Overview: After a slow and mixed start in Asia,
where Australia and India are on holiday, equity markets have turned
higher. Europe's Stoxx 600 is up around 1.9% near midday in Europe, which
if sustained would be the biggest gain of the year. US futures are
snapping backing too, with the S&P 500 popping more than 1% and NASDAQ by 2%. The equity recovery is having little impact in the bond market,
where the US 10-year yield is up a basis point or so to near 1.79% and European
yields are slightly firmer. The risk-on sentiment is evident throughout the foreign exchange market as the Swiss franc and yen are underperforming and the Norwegian
krone, and dollar-bloc are leading the advance. Emerging market currencies
are mixed. While the South African rand tops the performers, Russia and
Eastern European currencies are sporting modest declines. The JP Morgan
Emerging Market Currency Index is paring yesterday's gain. Meanwhile,
gold's rally may be stalling around $1850, a two-month high. March WTI is
firm and has held above $85 a barrel and is pushing through $86. US natural gas is up around 5% to
extend its rally for a fourth consecutive session, while Europe's benchmark
(Dutch) is snapping a four-day rally with a 3% pullback. Iron ore
extended its gains to the best level since August, and copper is firm in the
middle of its recent range. The main interest today is on the equity
performance after the volatility and the Fed and Bank of Canada
meetings.
Asia Pacific
The IMF downgraded this
year's forecast for global growth to 4.4% from 4.9% projected in
October. The
virus, higher inflation, and high debt levels were key considerations.
The new constraints on mobility are expected to weigh on Q1 activity but
recover in Q2. Still, a reassessment of the world's two largest economies
is at the heart of it. The combination of more aggressive Fed tightening and failure to pass the large (~$2.2 trillion) hard and soft infrastructure
measures led to a sharp cut in the IMF's US growth forecast to 4% from a little
over 5%. China's zero-Covid policy and travel restrictions, prompt the
IMF to reduce its projected growth by 0.8% to 4%.
Beijing has continued to harass
Taiwan by sending warplanes into its Air Identification Zone, with nearly 40
planes earlier this week, which is the most this year. Trying to make rhyme or reason for
the continued action, some point to the two US carrier strike groups in exercises
in the South China Sea. On another front, reports suggest Lithuania
is considering asking Taiwan to change the name of its de facto embassy.
It had planned to break tradition and allow Taiwan's name to appear, rather
than the more customary Taipei. China reacted as one would
expect.
Coming into this week, the
dollar had fallen against the yen for 11 out of 13 sessions. Today is the second day this week
the dollar is posting gains and has resurfaced above JPY114.00. Initial
resistance is seen in the JPY114.25-JPY114.50 band. Support is seen
near JPY113.80. As it was yesterday, so too today, the Australian
dollar is within Monday's range (~$0.7090-$0.7190). Indeed, it is
within yesterday's range (~$0.7120-$0.7175) but appears set to push
higher. A move above $0.7200 would lift the tone, while a break below
$0.7150 would be disappointing. The Aussie is also extending its gains
against the New Zealand dollar to new highs since last July above
NZD1.07. The next important technical level is near NZD1.08. The
Chinese yuan continues to edge higher. Today is the sixth consecutive
advancing session. It has only fallen in four sessions this year.
The dollar finished last year near CNY6.3560 and tested CNY6.3200 today.
The PBOC does not appear to be using the fix to express its displeasure, and
today its reference rate for the dollar (CNY6.3246) was spot on the market
projection (Bloomberg survey median forecast).
Europe
Italy's presidential selection
process continues. Tomorrow things will turn more interesting. The first three
rounds of votes are really about the behind the scenes jockeying, which is far
from transparent. However, after today's vote, the threshold is lowered
to a simple majority to win, making a deal more likely. There is concern
that if Draghi gets the nod, the coalition he led may not survive.
Because snap elections cannot be entirely ruled out, voter polls are being
watched closely. The latest shows the center-left PD with a small lead
around 21.4%, but the right's Brothers of Italy have been edging up and are now at
20.2%, followed by the League at 18.5%. Support for the 5-Star Movement has
slipped to 13.8%, while Berlusconi's Forza Italy has a little below 8%.
The euro had fallen to
CHF1.03 at the start of the week, its lowest level in almost seven years. Despite no relaxation in Eastern
European tensions, it has recovered to almost CHF1.04. The fingerprints of
the Swiss National Bank are suspected, and Monday's sight deposit report will
be scrutinized for evidence of intervention. Separately, an SNB board
member (Maechler) argued that the risk of a central bank digital currency for
retail outweigh the benefits. The central bank's efforts will be focused
on a wholesale digital currency.
The euro is softer for the
third consecutive session. The bounces after dipping below $1.13 have become shallower
as if the bids are being absorbed. Yesterday's low, slightly below
$1.1265 is the first obvious target and below there is $1.1235. The 1.2
bln euro option at $1.1225 that expires today seems too far away to be in play,
especially ahead of the FOMC outcome. That said, the trendline drawn off
last year's low in late November (~$1.1185) and catching the mid-December lows
(~$1.1220 and $1.1235) held on Monday and was penetrated on an intraday basis yesterday.
It comes in today around $1.1285. Sterling made a marginal new
low for the move yesterday (~$1.3437), held the month's low (~$1.3430) and
recovered above $1.3500. Follow-through buying lifted it to
$1.3520 before stalling. It encountered mild selling pressure in the
European morning. Support is seen by $1.3480 and there is an option for
GBP365 mln at $1.3450 that rolls off today. At the end of last week, the
euro had been sold to almost GBP0.8300, its lowest level since March 2020.
The rebound began ahead of the weekend and peaked near GBP0.8425 on
Monday. It has drifted lower and is back near the week's low
(~GBP0.8350). An expiring option for 360 mln euros at GBP0.8325 may
attract interest.
America
The US reports the December
goods balance and some inventory figures that may be helpful to fine tune Q4
GDP figures due tomorrow. New home sales may be interesting after a 12.4% surge initially
reported for November. But the real interest lies with the central bank
meetings. The Bank of Canada's meeting concludes first. The market
has about a 70% chance of a hike discounted that economists (Bloomberg survey)
are almost 50/50 split on. The case against a hike is that the central
bank has indicated that the output gap won't close until later in the first
half. However, a case can be made that the economy is outperforming
expectations, and the Q4 business outlook (surveyed by the Bank of Canada)
suggest strong investment and hiring intentions. The Bank of Canada
meets eight times a year and the swaps market has six hikes and a little more
(1-in-3 chance) of a seventh hike. This is pretty aggressive and
disappointed traders could punish the Canadian dollar. In the
Thursday-Monday trading and the volatile equities, the greenback recouped half
of what it lost from December 20 through January 19. A break of Monday's
high near CAD1.2710 could signal a move toward CAD1.2770-CAD1.2815. On
the other hand, given that the outcome of the Fed's meeting is a few hours
later, a 25 bp hike may not spur a strong advance. Separately, there had
been some talk that after having finished the buying a little abruptly last
year, the Bank of Canada could surprise by announcing an early roll-off of its
balance sheet. Such a move would seem to surprise the market and could
spur knee-jerk gains for the Canadian dollar.
Given the number of hikes
that some banks have suggested by the Fed this year, today could be the most
boring meeting of the year. It is the only one that nearly everyone agrees will not see
a rate hike. The assessment of the economy will be tweaked, and word cues
are expected to confirm a March hike, where the Fed Funds futures has about a
1-in-5 chance of a 50 bp move discounted. Given the apparent marching directions
from Congress and the White House, the Fed may have little interest in indicating
that it is not taking inflation seriously and therefore may not push against
such views, regardless of its intentions. At his confirmation hearings,
Chair Powell suggested it may take two-four meetings to sort out the balance
sheet strategy. It seems reasonable that Powell repeats something like
this at his press conference, but the statement is unlikely to refer to
it. The Fed is still buying securities. There seems little Powell
can say to push against market expectations for four hikes this year when several
officials seem open to it. A reporter is bound to ask about the
volatility of the stock market. Powell will be reluctant, we suppose, to
accept much blame for the overvalued metrics or the timing of the
volatility. He could explain how he monitors the equity market not
simply because of the impact on shareholders, but what it may say about broader
economic and financial conditions.
Last week's EIA estimate of
US oil inventories rose by 515k barrels (through January 14), the first
increase since mid-November. API estimated that inventories fell by around 875k barrels
(in the week through January 21). Economists expected EIA to show
inventories increased by one million barrels. Separately, but not totally
unrelated, the US announced it would loan 13.4 mln barrels out of its strategic
reserves, which would be the second-largest operation. Many observers are
concerned about the possible disruption of supplies should Russia invade
Ukraine. Reports suggest that the German government sought to get an
exemption for the energy sector if the US moved to prevent Russian banks from
clearing dollar transactions. Other European countries have reportedly
also looked for carve-outs, advocated transition periods for implementing sanctions,
and protections for existing contracts.
The Canadian dollar is bid
ahead of the central bank meeting outcome and amid better risk sentiment.
The US dollar has approached Monday's low (~CAD1.2455). The CAD1.2545 area corresponds to
the (61.8%) retracement of the recent greenback bounce from around CAD1.2450 to
CAD1.2700. Below there, we note the 200-day moving average is near
CAD1.2500. Mexico reports November retail sales, which even on
uneventful days, tends not to be a market-mover. The dollar is
consolidating its recent gains against the peso and is also within Monday's
range (~MXN20.4370-MXN20.6900). The intraday technicals favor a greenback
bounce in early North American activity. Initial resistance may be near
MXN20.65. Note that the Chilean central bank meets today too, and late in
the session, it is expected to lift its rate target to 5.25% from 4.00%.
It would match a similar move last month and in October. The policy
rate began at 0.50% last year. Local politics, and the weakness of
emerging market currencies as an asset class saw the Chilean peso depreciate by
16.5% last year, making it the worst performer after Turkey and
Argentina. So far this year, the peso's 6.5% gain leads the
world.
Disclaimer
Reviewed by Marc Chandler
on
January 26, 2022
Rating:
