Overview: The US dollar is consolidating in a mixed fashion today ahead of the employment report. Given the numerous comments from Fed officials in recent days, it is clear that the bar to a rate cut this month is very high. Next month's report will contain the annual benchmark revisions. Sterling, which has been the center of some of this week's drama has stabilized for the moment. It is still off nearly 1% this week, making it the worst G10 performer. The Canadian dollar is the only G10 currency that has managed to gain against the greenback. It is up about 0.25%, with the US dollar slightly above CAD1.44. Emerging market currencies are mixed, with Asia Pacific currencies outperforming central European currencies. The Chinese yuan is still pinned at the lower end of its band against the dollar. Around the open of the US stock market, following the 5-4 Supreme Court decision yesterday, President-elect Trump faces sentencing in a NY court for the "hush money." The spectacle may attract attention, but the market impact is likely minimal at best.
Equities are trading heavily. The Nikkei, China's CSI 300 and the index of mainland shares that trade in Hong Kong fell more than 1%. Only a handful of smaller equity markets posted minor gains. Europe's Stoxx 600 is slightly lower, as are US equity indices. Benchmark 10-year yields are firmer. Reports suggest the BOJ may boost its inflation forecasts at this month's meeting. European yields are mostly 1-3 bp higher. The 10-year UK Gilts yield is up three basis points to about 4.84%, a little below yesterday's highs. It is up 23 bp this week. Italy's 10-year posted the second biggest rise this week, up about 16 bp. The 10-year US Treasury yield is slightly firmer at 4.70%, putting it up about seven basis points this week. Gold is firmer, extending its advance for the fourth consecutive session. Near $2680, it is at its best level since mid-December. February WTI is surging more than 2% today to a three-month high near $75.80. Falling inventories, winter-cold, and the possibility of more sanctions on Russia and Iran are seen as the drivers today.
USD: The Dollar Index stalled in front of 109.40 for the past two sessions and it has capped it today. The market may have turned a little cautious ahead of today's jobs report. Some recession-minded observers played up the unexpected drop in November consumer credit (-$7.5 bln). Revolving credit (credit cards) fell by $13.7 bln, the largest decline since May 2020. This may have been in preparation of ahead of the holiday season, but we know that personal consumption expenditure rose a healthy 0.4% in November after a 0.3% increase in October. Still, after surging by 3.7% in Q3 24 the consumption may have returned to Q2 24 pace of 2.8% in Q4. The response to the December jobs report is the key the price action ahead of the weekend. Starting last January, the US nonfarm payrolls were in sawtooth pattern, alternating between better and worse on a monthly basis. November jobs gain of 227k was a marked increase over the 36k in October. For the pattern to hold, the December nonfarm payroll growth must be below November. The median forecast in Bloomberg's survey has crept up, despite the disappointing ADP report, and stands at 165k. The six-month average is about 143k and the average job growth through November was 180k. The unemployment rate peaked last July at 4.3%. It stood at 4.2% in November and is expected to have remained there last month. A 0.3% rise in average hourly earnings would keep the year-over-year rate steady at 4.0%, meaning wage growth remains above CPI.
EURO: Coming into today, the euro has been confined to last week's range (~$1.0225-$1.0460). It settled last week slightly below $1.0310 and continues to hover around there today. Of note, for the third consecutive week, the US two-year premium over Germany has narrowed. It peaked in mid-December a little shy of 235 bp and has trended lower to around 203 bp today. That is the lowest since the Fed cut on November 7. Although there is not a one-to-one correspondence between the level of the differential and the exchange rate, the euro often seems sensitive to the direction of the spread.
CNY: Despite PBOC efforts, the dollar is pushing against the strong side of the 2% band against the yuan. The PBOC has set the dollar's reference rate in a tight range of roughly CNY7.1876 and CNY7.1887 in the last few sessions, with today's fix, slightly firmer at CNY7.1891. To help take pressure off bond yields, the PBOC it will suspend its purchases. The 10-year yield rose a couple of basis points today to around 1.64%. The offshore market most often respects the onshore band, but not recently. The PBOC will sell CNH60 bln (~$8.2 bln) six-month bills in Hong Kong next week ostensibly to absorb excess liquidity and take some pressure off the offshore yuan. It appears to be the largest bill offering since the PBOC unveiled this tool in 2018. As of this week, there are CNH140 bln of previously sold bills outstanding. Against the offshore yuan, the dollar remains in the range established on December 31 (~CNH7.3050-CNH7.3700).
JPY: Without the machinations of Chinese officials, Japanese officials have succeeded in slowing the yen's decline. The dollar reached almost JPY158 on December 20, its highest level since July. This week, it reached about JPY158.55, when the US 10-year yield reached nearly 4.73%, its highest since last April. The exchange rate will likely take is cues from the US Treasury reaction to the US employment report. Initial support may be near JPY157.40 today, but only a break of this week's low (~JPY156.25) will be significant, for a technical perspective. News that the BOJ is considering raising its inflation forecasts due to the jump in the price of rice and yen weakness spurred speculation that it may also raises rates. The swaps market was little changed this week coming into today, with about 10 bp increase discounted for this month and about 18 bp for March. Now 13 bp are discounted for this month and 20 bp in March. Next week's speech by BOJ Deputy Governor Himino (January 14) is the next scheduled opportunity for the BOJ to prepare the market.
GBP: Sterling has had a rough few days but is has stabilized in its trough today. The week's high was set Wednesday near $1.2575 and recorded a low yesterday near $1.2240. It has held above $1.2265 today and is straddling $1.23 in the European turnover. Sterling settled yesterday below the lower Bollinger Band (~$1.2295 today). It is in vicious cycle. Unlike the US, where higher rates have supported the greenback, in the UK, the surge in rates signaling capital flight. Moreover, the surge in rates will squeeze households when mortgage rates are adjusted, which will be a drag on the economy, and worsen the fiscal position, leading higher rates, and a weaker sterling. Rinse and repeat. Yesterday, the UK's 30-year yield reached almost 5.5%, the highest since 1998. The UK's 10-year yield reached above 4.92%, the highest since 2008. The yields are off yesterday's peak but a few basis points above yesterday's settlement.
CAD: The US dollar traded in a CAD1.4280-CAD1.4450 range on Monday and has remained within it. Still, it is firmer for the fourth consecutive session. The greenback is above CAD1.44 in European trading. Today's employment report may challenge the range. Canada's labor market has improved in recent months. Consider that it has created 37k jobs on average over the past three months compared with 27.5k average in the previous eight months. Full-time jobs growth has been even more impressive, averaging 64k a month for the three months through November and slightly less than 10k a month in the previous eight months. Yet the unemployment rate rose to 6.8% in November, the highest since September 2021. The Bank of Canada argues that it is taking new workers joining the labor force longer to find employment, rather than an increase in layoffs. The swaps market is discounting almost an 80% chance of a quarter-point cut when the central bank meets on January 19. That would follow to half-point cuts in late last year. The market has 55- 60 bp of cuts priced in for this year.
AUD: The Australian dollar came within 2/100 of a cent from the September 2022 low yesterday. Bloomberg records yesterday's low at $0.6172. After the low was recorded, the Aussie was unable to move much above $0.6200 and even today has barely been above $0.6205. The lower Bollinger Band is near $0.6145. The next technical area of note is near $0.6100. The central bank has expressed concern about the strength of demand to explain the reluctance to begin an interest rate cutting cycle. Earlier today, it reported a 0.4% rise in household spending after a revised 0.9% (initially 0.8% rise) in October. The average increase in the first nine months of the year was 0.2%. The futures market has a 3/4 of a quarter-point cut discounted for the next meeting (February 18) and about 75 bp of easing this year.
MXN: The greenback rose against the Mexican peso for the third consecutive session yesterday, but it held slightly below Wednesday's high (~MXN20.5280). It is extending the gains today to almost MXN20.5650. The dollar set last year's high on December 31 near MXN20.9070 and fell to a low earlier this week around MXN20.2450. The pullback looks corrective in nature. There is a band of resistance between MXN20.58 and MXN20.65. Overcoming it will target the high from the end of last year. Mexico's December CPI was in line with expectations, with the headline rate slipping to 4.21% from 4.55%, the lowest in four years and the core rising to 3.65% from 3.58%. The tariffs the US threatens could cut both ways. A 25% tariff that was threatened would be a headwind for the economy, but the weaker peso could add to price pressures. The high degree of uncertainty suggests a quarter-point cut at next month's central meeting (February 6) is more likely than a half-point move suggested by Banxico Deputy Governor Heath as an option. Mexico reports November industrial production today. It is expected to stabilize after falling 1.2% in October.
Reviewed by Marc Chandler
on
January 10, 2025
Rating:
