Overview: The dollar is offered ahead of today's US
jobs report, even though expectations are for solid if not spectacular jobs
growth of around 185k. The Australian and New Zealand dollars are leading
today's move, while the euro approached $1.09, which it has not traded above
this week. Sterling neared the lower end of its $1.26-$1.28 trading range
yesterday and set a new high for the week today, slightly above $1.2770. Emerging
market currencies are mostly firmer as well, with the Turkish lira, South
African rand, and a couple central European currencies bucking the move.
Gold is consolidating in a narrow range above $2052 after approaching a one-month high near $2065 yesterday. March WTI fell by a little more than 5% of the past two sessions and has stabilized today after slipping to about $73.65. It is still off 4.5% on the week, which if sustained, would be the largest weekly loss since early October. Chinese stocks swung dramatically today, and despite some reports of offshore buying and the approval of a new games, the CSI 300 settled at new five-year lows. Other large bourses in the region rose, led by South Korea's Kospi. which advanced by almost 3.0%. Europe's Stoxx 600 snapped a six-day advance yesterday but returned to the winning side today. It has recouped yesterday's loss in full and is near its best level since early 2022. US equity indices are trading higher, helped by favorable earnings by Meta and Amazon. Yesterday's US bond rally helped ignite an advance in the Asia Pacific region today, but European benchmark yields are mostly 1-2 bp firmer today, with 10-year Gilt yields rising nearly six basis points. The 10-year US Treasury yield is flattish around 3.88%. Yesterday, the yield, which began the week near 4.14% fell almost 3.81%, the lowest since late December.
Asia Pacific
The week ending with a quiet
news stream from the Asia Pacific region. The Topix Bank index slipped a bit further
today after falling nearly 0.85% yesterday after Aozora warned of
losses emanating from the US commercial real estate market. It fell further
today to bring the two-day drop to about 33%. The perceived likelihood of a BOJ
rate hike next month diminished slightly but the odds of an April hike crept up
to a new high since late December. Still, consumption and production in the
world's third-largest economy is struggling to sustain upward momentum. Soft
CPI and disappointing real sector data encouraged the market to bring forward a
rate cut be the Reserve Bank of Australia. At the end of last week, the futures
market was pricing in about a 37% chance of a May cut. That has increased to
nearly 70% now. A week ago, the market thought a June hike was a 50/50
proposition and now it is nearly fully priced into the futures strip. Both
Japan and Australia report the final service and composite PMI on Monday. China
sees Caixin's service and composite PMI on Monday, as well.
Shortly after the US 10-year
Treasury yield recorded the low for the day (~3.81%), the dollar found a bottom
slightly below JPY146.00, to record a 2 1/2-week low. It recovered but could not resurface above
JPY146.50. It found support a little lower, near JPY146.25 in early local
trading today and set the session high near JPY146.80. The JPY147.00-10 offers
resistance. There are options for $1.4 bln at JPY146 that expire Monday. A
convincing break of JPY146.00, which could be sparked by a disappointing US
employment report, would target the JPY144.70-JPY145.00 area. After
falling by 0.5% to close out January, the Australian dollar was tagged for
nearly 1%, before it staged an impressive recovery. It had set a new
low for the year slightly below $0.6510 before recovering to new session highs
(~$0.6580) on the back of a broader US dollar pullback. Follow-through buying
is lifting it above $0.6600 in the European morning. A close above $0.6615-25
lifts the technical tone into next week. We suspect that the hemorrhaging of
Chinese equities makes officials even more determined to have a stable exchange
rate. Chinese officials have managed to keep the yuan's exchange rate
against the dollar inside last week's range (~CNY7.1440-CNY7.1975). This
week's range has been roughly CNY7.1675-CNY7.1845 and today's range was
exceptionally tight ~CNY7.1770-CNY7.1810). The PBOC set the dollar's reference
rate at its lowest for the week (CNY7.1006) and the average projection in the
Bloomberg forecast was also the lowest this week (CNY7.1610). The difference
between the two was the narrowest this week.
Europe
The swaps market reflects a
perceived increase in the likelihood that the ECB cuts rates in April. While ECB President Lagarde pointed to a
midyear move, the market was not persuaded. On the eve the of ECB meeting on
January 25, the swaps market saw about a 65% chance of a hike in April. It
stands a little below 90%. The market has discounted about 138 bp of ECB cuts
this year, slightly lower than before the ECB meeting. Turning to the Bank of
England, the market had around a 77% chance of a May cut discounted before
yesterday's meeting. It fell to almost 61% yesterday and has eased to about 55%
today. A May cut was fully priced in as recently as January 12. The market
anticipates around 108 bp in cuts this year, which a few basis points higher
than a week ago.
Yesterday, the euro staged
its most impressive rally of the year. It had been sold to new lows (~$1.0780) since mid-December
and proceeded to recovery to approach $1.0880 in the NY mid-afternoon. It
posted the highest settlement of the week (~$1.0870). Follow-through buying
today has seen in edge closer to $1.09. The euro has slipped below $1.08
three-times this week and has found good buyers each time. We had anticipated
that a new euro low could mark the end of the leg lower that began at the start
of the euro. The $1.0900-20 area may offer the initial hurdle, and then
$1.0960-$1.1000. Sterling was nearly as impressive. After
falling to two-week lows near $1.2625, sterling was lifted initially with the
help of a Bank of England. It was worth about half-of-a-cent. After
consolidating for a couple of hours, sterling jumped higher on the greenback's
broad pullback to briefly trade above Wednesday's high (~$1.2750). It remains
firm today and set new session highs slightly above $1.2770 in the European
morning. Sterling has not settled above since the end of last July.
America
Federal Reserve Chair Powell
acknowledged at the post-FOMC press conference that an unexpected deterioration
in the labor market would likely change the calculations and help boost the
officials' confidence that would allow an earlier rate cut, after he pushed
against expectations of a March move. Powell recognized that the labor market is slowing but
still described it as strong. He cited the three-month average jobs growth of
165k. That is the lowest average for a three-month period since January 2021.
Recall that in Q4 19, before the pandemic the US created almost 150k jobs a
month. Powell suggested the labor market was almost back to normal, though not
quite. The BLS will unveil its annual revisions to both the establishment and
household survey over the past two years, and the risk is job gains are revised
lower. Still, the median estimate in Bloomberg's survey has crept up in recent
days to stand at 185k.
The unemployment rate may
tick up to 3.8% after holding at 3.7% in November and December. It had been at 3.8% from August through
October after bottoming at 3.4% earlier last year. A 0.3% increase in hourly
earnings will keep the year-over-year rate at 4.1%. We learned in recent days
that the Q4 23 Employment Cost Index eased to 0.9%, the smallest quarterly
increase since Q2 21. However, what ultimately matters are labor costs in the
context of productivity. Unit labor costs for Q4 23 were reported yesterday.
They rose by 0.5%, about half of the expected pace, and it follows a revised
1.1% decline (initially -1.2%) in Q3 23. That is to say, the increase in labor
costs in H2 23 was more than offset by the increase in productivity.
The US dollar met a wall of
sellers yesterday around CAD1.3460 that drove it back to CAD1.3370 before
steadying. Although
it held Wednesday's low (~CAD1.3360), the price action keeps the bearish
technical scenario intact. It has made a marginal new low today near CAD1.3365.
A break of CAD1.3360 could signal losses into the CAD1.3300-10 area next. Note
that the 60-day correlation of the changes in the exchange rate and in the
S&P 500 is near its highest (0.55) since March 2023. The US dollar
posted a bearish outside down day against the Mexican peso by trading on both
sides of Wednesday's range and settling below its low. The greenback
peaked in early North American turnover near MXN17.2855 and trended steadily
lower to almost MXN17.07. It settled below the 20-day moving average
(~MXN17.0865) for the first time in two weeks. It has approached MXN17.05 area
today and a break may spur more dollar selling. Mexico's central bank meets
next week, and while pressure is building for a rate cut, we expect Banxico to
wait another month.
Reviewed by Marc Chandler
on
February 02, 2024
Rating:
