Overview: The US tariff threat was extended to China and the EU yesterday but after the North American market shrugged it off yesterday, for the most part, the market seemed to take it in stride. It is too early to say the market is becoming immune to the rhetoric. Still, the dollar is mostly softer today. Ironically, despite high confidence of a BOJ rate hike on Friday, the yen is the only G10 currency is lower on the day as the North American session is about to begin. The UK reported a larger than expected December budget deficit and although UK Gilts are underperforming, sterling has extended yesterday's recovery and is trading at its best level in two weeks. All but a handful of emerging market currencies are also pushing higher against the dollar today. China, Hong Kong, and Taiwan are among those sporting a softer profile on the day.
Chinese and Hong Kong equities reacted poorly to the latest tariff threat, but the other large markets have rallied, including Japan, South Korea, Taiwan, and India. Europe's Stoxx 600 is extending its advance to the sixth consecutive session and is trading at new record highs. Us index futures are extended yesterday's rally with the S&P 500 futures about 0.4% higher and the Nasdaq futures up nearly 0.8%. European benchmark 10-year yields are mostly one basis point softer, but the 10-year Gilt is yield is almost a basis point higher. The 10-year US Treasury yield is a little lower near 4.57%. Gold is extending its rally. Above $2760, it is at its best level since October 31 when the record was set slightly above $2790. After dropping 2% yesterday to almost $75 a barrel, March WTI has stabilized and come back a little firmer to reach almost $76.40. The $76.70 area is the initial retracement objective of the drop since the January 15 high near $79.40.
USD: The Dollar Index finished last week at 109.35 and settled yesterday near 108.00, its lowest close since late December. A two-year high was recorded earlier this month slightly above 110.15. The pullback has seen the momentum indicators turn lower. The North American market seemed more skeptical about the tariffs, or view them as a negotiating ploy or bluster, given the potential inflationary implications and threats of retaliation. The Dollar Index trended lower in North America and slipped below 108.00. It made a marginal new low today, and is probing the low set earlier this month near 107.75. The next technical target is near 107.25. The light calendar today features December Leading Economic Indicator Index. Recall that November's 0.2% gain was the first uptick since February 2022. The six-month annualized pace had fallen to levels that were associated with recessions in early 2023, which speaks to the unusual nature of this business cycle. It has subsequently recovered, and at -3.1 in November, was the highest since May 2022.
EURO: The euro is pushing higher today and is trading a new high for the month near $1.0450. It found support a little below $1.0350 yesterday and the North American market brought it back to the highs. A move above $1.0460 would signal a move toward $1.0500-35. European integration grows in crisis is a common refrain and the multifaceted challenges may encourage officials to proceed further, perhaps the Draghi report will offer a blueprint of sorts. Meanwhile, the swaps market is confident of an ECB rate cut next week and anticipates forward guidance that will point to another cut in March.
CNY: The dollar's broad setback on Monday bought Chinese officials some breathing space as the greenback moved off the top of the approved band. The dollar recovered from nearly CNY7.2615, Monday's low to almost CNY7.2870 yesterday before falling to new session lows in late dealings slightly below CNY7.26. The PBOC set the dollar's reference rate at CNY7.1703 yesterday, the lowest November 8, and today's was lower still at CNY7.1696. The lower dollar fix limits the dollar's upside/yuan's downside. The dollar is recording in an inside day against the offshore yuan. The dollar peaked near CNH7.2970 yesterday, which marks the (38.2%) retracement of the drop from the end of last year. It trended lower in North American time zone to reach CNH7.2570. The session low was set in the local session near CNH7.2525. Today's low, so far, is about CNH7.2615.
JPY: The dollar found support at the end of last week near JPY155, and although that was briefly taken out yesterday (to slightly below JPY154.80), it held on a closing basis. The dollar is trading firmly with within yesterday's range. A move above JPY156.50 lifts the technical tone. The swaps market continues to discount a strong (~95%) chance of a 25 bp hike at the end of the week. A week ago, there was about a 70% chance discounted. The dollar made little headway even though the 10-year Treasury yield unwound the recent gains and returned to nearly the low for the month (~4.51%).
GBP: Sterling stalled near $1.2340 the 50% retracement of the leg lower from the $1.2575 area on January 7 to $1.21 on January 13. It has moved higher today to reach $1.2375, which is where the 20-day moving average is found. Sterling has not closed above its 20-day moving average since December 17. The next retracement (61.8%) is slightly below $1.24. The down trendline drawn off the mid-December highs is found near $1.2435 today and $1.2410 at the end of the week. The momentum indicators have turned up, but sterling has yet to prove itself, though the settlements on Monday and Tuesday near session highs looks constructive. The UK reported a larger-than-expected budget deficit of GBP17.8 bln for last month. It is more than twice as high as last December and brings the fiscal year shortfall to GBP129.9 bln in the first nine months. This is about GBP4 bln more than the Office for Budget Responsibility projected less than three months ago.
CAD: Canada's December inflation softened in line with expectations but that was a side issue yesterday as the market's focus was on the latest US tariff threat. After initially surging to CAD1.4515, the US dollar pulled back to slightly below CAD1.4400. It traded as high as CAD1.4455 before Europe entered the fray and peaked near there in early North American activity. However, North American participants seemed more skeptical that a 25% tariff would be levied, and if it were, autos and commodities could be excluded. The heavier US dollar tone in the North American morning saw the greenback give back its early gains and briefly traded lower on the day (~CAD1.4290) before consolidating around CAD1.4320-40. It is still consolidating today at the lower end of yesterday's range (~CAD1.4310-CAD1.4355). A break of CAD1.4260 sets up a test on CAD1.4200.
AUD: The Australian dollar peaked on January 6 near $0.6300 and approached that $0.6290 on Monday and Tuesday. It is bid near highs today. Support near $0.6610 was tested and it held yesterday. In North American dealings the Aussie reached nearly $0.6280. The momentum indicators are constructive, but the $0.6300-cap needs to be taken out to lift the tone. The next immediate target is around $0.6340. The economic calendar is light. The upcoming features are the preliminary January PMI ahead of the weekend and the quarterly CPI in the middle of next week.
MXN: The peso was the weakest among emerging market currencies yesterday, and despite its recovery it finished about 0.6% lower. Yet, the dollar traded inside Monday's range and, as we have seen in other currency pairs, the tariff-inspired dollar gains were mostly unwound in North America yesterday. Some observers are skeptical that the 25% tariff threat on Canada and Mexico is bluster. Trump threatened 25% tariffs on Mexico in 2019 and nothing came of it. Currently, the average tariff is weighted average tariff is about 2.35%. The greenback is holding a up trendline from the lows before Christmas and has caught 3-4 lows this month. It comes in near MXN20.47 today and a little above MXN20.50 at the end of the week. The dollar is trading with a heavier tone against the peso today but has mostly held above MXN20.54. November retail sales in Mexico disappointed yesterday, falling by 0.1% after a 0.3% decline in October. The median forecast in Bloomberg's survey was for a 0.3% gain. Retail sales are off 1.9% year-over-year. They have not been positive on a year-over-year basis since April. The swaps market has about 15 bp of cuts discounted for the February 6 central bank meeting, and about 130 bp of cuts this year.
Reviewed by Marc Chandler
on
January 22, 2025
Rating:
