Overview: The dollar is bid going into the December
jobs report. After selling off into the end of last year, it has recovered this
week. The five-day moving average is crossing the 20-day moving average against
several of the currency pairs, capturing the shift in momentum. The greenback's
gains have as interest rates have jumped. The 10-year Treasury yield finished
last year near 3.88% and is now near 4.04%. European benchmark rates have
mostly risen 15-20 bp this week, though the 10-year Gilt yield is up almost 28
bp. The market has downgraded the odds of a March cut by the Federal Reserve to
around 68% from 100% at the end of 2023.
Stocks have been hit by profit-taking to
start this year. China's CSI 300 and Hang Seng have fallen every day this week
for about a 3% drop. Europe's Stoxx 600 is giving back yesterday's gains and is
off a little more than 2% this week. US index futures are trading heavily,
pointing to the fifth drop for the S&P 500 and sixth consecutive fall for
the NASDAQ. Gold is trading heavier. The yellow metal is trading lower for the
fifth session in the past six as rising rates and a firmer dollar sap its
recent strength. A break of the $2030 area could spur losses toward $2000-$2015.
February WTI is steady in the $72-$73 range. It finished November near $76 and
settled in December around $71.65.
Asia Pacific
Like the final manufacturing PMI, Japan's
final service and composite PMI are not what moves the market. That said the composite PMI was revised to
50.0 from 50.4 on the back of the downward revision in the services component
to 51.5 from 52.0. After contracting in by nearly 3% annualized in Q3, the
Japanese economy is expected to have returned to growth in Q4 23, as
consumption and private investment expands for the first time since Q1 23.
Despite the seemingly widespread speculation that the BOJ will lift its
negative overnight deposit rate from minus 0.1% in April, the
two-year bond yields less than five basis points. The 60-day rolling
correlation of changes in the exchange rate and the US 10-year yield is around
0.45, the upper end of where it has been in past six months. The correlation
with changes in the exchange rate and Japan's two-year yield is slightly below
0.25.
China may post its December reserve
figures over the weekend. A back-of-the-envelope calculation based on the dollar's decline
and the rally in bonds, we estimate that China's reserves may have increased by
around $50 bln. It would put the dollar-value of its reserves near $3.22
trillion, up from around $3.13 at the end of 2022. All of China's foreign
assets are not part of its reserves and this seems to be a common practice and
is true of the US too. As China amply demonstrates it can manage the exchange
rate without resorting to official intervention. The daily fix seems to us to
be the most powerful tool within the context of the moral suasion and implicit
threats by officials. Every time there is a press report saying that the
state-owned banks bought or sold dollars does not mean there was intervention.
They handle commercial accounts, like other banks, of course. Moreover, if
officials make it clear that they desire a stronger yuan, for example, and
state-owned banks buy the yuan, that still does not make it intervention.
Recall that in September 2021, the Federal Reserve indicated that they would be
raising rates in 2022. The market lifted the two-year yield by 50 bp before the
FOMC moved. Surely, this was not considered intervention. Perhaps with a
greater or more credible threat of adverse official actions, the communication
channel is powerful.
The fact of the matter is that many
countries in East Asia have been reluctant to embrace fully floating exchange
rates and have found different ways to mitigate the vagaries of the market. Interestingly, the Indian rupee and
the Singapore dollar have had lower actual (historical) volatility last year
than the Chinese yuan (SGD ~4.5%, INR ~3.4%, and CNY ~4.7%). South Korea has a
somewhat different challenge. It wants its equity market to be considered
developed for index purposes, which would attract another segment of global
investors, and to do so it must improve access. Next month, it will test a plan
that will be implemented in H2 24 to extend the hours of trading the won by
nearly 11 hours, which will correspond to bulk of the US session. A couple of
large banks are opting to boost staff in London and/or New York rather than
extend the local staff coverage.
The continued rebound in US rates and what
appeared to be option-related buying above JPY144 helped extend the greenback's
recovery to JPY144.85 in the North American session yesterday and JPY145.35
today. It is the
highest since December 13. The dollar has surpassed the (38.2%) retracement
objective of the dollar's decline since the peak last November (JPY152). The
next retracement (50%) is slightly above JPY146.00. The Australian
dollar was turned back from the session high yesterday seen in the European
morning near $0.6760. It was sold back below $0.6700 in the North
American session and follow-through selling has pushed it to $0.6675. A break
of the $0.6660 area could signal a push to $0.6600 and maybe $0.6550. Like
the greenback's movement against the yen, the five- and 20-day moving averages
are crossing today, reflecting reversal of the year-end rally. We have been
monitoring the dollar's climb into the gap created in mid-December. The
top of the gap is little above CNY7.1700. The gap was closed today, and the
dollar retreated to CNY7.15. The reference rate was set at CNY7.1029 (CNY7.0997
yesterday) and the average projection in Bloomberg's survey was for CNY7.1589
(CNY7.1488 yesterday). The dollar's rises this week of about 0.80% is the
largest against the yuan in three months. Some reports attributed the yuan's
late recovery today to state-bank buying.
Europe
The 0.2% monthly increase in the
eurozone's December CPI puts the three-month annualized increase at an enviable
1.2% pace. The
increase in the year-over-year rate to 2.9% from 2.4% reflects the base effect,
which ECB President Lagarde warned of, relating to energy subsidies in late
2022. The core rate fell for the fifth consecutive month, and at 3.4% (from
3.6%), it is the lowest since March 2022. The November PPI fell (0.3%) for the
first time since July. It is off 8.8% year-over-year and has not been positive
since April. Growth is weaker in the eurozone, and inflation is lower than in
the US, yet the market is pricing in the Fed to move before the ECB. The swaps
market has slightly less than a 50% chance of an ECB cut by the end of Q1 and
almost a 67% chance of a Fed cut.
The euro rose a little above $1.0970
yesterday, and although it took out Tuesday's high, the tone was consolidative
in nature. The high
was recorded in the European morning in what seemed like position squaring,
maybe from the interbank dealers who sold after the year-end rally. The euro is
trading below yesterday's low (~$1.0915) but found support ahead of $1.09. Barring a significant surprise with
the US jobs report, we expected the euro's downside correction to continue. The
$1.0875-85 offers retracement targets, while the 200-day moving average is near
$1.0845. The euro's five- and 20-day moving are also crossing today and the
momentum indicators are falling. Sterling is holding in a bit better,
but yesterday's impulsive gains seen in Europe carried into the North American
morning before stalling. It peaked near $1.2730 and fell back to
$1.2665 before trading broadly sideways. It is testing the $1.2650 area in the
European morning, and the five-day moving average has crossed below the 20-day
moving average. A break of $1.26 could open the door to another cent decline.
America
The US jobs report is the first major data
for a new month and is particularly difficult to forecast because of the
absence of solid inputs. Yes, weekly jobless claims are something and so are the PMI and
ISM surveys, but the relationship is loose at best. The four-week moving
average of weekly jobless claims slipped a little from the BLS survey week in
November to the survey week in December (8k).
Many seem to incorporate ADP private
sector estimate into their expectations, though it is not particularly
reliable, especially in the short-term. Through November, the ADP estimated that the private sector
created 2.33 mln jobs in 2023. The BLS estimates that the private sector
expanded its workforce by 1.91 mln. However, in the three months through
November, ADP estimates nearly 300k private sectors jobs were created, while
the BLS estimate is 50% higher at 435k.
The median forecast in Bloomberg's survey
calls for 170k increase in nonfarm payrolls of which the private sector is seen
expanding by 130k jobs. This compares with 199k and 150k respectively in November.
Separately, it appears that withholding tax collection fell sharply in
December, warning of downside risks today. The household survey, which
generates the unemployment rate, is subject to the annual revision that goes
back five years. The median forecast in Bloomberg's survey sees the
unemployment rate ticking up to 3.8% from 3.7% in November. It had reached 3.9%
in October and finished 2022 at 3.5%. A 0.3% increase in average hourly
earnings would translate into a 3.9% year-over-year rate, the first sub-4%
print since June 2021.
Canada's labor market condition1 have
eased faster than in the US. The unemployment rate has risen from 5.0% at the start of last
year to 5.8% in November and is projected to have risen to 5.9% last month. The
participation rate has risen slightly from 65.3% in November 2022 to 65.6% this
past November. Yet, job creation has held up. Consider that it in the first 11
months of 2023, Canada created 430k jobs of which almost 350k were full-time
positions. Job creation in the same period in 2022 was 340k and 375k,
respectively (part-time positions were lost in 2022 or became full-time posts).
Meanwhile, wage growth (average hourly wage, permanent workers) has remained
robust. It rose by 5.05% year-over-year in November after finishing last year
with a 4.70% increase. The median forecast in Bloomberg calls for a 5.4%
increase last month, which would be the most since November 2022. The swaps
market has about a 30% chance of a Bank of Canada rate cut discounted by the
end of Q1 compared with a nearly 70% chance of a Fed cut.
The US dollar was confined
largely to Tuesday's range against the Canadian dollar (~CAD1.3315-CAD1.3370). The market lacked conviction and it
settled practically flat yesterday. That said, the technical indicators warn
that the greenback's upside correction after its sharp fall over the past two
months has more room. It is trading near CAD1.3380 in Europe. A bottoming
pattern may be forming that could signal a move toward CAD1.3450-CAD1.3500. The
Mexican peso also went virtually nowhere yesterday and was mostly within 0.33%
of the Wednesday's settlement. It is little changed today. There may be
near-term potential toward the MXN17.15-17 area. Another drop in the core CPI
next week could fuel expectations of a Banxico rate cut here in Q1.
Reviewed by Marc Chandler
on
January 05, 2024
Rating:
