Overview: After wild swings in recent days, there is a nervous calm in the foreign exchange market so far today. The US dollar is narrowly mixed against the G10 currencies and is +/- about 0.15%. The dollar bloc and Scandis are softer. Among emerging market currencies, central European currencies and the Mexican peso lead the advancers, while Asia Pacific currencies, including the Chinese yuan and Indian rupee are sporting softer profiles. It is almost as if the market is waiting for "another shoe to drop," and it could come from President Trump's remote speech at Davos around 11:00 ET today.
The large bourses in Asia Pacific were mixed, with Japanese and Taiwanese indices rising but South Korea and Australia falling. Chinese indices were mixed, and the Hang Seng fell. Europe's Stoxx 600 is edging a little higher and is extending its advance for the seventh consecutive session to a new record high. US index futures are softer with the NASDAQ off almost 0.5% and the S&P trading around 0.2% lower. Bond yields are firmer across the board. Asia Pacific played a little catch-up, and European yields are mostly 1-2 bp higher. The 10-year US Treasury yield is at 4.63%, a marginal new high for the week. After reaching its best level since the record-high was set on October 31, gold is consolidating at slightly lower levels. The yellow metal reached almost $2763.50 yesterday and pulled back to $2741 today before new bids emerged. March WTI edged a little closer to $75 a barrel, a new low for the week but has recovered back to the opening level near $75.40 in quiet turnover.
USD: The Dollar Index rallied 10% from the late September low (~100.15) to the mid-January high (~110.15). It has since pulled back and the five-day moving average has fallen below the 20-day moving average, illustrating the change in the near-term trend. If the Dollar Index is retracing the gains from the December 6 low (~105.40), it tested the (50%) objective yesterday near 107.80. It recovered to 108.25. The market lacks near-term conviction and is consolidating mostly between 108.20-108.40 today. A move above 108.65 would likely make the new dollar shorts re-think. The economic calendar features weekly initial jobless claims and the Kansas Fed manufacturing survey. Neither are likely to have much impact.
EURO: From the high at the end of September to the low set on January 13, the euro fell 9.2%. The (38.2%) retracement is around $1.0575. However, initially we are looking at the retracements of the leg lower from the December 6 high (~$1.0630). It tested the (61.8%) retracement slightly below $1.0460 yesterday. The five-day moving average is above the 20-day moving average, having crossed on Tuesday. The momentum indicators are constructive. The euro is in narrow range today of roughly $1.0390-$1.0420. A break of the $1.0340-60 area may be an early warning the upside correction is over. Tomorrow is the preliminary January PMI, and a small uptick is expected in the composite, but it is projected to hold below the 50 boom/bust level for the third consecutive month. It stood at 47.9 in January 2024.
CNY: Beijing helped cap the dollar slightly above CNY7.33 earlier this month and the broadly lower dollar saw it approach briefly slip through CNY7.26 on Tuesday. We suspect the dollar must weaken further against the other major currencies to see a push through CNY7.25. After keeping the dollar's fix fairly flat (~CNY7.1800-CNY7.19), the PBOC has set the reference rate lower, closer to CNY7.17 for the previous two sessions and CNY7.1708 today. This serves to limit at least the initial scope for a dollar rebound. The dollar was confined to the range set on December 31 against the offshore yuan, until it broke lower on Monday. It tested CNH7.25 on Tuesday, and recorded an inside day yesterday, which appears to signal the loss of the dollar's downside momentum. The dollar has edged higher today to almost CNH7.2930, which meets the (38.2%) retracement of the losses since last Friday's high. The next retracements are CNH7.3050 (50%) and CNH7.3175 (61.8%).
JPY: For the four sessions through Tuesday consecutive session, the dollar consolidated between roughly JPY155.00 and JPY156.60. Implied one-month yen volatility is below 9.5%, it is the lowest since last July. With rising US rates and the dollar's firmer tone, the greenback made a marginal new high near JPY156.70 and settled firmly. Japanese equities have advanced for four sessions through today. It edged up to JPY159.75 today before the momentum stalled and is probing the lows in the European morning near JPY156.20. There does not appear to be anything preventing the BOJ from hiking tomorrow. The markets are prepared for a quarter-point hike. However, there is some concern that this takes the BOJ out of the game for a bit, and therefore, the move may be seen as a dovish hike. The swaps market does not expect the next move until Q4. Separately, Japanese reported a surprising JPY130 bln trade deficit for last month. Japan recorded a JPY110.3 bln deficit in November. Still, this improvement is broadly in line with the seasonal pattern, where the trade balance has deteriorated sequentially only three times in December in the past 20 years. In December, exports were 2.8% higher year-over-year and imports were up 1.8%. Despite the overall trade deficit, Japan appears to have run a little more than a $70 bln trade bilateral trade surplus with the US in 2024.
GBP: Sterling's upside correction extended to $1.2375 yesterday, fraying the 20-day moving average and meeting the (38.2%) retracement of the leg down from the December 6 high a little above $1.28. It could not sustain the upside momentum and posted its lowest close in three sessions yesterday near $1.2315. It slipped slightly below $1.2300 today in follow through selling but recovered to about $1.2325. The political and economic backdrop is poor, and the market remains convinced that the Bank of England will cut rates when it meets on February 6. The UK ran a modest trade surplus against the US last year of about GBP72 bln. So far, the UK has escaped being singled out by the new US administration.
CAD: After wide swings on Monday and Tuesday, the Canadian dollar consolidated yesterday and continues to do so today. The US dollar reached a low at the start of the week near CAD1.4260, the low for the month. On Tuesday, it rose to about CAD1.4515, a new high since March 2020. Yesterday's greenback recovery retraced about half of Wednesday's pullback and today it has firmed a little more to fray CAD1.4400. Nearby resistance is seen near CAD1.4430. As one would expect with these price swings, implied volatility is elevated. The one-month implied vol is above 8%. To provide some context, the 50-day moving average is about 6.3% and the 100-day moving average is 5.7%. While Trump himself mentioned February 1 as a possible date to impose 25% tariffs, he also instructed officials to investigate fentanyl and immigration and report back by April 1. Around three-quarters of Canada's exports go to the US, and this accounts for about a fifth of Canada's GDP. Estimates suggest that almost half of Canada's exports to the US come from affiliates of US companies. There is some speculation that if the US were to impose tariffs, exceptions would be made for autos and energy. Recall that last August, the US raised tariffs on Canada's softwood lumber products from a little over 8% to slightly more than 14.5%. Another tariff on top of this could potentially impact the cost of home construction and may undermine the Trump administration's goal to make housing more affordable. Canada reports November retail sales today. The median forecast in Bloomberg's survey is for a 0.2% increase, which would be the smallest in H2 24. Retail sales fell by an average of 0.3% in H1 24 and in the four months through October, averaged 0.7%.
AUD: The Australian dollar approached the month's high yesterday near $0.6300 but held below. It remains below it today. Still, the consolidative tone, and it has been confined to yesterday's range, still appears constructive, and the Aussie remains above the down trendline drawn through last September and early November highs. It was taken out on Monday, and although the Australian dollar dipped below it on Tuesday, it settled above it. More than that, the small net gain on the day allowed the Aussie to post its highest close in a little more than a month. The trendline comes in near $0.6220 today but initial support may be in the $0.6250-60 area. Today's low has been about $0.6255. The Aussie met the (38.2%) retracement of its losses since the end of November. The next retracement (50%) is near $0.6330. The momentum indicators are constructive.
MXN: The greenback has carved out a range against the Mexican peso in recent weeks roughly between MXN20.2450 and MXN20.9380. Still, the dollar has taken out the trendline connecting the December 20 low and several lows this month and has eased to nearly MXN20.45 today. Yet, from another view, the dollar is at the lower end of its recent range near MXN20.4400. From this perspective, a convincing push below MXN20.37 may be needed to signal a breakout. Given the carry (interest rate differential), it is expensive to be short the peso unless it has downside momentum. Mexico reports CPI for the first half of January today. It may have accelerated from the second half of December, but the year-over-year pace looks to slow a little. Banxico does not meet until February 6 and Trump hinted at 25% tariffs as soon as February 1. The market is not convinced this will happen and is pricing in about 17 bp or 68% of a quarter-point cut. This is a few basis points more than at the end of last week.
Reviewed by Marc Chandler
on
January 23, 2025
Rating:
