Overview: The US dollar is mostly softer today against the G10
currencies, with the notable exception, yen, Swiss franc, and sterling. The
risk-on mood is seen in the foreign exchange market with the Antipodean and
Scandi currencies leading the move against the greenback. The yen has fallen by
about 1.3% this week, leading losers, while sterling's 1.1% gain puts it at the
top.
Despite the poor showing of US equities yesterday, risk appetites returned and most of the large bourses rose in the Asia Pacific region, led by a 1.8% rally in Hong Kong and a 2.3% gain in the index of mainland companies. Both indices are up more than 11% this year. Europe's Stoxx 600, which snapped a six-day advance yesterday with a 1.6% loss has stabilized and is up about 0.4% today. It has risen by almost 6.5% here at the start of the year. US futures point to a steady to higher opening. Meanwhile big moves are being seen in the bond market. European benchmark 10-year yields are 7-12 bp higher and peripheral-core spreads have widened, but this is a countertrend move to what has been seen this week. The US 10-year yield is up four basis points at 3.43%. It settled last week near 3.50%. A close here would be the lowest weekly close since early last September.
Asia Pacific
Japan's December inflation rose in line with expectations. The
headline and core rate (excludes fresh food) rose to 4.0%. The core rates
excluding energy rose to 3%. These are new cyclical highs and tipped by the
Tokyo CPI readings that were reported a couple of weeks ago. In fact, the
Tokyo's January CPI will be reported next week (January 27). Japan's inflation
may peak the in January or February as the impact from the fiscal efforts
(subsidies), decline in energy prices, and appreciation of the yen on a trade-weighted
basis (~11-12%) is anticipated. Separately, the generic 10-year JGB yield is
closing at its lowest level (0.386%) since before Christmas.
China's mainland markets are closed now for the extended Lunar New Year
holiday. They will not re-open until January 30. Earlier today, the
one- and five-year loan prime rates were left unchanged, as widely expected, at
3.65% and 4.30%, respectively. Separately, we note that despite the talk of
yuan being used more for trade, its share on the SWIFT system felt last month
to 2.15% from 2.37% in November. Of course, it fluctuates a bit and last year's
share varied from 3.20% in January to a low of 2.13% in October. It shares
ended 2021 at 2.7%.
The dollar is trading firmer against the yen, recovering from yesterday's
low near JPY128.40 to reach a high today close to JPY129.75. It continues
to trade in the range set in the middle of the week when the BOJ met and
surprised many by maintaining its current policy settings
(~JPY127.55-JPY131.60). It is trading around JPY129.50 in the European morning,
and it were to close here, the greenback would be up about 1.3% this week, the
most since the first full week in December. Not to get too far ahead of
ourselves, but the daily momentum indicators look like they ae bottoming,
suggesting further dollar gains are likely in the coming days. The
Australian dollar is firmer today, stabilizing as its two-day drop took it from
almost $0.7065 to nearly $0.6870 yesterday. Initial resistance near $0.6950
is holding and above there $0.6965, which marks the halfway point of the slide,
may cap it ahead of the weekend. It settled last week near $0.6970. Without
reclaiming it today, the Aussie would snap a four-week advance. It would be
only the third weekly decline since mid-October. The greenback edged up against
the Chinese yuan ahead of the holiday. It recorded a marginal new high for the
week, drawing closer to CNY6.79. It is the fourth gain this week. The reference
rate was set at CNY6.7702, slightly below the median projection in Bloomberg's
survey of CNY6.7719
Europe
The record of last month's ECB meeting, showing a "large
number" of officials initially backed a 75 bp hike (rather than 50 bp that
was ultimately agreed upon) and hawkish comments by ECB Lagarde seemed to push
in the same direction. In addition to reaffirming the ECB's commitment
to push policy rates to restrictive territory and bring inflation back to 2%,
Lagarde pushed back against concerns that a recession would steady the central
bank's hand, noting that growth will "not be as bad as feared."
Earlier this week, a press report suggested that while a 50 bp hike on February
2 was still in the cards, there was a discussion about whether the ECB could
shift to a 25 bp hike at the March meeting. As part of her message at last
month's ECB meeting, Lagarde held out the possibility of a half-point move but
was not as committal as she was about the magnitude of the Feb move. At the low
point this week, the swaps markets saw it as a 50/50 proposition, but it is
finishing the week, closer to a 66% probability.
UK December retail sales were considerably weaker than expected. They
fell 1.0% and 1.1% excluding gasoline. The median forecast in Bloomberg's
survey anticipated a 0.5% and 0.4% gain, respectively. The hope spurred by the
unexpected resilience of the economy in November, which saw the monthly GDP
rise by 0.1% rather than contract, has been dashed by these consumption figures.
The details showed a rise in value terms (higher prices) and a sharp drop in
volumes. Economists knew of the rail and postal strikes, and the World Cup, but
may have still weighed on activity. Note that retail sales in the UK account
for around a third on consumption expenditures.
The euro continues to chop around its well-worn range. It has traded
between about $1.0730 and $1.0885 for the past seven sessions, including today.
A key question is whether it is carving out a top or basing for another leg
higher. Our bias remains the former, informed as it were by the momentum indicators
and extended net long position in the futures market. That said, the $1.0940
area represents the (50%) retracement of the losses seen since the January 6, 2001,
high near $1.2350. For its part, sterling remains within the range set on
Wednesday (~$1.2255-$1.2436). It approached but failed to take out the
mid-December high closer to $1.2450. After recovering from the record low near
$1.0350 at the end of September, it has mostly broadly sideways in the past
month. Sterling is strongest G10 currency so far this month, with a 2.3% gain. The
Australian dollar is in second place, rising about 1.75%.
America
It may be too early to get a good read on the US economy at the start of
the new year. The Empire State manufacturing survey was worse than
expected, while the Philadelphia Fed's Business Outlook survey was better than
expected, with the contraction continuing but at a slower pace. Weekly initial
jobless claims for the week in which the non-farm payroll survey was conducted
below 200k for the first time since last September. The weekly report is often
volatile, spurred by weather-related disruptions. Despite the headlines about
layoffs, the four-week moving average of new claims is the lowest since mid-May.
It speaks to the continued resilience of the labor market. Meanwhile December
housing starts were a bit better than expected, but at 1.382 bln (SAAR), they
were still the lowest since August 2020. Housing starts feel last year (~22%)
for the first time since 2008. Permits, a leading indicator were weaker than
expected and fell for the third consecutive month to finish the year down
nearly 30% from a year ago.
On tap today is index of leading economic indicators. It is expected
to have extended it downward trek for the ninth consecutive month. It only rose
once last year (February). As one would expect, such a sustained decline is
often associated with recession. December existing home sales will also be
reported. They have been falling uninterrupted since last January. The median
forecast in Bloomberg's survey sees the pace (SAAR) falling below 4 mln for the
first time since 2010. Philadelphia Fed President Harker (voting member of the
FOMC this year) and Fed Governor Waller speak today ahead of the quiet period
in the run-up to the FOMC meeting.
Canada and Mexico report November retail sales. The data seems too
old to have much impact, but after a heady 1.4% increase in October, Canadian
retail sales are expected to have softened (~-0.5%). They rose without fail in
H1 22 but stumbled in H2 as both cause and effect of the slow growth. In H2,
Canadian retail sales have a sawtooth pattern of alternating increases and
declines. Mexico's retail sales are also expected to have fallen in December
(~0.3%). They rose by 0.7% in October. The year-over-year pace is seen slowing
to 2.2%, which would be the weakest since February 2021.
Some observers attributed the Canadian dollar's gains yesterday despite
the losses in the US equities to speculation that the Bank of Canada may hike
50 bp next week, but we do not see this reflected in the swap market. The
greenback jumped with Wednesday's risk-off action from around CAD1.3350 to
CAD1.3500. It rose to a nearly two-week high yesterday near CAD1.3520 and came
off to about CAD1.3450. The US dollar edged slightly lower today, finding
support ahead of CAD1.3440. Support is seen in the CAD1.3400-20 area. After
staging a key upside reversal on Wednesday, the greenback saw follow-through
gains that lifted it to almost MXN19.11 yesterday. This was a little more
than the halfway mark of this month's decline. There did not appear to be a
macro spark and the explanation may lie with market positioning. It is
consolidating today, and we suspect the pullback in the peso will provide a new
buying opportunity. Initial dollar support is seen near MXN18.90.
Disclaimer
Reviewed by Marc Chandler
on
January 20, 2023
Rating:
