Overview: The mostly consolidative week for the US dollar
continues. Most for the G10 currencies are +/- about 0.25% today and only a
slightly wider range for the week. The odds of a Fed rate cut in March is
virtually unchanged on the week at around 75%. The JP Morgan Emerging Market
Currency Index is practically flat on the day and week. The Russian ruble and
Mexican peso lead today's advancers, while eastern and central European
currencies are laggards. The Chinese yuan is flat despite moderating deflation
and a larger trade surplus. Lending figures disappointed. The PBOC is likely to
cut its one-year benchmark rate at the start of next week.
The US and UK strike on the Houthi in Yemen has helped lift oil and gold
prices, but otherwise the impact on the markets is minimal. Outside of Japan
and India, most of the large markets in Asia Pacific saw modest losses. Europe's
Stoxx 600 is up about 0.8%, which, if sustained, would be the largest gain
since mid-December. Perhaps European equities have been helped by a 4-5 bp
decline in 10-year yields today. The 10-year US Treasury yield is up slightly
near 3.98%. US index futures are a little softer. Gold set a new high for the
week, as it draws near $2050. February WTI has reached a new high for the year,
a little above $75 a barrel.
Asia Pacific
Japan's November current account surplus narrowed as is the historical
pattern, which was violated in 2022. For the first time in 16 years,
Japan's current account surplus widened in November 2022. More broadly, Japan's
current account has returned to its pre-Covid size. Through November, Japan's
current account surplus has averaged about JPY1.8 trillion a month (~$12.8
bln). In the first 11 months of 2019, the average was around JPY1.7 trillion.
In Europe and the US, the current account position is driven by the trade
balance. This does not hold in Japan. On a balance of payments basis, Japan
recorded an average trade deficit of a little more than JPY610 bln a month
through November last year. In January-November 2019, Japan recorded a nearly
balanced trade account (~JPY7.5 mln monthly average).
China does not have a fixed schedule for many of its economic reports. Today,
it updated inflation (really deflation), lending and trade figures. First, the
deflation in CPI continued by at a slower rate. Consumer prices fell by 0.3%
year-over-year in December. It as -0.5% in November and the median forecast was
for -0.4%. Conventional wisdom attributes the deflation to weak demand, yet the
deflation is primarily about food, where demand is not so elastic. Food prices
are off 3.7% year-over-year, while non-food prices are up a 0.5%. CPI rose for
the first time on a month-over-month basis since September. The core rate rose
by 0.6% year-over-year for the third consecutive month. Producer price
deflation slowed to -2.7% (-3.0% in November). Separately, aggregate lending
figures slowed to CNY1.94 trillion from CNY2.45 trillion and was less than
expected, despite a small improved in bank lending. Taken together, the
inflation and lending figures add to expectation that the PBOC will cut the
benchmark one-year Medium Term Lending facility rate Monday (from 2.50%).
Lastly, China reported a larger-than-expected trade surplus of $75.3 bln, up
from $68.4 bln in November. Exports rose by 2.3%, the second consecutive
increase, while imports edged up 0.2% after falling by 0.6% previously. For the
year as a whole, China's trade surplus narrowed for the first time since 2016. Exports
were off 4.6% last year, though auto exports surged by almost 64% (and a little
more than 4% increase in domestic sales). Imports were off 5.5% last year.
Taiwan votes tomorrow. The most likely outcome is a continuation
of the status quo. The current vice president (Lai Ching-te) was running a few
percentage points (~3%-11%) ahead of his closest rival from the KMT Hou Yu-ih.
There is a ten-day black out period of polling before the election. There was a
brief possibility several months ago of a unified opposition ticket. Although
there was some excitement, the deal could not be consummated. Beijing has been
continuing its aerial harassment of Taiwan in the run-up to the election. Lai
has previously said he was a political worker for the independence of Taiwan.
He seems modified his position and now says that there need not be a formal
declaration of independence because Taiwan is already de facto sovereign. The
continuation of the status quo means tense cross-strait relations. After
trending higher against the Taiwan dollar for most of 2023, the greenback
peaked in early November near TWD32.50. The US dollar's broad decline in
November and December saw it tumble 5.7% against the Taiwan dollar (~TWD30.64)
It has recouped about 1.6% since the turn of the year. There may be scope for
near-term dollar gains. The TWD31.35 area may be a reasonable initial target.
It houses the 200-day moving average, the highs from the second half of December,
and the (38.2%) retracement objective of the dollar's fall from last November.
The dollar reached JPY146.40, a new high since December 11, after the US
CPI was reported. It was the third consecutive session that the
dollar's highs were set in North America. It consolidated mostly in a
JPY145.70-JPY146.20 range for most of the remainder of the session. The CPI was
slightly firmer than expected, and Cleveland Fed President Mester, who votes
this year (though retires in June), pushed against March rate cut, US rates
softened, and this seem to weigh on the greenback. True to the recent pattern,
there was no follow-through dollar buying in Asia Pacific hours. The greenback
slipped to about JPY144.85 before resurfacing JPY145. It has been capped in the
European morning near JPY145.25. Near there, the dollar is about 0.4% higher on
the week. The Australian dollar was sold after the US data. It came
within about 6/100 of a cent of last Friday's low (~$0.6540). It recovered to
settled above the lows seen in the first three sessions of the week (~$0.6680).
Today, it has been confined to about 15 ticks on either side of $0.6700. Australia
reports December employment figures next week and disappointing news could help
the Aussie finish the downside correction we envisioned. The PBOC set
the dollar's reference rate at CNY7.1050. The fixings have been in a narrow
range this week (CNY7.1006 to CNY7.1087). The average in Bloomberg's survey was
CNY7.1584 today, but it too has been in a narrow range this week
(CNY7.1498-CNY7.1696). The dollar has risen by a little more than 0.25% against
the yuan this week after gaining about 0.65% last week.
Europe
The 0.3% growth the UK reported for November was slightly better than
expected and offsets the contraction of the same magnitude in October. However, the three-month change slipped into contraction for the first time since
October 2022. Still, November details were somewhat encouraging. The key
sectors had all contracted in October and recovered in November. Industrial
output rose by 0.3% after falling 0.8%. Services output rose by 0.4%. It had
declined by 0.2% in October. The trade deficit was halved to GBP1.4 bln.
Construction was the exception. It failed to gain traction and fell by 0.2% after a revised
0.4% decline in October (initially -0.5%). The high-frequency data next week
may have greater impact on BOE expectations, though there is practically no
chance of a move at the next meeting on February 1. Next week's data includes
an update on the labor market and wages, CPI, and retail sales.
The euro recorded the session high slightly shy of $1.10 in the
positioning ahead of the US CPI. The session low was recorded near
$1.0930 in the subsequent dollar bounce. The euro recovered back toward $1.0980
in the North American afternoon. Recall that last Friday's range was roughly
$1.0875 to almost $1.10. Yesterday's high, according to Bloomberg was 2/100 of
a cent below last Friday's high. The market seems to lack near-term conviction,
torn between softer US rates and the steady stream of poor eurozone economic
new. Options for nearly 1.6 bln euros at $1.10 expire today. It is in a
narrow range today between about $1.0955 and $1.0985. After falling by around
0.85% last week, the euro is up ~0.15% this week. Sterling set a
marginal new high for the year today at $1.2785, where is stalled and slipped
back to slightly below $1.2750 in the European morning where new buying
materialized. The upper end of the range is around $1.28. There had
been minor intraday penetration in thin markets at the end of last year, but
sterling has not closed above it for nearly six months. Still, the sideways
movement has alleviated the overextended momentum indicators. A move above
$1.2825 will likely be seen as a breakout and could spur a move toward $1.30.
Sterling is the strongest G10 currency this week, ahead of the North American
session, with a nearly 0.3% gain.
America
On the heels of yesterday's CPI is the December PPI to close out the
week. The CPI print was slightly firmer than expected with a 0.3%
increase in the headline rate (lifting the year-over-year rate to 3.4% from
3.1%). The 0.3% increase in the core rate puts the year-over-year rate at 3.9%,
down from 4.0%. The core figure, excluding housing, which has been cited by
several Fed officials, including Chair Powell, rose by 0.4% for a 3.9%
year-over-year rate, unchanged from November. Producer prices are expected to
have edged slightly higher last month. The base effect (PPI fell by 0.3% in
December 2022), a minor rise like 0.1% would translate into a year-over-year
rise to 1.3% from 1.9%. Still, producer prices would have fallen at annualized
rate around 1.2% in Q4. Excluding food and energy, core PPI is likely steady at
2.0%. A 0.2% month-over-month increase would be the first increase in three
months, after unchanged in October and November.
The Fed funds futures market had a 25 bp cut fully discounted for March
at the end of last year. After the December employment figures, it
settled last week with a little less than a 75% chance priced and net-net is
little changed this week. We still think that is too high, and suspect, based
on the current information set that the odds are probably a little less than
50/50. Next week's real sector data, retail sales, industrial production, and
housing starts will likely confirm that the US economy has not fallen off a
cliff and that growth may still be running slightly ahead of what the thinks is
the non-inflationary pace (1.8%).
In the post-CPI action, the US dollar reached slightly through CAD1.3440,
its best level since December 14. The CAD1.3450 area holds the (38.2%)
retracement of the dollar's losses since the November 1 high for last year near
CAD1.39 and the (61.8%) retracement of the dollar's pullback from last month's
high around CAD1.3620. The greenback is better offered today and looks poised
to test the week's low near CAD1.3340. Meanwhile, disappointing Mexican
industrial production (-1.0% compared with median forecasts in Bloomberg's
survey for a 0.2% gain) did not deter the peso bulls. The greenback
initially rose MXN17.0680, a new high for the week, and then reversed lower,
and settled below Thursday's low to record a bearish outside down day.
Follow-through dollar selling pushed it toward MXN16.87. The week's low was set
on Monday near MXN16.7850, a little more than a four-month low. The swaps
market has a quarter-point rate cut discounted for Q1. The central banks meet
on February 8. Its March meeting is the day after the FOMC meeting concludes on
March 20.
Reviewed by Marc Chandler
on
January 12, 2024
Rating:
