Overview: After rallying last week, the US dollar pulled back today, though is mostly consolidating within the range set last Thursday and Friday. The Japanese yen is the exception among the G10 currencies and is heavier against the greenback despite Bank of Japan Governor Ueda's reiteration of plans to raise rates if the economy and prices evolve as expected. Among emerging market currencies, central European currencies are leading the way higher. A few Asia Pacific currencies are trading heavier, including the Chinese yuan and Indian rupee.
Most of the large equity markets in Asia Pacific region were lower, but Taiwan and South Korean markets were notable exceptions with 2.8% and 1.9% gains, respectively. The Nikkei lost about 1.5%, while China's CSI 300 settled slightly lower. Australia and New Zealand equities eked out a small gain. Europe's Stoxx 600 is slightly firmer after losing nearly 0.5% before the weekend. Meanwhile, the NASDAQ futures are around 0.70% higher and the S&P 500 futures are up nearly 0.50%. Gold trading at a two-and-a-half week high (~$2665.3) ahead of the weekend but is trading heavier today to approach the January 2 low near $2621. Trendline support is around $2600. February WTI rally 4.75% last week to $74.25, its best level since early October. It made a marginal new high today but is consolidating and straddling the $75 area.
USD: The US dollar is trading heavily today as some of last week's gains are pared. The week's highlight is the employment report on Friday. The median forecast in Bloomberg's survey is around 160k. As Fed Chair Powell acknowledged that officials recognize that jobs growth has been overstated. Benchmark revision could reduce the average monthly rise by as much as 100k, according to some projections. The FOMC minutes due Wednesday may shed some light on what appears to have been the Fed's pivot back to emphasizing its price stability mandate. A poor employment report may challenge that. The final services and composite PMI will draw little attention, and the final reading of durable goods may see the 1.1% drop pared. The Dollar Index is within the January 2 range (~108.25-109.55) Treasury kicks off the year with the $119 bln sale of coupons with $58 bln in three-year notes today and $156 bln in bills.
EURO: The euro was sold to about $1.0225 on the first trading day of the New Year, the lowest level in two years. It consolidated ahead of the weekend and is trading firmer today. However, it has stalled in front of the January 2 high near $1.0375. Trump's tariff threats compound the eurozone's woes. The weak economy is expected to lead to more aggressive rate cuts than the Federal Reserve, and the political instability in Germany and France may deter bold initiatives. Meanwhile, the attempt to exclude the far-right Freedom Party from a new government coalition failed and it will now be given a chance to form a new government. Ukraine's decision to stop the pipe transit of Russian gas hits central Europe, while squeezing exist supplies, though the Dutch benchmark eased today for the third consecutive session. Tomorrow, the preliminary December CPI is due. It has been net-net flat so far in H2 24. A 0.4% rise in the headline rate in December will lift the year-over-year rate to 2.4%. The core rate is expected to be steady at 2.7%. The unemployment rate in November is projected to be unchanged at a record low of 6.3%. There are large options that expire today (1.36 bln euros) and tomorrow (2.41 bln euros) at $1.03.
JPY: Bank of Japan Governor Ueda spoke at a conference earlier today and reiterated his commitment to raise rates if the economy and prices continues to improve. This helped lift Japanese rates 2-3 bp today. The 10-year yield is near 1.14%, a new multiyear high. The swap market shows slightly more than 11 bp hike is discounted for this month's meeting. Separately Japanese officials stepped up their verbal warnings to the foreign exchange market, but material intervention does not seem particularly likely in the near-term. The backing up of Japanese rates is not lending much support to the yen. It is the only G10 currency that is not trading firmer against the dollar today. The dollar is consolidating against the yen in a roughly JPY156-JPY158 range and is probing the upper end. On a break, there is little of technical importance ahead of JPY160. Japanese economic highlight comes on Thursday and Friday: labor earnings and household spending.
CNY: The dollar settled last week at its best level since September 2023, above CNY7.32. Officials had successfully held it below CNY7.30 in the previous couple of weeks. The 2023 high was near CNY7.35. China's two-year yield slipped below 1% last week but is firmer today. The 10-year yield though has extended last week's break of 1.60%. China's 10-year yield discount to the US is near 300 bp, which appears to be a record. The PBOC set the dollar's fix at CNY7.1876, slightly lower than the past two sessions and indicated plans to issues bills in HK this month, to ostensibly to mop up extra liquidity to take pressure off the yuan. The Caixin services and composite PMI were reported earlier today. Like the official PMI, the Caixin iteration showed an uptick in the services PMI but not enough to offset the decline in manufacturing PMI, so that the composite eased to 51.4 from 52.3. The December CPI and PPI readings are due Wednesday but are unlikely to change perceptions. The dollar settled near CNH7.3585 before the weekend and is trading softer near CNH7.3470 in Europe.
GBP: Sterling was sold to eight-month lows on January 2 and consolidated ahead of the weekend. The low was slightly below $1.2355. The 2024 low set in April was $1.2300. In addition to the broadly strong greenback, the other drag on sterling seemed to come from the recognition that the British economy is weaker than thought. Still, sterling has come back bid today and reached $1.2490 in early European turnover. The December manufacturing PMI was revised down and finished the year at 47.0, matching the 2024 low set in January. Earlier today, the services PMI was also revised lower (51.1 vs. 51.4). This suggests that economic conditions deteriorated in the second half of December. There are GBP555 mln of options at $1.25 that expire today and GBP400 mln at $1.2465 that expire tomorrow.
CAD: The US dollar posted its highest close in two years against the Canadian dollar ahead of the weekend, slightly above CAD1.4460. The Canadian dollar was the worst performing G10 currency on Friday, falling about 0.4%. Still, the US dollar pulled back to about CAD1.4360 today, a four-day low. On one hand, the continued widening of the US-Canada two-year interest rate differential is a headwind for the Loonie. It reached a new 28-year high today slightly above 136 bp. Recall that as recently as September, the differential was near 60 bp. On the other hand, there is much speculation that the beleaguered Prime Minister Trudeau will resign as early as today. With many fellow Liberals calling for his resignation and the NDP having said that it too will support a no-confidence vote, Trudeau's position looks untenable. Canada sees the December services and composite PMI today and November trade balance tomorrow, the highlight of the week is the December jobs report on Friday. The median forecast in Bloomberg's survey overall job growth at half of November's 50.5k rise. The US dollar reached nearly CAD1.4670 in the early days of the pandemic.
AUD: The Australian dollar sank 10.5% in Q4 24, its worst quarterly performance since Q1 20 (-12.7%), which itself was the poorest showing since Q3 08 (-17.3%). On December 31, it recorded a two-year low slightly below $0.6180. After consolidating at the end of last week, it has come back bid today and pushed slightly above $0.6250, the lower end of a band of resistance that may extend toward $0.6275. The swaps market has about a 67% chance of that the first rate cut will be delivered on February 18. This may be a bit high. While the central bank, though, puts more weight on the quarterly reading, the November CPI will be released on January 8, and it may have ticked up to 2.2% from 2.1%. Retail sales and household spending January 9 and 10, respectively, are likely to be firm.
MXN: The peso recorded its lows for the year on the last trading day of 2024, with the greenback rising to nearly MXN20.91. It consolidated over the last two sessions, but the dollar held above MXN20.50. This may be challenged today, but initial support is slightly higher, around MXN20.52. Mexico reports December CPI on Thursday. The median forecast in Bloomberg's survey sees the headline rate easing (to 4.20% from 4.55%), while the core rate edges high (3.61% vs. 3.58%). It may not deter the central bank from cutting rates at its February 6 meeting (the January CPI is released the following day). November industrial output is released on Friday, and it is expected to have fallen by around 1%, which would be the third decline in four months.
Reviewed by Marc Chandler
on
January 06, 2025
Rating:
