Overview: The US dollar is narrowly mixed against
the G10 currencies. The Canadian and Australian dollars lead the advancers,
while the Scandis are pacing the losers off 0.1%-0.2% in quiet turnover. Most
the freely accessible emerging market currencies are sporting softer profiles
today, the Chinese yuan is among them. However, most Asia Pacific currencies,
are firmer. Benchmark 10-year yields were softer in the Asia Pacific region in
mostly a catch-up to the eight-basis point decline in 10-year US Treasury yield
yesterday. The 10-year JGB yield of about 0.74% is 10 bp off its recent high. European
and US yields are firmer today and the peripheral premium in Europe is widening
today. The US Treasury raise $143 blin in bills yesterday and $109 bln in
coupons. Today it is back for $114 bln in bills and $39 bln of 7-year notes.
Outside of Tokyo and Hong Kong,
most large bourses were higher in the Asia Pacific region, led by more than 1%
gains in Taiwan and South Korea. Europe's Stoxx 600 is off by a little more
than 0.5%. If sustained, it would be the first back-to-back loss in three weeks.
US index futures are nursing small losses. Gold is consolidating slightly below
yesterday's six-month high near $2018.20. It has held above $2012 but looks
vulnerable to more selling pressure in North America today. January WTI has
steadied today after falling for the past four sessions. Yesterday's high near
$76.25 also corresponds to the 200-day moving average.
Asia Pacific
There are three highlights
from the Asia Pacific session. First, Australia reported a dramatic downshift in retail sales.
The 0.2% fall in October follows a heady 0.9% rise in September and an average
of gain of 0.6% a month in Q3. It should help mollify the central bank, which
has expressed concern about excess demand. Year-over-year, retail sales are up
1.2%, and on a per capita basis, real retail sales are off 1.6% year-over-year.
Most categories of retail sales were softer except food. The RBA meets on
December 5 and after a hike early this month, it is expected to standpat.
Still, the swaps and futures market pricing are consistent with another rate
hike in H1 24. Second, ahead of the Bank of Korea meeting later this week
(concludes on November 30), it reported October retail sales. It slowed to 6.4%
year-over-year from 9.5% in September. South Korea's base rate has been at 3.5%
since January, which as the last hike in a 300 bp tightening cycle. South
Korea's CPI peaked in January at 5.2% and stood at 3.8% in October. Third, the
US dollar recovered from new lows for the year scored yesterday against the
Hong Kong dollar amid a scramble for cash that has driven up the Hong Kong
interbank offered rate (HIBOR) over 5.5% to its highest level since October
2007. This seems to reflect a combination of year-end demand and poor liquidity
(aggregate balance), after the HKMA drained funds earlier this year to protect
the fixed exchange rate.
Softer US rates saw North
American operators push the dollar to session lows yesterday near JPY148.65 and
in Asia earlier today it fell slightly below JPY148 before recovering to almost
JPY148.85. The
five-day moving average moved below the 20-day moving average on November 20
and has not looked back. It was the first cross since late July. A nearby cap
has been forged around JPY149.70-75, though initial resistance now is likely
near JPY149. Last week's low was about JPY147.15. The Australian dollar
spent little time in yesterday's North American session below $0.6590 and it
settled above $0.6600 for the first time since August 1. It met the
(50%) retracement objective near $0.6585 last week of the losses since the
mid-July high (~$0.6900). That area offers initial support now. It extended its
rise for a fourth consecutive session, despite the disappointing retail sales
report. It reached slightly through $0.6630. The next retracement (61.8%) is
about $0.6660. The greenback is in a narrow range of roughly
CNY7.1465-CNY7.1545 range, which is inside yesterday's range. The PBOC
set the dollar's reference rate at CNY7.1132 (CNY7.1159 yesterday and CNY7.1151
on Monday). The average response in Bloomberg's survey was for CNY7.1435
(CNY7.1465 yesterday).
Europe
Germany has reported the
results of four surveys this month. The ZEW survey showed expectations improved (9.8 vs. -1.1)
to the highest since March, while the current assessment remains dour (-79.8
vs. -79.9). The flash PMI improved more than expected, but all three readings
remained below the 50 boom/bust level. The IFO survey improved from October,
but not as much as had been expected (judging from the median forecast in
Bloomberg's poll). Still, the overall assessment of the business climate edged
higher for the third consecutive month, and at 87.3 matches the highest here in
H2 23. Earlier today, the December GfK consumer confidence survey was released.
It showed a slight improvement to -27.8 from a revised -28.3 (from -28.1). Meanwhile,
the larger fiscal drama continues to play out following the constitutional
court ruling against efforts to redirect off-balance sheet Covid funding for
climate change. It is straining the governing coalition as well internal party
tensions for the Greens and Free Democrats. A poll by ZDF, the public
broadcaster, found SPD and Greens each draw about 15% support, while the FDP is
at 5%. Still, ZDF found that 61% of the public want to keep the debt brake,
which the SPD and Greens want to ease.
The euro set a range last
Tuesday/Wednesday that still is operative: ~$1.0850-$1.0965. Since then, the euro has made higher lows
and higher highs within that range. The euro came within 2/100 of a cent of
that high earlier today in Asia, while the high in Europe has been slightly
below $1.0960. Given the run-up--and this could be the euro's best month
(~3.6%) since November 2022, the stretched momentum indicators, the achievement
of technical retracement objectives, and the widening for the past two sessions
of the US two-year premium over Germany--a risk of a pullback is still palpable
before $1.10 is overcome. There are options at $1.10 for about 737 mln euros
that expire today and another batch for 1.37 bln euros on Friday. On
the other hand, sterling charges on, reaching almost $1.2645 yesterday, the
highest it has been since September 1 and is near it in late European morning
dealings now. We suspect that part of sterling's advance has been
driven by short covering. Speculators in the futures have been net sellers of
sterling ever week since the last week of August with one exception. The net
short position in mid-November was the largest since January. Sterling may also
be benefitting from the adjustment to rate expectations. Last Monday, the swaps
market had about a 55% chance of the first BOE cut next May. The odds have
fallen to below 20%. For sterling to meet the same retracement of the March
decline as the euro, it would need to rise to $1.2720.
America
House prices in the US are
expected to have firmed slightly in September. Still, the 0.4% increase in the FHFA price
index of purchased house would be the weakest since January. Through August,
its index has risen by about 0.6% a month. In the same period last year, the
average was 0.8%. S&P CoreLogic Case-Shiller index of house price in 20
large cities is expected to firm by around 0.7%, which would bring the
year-over-year rate to 3.95%, the most this year. Consumption is thought to be
driven by the wealth effect, which is a function of income and appreciation of
assets. The S&P 500 is up about 18.5% and the Russell 3000 is up about
17.5% this year. The Conference Board's measure of consumer confidence and the
Richmond and Dallas Fed November surveys are due. Separately, Fed Governor
Waller, who tends to be among the hawks, and Chicago Fed President Goolsbee,
perceived to be among the more dovish voting members of the FOMC this year
speak today. A consensus appears to have emerged in favor of standing pat.
Recall that the September Summary
of Economic Projections showed that the median projection saw two more
hikes this year as being appropriate, and it looks like none will be delivered.
It anticipated two cuts next year, even though the median forecast by Fed
officials saw the PCE deflator remaining above the 2% target.
The US dollar was in a
narrow range on both sides of CAD1.3640 yesterday and has been sold to
CAD1.3575 today, its lowest level since mid-October. The greenback has not closed below CAD1.36
since mid-October. There are about $925 mln of options struck at CAD1.36 that
expire Friday (after Canadian jobs data). That area is also around the (38.2%)
retracement of the rally from mid-July low slightly below CAD1.3100. The next
target is the CAD1.3500-20 area. However, the CAD1.36 area may also be the
neckline of topping formation that projects toward CAD1.33 (medium-term). A
word of caution comes from the Bollinger Band, where the lower band is a little
below CAD1.3585. Mexico recorded a smaller than expected October trade
deficit ($252.5 mln, about 1/6 of the deficit of the median forecast in
Bloomberg's survey and a 1/8 of the October 2022 shortfall). Exports
rose by 4.6% in the month while imports rose 2.1%. The peso rose to a two-month
high before pulling back. The US dollar fell slightly through MXN17.0350 and
recovered to a little above MXN17.21 amid reports quoting Heath, the deputy
central bank governor suggesting that the first rate cut could take place in
February or March 2024, which is a bit earlier than many expected. Of course,
the guidance was conditioned on inflation continuing to decline. The greenback
is in a narrow range so far today: ~MXN17.1480-MXN17.1845. Initial
support may be near MXN17.12-13 today.
Reviewed by Marc Chandler
on
November 28, 2023
Rating:
