Overview: The US dollar is trading mostly quietly in narrow ranges
against the G10 currencies ahead of the ECB's President Lagarde's press
conference at the conclusion of the policy meeting and the first estimate of Q4
US GDP. With elevated price pressures, Norway's central bank left rates steady
and reiterated its signal that rates will remain high for some time, and this
has lifted the krone by about 0.5% to leader the major currencies. Most of the
emerging market currencies are a little firmer, but not the Mexican peso or
Chinese yuan, which are a little softer today. The Turkish lira is also
slightly heavier ahead of its central bank's decision, which is expected to be
a small rate hike.
Chinese equities extended yesterday's recovery as officials
use formal and informal mechanisms to support the market. Most of the large
regional markets rose, including Japan, South Korea, Taiwan, and Australia. India
and most of the smaller markets moved lower. After rallying almost 1.2%
yesterday, Europe's Stoxx 600 has off by around 0.25% in late European morning
turnover. US index futures are narrowly mixed. The 10-year JGB edged higher,
extending the post-BOJ increase to about 0.75%, a new high since mid-December. European
benchmark 10-year yields are mostly 2-3 bp higher. The 10-year Treasury yield
is a couple of basis points softer near 4.15%. The two-year yield is slightly
lower around 4.37%. Gold is pinned in the lower end of yesterday's range. It is
holding below $2020, but mostly above $2013. March WTI is extending yesterday's
gain and has pushed marginally above $76.30 to reach its best level since early
December.
Asia Pacific
The swaps market has almost a 75% chance
of a 10 bp hike by the BOJ in April discounted. It was seen around a 20% chance two weeks
ago. The prospect of higher rates in Japan propelled Japanese bank shares
higher. The Topix bank index surged 4.2% yesterday, capping a six-day rally. It
slipped by about 0.4% today. Tomorrow, Japan sees Tokyo's January CPI.
Ironically, as rate hike speculation takes hold, Tokyo's core CPI is likely to
have slipped below 2% for the first time since May 2022.
The dollar was sold to a six-day low near
JPY146.65 in the North American morning. The jump in JGB yield amid a hawkish
interpretation of the BOJ meeting helped underpin the yen. That is until the US
January preliminary PMI surprised on the upside and the sell-off in US
Treasuries. The greenback resurfaced above JPY147.60 in late dealings. On a
closing basis, the dollar has held above the (61.8%) retracement (~JPY147.45)
of the slide from last year's high set last November. After a broad range
yesterday, the dollar is consolidating in a narrow range of roughly JPY147.40
to JPY147.90. The Australian dollar also recorded a six-day high
(~$0.6620) but could not sustain the momentum. It sulked back toward $0.6575
but has steadied today in a $0.6565-$0.6590 range. On the upside, it may take a
move above $0.6625-$0.6650 to lift the technical tone. Australia has a light
economic diary until next week's retail sales and CPI, leaving the Aussie at
the mercy of the external factors, include Chinese developments, and the
general risk appetite. Meanwhile, the US dollar has come back firmer
against the Chinese yuan and is poised to snap a three-day decline. It is
trading quietly in a CNY7.1570-CNY7.1725 range. The PBOC set the dollar's
reference rate slightly lower at CNY7.1044 (CNY7.1053 yesterday). The average
in Bloomberg's survey was CNY7.1649 (CNY7.1788 yesterday). For more than two
months, the greenback has largely been confined to a CNY7.10-CNY7.20 trading
range.
Europe
As widely expected, Norway's central bank
stood pay after surprising many with a quarter-point hike (to 4.50%) last
month. Officials
signaled rates will be on hold "for some time" and reiterated it
today. The market suspects this means no rate cut until at least Q3. Norway's
inflation is still elevated. In December, the headline rate was 4.8%
year-over-year and the underlying rate (which excludes energy and adjusts for
tax changes) was at 5.5%. After losing 3.6% last year, (the second weakest G10
currency last year after the Japanese yen, whose loss was twice as much) the
krone is off another 2.3% so far this year. Today, it is the strongest of the
G10 currencies, rising by about 0.5% against the dollar and around 0.4% against
the euro.
The focus is on the ECB. It is not about what the ECB will do,
which is nothing, but how it prepares the market for what lies ahead. The
market has pushed out the first rate cut and reduced the magnitude of this
year's rate reductions. Last month, the first cut was fully discounted in
April, but since the middle of last week, the perceived probability has fallen
and now is near 65%. There are about 45 bp of cuts discounted by mid-year. By
the end of the year, the swaps market implies around 130 bp of cuts this year,
down from nearly 165 at the end of last year. Separately, the eurozone's Q4 23
GDP will be reported next Tuesday and the risk is for the second consecutive
quarter of a 0.1% contraction.
The euro was turned back yesterday from a
six-day high near $1.0930, which corresponds to a (61.8%) retracement of the
losses from the high for the year set on January 11 near $1.10. The 20-day moving average is also
near $1.0930 today. The euro came off half a cent to test the $1.0880 area.
Ahead of the ECB meeting outcome it is in a 15-tick range on either side of
$1.0885. Sterling set an eight-day high as it approached the upper end of
its $1.26-$1.28 range. It traded as high as $1.2675. Every time that
range's extremes are approached and hold, it reinforces the tactics to assume
the range remains intact. There are who try to be nimble and use a tight stop
to play for a breakout. Eventually, it will work, and the wager is that the
losses incurred while the range holds will be more than made up when the break
finally materializes. Yet the longer the range holds the larger the breakout
necessary to compensate (or increased position size). Moreover, it is also a
set of decision-making rules that can be costly to quit until it is resolved.
So far today, it is in trading quietly between about $1.2705 and $1.2740.
America
The US preliminary January PMI was well
above expectations. Composite
rose to 52.3, the highest since June. It has not been below the 50 boom/bust
level since last January. It has not fallen since last August. At the same
time, estimate for next week's January nonfarm payroll continue to creep up and
the median in Bloomberg's survey is now 168k. This suggests the US economy has
begun the year with some momentum. The first estimate of Q4 23 GDP today will
likely show that the world's largest economy slowed (from a heady 4.9% in Q3)
to 2.0%-2.4% (the median forecast from Bloomberg's survey is the lower end of
that range, while the Atlanta Fed's GDP tracker is the upper end of the range).
Yet, while the economy slowed, it is still growing above the pace (1.8%) that
the Fed estimates is consistent with non-inflationary growth. There was
never much speculation about a cut next week, but the futures market has
downgraded the chances of a cut in March to about 43%. Late last year, it was
seen as a done deal. The futures market has discount about 135 bp of rate cuts this
year, down from nearly 170 bp in late December. This still seems aggressive.
After the March meeting, there are six remaining meetings. The 135 bp is the
equivalent of 5 cuts and about a 40% chance of a sixth quarter-point cut.
We do not think there are any policy
implications to the Federal Reserve's announcement yesterday, confirming the
end of new loans from the Bank Term Funding Program as of March 11, while lift
the rate on new loans immediately. It lifted the rate from one-year overnight index swap rate plus 10
bp to no lower than the interest on reserves when the loan is made. This is
aimed at closing the arbitrage window that allowed banks to borrow from the
BTFP (cheaper than the discount window) and deposit the funds with the Fed and
earn a modest risk-free mark-up. This seemed to have driven the BTFP borrowing
to a new high near $162 bln last week.
Unsurprisingly, the Bank of Canada kept
its policy rate at 5.0% and expressed caution about the "persistence"
of core inflation. The
market responded by shaving the odds of a cut in April to about 65% from 75%.
But, more dramatically, it boosted the magnitude of this year’s cuts to 95 bp
from 85 bp on Tuesday. Bank of Canada Governor Macklem explicitly refused to
rule out another hike, but that seems patently unlikely. The central bank cut
its forecast for Q4 23 GDP from 0.8% (quarter/quarter annualized) to flat and
estimates the economy will expand by 0.5% in the current quarter. The Bank
of Canada sees headline inflation (3.4%) in December, remaining around 3% in H1
24 before easing to 2.5% by the end of the year.
The US dollar had slipped to around
CAD1.3430 before the outcome of the Bank of Canada meeting and the US PMI. It quickly recovered and reached CAD1.3525
in late turnover. The greenback posted its highest close of the year. The US
dollar posted a bullish outside up day by trading on both sides of Tuesday's
range and closing above Tuesday's high. It edged slightly closer to last week's
high, near CAD1.3540 today before pulling back to about CAD1.3500 in the
European morning. Still, we are not convinced that a high is in place. A break
of CAD1.3540 would signal a move to CAD1.3600-20. Mexico's higher than
expected CPI for the first half of January (even though the core rate continued
its uninterrupted fall on a year-over-year basis since the end of January 2023)
and the risk-on mood underpinned the peso. The greenback was sold from
MXN17.3250 area through yesterday's lows to about MXN17.14. The dollar
recovered to about MXN17.25. It is trading quietly so far today in the
MXN17.21-MXN17.27 range. We suspect consolidative forces still grip the market
and the dollar continues to chop in a higher trading range. Still, a break of
Monday's low near MXN17.05 would be a bearish technical development and warn of
risk back toward the MXN16.70-80.
Reviewed by Marc Chandler
on
January 25, 2024
Rating:
