Developments in Holiday Markets

Overview:  Many centers remain closed for the holiday, and those that are open are seeing light activity.  The large bourses open in the Asia Pacific region, like Japan, China, and South Korea, advanced.  India and Taiwan equities slipped.  Most European markets remain closed.  The S&P 500 is trading a little higher in electronic activity.  The dollar has eased against most of the major currencies, led by the New Zealand dollar and Norwegian krone; both are up about 0.15% against the greenback.  The yen, euro, and Swiss franc are trading slightly lower.  The JP Morgan Emerging Market Currency Index is holding above Tuesday's highs.  Gold is poking above $1500 for the first time since early November, and oil is extending its gains to trade at new seven-month highs following larger than expected (7.9 mln barrel) drawdown of US inventories, according to the API.  

Asia Pacific

The PBOC had pumped sufficient liquidity into the banking system to push the overnight repo rate to its lowest in a decade.  The 10-year Chinese bond yield decline was extended for the sixth session today, and at 3.11% is the lowest yield in two months.  The reference rate for the dollar was set at CNY6.9801, its weakest in four months.  Separately, it was reported that China's purchases of US soy reached 2.6 mln tons in November, the most since March 2018, and the purchases began ahead of the trade agreement.  Recall that China hardly bought any soy from the US in November 2018.  China also bought 3.9 mln tons of soy from Brazil last month, little changed from October but off from the 5.1 mln tons purchases in November 2018.  

The US apparently is dropping its demand that South Korea pay as much as five times more for housing US troops and may settle for a 10-20% increase.  Reports suggest Seoul agreed to purchase more US weapons and beef-up its presence in the Strait of Hormuz.  

Japan reported a surprisingly sharp 12.7% drop in November housing starts year-over-year, an acceleration from the  7.4% decline in October.  It was the largest decline in January 2018, and the level of starts is the lowest in seven years.  Tomorrow, Japan reports November retail sales, industrial output, and employment.  Retail sales are expected to bounce back after the tax-induced 14.2% (month-over-month) drop in October.  Industrial production, on the other hand, likely extended its sharp 4.5% fall in October.   The jobless rate is expected to have been steady at 2.4%.  

The dollar-yen rate continues to trade between JPY109.30 and JPY109.60, as it has all week.  It has not closed outside this range for a little more than two weeks.  Australian markets remain closed, but the Australian dollar remains firm and continues to hold above the 200-day moving average (~$0.6900) for the first time since March 2018.  The $0.6930 area is proving sticky, though, on an intraday basis, it reached $0.6940 on December 13. 

Europe

The euro is hovering in a narrow range below $1.11.  Before the holiday, the euro recorded a low this week near $1.1070.  The daily technical indicators warn that the downside appears more vulnerable than the upside.  Sterling has not traded above $1.30 since Monday but has stabilized after approaching $1.29 on December 24.  

America

In an otherwise light diary, the US reports mortgage applications for last week and weekly initial jobless claims.  The latter is the closest to a real-time economic reading.  Weekly claims have been elevated lately, but it is a noisy series.  Economists often use a four-week moving average to smooth out some of the volatility.  The four-week moving average stands at 225.5k, the highest since February and, even if this week's print eases to 220k (from 234k), the four-week average will rise further. Also though the holiday may distort the figures, the four-week moving average will likely increase next week as well. 

The dollar continues to gravitate around CAD1.3150.  It appears capped near CAD1.3180.  It has been finding support recently by CAD1.3130.  The technical indicators favor the greenback.  Fundamentally, outside of the recent CPI, other data, including employment and retail sales, disappointed.  Earlier this week, October GDP unexpectedly contracted, bringing the year-over-year rate to 1.2%, its slowest since February.  Meanwhile, the dollar sits its trough against the Mexican peso. The greenback was near MXN19.60 at the start of the month before falling to the MXN18.90 area. It has been chopping mostly below MXN19.00 since December 16.  The relatively high yields and low volatility in the foreign exchange market attracted carry-trades over the holiday period.  

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