Dulaney

U.S. Government Bond Yields Up on Week The yield on the 10-year U.S. Treasury note edged down Friday but logged its second straight weekly gain, reflecting improved risk-appetite among investors and signs the Federal Reserve is confident about reaching its inflation target. The yield on the 10-year note settled at 2.828%, down from 2.831% Thursday but up from 2.779% the previous Friday. Yields, which rise when bond prices fall, climbed this week as investors regained some of their taste for stocks following a rough patch highlighted by rising trade tensions and concerns about potential regulation of technology companies. Investors often buy Treasurys during times of political or economic uncertainty because they offer steady interest payments with essentially no credit risk. Easing concerns, though, can hurt demand for bonds. Meanwhile, minutes from the central bank’s March 20-21 meeting released Wednesday showed officials gaining confidence inflation will hit their 2% target over the coming year. Officials also unanimously agreed that the economic outlook had strengthened in recent months. Expectations the Fed will tighten monetary policy at a steady clip have taken a heavy toll on short-term Treasurys, which are especially sensitive to rising interest rates. The yield on the two-year Treasury note settled at 2.368% Friday, its highest level since August 2008. «We’re clearly in a bear market here in the front end» as more investors bet the Fed could raise rates as many as three more times this year, said Ray Remy, head of fixed-income trading in New York at Daiwa Capital Markets America Inc. At its March meeting, the central bank raised its benchmark federal-funds rate by a quarter-percentage point to a range between 1.5% and 1.75%. Write to Sam Goldfarb


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