The dollar index (DXY00) on Tuesday rose to a 2-week high and finished up by +0.22%. A slump in the yen to a 4-month low Tuesday supported the dollar after BOJ Governor Ueda signaled the BOJ would maintain an accommodative policy despite ending its negative interest rate campaign. The dollar extended its gains on Tuesday’s stronger-than-expected US Feb housing starts and building permits reports, hawkish factors for Fed policy. The dollar fell back from its best levels Tuesday as stock prices recovered, curbing liquidity demand for the dollar.
US Feb housing starts rose +10.7% m/m to 1.521 million, stronger than expectations of 1.440 million. Feb building permits, a proxy for future construction, rose +1.9% m/m to a 6-month high of 1.518 million, stronger than expectations of 1.496 million.
The markets are discounting the chances for a -25 bp rate cut at 1% at the conclusion of the 2-day FOMC meeting on Wednesday, at 9% for the following meeting on April 30-May 1, and 65% for the meeting after that on June 11-12.
EUR/USD (^EURUSD) on Tuesday fell by -0.07% and posted a 2-week low. A stronger dollar Tuesday weighed on the euro. Also, the euro was undercut by Tuesday’s news that Eurozone Q4 labor costs eased, which was a dovish factor for ECB policy. The euro saw underlying support after the German Mar ZEW expectations of economic growth survey rose more than expected to a 2-year high.
Eurozone Q4 labor costs eased to +3.4% y/y from +5.2% y/y in Q3.
The German Mar ZEW expectations of economic growth survey rose +11.8 to a 2-year high of 31.7, stronger than expectations of 20.5.
ECB Vice President Guindos said, "The ECB hasn't yet discussed anything about future rate moves. The evolution of wages is key, and in June, we will also have our new projections and be ready to decide when to adjust our policy stance based on the data we see."
Swaps are pricing in the chances for a -25 bp rate cut by the ECB at 6% for its next meeting on April 11 and 82% for the following meeting on June 6.
USD/JPY (^USDJPY) on Tuesday rose by +1.17%. The yen on Tuesday tumbled to a 4-month low against the dollar based on dovish comments from BOJ Governor Ueda, who said BOJ policy would remain accommodative even after it ended its negative interest rate campaign. Also, the yen came under pressure Tuesday when the 10-year JGB bond yield fell to a 1-1/2 week low after the BOJ said it would continue buying long-term government bonds as needed.
Japan Jan industrial production was revised upward to -6.7% m/m from the previously reported -7.5% m/m.
The BOJ scrapped its yield curve control program and ended negative interest rates as it set a new policy rate range between 0% and 0.1%, shifting from a -0.1% short-term interest rate. The BOJ pledged to continue buying long-term government bonds as needed but ended purchases of exchange-traded funds.
BOJ Governor Ueda said, "We judged that achieving the goal of sustainable 2% inflation has come within view." He added that "there is still some distance to 2% if we look at it from the perspective of the expected inflation rate. Considering the gap, I think we will conduct normal policy, keeping the importance of maintaining an accommodative environment in mind."
Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 6% for the April 26 meeting and at 23% for the following meeting on June 14.
April gold (GCJ4) Tuesday closed down -4.6 (-0.21%), and May silver (SIK24) closed down -0.130 (-0.51%). Precious metals Tuesday posted moderate losses. Tuesday’s rally in the dollar index to a 2-week high undercut metals prices. Also, Tuesday’s rate hike by the Bank of Japan was bearish for precious metals. In addition, Tuesday’s stronger-than-expected US Feb housing starts and building permits reports were hawkish for Fed policy and bearish for precious metals. Finally, a rebound in stocks Tuesday reduced safe-haven demand for precious metals. Lower global bond yields on Tuesday limited losses in precious metals.
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
