Overview: The US dollar is winding down this week on
a quiet note. Most of the G10 currencies are trading within yesterday's ranges.
On the week, only the Scandis are set to close with gains, though with a little
effort, the Australian dollar could too. The Japanese yen and Swiss franc are
the laggards off 0.65%-0.75% this week. Most emerging market currencies outside of
central Europe are firmer. The South African rand is the strongest this week,
followed by four Latam currencies (though not the Brazilian real ~-0.4%, in its
Carnival-holiday shortened week).
The Nikkei drew closer to its record high
with modest gain that brought this week's advance to 4.4%. Mainland shares that
trade in HK rose 2.7% today amid reports of heavy travel during the Lunar New
Year holiday, which encouraged speculation of increased consumption. Among the
region's largest markets only Taiwan fell today after setting a record
yesterday. Europe's Stoxx 600 is trading firmer for the fourth consecutive
session. It is up about 1.5% this week, its fourth consecutive weekly advance.
Strong earnings are helping lift the NASDAQ futures. The cash index is poised
to gap higher. The S&P futures suggest another record high will be seen in
the cash market today. Benchmark 10-year yields are higher today. European
yields are mostly 1-2 bp firmer, but the strong UK retail sales are weighing
more on Gilts, where the yield is up four basis points. It was flat for the
week coming into today. The 10-year US Treasury yield is up three basis points
to 4.26%, which is about an eight-basis point gain on the week. Gold continues
to modest recovery after falling to $1984 after the US CPI report this past
Tuesday. It is trading near $2007. April WTI is consolidating after two days of
sharp swings that saw a range of roughly $75.50-$78.50. On the week, it is
slightly higher after rallying 6.2% last week.
Asia Pacific
With Q4 23 Japanese GDP reported
yesterday, the tertiary sector index for December is not so important. Still, it is notable that it snapped a
three-month decline (~8.8% annualized), which is the worst H1 20 when Covid was
raging. The risk of a recession in Japan this year seems low. Economists look
for the world's third largest economy to grow by a little less than 1% this
year, which is in line with the latest IMF's forecast. The Bank of Japan seems
a bit more optimistic with a 1.2% forecast.
Separately, Japan's MOF reported weekly
portfolio flows. Through
the first six weeks of the year, here is what the flows look like: Japanese
investors are buying more foreign stocks and bonds than they did at the start
of last year. One contributing factor is the launch of a new tax-exempt
retirement savings plan. The government's balance of payments data showed
Japanese investors bought a record amount of foreign equities and investment
trusts in January (~JPY1.2 trillion or ~$8.1 bln). The MOF figures are slightly
lower. The weekly data show Japanese bought about JPY4.5 trillion of foreign
bonds in the first six weeks of the year. They purchased JPY2.6 bln of foreign
bonds in the same period last year. Many observers thought the BOJ's raising
the cap on 10-year JGBS would spur Japanese investors to repatriate funds, and
in this reckoning US Treasuries were particularly vulnerable, and US yields
were rising. However, according to Japanese data US government bonds were
bought at a record pace in 2023 (~JPY18 trillion). Japanese investors also
bought about JPY843 bln of foreign stocks so far this year after purchasing
JPY110 bln in the first six weeks of 2023. Meanwhile, foreigners have stepped
up their purchases of Japanese stocks. They have bought about JPY3.4 trillion
this year so after having bought about JPY365 bln in the first six weeks of
last year. Foreign investors have bought about JPY1.3 trillion of Japanese
bonds this year through last week after selling around JPY4.1 trillion in the
first six weeks of last year.
The dollar was sold to session lows
yesterday near JPY149.55 after the disappointing retail sales report. It frayed the trendline drawn off the low
seen before the US jobs data on February 2. As US rates found support, the
dollar recovered to about JPY150.25 before consolidating in a little more than
a 10-pip range on either side of JPY150. It continues to trade quietly today,
in a narrow range of about JPY149.85-JPY150.35. Still, barring a sell-off in
North America today, the greenback would extend this year's advance to the
seventh consecutive week. The Australian dollar reached almost $0.6530
yesterday in North America, gaining almost 0.5% despite the disappointing
Australian employment report. It has held above $0.6505 so far today
and is testing yesterday's highs in the European morning. The Aussie must
re-establish a foothold above $0.6550 to improve the technical tone. Even then,
the high for late January was near $0.6625 and the high before the US jobs
report was about $0.6610. The dollar is trading quietly against the
offshore yuan. It is in a range of roughly CNH7.2170-CNH7.2230. That is
more of less the low since the mainland closed on February 8. The high was set
earlier this week near CNH7.2370. It has stayed well within 2% band around the
last onshore fix, without any apparent intervention or reports of state-owned
bank activity.
Europe
The data-packed week for the UK ends on a
positive note. January
retail sales, which are reported in terms of volume rather than price, jumped
3.5%. That is the most since the early days of the recovery from Covid in early
2021. It also follows a dreadful 3.3% decline (revised from -3.3%) in December.
All sectors showed an increase except clothing. Still, overall sales volumes
slipped by 0.2% in the three months through January from the previous
three-month period. This week's data showed a somewhat more resilient labor
market and wages pressures that did not ease as much as expected, softer than
expected headline inflation, though sticky service prices, which ticked up, and
the second consecutive contracting quarter in Q4 23. However, net-net there has
been a small decline in rate cut expectations based on the swaps market. The
swaps market has slightly less than a 60% chance that the first cut is
delivered by the end of H1, down from 67% at the end of last week. It has about
73 bp of cuts priced in this year compared with about 78 bp at the end of last
week.
Who will be the first G10 country to cut
interest rates? Based
on the current set of information, we are inclined to think it will be the
Swiss National Bank. Earlier this week, Switzerland reported January harmonized
headline CPI of 1.5%, down from 2.1% in December. The median forecast in
Bloomberg's survey was for a 2.0% reading. The national core rate slipped fell
to 1.2% from 1.5%. The SNB meets on March 21 and a rate cut seems increasingly
likely. The Swiss economy contracted by 0.1% in Q2 23 and grew by 0.3% in Q3
23. It will report Q4 GDP at the end of the month and the latest Bloomberg
survey found a median forecast for 0.2%. Switzerland last raised it policy rate
in June 2023 to 1.75%. The euro fell to a seven-year low against the Swiss
franc late last year near CHF0.9255. It poked a little above CHF0.9500 this
week, a two-month high. Chart resistance is seen around CHF0.9550. Trendline
resistance and the 200-day moving average are near CHF0.9580. That said, the
momentum indicators are getting stretched.
The euro traded to $1.0785 yesterday,
stalling in front of the week's high set Monday near $1.0805. A narrow fifth-of-a-cent range is
prevailing today (~$1.0755-75). There is a band of resistance from around
$1.0810 to $1.0830 that needs to be overcome to lift the tone. And recall that
before the US employment data, the euro has approached $1.09. More immediately,
if the euro does not settle above $1.0785, it would close lower for the third
consecutive week and six of the first seven weeks of the year. Sterling
recovered from a low seen near $1.2540 after the poor Q4 GDP. It set
the session high a little above $1.26 in North America, on the back of the
weaker dollar. It is in slightly more than a quarter-cent range today above
$1.2575. Sterling settled slightly below $1.2630 last week. It has risen only
one week this year and is off by 1.1%, making it the best performing G10
currency halfway through Q1 24.
America
US January housing starts are expected to
have fallen. It
would be the second consecutive decline. It would make it the fourth
consecutive January that housing starts fell. The data are seasonally adjusted
but there might be a residual seasonal factor. Still the Q4 average of 1.45 mln
is the highest three-month average since October 2022. January producer prices
are also due. They typically do not move the market. Despite talk about
pipeline inflation, most seem to recognize the weak relationship with CPI and
the PCE deflator.
We suggested a
soft CPI report and weak retail sales would cap US rates and the dollar. As it turned out, the CPI was a bit firmer
than expected, but the retail sales report was exceptionally poor. The January
retail sales drop was four-times larger than the median forecast in Bloomberg's
survey and the December series was revised lower. The 0.8% headline decline was
largest since last February. Autos and building materials led the decline, but
9 of the 13 categories fell. Poor weather may have contributed to the drop, but
the downward revision to December suggests something more. The core measure,
which excludes autos, gasoline, food services, and building materials, fell by
0.4%. The median forecast was for a 0.2% gain. On top of that, industrial
output defied expectations for a 0.2% gain and fell 0.1% last month, led by
0.5% decline in manufacturing production. Manufacturing output fell in five
months in 2023. Mining/drilling output fell by 2.3%, the third decline in the
past four months. Utility output, likely aided by the weather, rose by 6%,
after declining by a little more than 3% over the previous three months. The
two early February Fed surveys, from NY and Philadelphia, ticked up, but do not
have much heft in the capital markets. And look at the volatility of the NY
survey: from -14.5 in December to -43.7 in January to -2.4 in February.
Still, after yesterday's data, there was practically no change in the odds,
reflected in the Fed futures, of a rate cut in May (~45%, down from ~73% at the
end of last week.
The Canadian dollar climbed almost 0.6%
yesterday, its biggest gain of the year. This reflected the weaker greenback and the risk-on mood
illustrated by the rally in the S&P 500 that closed the gap from Tuesday's
sharply lower opening. The US dollar slipped to a marginal new three-day low
near CAD1.3460 today before consolidating. It is holding mostly below
CAD1.3485. The Loonie is the second best performing G10 currency at the start
of 2024, with about a 1.75% loss. Trendline support for the US dollar is seen
near CAD1.3450, though the week's low was set on Monday closer to CAD1.3430.
Last week, it settled near CAD1.3460. The greenback is trading at a new
low for the week against the peso near MXN17.0340 today. The week's
high was set after the US CPI near MXN17.2285. Last week's low was
slightly below MXN17.01. With only one exception on a closing basis, the dollar
has traded between MXN17.00 and MXN17.25 for the past month. Barring a recovery
and close above MXN17.0880, the dollar would have fallen for the third
consecutive week. This would be the eighth weekly decline in the past 10 weeks.
Reviewed by Marc Chandler
on
February 16, 2024
Rating:
