Yen Jumps on Growing Confidence of a Hike Next Week, While Disappointing November GDP Pulls Sterling Lower

Overview: With both of the US inflation gauges out, the focus turns to real sector data over the next two sessions and today's confirmation hear of the Treasury Secretary nomination today. The dollar is mixed. The euro, Swiss franc, and Japanese yen are firm. Disappointing UK November GDP weighs on sterling. Australia reported a loss of full-time positions. The Australian dollar, alongside the other dollar bloc currencies, are around a quarter of a cent lower. Emerging market currencies are also mixed. The Mexican peso leads the decliners and has been tagged for about 0.7%. Strong gains in TSMC helped lift the Taiwanese dollar to the top EM currency complex today. 

Equities are mostly higher today. The Hang Seng, Taiex, Kospi, and ASX200 all rose over 1%. Europe's Stoxx 600 is building on yesterday's 1.3% rise and is up and another 0.75% today. The Dax is extending its record high. US index futures are trading higher. Benchmark 10-year yields fell in the Asia Pacific region, playing catch-up with the large decline in the US yesterday. However, yields in Europe stabilized today and are slightly firmer today. The 10-year Gilt is the main exception. The yield is off three basis points. The 10-year US Treasury yield is practically flat near 4.65%. Gold is firm and is trading above $2700 for the first time since mid-December. February WTI has come in lower after reaching almost $80.75 yesterday. Recall, it settled at the end of last year near $71.70. The tighter sanctions on Russian oil and the continued draw down of US inventories had helped lift prices. 

USD: The dollar's pullback was extended after softer than expected core CPI. Ironically, the core CPI was 3.248%. If it had risen by 2/1000 of a percent more, it would have been rounded up to 3.3%. The Dollar Index fell to 108.60. It held above the 20-day moving average (~108.55), which it has not traded below since mid-December. Although the dollar recovered, the four-month 10% rally may be getting tired. The market may be vulnerable to "buy the rumor, sell the fact" after the inauguration. After the US employment data, the Fed funds futures market settled at the end of last week, with the first cut fully discounted for September and almost 29 bp of cuts discounted for the year. Now after both inflation gauges, the Fed funds have the first cut fully discounted for July and has about 37 bp of cuts priced in for year. Today's economic highlight is the December retail sales, which is expected to show the American consumer finished the year strongly, despite stressed consumer debt measures. Import/Export prices typically do not elicit a market response. The Philadelphia Fed survey tends to attract more attention than most of the regional Fed surveys. It is expected to have improved, though such expectations were disappointed with yesterday's decline in the NY Fed manufacturing survey (-12.6 vs. median forecast of 3.0 in Bloomberg's survey after a revised 2.1 reading in December. It was initially 0.2). Look for a rise in weekly jobless claims after what appears to be holiday-related softness. Treasury Secretary nominee Bessent has confirmation hearings before the Senate today. There may be three broad categories of topics that are especially relevant to the markets:  tariffs, budget deficit, and Fannie Mae/Freddie Mac. The market seems familiar with his 3-3-3:  3% growth, 3% deficit and 3 mln more barrels of oil. The broader question remains of how much power will the delegated to the cabinet and how much retained by the White House.

EURO: The recovery off the two-and-a-half-year low seen Monday (~$1.0180) was extended after the slightly softer than expected US core CPI. The single currency was run up to $1.0350 to probe the 20-day moving average. It is trading quietly but softer today in about a fifth of a cent below $1.03. Nearby support is seen in the $1.0240-60 area. The euro's trade surplus surged last year but it did little to help the euro. In this regard, the weakness of the yuan, despite China's large surplus is not an exception. The eurozone recorded an average monthly trade surplus through November of about 14.5 bln euros. In the first 11 months of 2023, the average trade surplus was about 3.7 bln euros. In 2019, pre-pandemic, before the latest Russian invasion of Ukraine, de-risking vis a vis China, and prior to the jump in prices, the eurozone's average monthly trade surplus averaged 19.3 bln euros.

CNY: The softer than expected core US CPI weakened the greenback broadly and this helped underpin the Chinese yuan. The movement has been small, the dollar settled softer against the yuan for the third consecutive day, as streak not seen since last September. Nevertheless, the dollar remains near the strong side of the band. Given today's fix at CNY7.1781, the top of the 2% band is about CNY7.3320. Against the offshore yuan, the dollar is in a narrow range mostly between CNH7.3425 and CNH7.3520. Tomorrow sees China's estimate of Q4 GDP (~4.9% 2024 vs 4.8% 2023) and high-frequency data for December. Many observers, looking at consumption as a percentage of China's GDP bemoan that it is low, but rather than underconsumption per se, it reflects overinvestment. In November, China said it retail sales grew by 3.5% year-to-date year-over-year. US consumption is regarded as robust, and retail sales rose by 3.3% by about 3.3% in first 11 months of 2024. 

JPY: The combination of the BOJ indicating that it is considering raising rates on January 24 and the softer than expected US core CPI reading delivered the dollar is largest loss since the end of last November against the Japanese yen. Further selling today as the market feel more confident of a BOJ hike at the end of next week. The dollar fell to about JPY156.15 yesterday and follow through selling pushed it to JPY155.20 today, a new low for the new year. The dollar settled below its 20-day moving average against the yen for the first time in a month and the five-day moving average is fallen through the 20-day moving average for the first time since mid-December. The JPY155 area corresponds to the (38.2%) retracement of the run-up from the JPY148.65 low in early December. The next retracement (50%) is near JPY153.75. Japan's PPI remained firm and reinforces the narrative. Japan's PPI rose by 0.3% year-over-year in December 2023. It finished last year at 3.8%. This likely reflects higher food and energy prices and the depreciation of the yen. 

GBP:  The UK's November GDP disappointed and this is weighing on sterling today. Helped more by the softer than expected US core CPI than the softer UK CPI, sterling extended the recovery off Monday's low near $1.21. Sterling rose a little over $1.23. It met the (38.2%) retracement of the last leg down last week's $1.2575 high. It is now straddling $1.22 in in late European morning turnover. The yield on the 10-year Gilt fell almost 10 bp from Tuesday's settlement through the UK's CPI yesterday. It dropped around eight basis points after the US CPI. This ended the seven-session, 30 bp surge. Still, at 4.71%, it is 15 bp higher than where it finished 2024. To provide some context, the US 10-year yield snapped an eight-day advance yesterday, during which time the yield rose about 15 bp and it is about nine basis points above where it settled last year. The UK's economy grew by 0.1% in November, a little slower than expected if though it was the first expansion in three months. The details show industrial production and manufacturing output fell for the third consecutive month. Services eked out a small gain after stagnating in the September and October. And the trade deficit narrowed slightly. The market is feeling confident about a rate cut early next month. The swaps market has about 90% of a quarter-point cut discounted compared with 75% at the end of last week. 

CAD:  The Canadian dollar strengthened amid the broad decline in the greenback after the US CPI, but the gains were quickly pared following news that Canada's existing home sales plunged by 5.8% in December, the most since May 2022. It was more than twice the decline called for by the median projection in Bloomberg's survey. The US dollar approached CAD1.4300 after the US CPI, a six-day low. It recouped its losses in full and returned to the CAD1.4340 area. The greenback has trended higher in Asia Pacific and early European activity to reach CAD1.4385. Initial resistance may be near CAD1.4400, though the high for the week, set Monday, was closer to CAD1.4450. Housing starts are due today and a softer report is expected after a surging nearly 23% in the previous three months. Meanwhile the US two-year premium over Canada had narrowed for six consecutive sessions Tuesday and traded inside 120 bp for the first time since early December. It widened by a couple of basis points and a couple more today to around 125 bp, the highest this week. 

AUD: The mixed Australian jobs data has put the Australian dollar on the defensive today. The Aussie rallied from about $0.6200 to nearly $0.6250 in response to the US CPI figures yesterday. It settled above the 20-day moving average for the first time since November 7. It surpassed the (61.8%) retracement of the decline from last week's high (~$0.6300). It returned to $0.6200 today and recovered to around $0.6220. However, it looks poised to retest the lows in North America. Australia reported an overall rise of 56.3k jobs, well above expectations though the November job growth was pared to 28.2k from 35.6k. However, that includes a loss of 23.7k full time jobs, after growing twice as many in November. The unemployment rate ticked up to 4.0% from 3.9% reflected the rise in the participation rate to 67.1% from 67.0%. The odds, in the futures market, of a hike at the Feb 18 RBA meeting stand near 67%, a new low for the week. 

MXN: The decline in US yields bolstered risk appetites broadly, sent equities sharply higher, and gave a bid to emerging market currencies. All but a few (Argentine peso, Taiwanese dollar, and Indonesian rupiah) emerging market currencies advanced. The greenback fell to a five-day low against the Mexican peso (~MXN20.3735). It took out the 20-day moving average (~MXN20.4450) but settled above it. Still, the dollar has come back bid today and is near session high above MXN20.62 in Europe. Nearby resistance may be encountered around MXN20.68, though the week's high set Monday was almost MXN20.87. It is not coincidental that the Mexican government will announce measures tomorrow that will aim at replacing imports (especially from China) with domestic production a few days ahead of Trump's inauguration. Still, the tension between the US and Mexico is palpable. Mexican President Sheinbaum acknowledged she was not invited to the inauguration. Rarely do heads of state attend but seems like a snub.

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