Overview: The Japanese yen is leading the
charge against the dollar today. Short covering in the Japanese bond market,
the decline in US rates, and some reports of real money saw the dollar tumble
to around JPY149.25 to approach the low for the month near JPY149.20. All the G10
currencies are firmer today, as are all but a few emerging market currencies. The
Dollar Index finished October near 106.55 and it has been finding support near
104.00 in recent days. A break targets the 103.00-50. Benchmark 10-year yields
are lower. In Europe, yields are mostly 7-8 bp lower. Disappointing UK retail
sales has pushed 10-year Gilt yields 10 bp lower. Italian bonds are
participating fully in rally even though Moody's rating update is due later
today. The US 10-year yield is pushing below 4.40%.
The poor news stream from
Alibaba, another casualty in the US-China chip war, weighed on Hong Kong shares
and mainland shares that trade there, but the reginal performance was mixed.
Not so in Europe, where the Stoxx 600 is up over 1% to bring this week's rise
to almost 3%. US index futures are firm. The S&P 500 is up 2.1% coming into
today to put the finishing touches on its third consecutive weekly advance. The
NASDAQ is up 2.3% this week so far and its three-week rally has lifted the
benchmark by more than 11%. The softer dollar and rates are bolstering gold. The
yellow metal is above $1990, up about 2.7% this week. January WTI has
stabilized after yesterday's 4.8% slide. It fell to nearly $72.35 yesterday and
is approaching $74 today.
Asia Pacific
The light economic calendar
today provides an opportunity to summarize this week's key developments in the
region. In terms of
economic data, four points stand out. First, Japan's economy contracted more
than expected in Q3 (2.1% annualized) and the deflator rose (5.1% from 3.5%). Consumption
was flat after falling 0.9% in Q2. Second, China reported weak October lending,
though there was reportedly a surge in bond issuance. The property sector
continues to suck wind, while the economic recovery remains unsatisfactory. Third,
Australia’s labor market has slowed, and in the four months through October,
has lost nearly 30k full-time jobs. The 3.7% unemployment rate is the upper end
of where it has been over the past 18 months. The 67% participation rate
matches the record high. Fourth, South Korea's memory ship exports increased in
October for the first time in 16 months. Overall, South Korea's exports rose
for the first time this year. In terms of political developments, Xi's meeting
with Biden and Kishida, the first such bilateral meetings in a year was the
highlight, but news that the opposition parties in Taiwan have agreed to run a
single candidate (which will be decided over the weekend) could have far
reaching implications for January's election and cross-strait relations.
The pullback in US rates
reinforced the sense that the dollar is toppish near JPY152.00. The greenback has been sold to around
JPY149.25 and is approaching the low for the month near JPY149.20. There had
not been much reaction to BOJ Governor Ueda's comment there were advantages and
disadvantages of a weak yen. Deputy Finance Minister Akazawa told the Diet that
there is not specific exchange-rate level for intervention, which is aimed at
"excess volatility." Reports suggest short covering in Japanese bond
market and real money demand for yen. The 10-year yield spiked down to 0.72%,
its lowest since mid-September. The 10-year yield was near 0.90% on Monday.
Note that the lower Bollinger Band is near JPY149, and the greenback has not
traded below it in four months. That said, a loss of JPY148 would encourage
talk of a dollar top. The Australian dollar spent yesterday consolidating
the nearly two-cent rally scored this week. It tested the (38.2%)
retracement objective of the gains off last Friday's low (~$0.6340) found
around $0.6465. It made a marginal new low slightly above $0.6450 and found a
bid that lifted it back above $0.6500. On Wednesday, the Aussie saw $0.6540,
its best level since mid-August. The technical outlook is constructive, and the
Aussie can work its way back up to the $0.6585-$0.6600, which houses the
200-day moving average and the (50%) retracement target of the sell-off since
the mid-July high near $0.6900. The Chinese yuan is also rising on the back
of the broadly weaker US dollar. The yuan is at its best level since
mid-August. The dollar, which was pushing against CNY7.30 at the start of the
week is now closer to CNY7.23. If chart support is meaningful in this highly
managed currency pair, it may be near CNY7.20. For the first time in several
weeks, the PBOC set the dollar's reference rate slightly weaker (CNY7.1728 vs.
CNY7.1724). The average in Bloomberg's survey was for CNY7.25 (vs. CNY7.2453
yesterday). It is the fourth consecutive session that the yuan has
strengthened. This week's gain of about 0.7% is the most in about two
months.
Europe
Eurozone data in recent days
have not changed the outlook substantively. The economy contracted by 0.1% in Q3, and economic impulses
are weak. Economists expect a stagnant performance this quarter, which might be
a tad optimistic. The swaps market has 80% chance that the first rate cut will
be delivered in April. A week ago, the odds were a little below 70%. The US and
EU remain unable to find a way past the Trump-imposed steel and aluminum
tariffs. The US has proposed "Plan B" to extend the status quo
through the end of 2025, which is a truce struck last year (after recriminating
tariffs on ~10% of the bilateral trade) and expires at the end of next month. That
truce replaced US tariffs with "tariff-rate quotas" and Europe froze all
its measures. The status quo then favors the US, it appears. Rather than
quarterly quota, Europe is seeking annual thresholds and a US commitment to
retain a liberal exclusion stance. Separately, Germany's high court ruled
against the government's off-budget funding to address climate change, which
could call into question this other such funding vehicles.
It has been a busy week in
the UK. Home Secretary
Braverman has the ignoble distinction of being fired twice--once by then Prime
Minister Truss and again last week by Sunak. Sunak had not only resurrected
Braverman a year ago, but he has brought back former Prime Minister Cameron as
foreign secretary. In terms of economic data, the UK reported a somewhat
stronger than job growth and stickier average weekly earnings and softer than
expected October CPI (4.6%, down from 6.7% in September) and year-over-year
declines producer prices. Today, the UK reported an unexpected 0.3% fall in
retail sales (volume) after September's decline was revised to -1.1% from
-0.9%. Excluding gasoline, retail sales slipped 0.1%. Still, the decline in
retail sales was broad-based. Reports indicated that all retail sectors
experienced a decline in sales but non-store retailers and "other
stores". Alongside gasoline, the slump in household goods was noted. The
swaps market is discounting around a 70% chance that the Bank of England cuts
rates next May. That is up from about 20% at the end of last week.
The euro recorded a marginal
new high of almost $1.09 yesterday. It
has not traded above there since the end of August. The $1.0860 area
corresponds to the (50%) retracement objective of the decline from the year's
high set in mid-July near $1.1275. The next retracement (61.8%) is closer to
$1.0960. Still, after closing above its upper Bollinger Band for the past two
sessions, the euro settled back inside it (~$1.0865). It fell to $1.0825 in
late Asia/early European activity but rallied to new session highs in Europe
near $1.0875. After stalling slightly above $1.25 on Tuesday and
Wednesday, sterling set back to almost $1.2375 yesterday before catching a bid and settled back near $1.2420. It retested the low today before
recovering to $1.2430. While sterling has retraced (38.2%) of its decline since
the mid-July high (~$1.3140), the next retracement (50%) is near $1.2590. It
had settled above the upper Bollinger Band on Tuesday but move back within it
on Wednesday and remained inside yesterday. The upper band is near $1.2495
today.
America
The US reported softer than
expected October CPI, PPI, and industrial output, while the decline in headline
retail sales was a little less than expected and September's increase was
revised slightly higher. Continuing
jobless claims rose for the eighth consecutive week to reach a two-year high,
while initial claims at their highest level since August. The much-awaited
Biden-Xi meeting agreed to renew military communication and China pledged to
crackdown on fentanyl. The partial government shutdown has been averted, or
more accurately, spending authorization was extended into Q1 24. Separately,
the Biden administration’s “Indo-Pacific Economic Framework" was dealt a significant
setback at the hands of fellow Democrats. The IPEF was not enthusiastically
embraced by US allies as it did not offer access to the US market. Still, many
seemed surprised that it was dropped for domestic political considerations,
while the war in Israel jeopardizes the pipeline that was supposed to be an
alternative to China's Belt-Road Initiative.
The data drove US rates
sharply lower. The
10-year yield plunged more than 25 bp this week, the most in four months. After
probing the 5% threshold in late October, the yield slipped slightly below
4.38% today. The two-year yield, which peaked near 5.25% on October 19, reached
almost 4.79%. The implied yield of the December 2024 Fed funds futures is about
4.43%, down from 4.69% a week ago, which implies three rate cuts and nearly 2/3
of a chance of a fourth cut.
The greenback rose to almost
CAD1.3780 to meet the (61.8%) retracement of the losses from last Friday's high
near CAD1.3855. Some
attributed the Canadian dollar's weakness to the nearly 5.5% slump in crude
(WTI) prices, which followed a 2% decline on Wednesday amid rising US
inventories. Still, the correlation between changes in the exchange rate and
oil prices is less than 0.25 and is at the low end of this year's range. We
also note that the New Zealand dollar fell more than the Canadian dollar and
the Australian dollar was lost nearly as much. On the other hand, the weakest
of the G10 currencies was the Norwegian krone. The greenback has pulled back to
around CAD1.3720 today. A close below CAD1.3700 would weaken the technical
tone. The US dollar fell to new lows since late September against the
Mexican peso, near MXN17.22 yesterday and follow-through selling today has seen
it approach MXN17.19. Lower US rates, the recovery of emerging market
currencies in general, and the falling out of favor of the Colombia peso after
the unexpectedly weak GDP figures on Wednesday may have helped Mexico
outperform. The objective of the double top pattern carved out in October near
MXN18.50 is closer to MXN17.00. As the peso has recovered, implied volatility
has fallen. Three-month vol peaked in early October near 14.6% and has slipped
below 12% to near the 200-day moving average (~11.8%).
Reviewed by Marc Chandler
on
November 17, 2023
Rating:
