Overview: The foreign exchange market is quiet to
start the new week. As the North American session is about to begin, the dollar
is mostly +/- 0.10% against most of the G10 currencies. The Swedish krona is
the notable exception, rising about 0.25% against the US dollar amid good
demand for its bonds today. Emerging market currencies are mostly lower. The
Taiwanese dollar is the strongest in the complex so far today, rising about
0.30% against the dollar, despite a dramatic 16% drop December export orders. The
two trend moves among Asia Pacific equities continued. Japanese indices made
new 30-year highs, while Chinese stocks on the mainland and Hong Kong continued
to be pummeled. Europe's Stoxx 600 is up about 0.4%, while US index futures are
extending their gains that carried the S&P 500 and Nasdaq 100 to record
highs before the weekend.
Bonds are bid. Benchmark 10-year rates are 3-6 bp lower in Europe. Of note, Italy's 10-year premium over Germany is around 155 bp to approach two-year lows. The 10-year US yield is slightly softer near 4.10%. The 2-year US yield is flat slightly below 4.40%. Gold is softer but trading quietly in around a $6-range on either side of $2025. March WTI is little changed near $73.40. Meanwhile, US natgas is lower for the fifth consecutive session. During this slump, it has fallen by almost a third. Europe's benchmark is off about 5% today and down around 15% since January 12.
Asia Pacific
As signaled when the PBOC
failed to cut the benchmark one-year Medium-Term Lending Facility rate last
week, Chinese banks maintained their loan prime rates. Officials are understood to have signaled
that more economic support will be forthcoming. The focus in Q4 23 seems more
on quantities (loans and increased quotas) rather than price (interest rates).
Consistent with this, many observers anticipate another reduction in reserve
requirements. Meanwhile, Beijing purposefully popped the property bubble, and
while it appears to have returned to industry as a vital engine of growth, it
has not found a new place to park savings. The CSI 300 is off 35% in the three-year
slide through 2023. Today's 1.5% loss brings the year-to-date decline to 6.2%.
And this might understate the case. The index of mainland companies that trade
in Hong Kong has fallen for the past four years and has been nearly halved. It
is off another 13.3% since the start of this year. Given the hemorrhaging of
the stock market, it ought not be surprising that Beijing seeks to avoid a
vicious cycle by keeping the yuan stable.
The dollar begins the week
with a three-week rally in tow against the Japanese yen. It has been fueled by the backing up
of US rates, and recognition that the BOJ, which meets this week, unlikely to
adjust policy until at least April. The momentum appears to be stalling as the
settlement for the last three sessions has been JPY148.12-16, according to
Bloomberg. The greenback has been confined to about 30 pips today on either
side of JPY148 in quiet turnover. The Australia dollar finished last
week a smidgeon below $0.6600, its highest close since December 7. There
are about A$500 mln of options at $0.6600 that expire today. It reached nearly
$0.6615 in the local session before being sold back to around $0.6580 in late
dealings. The Aussie needs to rise through the $0.6640-60 area to signal
anything more substantial than consolidation. The US dollar continues
to bump on a cap near CNY7.20. The PBOC set the dollar's reference rate at
CNY7.1105 (CNY7.1167 Friday). The average in Bloomberg's survey was CNY7.1873
(CNY7.1953 on Friday). The greenback has slipped against the offshore yuan in
the last two sessions and is practically unchanged now near CNH7.2030.
Europe
The talk of is
de-dollarization, but the evidence is scarce. SWIFT data provides evidence not of
de-dollarization but de-euro-ization. The timing of lines up not with China's
initiatives the Belt Road Initiative or the Asian Infrastructure Investment
Bank but Russia's invasion of Ukraine in February 2022. According to SWIFT, and
the end of 2020, the euro's share of global payments was 36.70%. At the end
2021, it was little changed at 36.65%. By the end of 2022, its shared slipped
to 36.35%, and at the end of last year stood at 22.41%. The euro's share
slipped near 14 percentage points last year and the dollar's share increased to
47.54% in December, an increase of 5.65 percentage points. At the end of 2020,
the dollar accounted for 38.73% of payments using SWIFT. Sterling and the yen's
share rose a little less than one percentage point in 2023 to 6.92% and 3.83%,
respectively. The Chinese yuan's share on SWIFT rose to 4.14% from 2.15% at the
end of 2022 and 1.88% at the end of 2020.
Chinese activity with Russia
will not be reported on the SWIFT network, from which most Russian banks
expelled, but on China's CIPS (Cross-Border Payment System), launched in 2015. Unlike, the US CHIPS (Clearing House
Interbank Payment System) which settles payments between banks on a net basis,
China's CIPS is a real-time gross settlement system. Several European officials
have expressed concerns about the future use of the euro if Russia's reserves,
which have been frozen, are given to Ukraine in some fashion to fund
reconstruction. About 2/3 of the $300 bln of Russian funds are in Europe,
meaning that its call is important. The Biden administration and many op-ed
writers seem to focus on the legality and moral righteousness. Many in Europe
seem to be more focused on the political and financial consequences.
The euro slipped by about
0.5% last week and settled the week below $1.09 for the first time since
mid-December. It
edged up to almost $1.0910 before being pushed back down toward session lows
near $1.0885. The euro bottomed last week near the 200-day moving average,
now around $1.0845. Sterling, confined to the $1.26-$1.28 trading
range, tested the lower end last week. The rule of alternation
suggests it will get closer to the upper end of the range next. It reached a
four-day high near $1.2725 earlier today but could not sustain the upside
momentum. It is straddling the $1.27 area. Speculators in the futures market
have been covering shorts and adding to longs during the range-trading affair
that began in mid-December.
America
The Federal Reserve
officials forecast, and statement reflected greater confidence in achieving the
proverbial soft-landing at the December FOMC meeting, and the recent string of
data provides even more encouragement. Last week's reports included stronger-than-expected retail
sales, a small gain instead of a small loss in industrial output, and the
lowest weekly jobless claims since September. The collapse of the Empire State
January manufacturing survey sent the chins wagging but the negativity was
blunted by the Philadelphia Fed's January business outlook, which improved
slightly. The preliminary January University of Michigan's consumer survey was
frosting on the cake. It not only rose more than expected to 78.8 from 69.7,
but the two-month gain (from 61.3 in November, is the largest back-to-back gain
since November-December 1992. The preliminary sentiment reading is the highest
since July 2021. And inflation expectations eased a little more than expected.
The one-year inflation outlook is for 2.9%, the lowest since the end of 2020
and down from 3.9% in January 2023. The five-year outlook slipped to 2.8% from
2.9%, matching last year's low.
Every business cycle is
unique, but for obvious reasons this one is particularly unusual. Some indicators that have in the
past been consistent with recession conditions continue to flash warning
signals. Today's US leading economic indicators is such an example. The
December LEI is expected to have fallen by 0.3%. What make is notable is not
the magnitude but the duration. It has been falling without fail since April
2022. The six-month annualized pace has been associated past economic
contractions. Yet, outside the trade and inventory induced contractions is the
first two quarters of 2022, the US economy has growing above what the Federal
Reserve estimates to be the non-inflationary long-term pace 1.8%. This quarter
could snap it, but first the US will likely extend the streak of above
trend-growth for in Q4 23.
The Canadian dollar's nearly
0.45% rally before the weekend was the largest advance in more than three
weeks, seemingly helped by the risk-on reflected in the strong rally in US
equity market. Also,
we note that the swaps market now has about 106 bp of cuts this year compared
with 135 bp at the beginning of last week. The US dollar settled on three-day
lows near CAD1.3430 and slipped to around CAD1.3420 today. A break of CAD1.3400
targets the CAD1.3360 area next. The US dollar jumped up against the
Mexican peso at the start of last week and trickled lower in the second part of
the week. The continued decline of headline and core CPI in the first
half of January (due mid-week) should encourage rate cut expectations. Initial
support may be seen in the MXN17.00-05 area. The greenback settled near
MXN17.0850 before the weekend and found sellers on a small bounce slightly
above MXN17.14.
Reviewed by Marc Chandler
on
January 22, 2024
Rating:
