Overview: The week began with a bang with the US tariff threat, which at the last minute was postponed by the US for a month. Narrow ranges in the foreign exchange market are prevailing ahead of the US jobs data, which will likely be distorted by the poor weather in parts of the country and the California fires. Nevertheless, it is clear that the Federal Reserve is on hold until the middle of the of the year at least and today's report is not clean enough to change that. India delivered its first rate in five years, but the neutral bias that was retained gave the cut a hawkish twist and the rupee is slightly higher on the day.
Equity markets are mostly heavier today. The large markets in the Asia Pacific but China, Hong Kong, and Taiwan fell. The Stoxx 600 rose 1.2% yesterday but is threatening to snap a three-day rally. US index futures area trading softer too. Most European benchmark 10-year yields are 1-2 bp softer. The 10-year Treasury yield is flat near 4.43%. Gold is trading higher but holding yesterday's high near $2873. China's reserves figures show that the central bank bought gold for the third consecutive month in January, after pausing for six months. March WTI is consolidating after falling to a new low since the end of December slightly below $70.50 yesterday. It has risen above $71.00 today. Yesterday's high near $71.85 held the 200-day moving average found near $72.00 now.
USD: The employment report is front and center, but the market's view of the trajectory of Fed policy is unlikely to change materially. The Fed is widely understood to be on hold until June of July. And after everything has been said and done, the Fed funds futures are pricing in 43 bp of cuts this year, unchanged from the end of last year. The US created an average of 186k jobs a month in 2024, down from the 251k average in 2023. Of those positions, 149k on average were in the private sector compared with 192k average in 2023. The labor market is expected to slow further this year. The California fires and winter storms in the south may have weighed on last month's job growth. The BLS will also announce its annual revisions to the nonfarm payroll series. Investors and policymakers know that the monthly numbers have been exaggerated, and Fed Chair Powell acknowledged that officials take that onboard. That said, the revisions may be in 600k-700k rather than the nearly 820k of initial estimates last summer. The University of Michigan's preliminary February survey may draw attention after the sharp drop in expectations in January and the jump in inflation expectations (one-year to 3.3% from 2.8%, the highest since November 2023, and the 5-10-year expectations to 3.2% from 3.0%). The narrow range that the Dollar Index is in so far today (~107.60-80) is likely be expanded after the employment report. The larger range is 107.30-108.10. Looking toward next week, the January CPI looks sticky.
EURO: The light economic calendar puts the euro at the mercy of the market's reaction to the US employment data. Yesterday's news of a 6.9% surge in Germany factory orders in December failed to lift December industrial production, which collapsed by 2.4%, the most in five months, and puts German output at levels not seen since mid-2020. The US two-year premium over German narrowed to around 190 bp in the first part of last week but is back near 218 bp now. It could rise toward 225 bp, though it peaked in late November 2024 near 240 bp. The euro's recovery from Monday's spike low near $1.0140 stalled near $1.0440 on Wednesday. The euro is in a narrow quarter-cent range below $1.04 today. A break of $1.0350 may signal a retest on $1.0280-$1.0300.
CNY: Beijing has other levers to pull against US tariffs and sanctions than the foreign exchange market. Although it is common to see references of China's dependence on exports, the fact of the matter is that as a percentage of GDP, China exports about 20% of GDP, which is less than half of Germany and about 1/3 lower than the UK and Canada, for example. The challenge of Chinese exports is the sheer size of the country and its aid to industry, which is often a different type and magnitude than aid given by high-income countries. The US dollar is recovered from the CNH7.27 area seen on Wednesday. It held below the 20-day moving average (~CNH7.30) yesterday and remains so today. A push higher puts the greenback into the CNH7.32-CNH7.3350 area. The PBOC has set the dollar's references range tightly near its pre-Lunar New Year fix (CNY7.1698). In the past such steady fixings tempted some to compare it to a fixed exchange rate, and now the stable reference rate is understood as a sign that Beijing does not seek to offset the US 10% tariff on imports from China with currency devaluation.
JPY: The US dollar fell to new lows since mid-December yesterday near JPY151.25 in the North American afternoon yesterday. This met the (38.2%) retracement of the greenback's rally from the mid-September low (~JPY139.60) to the January 10 high (~JPY158.85). The dollar's losses were extended in the local session today to a little below JPY151.00, but it has come back better bid and has resurfaced above JPY15215 in the European morning. The 200-day moving average is near JPY152.80 and may offer an upside target. Japan reported a dramatic 2.7% surge in December household spending earlier today. The median forecast in Bloomberg's survey was for a 0.5% rise year-over-year. The jump in spending may have been fueled by strong bonus payments, reported earlier in the week. The BOJ has signaled it intent to continue to raise rates. The swaps market has about an 80% chance of the next hike in late July, and around a 50% chance of another hike before the end of the year. The terminal rate is seen near 1%.
GBP: Sterling was sold to a three-day low yesterday near $1.2360. It peaked Wednesday near $1.2550. It met the (61.8%) retracement of the rally from Monday's low (~$1.2250). It is in a half-cent range above $!.2370 today, remaining inside yesterday's $1.2360-$1.2510 range. The Bank of England delivered a dovish quarter-point cut yesterday. It was dovish because the two dissents favored a 50 bp move and signaled. Yet, while downgrading its growth forecast and lower the potential (non-inflationary pace), the central bank warned that inflation would rise "quite sharply" later this year to 3.7%, a full percentage point higher in than in November (the December CPI was 2.5%). The BOE also warned that Q4 24 GDP (due February 13) likely contracted. Economists in Bloomberg's survey had projected 0.1% growth after stagnation in Q3 24. The swaps market is discounting nearly another 50 bp of cuts in the next six months.
CAD: Canada also reports January jobs data today. Last year, Canada created an average of 32k jobs a month, down from almost a 45k average in 2023. Of those jobs, nearly 25k on average a month in 2024 were full-time posts, compared with an average closer to 36k a month in 2023. Still, the unemployment rate has trended higher, from 5% at the end of 2022 to 5.8% at the end of 2023 and 6.7% at the end of 2024. The labor force has grown but the participation rate has changed little. It was at 65.6% at the end of 2022, 65.7% at the end of 2023, and 65.4% at the end of last year. Ahead of the report, the odds of a rate cut at next month's meeting have been pared from 100% on Monday to a little less than 80% now. The dollar found support a little ahead of last month's low (CAD1.4260) on Wednesday. It settled near session lows yesterday, slightly above CAD1.43. It is holding so far today. Near-term risk extends back to CAD1.4400. The US two-year premium over Canada continues to widen. It is at a new 27-year high near 165 bp now. The premium was near 130 bp at the end of last year.
AUD: The Australian dollar's recovery from Monday's spike low through $0.6090 stalled on Wednesday slightly shy of $0.6300. It made a marginal new nine-day high today but continues to hold below $0.6300. The January high was set closer to $0.6330. The Aussie consolidated yesterday and held above Wednesday's low near $0.6240. The 20-day moving average is near $0.6250 today. The economic calendar is light on market-moving reports until the central bank meeting on February 18. The pricing in the futures market reflects the high confidence of a cut then another one in May. The market has almost two more cuts discounted in H2 25. The Reserve Bank of New Zealand meets the following day, and the swaps market is pricing in a strong chance of the third consecutive 50 bp cut.
MXN: After delivering five quarter-point cuts last year, Mexico's central bank cut by 50 bp cut yesterday, to bring the overnight rate to 9.50%. It also signaled a low bar to another 50 bp cut. The next meeting is March 27, which is after the next tariff-threat deadline. The swaps market has another 75 bp of cuts discounted over the next six months. Today's release of January CPI illustrates why. The headline CPI is expected to fall to around 3.6% year-over-year to return to the 3% +/- 1 percentage point for the first time since February 2021. The core rate is seen nearly steady around 3.7%. Not only have price pressures moderated, but growth disappointed. The economy contracted by 0.6% in Q4 24. The dollar settled slightly below MXN20.68 at the end of last week and nearly MXN20.83 at the end of 2024. It spiked to almost MXN21.30 on Monday when the tariffs looked imminent. It reversed and fell a little through MXN20.31 on Monday and has been consolidating. It fell to about MXN20.4165 yesterday before settling near MXN20.4550. It is in a narrow range of about MXN20.53-MXN20.51 so far today. A move above MXN20.55 could see MXN20.65-70.
Reviewed by Marc Chandler
on
February 07, 2025
Rating:
