Overview: A calmer European debt market and the
second consecutive decline in the German two-year yield have weighed on the
euro. It briefly dipped below $1.14 in the European morning. European bond benchmark yields are softer and most peripheral premiums over Germany have narrowed. Bonds in the Asia-Pacific area rose sharply after the sell-off seen in Europe and
the US yesterday. Australian and New Zealand 10-year yields jumped 12 and
10 bp, respectively. The JGB benchmark poked above 0.20% and the BOJ has
not shown its hand. The US 10-year is around 1.93% as the 2%
psychological level draws near. Equity markets are mostly higher.
In the East, China, Hong Kong, and India were the exceptions. Europe's
Stoxx 600 is extending yesterday's gains but has yet to take out the
pre-weekend high. US futures are firmer. The dollar has edged
higher, though sterling, where Gilts are under pressure, and the Swiss franc are the most
resilient. The Norwegian krone, Canadian dollar, and Japanese yen are the
heaviest. Emerging market currencies are mostly lower. There the euro's
weakness seems to be a drag on most eastern European currencies, including the
Polish zloty, where the central bank is expected to deliver a 50 bp hike (to
2.75%). The rouble and South African rand are up about 0.4%, helping to lift the JP Morgan Emerging Market Currency Index. Turning to commodities, the rally in gold appears to be stalling
after a two-day, $15 advance. Oil is pulling back with the March WTI contract slipping below $90. US natural gas prices have steadied after falling
by around 25% over the past three sessions. Europe's benchmark has
recouped most of the 5% lost yesterday. Iron ore prices are
extending their rally that began in mid-December. Today is the sixth
consecutive gain. Copper is moving in the opposite direction to probe the 200-day moving average near $439.
Asia Pacific
There are three developments
in Japan to note. First, the US and Japan struck a deal to lift the 2018 steel
tariffs (25%) starting April 1. It will allow 1.25 mln tons of steel a
year to be shipped to the US without the levy. Second, household spending
rose by 0.1% in December, helping the year-over-year rate improve to -0.2% from
-1.3%. Yet it remains weaker than expected, and part of the reason why
may be the unexpected weakness in income as winter bonuses were cut.
Third, seasonal patterns held, and Japan's current account balance deteriorated
in December from November. The trade deficit was smaller but still larger
than expected. The key driver of the deterioration was the decline in
primary income. The report also showed that Japanese investors were net
sellers of US and European bonds. China was a net buyer of JPY1.04
trillion of Japanese debt, the most since August 2016.
Taiwan lifted its ban on
most food imports from Japan's Fukushima regions. The ban will be lifted toward the
end of next week. Only a few countries have maintained the ban since the
2011 meltdown (China, South Korea, and Taiwan). This could be a risky
move politically. A 2018 referendum found most Taiwanese were in favor of
keeping the ban. When the Taiwanese government lifted its ban on US pork
with traces of ractopamine, consumers boycotted, and US pork sales
slumped. Local elections will be held in November. Taiwan is trying
to enhance its candidacy for the Comprehensive and Progressive TransPacific
Partnership (CPTPP). While some members welcome Taiwan, many are
reluctant to antagonize Beijing.
The US dollar is at a
six-day high against the Japanese yen, probing the JPY115.50 area. The high from late January is
nearer JPY115.70. There is an expiring option for $350 mln at JPY115.65
today and another for $610 at JPY115.80 that expires tomorrow. The market
remains wary of unscheduled BOJ action to defend the 0.25% yield-curve control
cap on the 10-year JGB. The Australian dollar is trading a little
firmer. It extended yesterday's gains to almost $0.7140.
It rose in the first four days last week before shedding almost 1% before the
weekend. Last week's high was near $0.7170. A gain above the
$0.7180 would lift the technical tone. The greenback has edged
higher against the Chinese yuan for the second consecutive session for the
first time this year. The gain is modest, but it did manage to
close the gap from January 12 that extended to a little above CNY6.37.
The PBOC set the dollar's reference rate at CNY6.3569, slightly lower than
yesterday, but the market expectations rose from CNY6.3328 to CNY6.3555.
Note that Beijing eased property loan curbs for public rentals.
Europe
ECB President Lagarde seemed
to move into damage control mode yesterday after her hawkish comments at last
week's central bank meeting spurred the jump in European rates. Like the Federal Reserve, which did not
provide much forward guidance last month outside of signaling a March hike,
Lagarde sought to secure the maximum "flexibility and optionality"
given the high degree of uncertainty. She pushed back against a claim
that it could raise rates before the bond buying was complete. Recall
that the BOE made similar claims, but ultimately did not carry them out.
Lagarde defended the sequence, which is to conclude the Asset Purchase Program
buying shortly before the first hike.
France reported a record
trade deficit in December of 11.3 bln euros. Exports fell by 0.4% while imports rose
2.5%. Its bilateral trade balance with the US swung into deficit and its
shortfall with China swelled by 900 mln euros. France's trade deficit
with Germany widened by almost 500 mln euros. France's current account
deficit also widened on the back of stepped-up foreign travel. Spain had
disappointing news too. Industrial output plummeted 2.6% in
December. The median forecast in Bloomberg's survey called for a 0.5%
decline. November's 4.5% increase was revised to 3.9%. Italy was
the bright spot. Retail sales were expected to have fallen by 0.3% in
December. Instead, they rose by 0.9%, the biggest rise since June.
The euro found a bid after
briefly dipping below $1.1400 in the European morning. There are options struck there for
1.24 bln euros that expire today. Look for the $1.1430-$1.1440 area to
offer resistance now, and if that area holds, the euro could work its way
toward $1.1350 over the next day or two. Sterling has edged a
little higher, but it is running in resistance in the $1.3555-$1.3560
area. It holds the 20-day moving average and options for GBP1.1
bln that expire today. Buying emerged yesterday slightly below $1.35,
where options for about GBP435 mln also expire today.
America
With no Fed speakers planned
today, the US economic diary features the December trade balance. The advance goods balance already
showed a record shortfall and this was incorporated into the Q4 GDP
estimate. The US external deficit has not become a key focus for the
markets, with the Federal Reserve set to stop buying Treasuries next month, the
US funding needs would seem to be increasing. We suspect the "twin
deficits" return to the fore in in the second half of the
year.
A bipartisan group of 41
Senators is seeking more exemptions from the punitive tariffs on goods from
China. Following
the tightening of the rules last October, of the 2200 goods that were initially
exempt only 549 were extended. While the administration continues to work
on its response to China's failure to meet its commitment under the "Phase
1" trade agreement struck in 2018, there is a pushback.
Canada reports its December
merchandise trade figures today, as well. Canada is enjoying a favorable terms
of trade shock. Through November last year, the average monthly trade
balance was in surplus of CAD771 mln. In the same period in 2020, the
average was a C$3.25 bln shortfall, which was about twice the average in the
first 11 months of 2019. The domestic protests against the vaccine
mandate have reportedly closed the Ambassador Bridge on Sunday, a key
connection between the US and Canada. The protests have shutdown Ottawa,
and a state of emergency was declared. The direct market impact
appears minor so far. The economic calendars for Mexico and Brazil are
light but pick up starting tomorrow.
The US dollar has forged a
shelf in the CAD1.2650-CAD1.2660 area here in February. Provided this area holds, the
greenback can move to the top of its recent range seen near CAD1.2800.
For today, look for resistance in the CAD1.2720-CAD1.2740 area. The
greenback's pre-weekend range against the Mexican peso remains operative:
~MXN20.54-MXN20.79. The central bank meeting on Thursday, where
most expect a 50 bp hike, may deflect speculative attention away from the
peso. The US dollar fell 1.3% against the Brazilian real yesterday,
giving back the gains from the previous two sessions. Real money seems
attracted to Brazil, which is perceived to be near a peak in rate, and its
equity market is weighted toward commodities.
Disclaimer
Reviewed by Marc Chandler
on
February 08, 2022
Rating:
