Overview: The US dollar is broadly firmer, though the Japanese yen is proving a resilient ahead of the BOJ deputy governor's speech tomorrow. Sterling travails persist and it is the weakest of the G10 currencies. The Fed funds futures are no longer fully pricing in a single Fed hike this year. Indeed, the first cut is not completely discounted until mid-2026. Record exports lifted China's trade surplus to a record near $1 trillion last year, waving a red flag in front of the incoming US administration which has promised larger tariffs on Chinese goods. Exports to the US rose to a two-year high in December of nearly $50 bln.
Equities are under pressures. Most of the large markets in the Asia Pacific region lost 1% or more, including the Nikkei, Hang Seng, Taiex, Kospi, Australia, and India. Europe's Stoxx 600 is off around 0.8%, giving back nearly this year's gain. US index futures are broadly lower. The sell-off in US Treasury is pulling global rates higher. European 10-year yields are up 3-7 bp today, with the periphery under pressure. The 10-year yield is nearly three basis point higher around 4.79%. Gold is consolidating softer within the pre-weekend range when it held slightly below $2800. The new US sanctions on Russian oil shipments, amid US inventory draws have helped lift oil prices. February WTI has risen three consecutive weeks coming into today, for a cumulative gain of about 10%. It is up another 1.6% today to straddle the $78 area. It peaked near $80 in April and July last year.
USD: The Dollar Index reached nearly 110.00 area the stronger-than-expected jobs data. The gains have been extended to almost 100.20 today. It has not been higher since November 2022. Initial support is seen in the 109.60-75 area. US yields are firm ahead of the inflation data. Buy dollar-dip psychology prevails. The Fed Funds futures market now has the first Fed cut fully discounted near mid-2026.
EURO: The euro was sold to $1.0215 after the US employment report. The break of $1.02, where large options expire today, may have contributed to the selling that pushed the euro slightly below $1.0180 in early European turnover. The $1.02 area corresponds to the (61.8%) retracement of the rally from the September 2022 low (~$0.9535). One of the most telling considerations is that the market has a little more than 100 bp of ECB cuts discounted before the Fed's next cut.
CNY: While some observers argue that Beijing seeks a weaker yuan to promote exports, the PBOC has tried to slow the yuan's decline through various means, including the setting of the daily reference rate, squeezing liquidity in the offshore market, moral suasion, and perhaps indirect intervention, which as we argue, is difficult to distinguish from the kind of forward guidance that other central banks use and the normal commercial of banks buying hard currency from exporters. Few of China's many critics acknowledged that China ended its export tax subsidy and removed all tariffs on goods from the world's poorest countries. Nevertheless, China's December trade surplus jumped to almost $105 bln (from $97.4 bln in November). Exports were up 10.7% year-over-year, accelerating from 6.7% in November, perhaps bolstered by efforts to front-run near tariffs. Imports 1% (-3.9% in November). Separately, China's has a low nominal 10-year yield (~1.60%), in real terms, (adjusted for current CPI), it is higher than several high-income countries, such as Japan, Germany, and Switzerland. The dollar is approaching the 2023 high against the offshore yuan (~CNY7.3680). The 2022 high was clear to CNH7.3750. The dollar settled last week above CNY7.36 for the first time since September 2023. The dollar's high against the onshore yuan in 2022 matched peak against the offshore yuan. Since the US election, the dollar has risen by about 3.1% against the onshore yuan and 3.5% against offshore yuan. The reference rate was set at CNY7.1885 today, allowing a band of CNY7.0447-CNY7.3323.
JPY: The dollar recorded an outside day before the weekend, trading on both sides of Thursday's range. However, the close neutralized the potential technical signal by being will within Thursday's range. Still, the dollar is offered today against the yen. It has frayed the 20-day moving average, a little above JPY157.10 for the first time in nearly a month. US rates are firm, but this may reflect some position squaring ahead of the BOJ deputy governor's speech tomorrow. Last week's low was near JPY156.25. The combination of the yen's recent weakness and reports suggesting that BOJ may raise its inflation forecast when it updates its projections at this month's meeting has increased speculation of rate hike. Part of the challenge is that with the overnight target at 0.25%, what increment will the BOJ move. The swaps market has almost 15 bp increase this month discounted.
GBP: Sterling is posting its fifth consecutive losing session. It peaked last Tuesday near $1.2575 and approached $1.2100 in early European activity today. While the strong dollar was part of the story, there was also idiosyncratic UK developments. Namely, growing concerns about the fiscal policy, Labour's tax pledge, and the weak economic growth impulses. These took a toll on UK Gilts too. The 10-year yield is rising for the sixth consecutive session, during which time it has jumped 30 bp. Some concerns may ease this week, with core and services inflation eased a little and GDP rising in November for the first time in three months, and UK consumers continued to shop (retail sales). Initial resistance now may be around $1.2150. The lower Bollinger Band, which comes slightly above $1.2200.
CAD: The stronger-than-expected Canadian jobs data was overwhelmed by the US news, and the Canadian dollar fell for the fourth consecutive session ahead of the weekend. In each of the past three weeks, the Canadian dollar rose in only one session. Last week and the previous week, the advance was recorded on Monday. Nevertheless, last Monday's range (~CAD1.4280-CAD1.4450) continues to constrain the price action. Indeed, with a few exceptions that US dollar has been in the range set December 18 (~CAD1.4300-CAD1.4450). The key question is whether this range affair is a distributive top or a base for the next leg up. We are inclined toward the latter. A move above CAD1.4450 could spur a near-term advance toward CAD1.4500. The pandemic high was near CAD1.4670.
AUD: The Australian dollar extended last week's four-day slide into start of this week's activity. It set a new low since April 2020 today near $0.6130, a little below its lower Bollinger Band. ($0.6140). There is little on the charts until $0.6100. Nearby resistance may be encountered in the $0.6160-75 area. The Australian dollar's weakness has not impacted expected for the Reserve Bank of Australia to cut interest rates for the first time in the cycle when it meets next month. The futures market has about 68% of a quarter-point cut discounted. It was about 70% discounted at the end of 2024.
MXN: The broad dollar gains on the back of the jobs data and the risk-off mood saw the greenback rise to almost MXN20.75 at the end of last week. It has reached a slightly above MXN20.84 today. It is approaching the high recorded at the end of last year was a little below MXN20.91. Emerging market currencies are mostly over, amid a risk-off mood. Mexico has a light economic calendar this week. Although the market impact has been minimal, the moxie of the Mexico's President Sheinbaum stands out among the extensive kowtowing. The US holds the trump card, so to speak, as the USMCA is up for formal review next year. Previously, some Canadian officials seemed willing to cut Mexico out, but Canada will have a new government, and President-elect Trump's apparent desire to absorb Canada may change the dynamics.
Reviewed by Marc Chandler
on
January 13, 2025
Rating:
