The dollar fell against all the
G10 currencies last week. The dollar-bloc currencies, sterling, and the Scandis led the move, appreciating by about 0.55%-1.40% against the US dollar. The dollar bloc and sterling recorded new highs for the month ahead of the weekend. Against
the others, the dollar spent most of last week consolidating after its recent
losses were extended at the start of the week. Still, our review of the
technical condition warns that the US dollar's pullback appears to be entering
its final stages, with retracement targets being met and momentum indicators
stretched.
In terms of high-frequency
economic data, there are a few highlights in the week ahead. The US CPI
suggests the November PCE deflator will slow after being stuck at 3.4% since
July. The eurozone's preliminary November CPI may edge lower to 2.7%, down from
10.0% in November 2022, though this might be a bottom for a couple of months.
China's PMI may find some traction from the rash of measures recently announced
to support the economy and property market. The Fed's Beige Book is due Wednesday,
but it is unlikely to change ideas that central bank is on hold. The Reserve
Bank of New Zealand meets the same day and is also seen standing pat. The
delayed OPEC meeting is now scheduled for Thursday, which is also when COP28
starts. Ending the week on December 1, Canada reports its November employment
situation and Federal Reserve Chair Powell speaks at two venues.
United States: The market wants to see confirmation of
its two priors: that growth is slowing markedly, and price pressures are
cooling. Reports that could impact GDP forecasts include the October trade
balance (likely a slightly larger deficit), retail inventories (big jump in
Q3), personal consumption expenditures (to slow to around 0.2% from 0.7% in
September and an average of 0.6% this year), construction spending (median
forecast in Bloomberg's survey is for 0.4%, which would match the September
gain), and November auto sales (median forecast is for an unchanged 15.5 mln
unit SAAR pace). There seems to be little doubt that the world's largest
economy is slowing. The question is about the magnitude. It is important that
price pressures also continue to moderate. The CPI (and PPI and imported
prices) suggest price pressures have eased, which should be confirmed by the
PCE deflator. A 0.1% month-over-month increase will allow the year-over-year
rate to slow to 3.0%-3.1%. That would be the lowest since March 2021 and
follows four months stuck at 3.4%. The core rate may edge up by 0.2%, which
would still allow the year-over-year rate to slip to 3.5% from 3.7%.
The implied yield of the
December 2024 Fed funds futures rose by about 8.5 basis points last week and
at about 4.59%, the market has 74 bp of easing discounted. It had been flirting
with four cuts recently. The Dollar Index recovered from a low near 103.15, its lowest
level since early September, to about 104.20 were it stalled. It hovered around
the middle of the range ahead of the weekend. The 103.45 area is the (50%)
retracement of its rally from mid-July (~99.60) to the early October high
(~107.35). The 200-day moving average is about 103.60. The next retracement
(61.8%) is closer to 102.55. Momentum indicators appear to be basing in over-extended
territory. A move above 104.25 could target the 105 area.
China: Beijing and the PBOC have announced
several initiatives in recent weeks to support the economy, and it would be
disappointing if the measures failed to bolster sentiment among the purchasing
managers. While interest rates have been left unchanged, the PBOC has made
sizeable injections of liquidity. The central government will boost its deficit
by CNY1 trillion and is considering launching another CNY1 trillion fund to
support public housing and urban renewal. The PBOC launched a facility to help
relieve the debt stress of some local governments. President Xi seemed to have
gone on a charm offensive with Mastercard getting its long-awaited permission
to enter into a local JV, considering ordering Boeing Max 37 airplanes, new soy
purchase orders, will lend the US a couple of pandas, and after repeated
denials it can do anything about the fentanyl trade, more efforts were
promised. That said, reports suggest that China's aerial harassment of Taiwan
continued. US gestures are not clear outside of easing export restrictions on
one Chinese company.
The yuan has had its best two
weeks since early January, rising by about 1.9% against the greenback. Even as
the dollar fell, the PBOC set its dollar reference rates at lower levels every
session last week. It began the week at CNY7.1612 and the fix ahead of the
weekend was at CNY7.1151. The gap between the market projections (Bloomberg
survey) and the actual fix has also narrowed over the past two weeks. While
many are now talking about a test on the CNY7.00-05 area in the coming weeks,
we suspect the greenback may rise first toward CNY7.19-CNY7.22.
Japan: Japan has an extraordinarily accommodating
monetary policy and fiscal support in the form of a 5.5% deficit/GDP this year.
The government is in the final stages of approving another supplemental budget.
In terms of the OECD's measure of purchasing power parity, the yen is
undervalued by historical proportions. And yet the economy struggles. It has
contracted in two of the past four quarters. Private domestic demand and
capital expenditures have fallen for the past two quarters. This week's data,
especially October retail sales and industrial production will shed light on
economic activity as Q4 got underway. Modest gains are expected. Disappointment, and any sign that the
economy may still be contracting, will likely impact expectations for the Bank
of Japan. Japan's October employment report is due on December 1. Despite
above-target inflation, the Japanese government and the BOJ stand out among the
G10 as the only ones encouraging higher wages. Unemployment was mostly
2.5%-2.7% in 2022. This year's range was set in Q1: 2.4%-2.8%, and in
September, it was in the middle of the range.
The dollar appears have carved
a potential double top against the Japanese yen this month near JPY151.90. The
low between the two highs was about JPY149.20 (neckline). The measuring
objective is found by rotating the pattern around the neckline and that would
give a target of around JPY146.50. Last week, the dollar stopped shy of that at
around JPY147.15, and proceeded to recover to about JPY149.75, where it stalled.
Nearby resistance is seen a little above JPY150 and the 20-day moving average
is a little higher (~JPY150.25). The momentum indicators look poised to turn
higher in the coming days.
Eurozone: The highlight of the week is the
preliminary estimate of November CPI. The dramatic improvement that has seen
the year-over-year rate slow from 5.3% year-over-year in August to 2.9% in
October may have a little more downside scope. A decline in German and Italian
consumer prices in November, may allow the aggregate pace to slow to 2.7%,
according to the median projection in Bloomberg' survey. Still, the risk is
that headline CPI moves higher in the coming months December and January. The
swaps market has almost a 60% chance that the first cut will be delivered next
April. This may be pushed back into Q3 24. Last week there were two highlights.
First, the German Constitutional Court ruling against the government's efforts
to re-purpose off-budget Covid funds for climate change. This blew a 37 bln
euro (~$40 bln) hole in this year's budget and prompted a reluctant Finance
Minister Linder to endorse the debt brake waiver again. This intensified concerns
about increased government debt issuance and when the Bundesbank acknowledged
that book value of bank bond holdings are above market values, meaning that
selling would realize losses. Second, the anti-immigration and anti-EU Freedom
Party secured the more seats than any other party in the Dutch election. Still,
with 35 seats out of 150, and few willing to be in a coalition with the Freedom
Party, a period of uncertainty will persist for some time. The right appears in
the ascendancy in several European countries, with Le Pen in France and the AfD
in Germany polling better. Italy's right-wing government, led by the Brothers
of Italy, has not been as disruptive as many feared. Prime Minister Meloni has
been pro-NATO and pro-EU and finds common ground with Germany, UK, and arguably
the US on its immigration stance.
The euro stalled on November 21 a liitle above $1.0960, the (61.8%) retracement of its losses since the July
high (~$1.1275 to ~$1.0475). It pulled back to almost $1.0850 before recovering
to $1.0950 ahead of the weekend. The momentum indicators are stretched, and the
Slow Stochastics have turned lower. The US premium over Germany for two-year
money narrowed in the first four sessions last week to the lower end of its
nearly two-month range (~185 bp) but steadied ahead of the weekend and looks
poised to recover. $1.10 offers psychological resistance. On the downside, a break of the $1.0850-75 area would likely signal that the
nearly two-month advance in the euro is over, and a corrective/consolidative
phase is at hand. That said, it may take a break of the $1.0795-$1.0800 area to
signal a proper correction rather than consolidation.
United Kingdom: The UK reports October consumer
credit and mortgage lending in the week ahead. These are not market movers even
in the best of times. Since the Autumn statement in the middle of last week, UK
rates and sterling have risen. The 10-year Gilt yield has risen by nearly 20
bp, and the two-year yield is up nearly as much. On November 20, the swaps
market implied slightly more than a 55% chance of a cut by the end of May. By
the end of last week, the chances were reduced to practically zero. Sterling
reached $1.2615 ahead of the weekend, its best level since September 5, and met
the (38.2%) retracement of the losses since the July high ($1.3140). The next
retracement (61.8%) is about $1.2720. The momentum indicators are stretched.
Initial support is around $1.2500, while a break of last week's low near
$1.2450 could spur a 3/4-1-cent decline.
Canada: In a quirk of the calendar, Canada
will report its November employment data on December 1, a week before the US. Canada
did lose full-time jobs in October (3.3k) and there is a general sense that the
labor market is slowing. The unemployment rate has risen to 5.7% from 5.0% in
April. The participation rate (65.6%) is unchanged from April. However, Canada
grew 288.1k full-time positions through October compared with 285k in the first
ten months of last year. The 12-month moving average of the change in the
annual wage rate for permanent employees continues to hover around 5%, almost
double of the 12- and 24-month average before Covid. Canada also reports Q3 GDP.
The 0.4% median forecast in Bloomberg's monthly survey seems a little
optimistic given that the monthly GDP estimates were flat in July and August
after contracting by 0.2% in June. The market has recognized the economic
trajectory and taken the two-year yield down from nearly 5% in early October to
the 200-day moving average last week near 4.35%. Stronger than expected
September retail sales (0.6% vs. median forecast of a flat report) helped rates
and the Canadian dollar recover. The two-year yield approached 4.50% before the
weekend. According to the swaps market, there is now about a 50% chance of a rate
cut next April, down from more than 80% around middle of the month. The
greenback finished last week with a push below the trendline drawn off the
mid-July low for the year, the late September, low and the November 3 low,
found near CAD1.3655. It made a new low for the month slightly below CAD1.3600
ahead of the weekend. A convincing break of it, could spur a move toward the
CAD.1.35 area.
Australia: The market has not been persuaded by
news recently that Australia's employment rose by twice what was forecast by
the median in Bloomberg's survey or the hawkish tone by central bank Governor
Bullock. Annual wage growth reached a 14-year high in Q3 of 4%. The futures
market has discounted a little more than a 20% chance of a hike in H1 24. As
recently as November 14, the market had more than a 55% chance of a hike. The
wage and employment data were released on November 15-16. Australia reports
October CPI on November 29. The pace had slowed from 8.4%, the peak set at the
end of last year to 4.9% in July. In August and September, it reaccelerated to
reach 5.6%. It is expected to unwind the September gain and return to 5.2%.
This would typically be the highlight of the week. However, Bullock's comments
draw attention to demand and the market may be sensitive to the retail sales
report out (November 28), the day before the CPI. Retail sales jumped by 0.9%
in September and when this was reported on October 30, three times higher than
expected that seemed to prompt some to anticipate the rate hike that was
delivered a week later. Retail sales rose by an average of 0.6% in Q3 after a
flat Q2 and an average of 0.8% in Q1. A slowdown in retail sales and CPI could
cap the Australian dollar in the $0.6600 area, which houses last week's
high, the (50%) retracement of the losses since the July high (~$0.6900) and
the 200-day moving average. The momentum indicators are stretched. Initial
support may near $0.6520.
Mexico: The upcoming data will showcase Mexico's
strengths. Exports near record levels despite the appreciation of the peso over
the last two years. The near-shoring/friend-shoring narratives favor it.
Mexico's trade deficit trade deficit of about $10.1 bln through September is
less than half of what it was in the first nine months of 2022 (~$25.7 bln). And
that trade deficit is more than covered by worker remittances (~$47 bln in
Jan-Sept 2023 vs.~ $43 bln in Jan-Sept 2022). Mexico's economy is among the
region's best performers, and the manufacturing PMI and IMEF surveys should
confirm it. At the end of last week, Q3 GDP was revised higher to 1.1%
(quarter-over-quarter), up from 0.9% initially. Note that Brazil's economy may
have stagnated or contracted slightly in Q3 and Colombia unexpected contracted
by 0.3% in Q3. The central bank's inflation report will be published on
November 29. Mexico's institutional strength, including the independence of
Banxico and the judiciary, may allow for compromises, as it were, in other
areas without alienating investors. While the central bank hesitates to begin
its easing cycle, it has begun adjusting its language, seemingly validating
expectations of a cut before the mid-year election. Last week, dollar set the
range on November 21 (~MXN17.0655-MXN17.2690). It held below MXN17.20 ahead of
the weekend. The objective of the double top carved last month anear MXN18.50
is near MXN17.00. The momentum indicators are stalling. A move above last
week's high could spur dollar gains toward MXN17.40-50.
Reviewed by Marc Chandler
on
November 25, 2023
Rating:
