Overview: The US dollar is mostly firmer today. Underlying sentiment is constructive, and yesterday's JOLTS and ISM reports were stronger than expected, playing on the American exceptionalism meme. The disruptive nature of the new US administration was on full display, as Trump declined to rule out the use of military force to secure Greenland and Panama and continued to press with absorbing Canada. He demanded NATO members boost military spending to 5%, which the US does not meet. Even renaming the Gulf of Mexico to the Gulf of America was suggested. To many, given the aggressiveness of Russia and China, and Iran's nuclear ambitions, threat to US allies is a distraction that will aid America's rivals.
The sell-off in US equities yesterday appeared to weigh on Asia Pacific markets today. South Korea, Australia, and Singapore were exceptions, and even a large share buyback announcement by Tencent, that was blacklisted by the US Pentagon, was unable bolster the Hang Seng today. However, Europe's Stoxx 600 is higher for the third consecutive session, and US index futures are firmer. European benchmark 10-year yields are a bit firmer, while the 10-year Treasury yield is little changed near 4.68%. The US finishes this week's coupon sales with the 30-year bond auction today. The yield is slightly above 4.90% today and was last above 5% in November 2023. Gold is firm but below yesterday's ~$2664 high. February WTI gapped higher and reached nearly $75.30, its best level since last October when it peaked slightly below $76.50. The API estimated that US private sector inventories fell for the seventh consecutive week, the longest drawdown in three years.
USD: The Dollar Index has retraced the rally since the December 18 FOMC meeting and is rebounding. It settled that day slightly above 108 and rallied to nearly 109.55 on the first trading day of the new year. It reached 107.75 on Monday and posted an inside day yesterday, though settled near session highs (~108.60). It is approaching 109.00 today. There are three highlights of today's session: the ADP estimate of private sector job creation, this week's coupon sale finishes with $22 bln 30-year bonds, and the FOMC minutes. In the three months through November, ADP estimates that the private sector created 489k jobs. The BLS estimates the private sector added 414k jobs. In the 11 months through November, ADP estimates the private sector grew nearly 1.7 mln jobs, while the BLS estimate is 1.57 mln jobs. Yet, economists recognize, and Fed Chair Powell has acknowledged that the BLS estimate of overall job creation has been exaggerated (and that officials take this into account). In terms of US Treasury supply, both yesterday's 10-year note sale and today's 30-year bond sale are adding to existing issues. The supply is hitting when yields were rising. Job openings unexpectedly increased (JOLTS) and the ISM services and prices paid were stronger than expected. The Fed pivoted in December to emphasis price stability, perhaps encouraged by the stability of the unemployment rate, which remained below the July peak of 4.3%. The dot plot showed the median projection was for two cuts this year rather than four. After being more dovish than the Fed, the market is now less so. The futures market has slightly less than 40 bp of easing this year discounted.
EURO: The euro consolidated yesterday in the upper end of Monday's range, but the upside momentum stalled. The 20-day moving average has been frayed on an intraday basis, but the single currency has not settled above it since December 9. It is near $1.0405 today. The break of $1.0350 is spurring a move toward $1.03. Options for 1.6 bln euros at $1.03 expire after the US jobs data on Friday. Yesterday's preliminary eurozone CPI failed to inspire so it is not surprising that today's December PPI (-1.4% vs. -3.3% in November) is not the focus today. Poor German data appears to be the bigger drag on the euro. Germany reported November retail sales fell 0.6%. The median forecast in Bloomberg's survey was for a 0.5% increase after October's 0.3% decline. More importantly, German factory orders tumbled by a whopping 5.4% in November. The market had expected a 0.2% decline. It was the third decline in four months. In the first 11 months of last year, German factory orders rose only three times. Some found some comfort in the fact that if it were not for the collapse of large orders, factory orders would have risen by 0.2%. Tomorrow, Germany reports industrial production and trade figures. France reported a 7.1 bln euro November trade deficit earlier today. Through the first 11 months of 2024, it is almost 20% smaller year-over-year.
JPY: The US dollar reached JPY158.40 yesterday, its best level since last July. It pulled back to JPY157.50 in Europe, and stronger than expected US data (JOLTS and ISM services), the greenback returned to session highs, encouraged by the new eight-month high in the US 10-year yield (~4.70%). The greenback is trading quietly in a tight range today: ~JPY157.90-JPY158.35. The yen's weakness may spur speculation of a BOJ rate hike later this month (January 24). The swaps market has about 10 bp discounted. The scheduled speech by BOJ Deputy Governor Himino on January 14 has added importance, given the perceived need to signal its intent to the market. There appears little chart resistance ahead of the psychologically important JPY160.
CNY: Against the offshore yuan, the dollar remains in the range set on the last session of 2024, roughly CNH7.3055-CNH7.3700. Officials have tried to slow the dollar's rise by setting the reference rate for the dollar to limit its potential to rise around CNY7.33 and it has mopped up liquidity in the HK market that makes it more expensive to borrow (to short) the offshore yuan. State banks have been rumored to have sold dollars, and some observers argue this "stealth intervention." Maybe, but it is next to impossible to distinguish these dollar sales from commercial activity, such as exporters converting hard currency earnings. It is not clear the significance of the Bloomberg survey, which is said to show bank estimates of the fix. In recent days, the average estimate (when the high and low is excluded) has been between about CNY7.3055 and CNY7.32 (today's was CNY7.415). This reference rate has been fairly steady around CNY7.1875-80 It was set at CNY7.1887 today after CNY7.1879 yesterday. That puts the 2% band, which it is allowed to trade at about CNY7.0450-CNY7.3325. The dollar is near the strong end of the band.
GBP: The UK's economic calendar is light for the remainder of the week. Sterling's high yesterday (~$1.2575) approached the (50%) retracement of the losses since the last US jobs report. But, as the dollar rebounded in response to the stronger US data, sterling reversed lower and fell to about $1.2480. Follow-through selling knocked it back to $1.2425 today. Barring a particularly weak US jobs report on Friday, sterling could return toward the eight-month low set last week (~$1.2355) over the next week. Next week's UK data features December CPI (year-over-year rate may soften from 20.6%), November GDP, and December retail sales.
CAD: The Canadian dollar consolidated inside Monday's range yesterday. The greenback is little changed near CAD1.4370 in late morning turnover in Europe. The possibility that Mark Carney seeks the Liberal Party leadership has captured the imagination of many observers. Some argue that in the most favorable scenario, he wins and secures the support of the NDP for the minority government, which would buy him time (until October at the latest) to repair Liberals standing in the polls before the required election. It seems like a longshot.
AUD: The Australian dollar was turned back on Monday after poking above $0.6300. It tried again yesterday but could not make it above $0.6290. It settled near $0.6230 and has edged to lower to nearly $0.6210 today. The break of $0.6225 warns of the risk of a retest on the recent lows near $0.6180. Recall that that was the lowest level since the October 2022 low (~$0.6170), which itself was the lowest since April 2020 and the pandemic. Options for almost A$650 mln at $0.6185 expire Friday. Today's November CPI report had little impact on expectations for the central bank, which meets on February 18, though for the record, it came in slightly firmer than expected at 2.3%, up from 2.1%. Some consolation was found in the slippage of the trimmed mean measure to 3.2% from 3.5%. The futures market has almost a 75% chance of a quarter-point cut discounted, which is slightly above the recent levels. Still, the data in the coming days may play on the RBA's concern that demand is still strong. Tomorrow, Australia is likely to report strong November retail sales. The median forecast in Bloomberg's survey is for a 1% gain, which would be the largest increase since March 2022. Australia will also report November trade. After not rising since June, exports (foreign demand) rose by 3.6% in October. That was the largest increase since August 2023. November household spending is due Friday. Through October, household spending rose an average of 0.3% a month. It rose by 0.8% in October and is seen rising by 0.6% in November.
MXN: The dollar was little changed against the peso yesterday and was confined to a relatively narrow range (~MXN20.2640-MXN20.3965) in the lower end of Monday's range. It was the first session in six that the greenback did not trade above MXN20.50. The greenback is firmer but in a narrow range today (~MXN20.3150-MXN20.4240). It spent most of December in a MXN20.00-MXN20.50 range. December CPI (softer headline but a small increase in the core rate is expected), and minutes from the last central bank meeting, when it cut 25 bp, will be published tomorrow, followed by November industrial production on Friday. A small bounce is seen after the sharp 1.2% drop in October.
Reviewed by Marc Chandler
on
January 08, 2025
Rating:
