Dollar Consolidates and Equity Rally Stalls

Overview: The US dollar is firmer against most major and emerging market currencies.  The yen is a notable exception, and it is firmer, but well within recent ranges.  The dollar-bloc currencies and the Norwegian krona are the weakest of the majors as a setback in equities and oil reflects a diminished risk appetite.  The IMF revised down its global GDP forecasts yesterday, and a press report emphasizes the lack of progress in US-China trade talks on intellectual property rights and non-tariff barriers.  All the large markets in Asia fell today.  The Dow Jones Stoxx 600 ended a four-day advance yesterday and is little changed today.  It has not fallen in back-to-back sessions since Jan 2-3.  The S&P 500 gapped higher last Friday and has a four-day rally in tow.  It is called about 0.5% lower.  Weaker equities and heavier crude oil prices are underpinning bond prices.  Benchmark 10-year yields are mostly softer.   

Asia Pacific

The Bank of Japan's meeting concludes tomorrow, and Governor Kuroda will hold his press briefing.  The on-the-run benchmark 10-year JGB again offers a negative yield.  The economy contracted in Q3 and appears to have rebounded slightly in Q4.  Price pressures, when stripped of energy and fresh food rose 0.3% in December 2018 year-over-year, the same as in December 2017.   It stood at 0.1% in December 2016.  The modest reduction of bond purchases has had little apparent impact on yields. Kuroda may be asked about the surge in the yen at the start of the year. Contrary to some speculation, the BOJ refrained from intervention.   The OECD's model of Purchasing Power Parity has the yen about 10% below fair value.  The shift away from material intervention in the foreign exchange market and the desire to avoid antagonizing the US ahead of trade talks later this year kept the BOJ on the sidelines, but Kuroda may provide more color.  

Over the past week, two press stories on the US-Chinese trade talks captured the market's imagination.  First was a report that the US Treasury was pushing for some relaxation of tariffs to induce China into deeper reforms, while the Trade Representative office was pushing back.  The reported was denied by the Treasury Department and President Trump himself.  Still, it struck a responsive chord among many observers as Treasury Secretary Mnuchin is seen as a leading voice of the globalists in the American First Administration, while Trade Representative Lighthizer towing a harder line.  Yesterday's NY Times casts doubt on progress on deeper structural issues, despite being told by the President that trade talks are going well.   Also, news that the US is proceeding with the extradition of the Huawei CFO from Canada is seen as unhelpful for the trade talks.  Other companies who violated US trade embargos, as Huawei is accused of, typically face fines not individual arrests. 

Amid concern of weakening world growth, South Korea offered a pleasant surprise.  It reported that Q4 18 GDP rose 1.0% rather, beating estimates of a 0.6% increase.  The year-over-year pace rose to 3.1%, up from 2.0% in Q3 and exceeding forecasts for a 2.7% clip.  Still troubling was the 2.2% decline in exports in Q4 and the modest 1% rise in private spending.  Government expenditures rose 3.1% offsetting the decline in foreign demand and soft domestic demand.   The stronger overall growth failed to lend much support to the Korean won.  It weakened by about 0.25% today to post its first back-to-back decline since the very early this month. 

After advancing in the last four sessions of last week, the dollar slipped yesterday and today against the Japanese yen.  Initial support is seen near JPY109.20 today, and there is roughly $600 mln option at JPY109.25 that expires today.  Softer equities and core yields often coincide with a firmer yen.   Resistance is seen in the JPY109.50-JPY109.60 area ahead of JPY110.   We have been noting that the Australian dollar was struggling near $0.7200 and we have been looking lower.  It traded at 10-day lows near $0.7120 today, where the 20-day moving average is found.   The $0.7150 level may offer resistance now, reinforced by an expiring option for about A$710 mln today.  The next important technical area is near $0.7045. The Chinese yuan is softer for the fourth consecutive session, its longest losing streak since last November.  Near-term potential extends to CNY6.8250-CNY6.8550.  

Europe

There are four Brexit developments to note.  First, Prime Minister May's Plan B seems to rest on convincing the EC to make some concession on the Irish backstop, which keeps the UK in the customs union until a new agreement is struck.  She denied reports claiming she was looking at changing the Good Friday Agreement.  The Irish foreign minister reported rejected the Polish compromise proposal to limit the backstop to five years.  Second, Labour leader Corbyn advocating a vote in Parliament on various ways to avoid an exit without an agreement, including another referendum, which much of his party rank and file and MPs appear to favor.  Even though May is opposed, reports suggest around 10  Tory MPs support a second referendum.  Paradoxically, that could add pressure on some Brexiters to support the Prime Minister in fear that another referendum could mean no exit.  Third, a cross-party alliance is emerging for the House of Commons to take control over Brexit if there is no deal by the end of February 26.  It is not clear where this would lead though we suspect it would likely be a later and softer exit. Fourth, as many as 40 members of the government threaten to resign next week if the Tory MPs are banned from voting on a plan to prevent a no-deal exit.   

The UK reported favorable news on the employment front.  The ILO measures of unemployment unexpectedly ticked down to 4.0%, matching the cyclical low from last summer.   Payroll growth accelerated to 141k in the three months through November, the most since last April.   The claimant count rose 20.8k, down from a revised 24.8k in November.  Average weekly earnings (three-months year-over-year) rose 3.4% in November from 3.3% in October, which represents a new cyclical high.  

The euro is stuck in about a quarter-cent range.  It dipped briefly below $1.1350 in late Asian turnover to match its low from January 4.  Nearby resistance is seen in the $1.1370-$1.1380 area.  So far, today is the first session since December 17 that the single currency has not traded above $1.1400. Although we see downside risks through Thursday's ECB meeting, we expect the euro to begin recovering ahead of next week;'s FOMC meeting and US jobs data.  Sterling has bounced nearly a cent off yesterday's lows  (~$1.2830) amid stronger ideas that Brexit will be delayed. The euro has been sold back below GBP0.8800.  It bottomed last week closer to GBP0.8765, and that remains the proximate target.   

North America

The US partial government shutdown continues, and the data stream is light.  Today's feature is existing home sales.  Economists are looking for the 1.9% rise in November to be unwound.  The API oil inventory estimate may draw more attention after Baker-Hughes estimated that the US rig count fell by 21 last week, the largest decline in a couple of years.  The EIA estimates that oil inventories fell in the first two weeks of January after rising every week in December.  No Fed officials are speaking ahead of next week's FOMC meeting.  Canada wholesales sales and manufacturing sales ahead of tomorrow's November retail sales report.  Mexico unemployment, which is expected to be nearly flat from 3.27% in November.  

The US dollar continues to drift higher against the Canadian dollar after bottoming near CAD1.3180 on January 9.  It reached about CAD1.3340 today, its best level since January 7.  The next objective is CAD1.3365-CAD1.3400.  The lower end of the range is a retracement objective of the slide in earlier January and the 50-day moving average.  The latter is the 20-day moving average and chart resistance.  The dollar is climbing against the Mexican peso for the fourth consecutive session.  It is trying to establish a foothold above MXN19.20.  Near-term potential extends into the MXN19.26-MXN19.33 band. 

  


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