Overview: Turn Around Tuesday began yesterday. The dollar pared early gains in North America yesterday and follow through selling today has given it a softer profile against most of the G10 and emerging market currencies. The downticks look corrective in nature, but a great deal of news has been discounted, and after a flurry of activity, the derivatives market is settling on October as the timeframe of the next Fed cut ahead of today's US PPI and tomorrow's CPI reports. Meanwhile, some press accounts reports suggest that US tariffs could be implemented in stages were seen to be a step away from the "10-20% tariffs" but the stages, which could involve more than doubling the average US non-China tariffs are only "moderate" is some abstract sense.
The S&P 500 recovered after the gap from the day after the election was filled yesterday. This has lent support to equity trading today. All the large bourses in Asia Pacific rallied today but Japan. China's CSI 300 was up 2.6% to turn positive now for the year. Europe's Stoxx 600 is about 0.5% higher near midday to recoup most of yesterday's losses. US index futures are up 0.4%-0.7%. Benchmark 10-year yields are mostly softer in Europe, including in the UK. The 10-year Gilts yield is a basis point lower. It is threatening to end a six-day 28-basis point increase. The 10-year US Treasury yield is virtually flat near 4.77%. Gold has steadied after falling 1% yesterday, its first decline in five sessions. February WTI peaked yesterday near $79.25 and is consolidating above $78 today. Last week's high was about $77.85.
USD: The pendulum of market sentiment may have peaked yesterday when the derivatives market did not have the next Fed cut fully priced in until around mid-2026. By yesterday's close it had retreated to Q4 25, where it is now. Reports that the new US administration's economic team is considering implementing the tariff increases in stages saw a media spin to call 2-5% tariff increases a month as "moderate." Yet the average US tariff in 2023, excluding China was less than 3%. Meanwhile, attention turns to the inflation gauges, with the PPI set to accelerate. Tomorrow's headline CPI is also expected to pick-up while the core is seen steady. The bottom line is that the Fed is not in a hurry to follow up the 100 bp of cuts delivered in September-December 2024. This is in contrast with other G10 central banks but the Bank of Japan. This broad divergence has extended the dollar's rally. The Dollar Index has rallied 10% off last September's lows and about two-thirds has been recorded since last November's election. The consolidation today looks constructive as the Dollar Index holds above 109.30.
EURO: The swaps market has the European Central Bank cutting rates by 75-100 bp this year. The contrast with Fed expectations is stark even if the US were not threatening tariffs. The euro snapped a four-day drop yesterday and is trading firmer today, reaching almost a cent above yesterdays' low. French Prime Minister Bayrou is set to unveil his budget proposals. A poll over the weekend showed his public support was near 20%, the lowest of the six prime ministers that have served under Macro's presidency, which began in 2017. The governor of the central bank has warned that the government's credibility is on the line and wants to see a deficit projection of as close to 5% as possible, but clearly under 5.5%. On the other hand, support from the Socialist Party could be achieved by adjusting the 2023 controversial law raising the minimum retirement age to 64 from 62. In the first three sessions of the week options at $1.02 for around 7 bln euros expired. Yesterday's low, slightly below $1.0180 may mark a temporary low. It has approached $1.0280 today. A move above $1.0300 would stabilize the technical tone but there is little reason to expect this before tomorrow's US CPI. Initial support may be near $1.0240.
CNY: Last month and through the first couple sessions this year, Beijing managed to keep the dollar below CNY7.30. It broke higher on January 3 to push above CNY7.32. It reached nearly CNY7.3330 at the end of last week. It has held a tight range so far this week (~CNY7.3280-CNY7.3320). The dollar's reference was set at CNY7.1878 today. The reference rate has been tightly set between CNY7.1876 and CNY7.1891 so far this year. Against the offshore yuan, the greenback continues to trade within the range set on December 31 (~CNH7.3055-CNH7.3700). China reported somewhat better than expected December lending figures. Aggregate financing rose by 9.7% in December, the strongest rise in three months, but for the year, aggregate lending fell for the first time since 2021, and the decline nearly offset the 2023 increase.
JPY: BOJ Deputy Governor Himino gave a balanced speech, signaling that a rate hike will be discussed at next week's meeting (January 23-24). Since around mid-December, the market has wavered between 10 and 15 bp and is at the upper end of that range now. Himino also recognized the uncertainty stemming from the new US administration, as has Governor Ueda. Separately, Japan's current account balance typically deteriorates in November from October (17 of the past 20 Novembers) but not last year. The switch to an unexpected trade surplus (JPY97.9 bln vs. -JPY155.7 bln in October) accounted about a quarter of the improvement in the broader current account balance. The bulk of the improvement came from overseas investment income (e.g., interest, dividends, royalties, licensing fees, and remittances). Yesterday, the dollar traded below the 20-day moving average (~JPY157.15) for the first time since December 12. It has come back better bid today and has frayed yesterday's high (~JPY158). The high since last July recorded after the US employment data before the weekend was slightly above JPY158.85.
GBP: Sterling's headlong plunge over the past five sessions has cost it a nickel against the dollar, which is a little more than 3%. It has been the poorest performer among the G10 currencies, with the Swedish krona's 2% loss giving the dubious honor of second place. It looks as if something was exhausted yesterday with the test on $1.21. Yesterday's recovery extended to $1.2250 today before stalling. Chancellor Reeves will speak in Parliament shortly. Ostensibly, she is to discuss her recent trip to China but the backing up of Gilt yields is fair game during the questioning. Recall that a two-and-a-half-year high was set at the end of last September near $1.3435. The UK's December CPI is due early tomorrow. The headline is seen steady at 2.6%, while core and services measure may soften a little.
CAD: The US dollar made a marginal new five-day high yesterday slightly shy of CAD1.4450. It was the fifth consecutive session of higher lower, but it reversed lower and settled on its lows near CAD1.4375. Follow-through position adjusting today saw it dribble slightly below CAD1.4345 before recovering in European turnover. The greenback traded in a CAD1.4280-CAD1.4450 range on January 6 and has been in that range ever since. A close below CAD1.4375-85 could spur a test on the lower end of the range. The five-day moving average crossed above the 20-day moving average in early October but could cross down in the coming days. The broad sideways trading can whipsaw moving averages. The sideways trend has also seen the momentum indicators move lower though are still stretched.
AUD: The Australia dollar snapped a four-day drop yesterday but only after falling to a new low since April 2020 (~$0.6130). It traded briefly below the lower Bollinger Band (~$0.6145) but recovered to settle above it. Despite the softer Westpac-Melbourne consumer confidence report, corrective forces lifted the Aussie to three-day highs today, a little north of $0.6705. Nearby resistance is seen in the $0.6215-35 area. The New Zealand dollar made a marginal new low since October 2022 yesterday (~$0.5540) and recovered to new session highs near $0.5585. Follow-through buying today saw a test on the $0.563-35 area, which held initially. A move above there could signal a move toward $0.5700.
MXN: The risk-off was too much for the Mexican peso. It had weakened for the fourth consecutive session yesterday and recovered alongside US S&P 500. The US dollar retreated from nearly MXN20.87 to settled near session lows around MXN20.65. It pushed to a little below MXN20.58 today before finding bids. Last year's high set on December 31 was slightly shy of MXN20.91. Mexico is expected to unveil new incentives for domestic investment at the end of the week, a couple of days before Trump's inauguration.
Reviewed by Marc Chandler
on
January 14, 2025
Rating:
