Overview: After a strong showing yesterday, the
dollar was sold in Asia and Europe. China announced a cut in reserve
requirements and took more informal action to support the stock market, which
encouraged risk-taking. Yet, the dollar's decline has stretched intraday
momentum indicators, which may provide early operators in North America a new
dollar buying opportunity. The ECB and Norway's central banks meet tomorrow,
and the US reports its first estimate of Q4 23 GDP.
Led by a more than 4% rally in index of
mainland shares that trade in Hong Kong, but of the Asia Pacific equity markets
advanced today, with Japan and South Korea the notable exceptions. Europe's
Stoxx 600 is up more than 0.8%, which, if sustained, would be the
second-largest advance of the year. US index futures are also enjoying a firmer
tone. Japan's 10-year government bond yield rose to 0.70%, its highest level
since mid-December. European and US 10-year yields are 1-4 bp lower. Here, UK
Gilts are an exception, and the 10-year yield is up four basis points to 4.02%.
Gold is little changed in a narrow $6 range on either side of $2028. March WTI
is little changed on the $74-handle. API reportedly estimated private crude
inventories fell by 6.7 mln barrels, a much larger than expected decline that
is expected to be reported by the US EIA later today (-980k barrels).
Asia Pacific
The overnight index swaps market has the
BOJ's effective overnight rate at two-week high of five basis points at the end
of April. The BOJ
targets -0.10%, but the effective rate is near -0.015%. At the end of last
year, the swap market had it at six basis points discounted. Some observers are
playing up the possibility of a move at the next meeting on March 19. The swaps
market shows an implied yield of about 0.025%. It was at four basis points at
the end of 2023 but was less than one basis point early last week.
Japan unexpectedly reported a small
December trade surplus as exports grew and imports fell on a year-over-year
basis. Exports rose by
9.8% year-over-year (-0.2% in November), while imports fell by 6.8% (-11.9% in
November). Although Japan reported a trade surplus in two months last year, the
average monthly deficit was about JPY775 bln. This is a marked improvement from
the average 2022 deficit of JPY1.69 trillion. Still, in 2019, pre-Covid the
average monthly shortfall was slightly less than JPY140 bln.
Japan and Australia saw preliminary
January PMI. Japan's
manufacturing PMI is at 48.0 from 47.9 in December. With the exception of last
May, Japan's manufacturing PMI has been below 50 since October 2022. The
service sector has fared better. It has held above 50 since end of Q1 22 except
for August 2022. It improved to 52.7 from 51.5 in December. The composite rose
to 51.1 from 50.0. The rise in new orders (50.4 from 49.8) is promising.
Australia's manufacturing PMI surprisingly jumped back above 50 for the first
time since last February (50.3 vs. 47.6) The service PMI ended 2022 at 47.1 and
was 47.9 last month. The preliminary January composite stands at 48.1, up from
46.9, a four-month high.
The PBOC announced a 50 bp cut in reserve
requirements, effective early next month. It is estimated to free up CNY1 trillion in funds for banks.
Reports suggest that officials have "asked" some hedge funds to limit
short sales of equity index futures. The Chinese yuan rallied as did Chinese
equities. The PBOC set the dollar's reference rate sharply lower at CNY7.1053
(CNY7.1170 yesterday). The average projection in Bloomberg's survey was
CNY7.1788 (CNY7.2008 yesterday). The dollar traded to almost CNY7.1550, a
nine-day lows. The dollar rebounded off the JPY147 low seen in the immediate
reaction to yesterday's BOJ meeting and rose almost last Friday's high near
JPY148.80. Options for around $550 mln struck at JPY149 expire today. The
outside up day is technically constructive, but there has been no
follow-through dollar buying today. Instead, it has been sold back to around
JPY147.40. The half-of-a-cent rally in the Australian dollar recorded
in the local session on Tuesday was reversed in Europe and extended in North
America. The Aussie was peaked a near $0.6610 and did not find solid
bids until $0.6550 after Europe closed. Today, it held above $0.6565 and is
probing the $0.6600 area in Europe. Note that there are options for a little
more than A$5 bln that expire today between $0.6565 and $0.6580.
Europe
The eurozone's January flash PMI confirms
what we already know. The
pace of contraction is moderating but the growth impulses remain weak. The
manufacturing PMI has not been above the 50 boom/bust level since June 2022. It
bottomed last July at 42.7 and in January stood at 46.6 (44.4 in December). The
service sector had fared better but succumbed to the pressure in H2 23. The
last time it was above 50 was July. It softened to 48.4 (down from 48.8 at the
end of 2023). The composite reading stands at 47.9 (47.6 in December) which for
all practical purposes remains in the trough. The low print was in October 2023
at 46.5. Dragged down by a deterioration of services, the German composite
slipped to 47.1 from 47.4. It was at 49.0 at the end of 2022 and 49.9 at the
end of 2021. The French manufacturing and service PMI are lower than Germany's
and deteriorated further in January. The composite eased to 44.2 from 44.8 in
December. It was at 49.1 in December 2022 and 55.8 in December 2021. The
eurozone's Q4 23 GDP will be published on January 30. It looks to have
contracted (~0.1%) for the second consecutive quarter. The ECB meets tomorrow.
No change in policy is expected and we look for ECB President Lagarde to talk
about the data dependency and underscore the recent signals about the mid-year
being the timeframe of the first cut.
While the UK PMI has fared better than the
eurozone's, the economy performed equally poorly. The UK was stagnant in Q2,
contracted by 0.1% in Q3 and may have been flat or contracted by 0.1% in Q4 23.
The estimate for Q4 GDP is due February 15. The last time the UK's
manufacturing PMI was in July 2022 (yes Johnson was still prime minister). It
rose to 47.3 in January from 46.2 in December. The UK's manufacturing sector
does not stand out, but its service sector does. Except for the August-October
2023 period, the services PMI has been above 50. It ticked up to 53.8 in
January from 53.4 in December. The Bank of England meets on February 1. There
is virtually no chance of a policy move. The swaps market has the first cut
discounted for May and now has almost 95 bp of cuts priced in for this year,
down from 110 bp at the end of last week, 130 bp the week before, and slightly
more than 170 bp at the end of last year.
The euro began yesterday with new five-day
highs in the Asia Pacific session, but this proved to be a bull trap. During the European afternoon and
the North American morning, the euro tumbled nearly a cent to $1.0820, its
lowest since December 13. The proximate cause seems to be position adjusting
and stop-loss selling ahead Thursday ECB meeting. The euro rebounded today but
has thus far stalled near $1.0910, in front yesterday's high ($1.0915). Still,
the intraday momentum indicators are stretched, warning of a pullback or at
least consolidation in the North American morning. Like the euro,
sterling also posted a bearish outside down day, by trading on both sides of
the previous day's range and settling below its low. But sterling is
bid today and has reached almost $1.2775, its highest since January 12
(~$1.2785 high). Here, too, the intraday momentum indicators are stretched and
the proximity of upper end of the trading range (~$1.28) warns against chasing
it.
America
Given that the first official estimate for
Q4 23 GDP is due tomorrow and the latest monthly PCE deflator is on Friday, do
not be surprised if the preliminary January PMI draws little attention after
the headline. Note
that the composite PMI averaged 50.8 in Q4 the same as in Q3, though we ae
pretty sure GDP was slower in Q4 than Q3. In Q2 23, when the economy expanded
at an annualized rate of 2.1%, the composite PMI averaged 53.6. In Q3, the
economy grew at a 4.9% rate. Economists who participate in Bloomberg's survey
gradually raised their forecast and the median is now 2%. The Atlanta's Fed's
tracker is at 2.4% as of the end of last week.
The Bank of Canada meets today. It has not signaled that it is
prepared to cut rates quite yet. Indeed, the market does not have the first cut
fully discounted until May. The swaps market has almost a 60% chance of a cut
in April. In the middle of last month, the market had a cut completely
discounted for April and roughly a 60% chance of another move. The swaps market
now has about 90 bp of easing priced in for this year. This is about 40 bp less
than anticipated in mid-December. The adjustment of expectation, however, does
not appear to have helped the exchange rate. The Canadian dollar has fallen by
about 1.8% so far this year after gaining around 5% last November-December.
Mexico reports the IGAE monthly activity
surveys. The economy
is slowing, and it should be reflected in the surveys. However, the focus is on
the bi-weekly CPI readings. The year-over-year headline pace has been rising
since bottoming last October at 4.27%. It could soften for the first time since
then in the first half of January from 4.86% in the second half of December.
The core rate last rose in January 2022. It has been falling without fail since
then to 4.98%. It peaked at 8.46%. The combination of slower growth and softer
price pressures will boost speculation of a rate cut later in Q1.
Ahead of the Bank of Canada meeting, the
Canadian dollar has been consolidating this week mostly inside last Friday's
range (~CAD1.3430-CAD1.3500), though on Monday, it slipped briefly
CAD1.3415. It has
tested the CAD1.3430 area today. The greenback needs to reestablish a
foothold above CAD1.35 to reinvigorate the momentum. Otherwise, the momentum
indicators will signal additional US dollar losses. On the downside, the
CAD1.3400 area offers support and then CAD1.3360. However, we suspect that the
consolidative phase continues. The Mexican peso lurched lower
yesterday. The US dollar tested last week's high near MXN17.3860 and
it held. There are $650 mln of options at MXN17.40 that expire tomorrow. This
seemed to encourage some dollar sales that pushed the dollar back toward
MXN17.3000. The US dollar pullback to MXN17.19-20 area, where it has found
support today. That could prove to be the session low.
Reviewed by Marc Chandler
on
January 24, 2024
Rating:
