Sterling is Pounded

Overview: The US dollar is mostly firmer today. Among the G10 currencies, strong wage data and softer US 10-year yield is helping the yen defy the dollar's tug. It is up almost 0.2%. On the other hand, pressure on sterling and the UK Gilts has continued. The pound took out last year's low near $1.23 today and was pressed to $1.2240. The 10-year yield is rising for the fourth consecutive session and is near 4.85%, up nearly 25 bp this week. Fiscal concerns amplified by weak growth appears to be the main culprit. Emerging market currencies are a little softer, led by the Mexican peso's 0.2% loss. The South African rand and Malaysian ringgit are the chief exceptions (apart from the Russian ruble. 

Equities are mixed. Nearly all the markets in Asia Pacific fell, with the Japan's Topix and Taiwan's Taiex off more than 1%. South Korea's Kospi eked out a miniscule gain to be the chief exception. Europe's Stoxx 600 is recouping most of the yesterday's 0.2% slippage. US index futures are lower, but the cash market is closed today and will not re-open until after tomorrow's US employment data. European benchmark 10-year yield are mostly 1-3 bp higher. The 10-year Treasury yield is off a couple basis points to slightly below 4.70%. Gold is firm, slightly below yesterday's high near $2670. It looks poised to test $2700 in the coming sessions. February WTI reversed low after reaching a three-month high yesterday near $75.30. It settled nearly $2 off its high. Losses were extended to $72.85 today before returning to yesterday's settlement. 

USD: The US stock market is closed, and the bond market will close early to mark President Carter's funeral. Despite the disappointing ADP jobs estimate yesterday, the second consecutive slowing, the Dollar Index remained firm and settled near 109.00. Technically, the 109 area corresponds to the (61.8%) retracement of the losses from the September 2022 high (~114.80) to the July 2023 low (~99.60). The next psychological target is 110.00, but we look for a test on 111.00, especially if Friday's employment report and next week's CPI does spur the market to bring forward Fed cut expectations. The first cut not fully discounted until July and the market is somewhat less dovish than the Fed, as it is not pricing in the two cuts the December projections anticipated.

EURO: Some option-related selling on the break yesterday of $1.03 sent the euro slightly below $1.0275. The weaker-than-expected US ADP private sector job estimate helped steady the euro and it settled near $1.0320. The euro is trading quietly in a roughly $1.0285--$1.0320 range. Options for nearly 3 bln euros expire today at $1.02, but that seems a bridge too far. The $1.02 area, which was approached on January 2 (low was ~$1.0225) marks the (61.8%) retracement of the euro's gains off the September 2022 low near $0.9535. Germany followed up yesterday's dreadful 5.4% drop in November factory orders with a larger-than expected gain in industrial output. The 1.5% jump follows a revised 0.4% decline in October (initially -1.0%). Still, it does not appear sufficient to prevent the second consecutive annual decline in GDP for which the first official estimate will be presented next week. This year, the Bundesbank has penciled in 0.2% growth. On the other hand, through November, Germany's trade surplus is about 12% higher than the similar 2023 period. Germany reported that the November trade surplus rose to 19.7 bln euros (13.4 bln in October), helped by a 2.1% rise in exports and a 3.3% reduction of imports. 

CNY: While the dollar remains in the range set against the offshore yuan on December 31 (~CNH7.3055-CNH7.3700), it has continued to creep up against the onshore yuan. It is at its best level since September 2023 having pushed up through CNY7.33 yesterday and a little higher today. The dollar remains near the upper end of the 2% band that the PBOC allows, which is found slightly below CNY7.3325 today. China's December CPI slowed to 0.1% year-over-year. This seems to overstate the deflationary pressure. First, food prices fell by 0.5%. This is not an issue of demand. Second, non-food prices edged up by 0.2%. Third, core prices, excluding food and energy rose to 0.4%, the highest since July. China's PPI, which has not been positive since September 2022, finished 2024 at -2.3%. China's PPI fell 2.7% in 2023 and 0.7% in 2022. China's 10-year yield is around 1.60%. It is near-record lows, but the real rate is still positive. In Japan, Switzerland, and Germany, adjusting the 10-year yield by the recent CPI prints, produces negative real rates.

JPY: Higher US 10-year yield, reached nearly 4.73% yesterday, helped lift the dollar to a marginal new six-month high (~JPY158.55), and has held slightly below there today. The market seems to be probing gradually but in the 28 sessions since the last US jobs report (December 6), the dollar has risen in all but five sessions and that includes three in row this coming into today. Still, the risk of BOJ intervention seems low. Yet, the yen's weakness seems to be encouraging some speculation of a BOJ rate hike later this month. The swaps market has about 11 bp discounted, even after today's wage data. The November labor cash earnings rose 3.0%, stronger-than-expected and follows a 2.2% year-over-year increase in October. When adjusted for inflation, real earnings have been below zero on a year-over-year basis since April 2022, with June and July last year being sole exception. They fell 0.3% year-over-year in November, half the decline that the median forecast in Bloomberg's survey anticipated. Household spending is due tomorrow. It was off 1.3% year-over-year in October and in October 2023, it had fallen 2.5% year-over-year. The BOJ branch managers report recognized the wage gains and upgraded its economic assessment for two of the nine regions. The BOJ is keeping the market on tenterhooks--not giving a clear signal whether a hike could come later this month or March. 

GBP: The sell-off in UK Gilts yesterday helped fuel a sharp drop in sterling. It was sold through the eight-month low set on January 2 near $1.2355 and found support near $1.2320. The pressure continues today. Sterling fell to 1.2240, though has recovered to around $1.2285 in Europe. Initial resistance is now seen around $1.23. The 10-year Gilt yield is up another four basis points today. The yield finished last week near 4.57% and is now near 4.85%, having reached 4.92% earlier today. There were three sessions in 2024 in which sterling fell by 1% or more. Before yesterday's recovery, sterling was threatening its second of the year. Many market participants suspect that sterling's weakness could impact the Bank of England's considerations. On Monday, the swaps market had 61 bp of cuts discounted for this year and now 48 bp. 

CAD: The greenback extended its recovery off Monday's low (~CAD1.4280) to reach CAD1.4410 yesterday. So far today, the US dollar is trading in a CAD1.4365-CAD1.4405 range, at the upper end of yesterday's range. A retest on the 2024 high, slightly above CAD1.4465 (December 19) seems likely, though the precise timing may depend on tomorrow's jobs data. Above there, the next target may be CAD1.45 but there seems to be little standing in the way of the pandemic high from March 2020 near CAD1.4670. That said, since the US election, the Canadian dollar and Norwegian krone have fared the best among the G10 currencies, depreciating a little less than 4%.

AUD: Since the US election, the Australian and New Zealand dollars have been the worst performers in the G10, losing about 6.7% and 6.9%, respectively. The Aussie slipped through $0.6200 yesterday but found bids above the 2024 low set on December 31 slightly below $0.6180. However, today, it approached the 2022 low a smidgeon under $0.6170. Nearby resistance is seen around $0.6220. Australia reported a 0.8% jump in November retail sales earlier today. While that was slightly smaller than expected, it was the largest increase since November 2023 (1.3%). Australia reported a larger than expected goods trade surplus (A$7.08 bln vs A$5.7 bln in October). November exports for 4.8% after a 3.5% increase in October. That makes for the strong two month of foreign demand since August-September 2022. Still, in the Jan-Nov 2024 period, Australia recorded a goods surplus of about A$66.2 bln. In the first 11 months of 2023, the goods surplus was nearly A$112 bln.

MXN: Since the US election, the Colombian peso's 1.9% gain puts its atop the emerging market currencies. Indeed, it is the only emerging market currency to rise against the greenback. Even the fixed Hong Kong dollar has slipped by 0.10%. The Mexican peso's 1.5% loss puts in in fifth place. The greenback briefly traded above MXN20.50 yesterday, and reached almost MXN20.5280, but settled near MXN20.40. It is holding slightly below MXN20.50 today, ahead of the December CPI report. The headline rate is expected to have eased toward about 4.25% from 4.55% while the core rate may rise slightly to about 3.65% from a little below 3.60% in November. A surprise may point to direction of the peso today, ahead of tomorrow's US jobs report.

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