After extending its recent slide yesterday, which the US markets were on
holiday, the dollar is firmer against all the major currencies and most of the
emerging market currencies. There does not seem to be macroeconomic
developments behind the dollar's stabilization, and the gains are quite minor,
suggesting a pause in the downtrend rather than a reversal at this
juncture. That said the extent and duration of what appears to be little
more than a technical adjustment is the key to the near-term
outlook.
The euro rose for the fourth session yesterday and approached $1.23.
Today, the pullback took place mostly in the European morning.
Initial support is seen in the $1.2180 area. News from the eurozone
is light. Germany and Italy confirmed their December inflation readings
ahead of the aggregate report tomorrow.
Much of the discussion of the ECB stance, including the record from the
December meeting that the market read so hawkishly, was before the preliminary
release of the December CPI. Recall that it was softer than expected.
The headline eased to 1.4% from 1.5%, but it was the flat core at 0.9% that was
most disappointing. Recall that the core measure bottomed at 0.6%.
The core rate jumped to 1.2% in early Q2 17 and returned to it in early Q3, but
has returned to the middle of its four-year range.
The UK reported December prices today. Headline CPI was in line
with expectations, rising 0.4% on the month, which saw the first decline in the
headline rate (3.0% from 3.1%) in six months. The core rate eased a
little more than expected. The 2.5% year-over-year rate is the lowest in
five months. Service inflation also fell to 2.5%, which is a nine-month
low. Given the re-weighting of airfare, it may be premature to read too much
into today's report, but many, including ourselves, continue to look for the
past decline of sterling to drop out of the comparisons, which would point to a
general easing of price pressures. Also, a favorable dynamic was apparent
in producer prices, where input prices slipped more than expected while output
prices were firmer than expected, which speaks to margins.
Separately, news reports suggest that the EU has toughened its demands
for a transition deal. The negotiators were given more specific terms
that will complicate the talks. The UK is being asked to adhere to EU
rules on immigration and rights of EU citizens to live in the UK during the
transition, as well as agree to no new trade agreements and no renegotiating
fishing rights during the transition. In essence, these latest conditions
appear to make more concrete what a "standstill" transition
means.
Four sessions ago, sterling was fraying support seen near $1.35.
Yesterday, it saw $1.3820. Recall that $1.3805 is the 61.8%
retracement of sterling's drop following the 2016 referendum, and $1.3885 is
the 38.2% retracement of the decline since the 2014 peak a little shy of
$1.72. Sterling has slipped to nearly $1.3740 in the European
morning. Support is seen in the $1.3680-$1.3700.
The BOJ's Kuroda reiterated his commitment to continue to pursue policies
that will push inflation toward the 2% target, while recognizing improvement
that has been secured. Finance Minister Aso was careful not to say
much about current yen levels, but did speak against excess moves in exchange
rates. The dollar is stabilizing against the yen after approaching
JPY110.30 yesterday. The dollar began last week above
JPY113.00.
News yesterday that both the German and French central banks have
purchased Chinese yuan for reserve purposes is notable but not
surprising. The ECB indicated was adding yuan to its reserves around
the middle of last year and it makes sense that it is partly duplicated within
the Eurosystem. Still, it should not be exaggerated. The yuan has
the smallest of shares of a reserve currency of a little more than
1%. It is also not surprising that some central banks have added
yuan given that since the end of 2016 it is part of the SDR. More
striking, we thought were the comments from the BBK official recognizing that
China's effort to boost the internationalization of the yuan has stalled
lately.
China's rating agency Dagong cuts its rating assigned to the US to BBB+
from A- (stable outlook) citing that tax cuts reducing revenue.
Investors do not typically take the agency rating seriously. As Bloomberg
note, Dagong puts the US credit rating on the same level as Colombia.
Although the rating agency is not an official (state-owned), the downgrade
looks political and perhaps retaliation for S&P's downgrade of
China's sovereign rating last September and protested a downgrade by Moody's
earlier last year.
While corrective forces apparently on this Turn Around Tuesday in the
foreign exchange market, equities continue to motor higher. The MSCI Asia
Pacific Index advanced 0.4% after a 0.6% advance yesterday. It is driving
the MSCI Emerging Markets Index to record highs. European share is also
extending the year's strong start. The Dow Jones Stoxx 600 is up 0.4%,
led by the beaten-up utilities. Materials and energy are drags, as base
metals and oil are softer. Bond markets are moving higher today alongside
the equity markets in Europe. Yields on Japan and Australia edged higher
today, but benchmark 10 -year yields are two to five basis points lower in
Europe and the 10-year Treasury yield is off 2.5 bp to 2.52%, a four-day
low.
The light North American calendar features the Empire State Manufacturing
Survey (an early look at January). Tomorrow the Bank of Canada meets
and is widely expected to lift rates. There is scope for "buy the
rumor, sell the fact" or other disappointment given market
positioning. Tomorrow the Fed's Beige Book, industrial production, and
the TIC report are on tap. Fourth quarter corporate earnings will
also be reported throughout the week. US earnings are expected to have
risen by around 12% last year.
Disclaimer
Dollar Given a Reprieve
Reviewed by Marc Chandler
on
January 16, 2018
Rating: