Overview: After
some intraday penetration, the euro finally settled above $1.09 yesterday. However,
follow-through buying has been limited and technical and option-related
resistance is seen in the $1.0940-50 area. The dollar is more broadly mixed
today, with the dollar-bloc and Norwegian krone leading the advancers. The
euro, yen, and sterling are nursing small losses near midday in Europe. The
recovery of US equity indices yesterday after gap lower openings failed to help
most of the Asia Pacific markets. However, the re-opening in Hong Kong saw
sizeable gains and South Korea's Kospi continued its advance after re-opening
yesterday, despite news that the economy contracted by 0.4% in Q4 22. Europe's
Stoxx 600 has recouped the losses of the past two sessions, and US futures are
trading with a firmer bias.
Bond markets are under pressure
and benchmark 10-year yields are up mostly 3-5 basis points in Europe and US. There
is a host of US economic data today and the first estimate of Q4 GDP is the
highlight. Also, strong demand has been seen as this year's Treasury auctions
and $35 bln of seven-year notes will be sold today. Gold made a new marginal
high near $1950 before reversing lower and is now near $1935. There is much
attention in the energy space as US natgas prices are below $3 for the first
time since May 2021. Europe's benchmark is off for fourth consecutive session
and is near its lowest level since September 2021. March WTI is consolidating
mostly between $80-$81.
Asia Pacific
China is markets do not
re-open until Monday, but some preliminary reports on travel, movie-going, and
other activities will feed into to the optimistic narrative. The early findings suggested improvement
year-over-year. On the other hand, some observers are concerned about a surge
of Covid post-holiday and in rural parts of the country with less medical
infrastructure. Still, the optimism about post-Covid Chinese economy seems to
be a strong conviction idea rippling through some industrial metals like copper
and iron ore, and helps explain the strength of the Australian dollar,
Brazilian real, and Chilean peso. Before the Lunar New Year, the Chinese yuan
was nearly flat for the year (~0.15%).
The IMF's Deputy Managing
Director Gopinath seemed critical of the Bank of Japan's December surprise,
urging it to communicate more clearly about its policy intentions. She warned of the upside risks still to
Japanese inflation and advocated a more flexible approach to managing its Yield
Curve Control. She suggests three possible options to allow more flexibility
around the long-term JGB yields, 1) widen the 10-year yield band, 2) shorten
the yield curve target (which the IMF had previously suggested), and 3) shift
back to a quantity target of JGB purchases. That said, the IMF expects core
Japanese inflation (excludes fresh food) to peak here in Q1 and gradually fall
back to below 2% by the end of next year. It projects growth this year in the
world's third-largest economy at 1.8% and then slowing to 0.9% next year.
The dollar slipped to a
marginal new three-day low against the yen near JPY129 in the Asian session but
recovered to JPY130 by early in the European morning. This was more the less the high from
the North American session yesterday. A move above there would target the
JPY130.50 area, but more likely, given the stretched intraday momentum
indicators, the dollar pullback first. There are options for $2 bln struck at
JPY130 that expire today. The Australian dollar extended its surge that has
carried it from almost $0.6870 last week to nearly $0.7130 today. It
is near last August's high (~$0.7135). The session high does not seem to be in
place and a marginal new high is likely in North America. In the period ahead,
the next technical target is around $0.7280-$0.7300, the (61.8%) retracement of
the losses since the peak in March 2021 and the high from last June. After
knocking on the CNH6.80 area with no success pushing through, and given the
greenback's heavier tone more broadly, it may not be surprising the dollar has
been pushed down to almost CNH76.7250, an eight-day low. Perhaps the
market was also encouraged by the strong gains as the Hang Seng re-opened
(~2.4%) and the index of mainland shares that trade in HK (~3%).
Europe
The two-day protest at
Italian gas stations was called off yesterday amid new talks. The issue was not pay but the government's
new requirement that gas stations show the average gasoline price in the area. The
goal was to reduce alleged gouging. It added to the pressure on Prime Minister
Meloni, who has not renewed the fuel subsidy that ended last month. However, it
could also mark the low point in the trend that has seen the Italian interest
rate premium over Germany narrow considerable. A new divergence of economic
performance and inflation may materialize. German industry seems to be in a
better place than Italy, and German inflation is falling slowing much faster
than it is in Italy.
The euro settled for the
first time since last April above $1.09 and edged ever so slightly higher today.
However, it has stopped
short of the $1.0940 area, which holds the (50%) retracement of the decline
since the post-Covid peak on January 6, 2021 (~$1.2350). There are also about
1.25 bln euros in options at $1.0950 that expire today. The euro's pullbacks
are still being snapped up and the intraday momentum indicators suggest a new
high is possible in the North American session today. Sterling extended
yesterday's recovery, but the buying enthusiasm is not quite the same as for
the euro. Buying continues to appear to dry up in front of
$1.2450. Still the market has not given up and looks poised to challenge the
upside again today. South Africa's central bank is seen hiking its repo rate 50
bp (to 7.50%) today, following three 75 bp moves.
America
Remember all those
narratives built around the alleged decline in demand for US Treasuries? It led some to even suggest it was a sign
that the dollar was being eclipsed on the global stage. Foreign investors,
including central banks were divesting, we were told, and the lack of demand
could even prompt the Fed to renew their bond purchases to help stabilize the
market. Not so fast. Yesterday was the seventh auction of the year and they
have been well received, with strong bid-covers and generating a yield that was
below where the instruments were trading in the when-issued market. Moreover,
like in yesterday's sale of $43 bln of five-year notes, primary dealers have
not had to buy very much. They took 8.8% at yesterday's sale, a record low. Today,
the Treasury is back with $35 bln 7-year notes and $135 bln of bills (4- and
8-week) for sale. After today's 7-year note sale, the next coupon offering ae
three-year notes on February 7.
The US economic diary is
jammed today. The
headlines will be about Q4 GDP. Market economists see growth moderating after
the 3,2% annualized pace in Q3. The median and average in Bloomberg's survey is
for 2.6%. Of the 70 economists survey almost 20% project growth of more than
3%, including three of the top 10 GDP forecasters. We have suggested that just
like the market looked past the contractions in Q1 22 and Q2 22, they are
looking through the growth in H2 22. Despite the soft-landing meme, many
economists still see downside risks. The median forecast for this quarter in
Bloomberg's monthly survey is no growth and a 0.6% contraction in Q2. The other
December data due out will be overshadowed by the GDP. Weekly initial jobless
claims may attract some intention, though they are reported at the same time as
the GDP figures, given last week's unexpected drop below 200k.
Given the somewhat more
dovish than expected Bank of Canada and the early weakness in US equities, the
Canadian dollar was resilient. The greenback bounced to almost CAD1.3430 from around
CAD1.3360 before the announcement. Governor Macklem's pauses,
conditional on the economy evolving as the central bank expects, it was clear
that the bias was that it would stand pat. It was the eighth consecutive hike,
and the quarter-point hike puts the overnight cash target at 4.5%. The Bank of
Canada expects, as the market does, marked slowdown. Macklem did not push back
against questions about a cut very forcefully, like the Fed. Instead, he said
it was too early to discuss. Canada would be the first of the G7 central banks
to reach the end of the cycle, though among the G10, the market suspects Norway
may also be done. The BOC expects inflation to fall back into the 1%-3%
"control range" by mid-year and 2% next year.
The Canadian dollar is
trading quietly within yesterday's range (~CAD1.3340-CAD1.3430). Near CAD1.3390, it is virtually
unchanged this week. While the Canadian dollar's correlation with US equities
(as a risk currency) has lessened, its general underperformance in a soft US
dollar environment continues. This year, so far, it is the weakest of the
dollar-bloc currencies, up about 1.25%. The Australian dollar leads the G10
with a nearly 4.5% advance and the New Zealand dollar has risen by about
2.15%. The greenback is little changed against the Mexican peso
as it hovers around MXN18.80. Recall last week, the dollar jumped from
around MXN18.5665, its lowest level since March 2020, to nearly MXN19.11.
It has stalled now after meeting the (61.8%) retracement objective around
MXN18.77. Lastly, we note that the central bank of Chile meets late today and
is expected to stand pat with its overnight target rate at 11.25%. It has held
steady since the 50 bp hike last October.
Disclaimer